Zomato Shares: Zomato shares traded higher during the morning session, rising as high as 3 percent after announcing that the board has approved the acquisition of Blink Commerce Pvt Ltd (formerly known as Grofers), where it already owns an 8-9 percent stake. for Rs 4,447 crore in a share swap deal as part of its strategy to invest in fast trading business.
As part of the deal, Zomato will issue up to 629 million shares, representing a 6.88 percent equity stake on a fully diluted basis, at an allotment price of Rs 70.76 per share.
On June 24, after market hours, Zomato informed the exchanges that the board has approved the acquisition of up to 33,018 shares of fast trading company Blink Commerce (BCPL) (formerly known as Grofers India) for Rs 4,447.48 crore in a all stock deal. The company also said it has entered into an amendment to the June 28, 2021 final agreement with Grofers International Pte. Ltd, Hands-on Trades Private Limited (HOTPL) and Albinder Singh Dhindsa, amend certain of the company’s rights in relation to its existing investment in HOTPL (agreement). The agreement will come into effect upon completion of the company’s acquisition of BCPL.
What do analysts say?
“Blinkit increases Zomato’s TAM and makes the company more defensible. Both apps will remain separate and Zomato will explore ways to leverage its existing customer base. Peak food delivery times are also complementary to fast trading — this should help improve delivery fleet utilization,” Jefferies said in a note.
The global brokerage has a ‘Buy’ rating on Zomato shares with a target price of Rs 100. “Quick commerce, while growing rapidly, is at an early stage and the business model has yet to be proven – Blinkit is in this space for just 5 months to date.Unlike food technology, the market is busy and rates are low, but management sees better profitability in the medium term.”
JM Financials said in its note: “We believe that in the long run the Quick Commerce space can provide a large free profit pool for players like Zomato who have built significant expertise in on-demand services over the years. Blinkit’s deal is EV 1.5x basis 5MCY22 GMV year-over-year (JMFe of USD 475 million), indicating a 19 percent discount from Zomato’s current valuation multiple of 1.85x basis 1QCY22 GMV year-over-year, slightly lower than the 25 percent discount we had suggested in our valuation framework for Quick Commerce players in our earlier report Given the intense competitive intensity in the Quick Commerce space, we believe the path to profitability for the Zomato group (post-acquisition) can be reduced by at least a year may be extended (from FY25 to FY26) Despite management’s optimism, we conservatively build forecasts for Blinkit due to limited data and base DCF, noting that the acq uisition > 8 percent value can add to our published TP of Rs 115 for Zomato.
Another brokerage, Edelweiss, maintained its positive stance on its core business, considering a long career path and road to profitability. It has maintained the ‘Buy’ rating with a DCF-based target price of ₹80.
“The acquisition of Blinkit, to achieve synergy on delivery costs, is crucial for Zomato. Zomato’s management has allocated a cap of $400 million for fast trading investments over the next two years (CY22, CY23E). Any deviation from this would be a significant risk to our hypothesis. We expect Zomato to be able to generate 5-10 percent synergies on delivery costs,” Edelweiss said in a note.
While management’s “taught bet” is that Blinkit will break even at an adjusted EBITDA level for the next three years, analysts at Edelweiss are skeptical.
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