On Friday, Zomato announced the acquisition of Blinkit. Many investors don’t approve of adding another loss-making company to its portfolio, leading to a fall of 6.6 percent in the company shares.
Following the company’s announcement on Friday after market hours, of the acquisition of quick commerce startup firm Blinkit in an all-stock deal for INR 4,447 Cr, shares of meal delivery startup Zomato plunged 6.6 percent to INR 65.85 on the NSE on Monday, June 27.
“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 revealed in a conversation with Inc42.
Furthermore, they added that in the short run, the deal might weigh on the stock.
Zomato’s shares were finally on the rise but still erratic for the past few days after seeing a sizable fall at the start of May. It increased 8.5 percent in the four sessions since June 20 and closed at INR 70.5 on Friday, June 24.
Zomato’s expectation with the acquisition
Deepinder Goyal, the CEO and founder of Zomato, claimed that Blinkit company is complementary to Zomato’s core food business, giving the foodtech firm the “right to win” in the long run. Early this year, in August, is when the deal is anticipated to close.
Predictions from research analysts
In a research note, JM Financial said that Zomato’s management has larger ambitions of capturing a larger share of India’s commerce market, which is highlighted by the company’s proposed acquisition of Blinkit. This acquisition would not only expand Zomato’s scope of hyperlocal delivery services beyond food delivery, but it would also highlight these broader ambitions.
Despite the negative sentiment around the deal in the near term, JM Financial stated that it is keeping its “buy” recommendation on the company’s stock and has set a target price of INR 115. It predicts that Blinkit will have robust growth in the short to medium term and will reach a Gross Merchandise Value (GMV) of $4.5 billion by FY27.
While JM Financial conservatively anticipated Blinkit to turn profitable only by FY27, Zomato expects the Blinkit business will become profitable in less than three years. It is important to remember that Zomato is still a losing venture. In FY22, the startup revealed that its net loss increased to INR 1,222.5 Cr in FY22 from INR 816.4 Cr in FY21. JM Financial believes that this path to profitability for Zomato Group after the acquisition might be extended by at least a year, from FY25 to FY26.
In comparison, Edelweiss Research also continues to view Zomato as a “buy” with a target price of INR 80. The research company identified some major concerns, noting that Zomato’s weaker execution strength would cause integration problems and greater cash burn.
In a note, it described Zomato’s expectations as “ambitious”—its prediction that Blinkit will reach adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) breakeven in three years.
Edelweiss Research continued to add that while they do anticipate that a higher order throughput and lower delivery costs will help reduce the burn, profitability in this business will require a significantly higher take rate and delivery fees, which may hinder the scalability of the operation.
In the meantime, it is also crucial to note that Blinkit’s founder Albinder Dhindsa, who would continue to oversee the firm after the acquisition, is married to Zomato’s cofounder Akriti Chopra.
Prior to the IPO that took place the previous year, Chopra was moved to the post of cofounder at Zomato from her previous capacity as the company’s Chief Financial Officer. Chopra began working for the food technology firm in 2011 and is recognised in Zomato’s DRHP as one of the company’s Key Managerial Personnel. On the other hand, Zomato did not include any such disclosure in its filings when it invested in Blinkit in 2021 or when it announced the acquisition just last week.
According to analysts who spoke to Inc42, the turbulent market environment, relatively lower valuations of its worldwide peers, and investors’ concentration on profitable names could restrict the upside in Zomato’s shares in the near term.
Since the beginning of 2022, the price of the company’s shares has decreased by more than 53 percent so far. Zomato made its debut on the stock market in July of the previous year, starting on the markets at a price of INR 120. This represented a premium of around 53 percent over the initial public offering price of INR 79.
