Zomato tumbles 6% as Street cautious on Blinkit buyout

Mumbai: Shares of food delivery platform fell 6.4% on Monday as analysts were cautious about the company's acquisition of Blinkit, an instant delivery service firm. Market participants are concerned that Zomato's path to profitability would get further delayed due to a cash burn of $165 million a year for Blinkit.

"Given the intense competitive intensity in the quick commerce space, we believe that the path to profitability for Zomato group post-acquisition can get extended by at least a year from FY25 to FY26," said Swapnil Potdukhe, analyst at . "The volatile market environment, relatively cheap valuations of global peers, investor focus on profitable names, and the lock-in expiry for pre-IPO investors on July 22 may limit the near-term upside for the stock."

The stock, which opened at ₹73, fell as much as 12% from the day's high before closing at ₹65.85. About 117 million shares were traded on Monday compared to an average of 43 million shares traded in the previous 10 trading sessions.

On Friday, Zomato's board approved the acquisition of Blinkit (formerly Grofers) for ₹4,447 crore (about $570 million) in an all-stock deal.

As per the deal, shareholders of Blinkit will get about 7% in Zomato at ₹0.76 per share. The transaction implies a 7.4% dilution in Zomato's existing share capital and is valued at an enterprise value to revenue of 8.1 times on May 2022, similar to its valuation.

"The transaction would have a three-fold impact on the earnings of Zomato such as increased operating losses to fund Blinkit operations, impact on other income as investments in capex for Blinkit operations would increase and over 7.4% dilution in equity," said Rahul Jain, VP-research at Dolat Capital.

Brokerage Jefferies, which has a buy rating and price target of ₹100 on the stock, said quick commerce is growing rapidly but it is at an early stage and the business model is yet to be proven. Blinkit has been in this business only for five months so far, it said.

Kotak Institutional Equities has cut its rating on the stock to 'add' from 'buy' and price target to ₹77 from ₹83 after the acquisition announcement.

"E-grocery economics have been tough to crack given price competition, relatively lower-margin nature of the category, high number of products per order which need efficient fulfilment, and very high competition," said Kotak's analysts Garima Mishra and Shubhangi Nigam in a client note. "With a large upfront investment, we don't see immediate value accretion from Blinkit acquisition."

Zomato shares, which were listed on July 23, 2021, are down 61% from their all-time high of ₹169 hit on November 16. The stock had rallied as much as 122% from its issue price of ₹76.

"In the worst-case scenario, Blinkit's cash burn in perpetuity could drag down Zomato's valuation by 14%," said Pranav Kshatriya, analyst, Research. "Zomato, however, has enough muscle with a cash balance of $1.6 billion to withstand this situation."

VK Vijayakumar, chief investment strategist, said this is a segment where profitability is a few years away. "Some of them might do well in the long run. But retail investors, instead of chasing hope, will be better off chasing solid stocks with strong fundamentals now," said Vijaykumar. "That's a bird in hand; e-commerce companies are birds in bushes."