Zomato share price tanked 6% on Monday after the online food delivery platform announced that it has agreed to acquire Blink Commerce Pvt Ltd (Blinkit, formerly known as Grofers) 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% on a fully-diluted basis, at an allotment price of Rs 70.76 per share. 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, said JM Financial in its report.
Remain bullish on Zomato but near-term overhangs can limit upside
The brokerage believes that Zomato is well-placed to gain from robust industry tailwinds for hyperlocal delivery services. However, the volatile market environment, relatively cheap valuations of global peers, investor focus on profitable names and the lock-in expiry for the company’s pre-IPO investors in Jul ’22, may limit near-term upside for the stock.
Zomato to generate 5-10% synergies on the delivery costs
Another brokerage Edelweiss has also maintained its positive stance on the core business, considering long growth runway and path to profitability. It has maintained a ‘Buy’ rating with a DCF-based target price of Rs 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% synergies on the delivery costs,” Edelweiss said in a note.
Blinkit is synergistic to Zomato’s food delivery business
According to Punit Patni, Equity Research Analyst, Swastika Investmart Ltd, “The recently announced acquisition of Blinkit by Zomato Ltd. 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.”
(The stock recommendations in this story are by the respective research analysts and brokerage firms. FinancialExpress.com does not bear any responsibility for their investment advice. Capital markets investments are subject to rules and regulations. Please consult your investment advisor before investing.)
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