Zomato share price tanks 14% in 2 days. What is driving the selloff?
Premium- Zomato share price plunged more than 7% to ₹61 apiece on the BSE in Tuesday's early deals
Shares of food delivery firm Zomato plunged more than 7% to ₹61 apiece on the BSE in Tuesday's early deals, heading for its second straight session of losses after announcing a deal to buy local grocery-delivery startup Blinkit. The stock has plunged about 14% in the last two trading sessions.
Big investments in Blinkit, uncertainty on its profitability, and an overcrowded sector are some troubling factors as investors wait to see how this expensive investment by Zomato pans out in the future. Zomato is making a fairly substantial investment towards a business where investments can increase because of competitive intensity.
"This high cash burning sector houses fierce competition from the likes of Zepto, Dunzo, Swiggy Instamart, BigBasket, etc and it will be interesting to see how this expensive investment by Zomato pans out in the future," said Shivam Bajaj, Founder and CEO at Avener Capital.
Zomato Ltd announced that it has agreed to acquire Blink Commerce Pvt Ltd (formerly known as Grofers), where it already owns an 8-9% stake, for ₹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 ₹70.76 per share.
Blinkit operates in a highly competitive sector, which would elongate the path to profits. “Swiggy’s success in grocery has given it an upper hand. Hence, 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," said brokerage Edelweiss.
While the acquisition price and dilution are broadly in line with our expectations, the brokerage believes that this acquisition at 21x FY22 P/S is an expensive proposition with Zomato itself trading at 13x FY22 P/S. Blinkit has reported only 20% revenue CAGR over FY20-22 and continues to make heavy losses in a hyper competitive environment.
While management’s ‘educated guess’ is that Blinkit will break even at adjusted EBITDA level over the next three years, analysts at Edelweiss are sceptical.
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Zomato shares have fallen more than 57% in 2022 (YTD) so far as compared to an 11% decline in benchmark BSE Sensex.