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    Zomato shares erase early gains as online food delivery platform may pay more than expected for Blinkit deal

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    Zomato shares erase early gains as online food delivery platform may pay more than expected for Blinkit deal

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    Zomato Blinkit Deal: Analyst commentary after the announcement of the acquisition was mixed. Brokerage firms see about 17 to 64 percent upside from the previous close of Rs 70.35 while some said that EBITDA loss for Zomato is seen rising in FY23 or FY24.Some analysts also said that Zomato is paying a higher valuation for the deal. An analyst from a domestic brokerage firm said that the online food delivery platform is paying more than anticipated for the BlinkIt acquisition.

    Shares of Zomato opened higher after the online food delivery platform said the company would acquire Blink Commerce (formerly known as Grofers) for Rs 4,447.48 crore in a share swap deal. However, the enthusiasm faded away soon, with shares slipping into the red.
    Analyst commentary after the announcement of the acquisition was mixed. While some brokerage firms see a 17-64 percent upside from the previous close of Rs 70.35, some others said that EBITDA (earnings before interest, taxes, depreciation, and amortisation) loss for Zomato would rise in FY23 or FY24. Some analysts also said that the online food delivery platform is paying more than anticipated for the BlinkIt acquisition.
    At 10:32 am, shares of Zomato were trading 4.8 percent lower at Rs 67 on the BSE. Zomato made a stellar debut on bourses on July 23, 2021, listing at Rs 116 apiece on the NSE, an 52.63 percent premium over its issue price of Rs 76 per share.
    This transaction will be carried out through issuance and allotment of up to 62.85 crore fully paid-up equity shares of Zomato, having a face value of Re 1 each at a price of Rs 70.76 per equity share on a preferential basis.
    Blink Commerce runs the online quick commerce service under the Blinkit brand.
    “Quick commerce will help us increase the customer wallet share spent on our platform and also drive higher frequency and engagement from our customers,” said Deepinder Goyal, Founder and CEO of Zomato.
    Akshant Goyal, the company’s Chief Financial Officer, added that “quick commerce increases addressable market, the potential profit pool and also makes our business more defensible”.
    The online food aggregator plans to keep the Blinkit app and brand separate from Zomato.
    Post the announcement, here is what brokerage firms recommend:
    Brokerage  firmsRatingTarget price
    CLSABuyRs 90
    Credit SuisseOutperformRs 90
    BofA SecuritiesNeutralRs 82
    UBSBuyRs 95
    JM FinancialBuyRs 115
    CLSA noted that the company believes quick commerce is a natural extension of its food delivery business and the BlinkIt acquisition would expand Zomato’s addressable market.
    Meanwhile, Credit Suisse said that the acquisition was on expected lines and would Zomato's EBITDA loss in FY23 or FY24. Additionally, annualising May 2022 EBITDA loss could reduce its FY23 adjusted EBITDA by Rs 756 crore, it added. Credit Suisse also noted that the company has not guided on profitability in the near term. It is of the view that Zomato’s cash reserves ensure sufficient funding for growth initiatives in the near term.
    BofA Securities said that the deal was well flagged in advance and is 7 percent dilutive for shareholders. The acquisition price is lower than the last round of valuation of $1 billion, according to BofA Securities.
    UBS said the integration was expected to drive synergies. Lower valuation and reiteration of investments of an upper limit of $400 million over the next two years into BlinkIt are positives, it said.
    JM Financial Institutional Securities is of the opinion that Zomato is well-placed to gain from the 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 July 2022, may limit the near-term upside for the stock,” the brokerage firm quickly added.
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