Zomato Shares: Zomato shares were trading higher in the morning session and went up to 3 per cent after it announced that its board has approved to acquire Blink Commerce Pvt Ltd (formerly known as Grofers), where it already owns an 8-9 per cent stake, for Rs 4,447 crore in a share swap deal as part of its strategy of investing in quick commerce business.
As part of the deal, Zomato will issue up to 629 million shares, amounting to an equity stake of 6.88 per cent on a fully-diluted basis, at an allotment price of Rs 70.76 per share.
On June 24, after market hours, Zomato informed the bourses that its board has given its approval for the acquisition of up to 33,018 equity shares of quick commerce company Blink Commerce (BCPL) (formerly known as Grofers India) for Rs 4,447.48 crore in an all-stock deal. The company also said that it has entered into an amendment to the definitive agreement dated June 28, 2021, with Grofers International Pte. Ltd, Hands-on Trades Private Limited (HOTPL) and Albinder Singh Dhindsa, modifying certain rights of the company’s in relation to its existing investment in HOTPL (agreement). The agreement shall come into effect post completion of the acquisition of BCPL by the company.
What Do Analysts Say?
“Blinkit increases Zomato’s TAM and makes the business more defensible. Both apps will remain separate and Zomato will explore ways to leverage its existing customer base. Peak delivery times for food delivery are also complementary to quick commerce, – this should help improve delivery fleet utilisation,” Jefferies said in a note.
The global brokerage has a ‘Buy’ rating on Zomato shares with a target price of Rs 100. “Quick commerce, while growing rapidly, is at an early stage and business model is yet to be proven – Blinkit is in this space for only 5 months so far. Unlike food tech, market is crowded & take rates are low but management sees better medium-term profitability.”
JM Financials in its note said: “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 per cent discount to Zomato’s current valuation multiple of 1.85x basis 1QCY22 annualised GMV, marginally lower than the 25 per cent discount we had suggested in our valuations framework for Quick Commerce players in our earlier report. Given the intense competitive intensity in the Quick Commerce space, we believe that the path to profitability for the 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 per cent value to our published TP of Rs 115 for Zomato.
Another brokerage Edelweiss has maintained its positive stance on the core business, considering long growth runway and path to profitability. It has maintained ‘Buy’ rating with a DCF-based target price of ₹80.
“The Blinkit acquisition, to extract synergy on delivery cost, is crucial for Zomato. Zomato’s management has assigned an upper bound of $ 400 mn towards quick commerce investment for the next two years (CY22, CY23E). Any deviation from this would be a key risk to our hypothesis. We expect Zomato will be able to generate 5-10 per cent synergies on the delivery costs,” Edelweiss said in a note.
While management’s ‘educated guess’ is that Blinkit will break even at an adjusted EBITDA level over the next three years, analysts at Edelweiss are skeptical.
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