Zomato loses $1.1 Billion in Market Value post Blinkit acquisition

On Friday, the Zomato Board approved the acquisition of Blinkit. The Zomato share price has fallen more than 15% in the last two days. What should investors do? Let us look at all the details of the deal and the impact on the share price.

Zomato-Blinkit Deal

• In August 2021, Zomato invested Rs 741 crore in Blinkit for a 9% equity share in Blinkit (then Grofers).
• In March 2022, Zomato provided a credit line of Rs 1,125 crore extended to cash-strapped Blinkit.
• On Friday, Zomato acquired Blinkit in a share-swap deal (an all-stock deal) of Rs 4,448 crore.
• As per the deal, shareholders of Blinkit will get about 7% in Zomato at Rs 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 in May 2022, similar to its valuation.

Zomato's other investment

Zomato has also made at least 6 minority investments worth around $200 million. It includes $75 million in Shiprocket and $50 million each in Curefit and Magicpin.

Is Quick commerce the future?

• When investors evaluate a startup, they give importance to the market size as a large market ensures that sales can keep growing at a fast tick.
• On the same idea, hyperlocal delivery companies are betting. The idea is that the customers acquired through high-frequency purchases (like bread and butter) can upsell other products including lunch and dinner. 
• As per Red Deer, the e-commerce consultant, the market size will cross $1 trillion by 2025. It is too big an opportunity to let go for Zomato!!

How does Blinkit acquisition help Zomato?

• Blinkit has a monthly order book of Rs 413 crore which is one-fifth that of Zomato. At present, it only has business in 15 cities with 400 dark stores. All these stores cater to users within a radius of 2 kilometres.
• Currently, on average, the company serves 613 per day. As per available data, the company loses Rs 132 per order.
• With the acquisition, Zomato expected the loss per order to lower. 
• When the dark stores start operating at their full capacity - between 2500 and 3500 orders per day, the losses will automatically narrow.
• Zomato plans to cross-sell Blinkit's service on its own app which has over 15.7 million monthly transacting users (MTU). Blinkit only has 2.3 million MTU.
• As per experts, with the acquisition, Blinkit will be in a better position to negotiate better margins with consumer packaged goods (CPG) companies - and also get ad revenues from them - when it hits a certain scale.

What are the negative impacts of the Zomato-Blinkit deal?

Zomato may now take longer even longer to make profits after it acquires Blinkit amid intense competition in the quick commerce industry. As per a report, Zomato may turn profitable by FY27 now.

Zomato share price movement since listing

Zomato came with its IPO in July last year with an issue price of Rs 76. In November, the Zomato share price hit an all-time high of Rs 169 per share - the stock rallied 122% from its IPO listing price. 

Last month, Zomato's share price hit an all-time low of Rs 52.45 per share. The company’s losses widened by 50% to Rs 1,223 crore in FY22. There seemed to be a massive growth to back it up. Its revenue jumped 110% to Rs 4,192 crore in the same period.

What is Zomato's share target price for 2022?

Kotak Institutional Equities has cut its rating on the stock to ADD from BUY and cut the target price to Rs 77 post the acquisition announcement. Earlier, it has given a target price of Rs 83 per share. As per the firm, E-grocery economics have been tough to crack given price competition, relatively lower-margin nature of the category, a high number of products per order which need efficient fulfilment, and very high competition. It added that with a large upfront investment, the firm doesn't see immediate value accretion from the Blinkit acquisition.