Zomato Share Price: Zomato stock skids 6.6% lower post Blinkit acquisition announcement

On Friday post-market hours, Zomato announced that it will acquire Blink Commerce Pvt Ltd for Rs 4,447.48 crore in a share swap deal as part of its strategy of investing in quick commerce business. The company’s board at a meeting on Friday approved the acquisition of up to 33,018 equity shares of Blink Commerce Pvt Ltd from its shareholders for a total purchase consideration of Rs 4,447.48 crore at a price of Rs 13.45 lakh per equity share, it informed in an exchange filing.

Blink Commerce runs the quick commerce service brand Blinkit. It was known as Grofers earlier.

The transaction will be carried out through issuance and allotment of up to 62.85 crore fully paid-up equity shares of Zomato, having face value of Re 1 each at a price of Rs 70.76 per equity share on a preferential basis, the filing said adding that the company currently holds 1 equity share and 3,248 preference shares presently in BCPL.

Reacting to the announcement and subsequent stock movement, Punit Patni, Equity Research Analyst at Swastika Investmart said, “The recently announced acquisition of Blinkit by Zomato is expected to add to its woes of high operating losses. The Blinkit is synergistic to Zomato’s food delivery business and the management expects the business to grow significantly in the future. The quick commerce market, however, has become incredibly competitive, and it will take a very long time to figure out the unit economics and turn profitable. Further, the current markets are not conducive for businesses that a growing without showing profits. Thus we believe that this company is suitable only for investors having a high-risk appetite and a long-term view.”

Ravi Singh, Vice President and Head of Research at Share India Securities told indianexpress.com, “Zomato share prices since its listing is struggling to survive in the market. Its high valuations and market sentiments took the toll further. The latest Zomato – Blinkit deal is also not going to make any difference in the near term as Blinkit is at an early stage and its business model is yet to be proven. The stock is trading between the range of Rs 60 – Rs 80 levels since its listing. Investors are advised to refrain from taking fresh buy positions at current levels. The stock may touch levels of Rs 90 if it breaks the levels of Rs 70, however, the possibility seems less in the current scenario.”

JM Financial Institutional Securities in a research note said, “Zomato’s proposed acquisition of Blinkit (at an EV of USD 720mn, ~7.3% dilution for existing holders) not only widens its scope of hyperlocal delivery services beyond food delivery but also highlights management’s broader ambitions of capturing a larger slice of India’s commerce market (USD 1.3 trillion). we believe the Quick Commerce space in the long run can offer a large complimentary profit pool for players like Zomato that over the years have built significant expertise in on-demand services. Blinkit’s deal EV is at ~1.5x basis 5MCY22 annualised GMV (JMFe of ~USD 475mn), indicating ~19% discount to Zomato’s current valuation multiple of ~1.85x basis 1QCY22 annualised GMV, marginally lower than the 25% discount we had suggested in our valuations framework for Quick Commerce players in our earlier report (refer exhibit 1). Given the intense competitive intensity in the Quick Commerce space we believe that the path to profitability for Zomato group (post-acquisition) can get extended by at least a year (from FY25 to FY26). Despite management optimism, we conservatively build forecasts for Blinkit due to limited data and basis DCF, ascertain that the acquisition can add >8% value to our published target price of Rs 115 for Zomato.”

Manoj Dalmia, Founder and Director at Proficient Equities said that Zomato-Blinkit synergy may reduce the delivery cost due to greater order density, but it won’t quickly add to the margins of Zomato.

“The major concern that remains here is the cash burn rate(annually) of Blinkit which is Rs 1290 crore and the reduction in the number of dark stores from 450 to 400, as per the management guidance it is expected that Blinkit will come to break even at Ebitda over the next three years,” he told indianexpress.com noting that investors can monitor the earnings in the upcoming quarters and then take decision accordingly.

“Existing investors have some hope as Zomato has a good amount of cash reserves to ensure funding for growth initiatives going further,” Dalmia said.

“Blinkit has reported orders of 79 lakhs in May, which is 16% of Zomato run-rate. This acquisition would therefore increase the order density of Zomato but will push the path to profitability back by up to a year which is not a good outcome in the public markets. So this deal could be a long-term win with a short-term pain if the synergies as expected fall through and Blinkit’s book stand firm,” Sonam Srivastava, smallcase manager told indianexpress.com.

“Short-term investors can be expected to leave the stock, but long-term investors can hold at these levels. We would not give a buy just yet as the clarity on Blinkit’s financial situation and synergies is yet to come,” she added.