While the deal adds long-term value to Zomato, many investors don’t approve of it adding another loss-making company to its portfolio, analysts told Inc42
However, JM Financial said that the acquisition will widen the scope of Zomato’s hyperlocal delivery services beyond food delivery, and also highlights the management’s broader ambitions
On Friday, Zomato announced the acquisition of quick commerce startup Blinkit in an all-stock deal for INR 4,447 Cr
Shares of food delivery startup Zomato tanked 6.6% to INR 65.85 on the NSE on Monday (June 27) following the company’s announcement of the acquisition of quick commerce startup Blinkit on Friday after market hours.
While the deal adds long-term value to Zomato, many investors don’t approve of it adding another loss-making company to its portfolio, analysts told Inc42, adding that the deal might weigh on the stock in the short-term.
After witnessing a significant decline in the beginning of May, Zomato shares were on a rise but volatile for the last few days. In the four sessions since June 20, it rose 8.5%, closing at INR 70.5 on Friday (June 24).
Zomato CEO and founder Deepinder Goyal said that the business of Blinkit is synergistic with its core food business, giving the foodtech startup the “right to win” in the long-term. The deal is expected to close in early August this year.
While there seems to be a negative sentiment around the deal in the near term, equity research firm JM Financial continues to remain bullish on the stock and maintained its ‘buy’ rating.
“Zomato’s proposed acquisition of Blinkit 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,” the firm said in a research note.
Maintaining the ‘buy’ rating on the stock with a target price of INR 115, JM Financial said that it anticipates strong growth for Blinkit in the near to medium-term and forecasted Gross Merchandise Value (GMV) of $4.5 Bn by FY27.
While Zomato believes the Blinkit business will turn profitable in less than three years, JM Financial “conservatively forecast Blinkit to turn profitable only by FY27”.
It is pertinent to note that Zomato also continues to be a loss-making entity. In FY22, the startup reported a widening of its net loss to INR 1,222.5 Cr from 816.4 Cr in FY21.
“…we believe that the path to profitability for Zomato group (post the acquisition) can get extended by at least a year (from FY25 to FY26),” JM Financial’s note said.
On the other hand, Edelweiss Research also maintained its ‘buy’ stance on Zomato with a target price of INR 80. The research firm, however, noted that Zomato’s lower strength in execution might lead to integration issues and increased cash burn, and pointed them out as the key risks.
Zomato’s expectation that Blinkit’s adjusted EBITDA breakeven would be achieved in three years is “ambitious”, it said in a note.
“We do expect higher order throughput and lower delivery costs will help reduce the burn, but profitability in this business will require significantly higher take rate, and delivery fees, which may impede the scalability,” Edelweiss Research added.
Meanwhile, it is also important to note that Blinkit’s founder Albinder Dhindsa, who would continue to run the business post acquisition, is married to Zomato cofounder Akriti Chopra.
Ahead of its IPO last year, Zomato promoted Chopra to the position of a cofounder from her then role as the company’s Chief Financial Officer. Chopra joined the foodtech startup in 2011 and was listed as the Key Managerial Personnel in Zomato’s DRHP. However, Zomato did not make any such disclosure in its filings during its investment in Blinkit in 2021 or during the announcement of the acquisition last week.
The volatile market environment, relatively cheaper valuations of its global peers, and investors’ focus on profitable names might limit the upside in Zomato’s shares in the near-term, analysts told Inc42.
The company’s shares have fallen over 53% so far since the beginning of 2022. Zomato made its stock market debut in July last year, listing on the exchanges at INR 120, a premium of about 53% over its IPO price of INR 79.
