Shares of food delivery firm Zomato fell over 7% 61 on the BSE in early deals on Tuesday, is heading for its second straight session of losses after announcing a deal to buy local grocery-delivery startup Blinkit. The stock has fallen nearly 14% in the past two trading sessions.
Big investments in Blinkit, uncertainty over its profitability, and a congested region are some of the troubling factors as investors wait to see how this expensive Zomato investment pans out in the future. zomato Is investing fairly substantial for a business where the investment can increase due to competitive intensity.
Shivam Bajaj, Founder & CEO, Shivam Bajaj said, “There is stiff competition from Zepto, Dunzo, Swiggy Instamart, BigBasket, etc. in this high-cash space and it will be interesting to see how this expensive Zomato investment pans out in the future. – flourishes.” At Avenor Capital.
Zomato Ltd announced that it has agreed to acquire Blink Commerce Pvt Ltd (formerly known as Grofers), where it already holds 8-9% stake. 4,447 crore in share swap deal as part of its strategy to invest in accelerated commerce business.
As part of the deal, Zomato will issue 62.9 million shares on a fully diluted basis at an allocation price of an equity stake amounting to 6.88%. 70.76 per share.
blinkit Works in a highly competitive field, which will pave the way for profits. “Swiggy’s success in grocery has given it an upper hand. Hence, the Blinkit acquisition is crucial for Zomato to achieve synergies on delivery cost. Zomato’s management has set an upper limit of $400 million for accelerated commercial investment for the next two years (CY22, CY23E). Any deviation from this would be a significant risk to our hypothesis, said brokerage Edelweiss.
While the acquisition price and dilution price are broadly in line with our expectations, the brokerage believes that this acquisition at 21x FY22 P/S is an expensive proposition with Zomato trading at 13x FY22 P/S. doing. Blinkit has reported only 20% revenue CAGR in FY 2012-22 and continues to make huge losses in a highly competitive environment.
While management’s ‘educated guess’ is that Blinkit will break even at adjusted EBITDA levels over the next three years, analysts at Edelweiss are skeptical.
Shares of Zomato have fallen over 57% so far in 2022 (YTD), compared to a 11% drop in the benchmark BSE Sensex,