Private and public valuations

HSBC seems to have set a cat among the private market pigeons by recommending that Zomato’s “real valuation” is half of the stated headline valuation (my apologies for not “covering” Zomato in my piece on startup valuations two weeks back).

This was part of HSBC’s analyst report on InfoEdge (Naukri), which is Zomato’s largest investor. All possible parties concerned have hit back at HSBC for this valuation. Most of them (Sanjiv Bikhchandani (founder of InfoEdge), Zomato founder Deepinder Goyal, investor Sequoia, etc.) have been simply talking their book.

But you see several completely unrelated people in the Indian startup world commenting about HSBC’s valuation, including allegations that HSBC doesn’t understand how private companies are to be valued.

The interesting thing about this discussion is that you seldom see such debates about public companies. Nobody questions analyst reports of public companies on methodology. At worst, company PRs might issue statements challenging some of the assumptions that have gone into the analyst reports.

What differentiates public and private market analyst reports is the ability to trade – if you have a view on the valuation of a public company, it is rather easy for you to turn this view into a profit (with the risk of a loss) by trading on it. If you think a company is undervalued, you buy shares, and profit when its valuation corrects.

With private companies such as Zomato, on the other hand, there is no way for someone who is not already an investor to profit from their views on the company’s valuation. Shorting is out of the question. Even going long happens in different “series”, and is not a continuous process.

If Zomato were a public company, investors acting on HSBC’s report might have tried to push down the price of the stock, and the extent of money on the “other side” would have quickly shown whether HSBC’s view was correct. With the company being private, such objective means of agreeing on valuations don’t exist. And so concerned parties bicker.

To me, the most telling line in the Mint report on the spat between HSBC and InfoEdge is where they quote Bikhchandani.

“We value our investments at cost and Info Edge has not marked down Zomato at all,”said Bikhchandani.

Speaking of ostriches with their heads buried in the sand…

Put Comment