Should You Buy, Sell, or Hold Stocks After Zomato Acquires Blinkit Through A Share Swap Deal?

Zomato Shares: Following the announcement that its board had approved the acquisition of Blink Commerce Pvt Ltd (formerly known as Grofers), where it already owns an 8–9% stake, for Rs 4,447 crore in a share swap deal as part of its strategy to invest in quick commerce businesses, Zomato shares were trading higher in the morning session and went up to 3%.

As part of the agreement, Zomato would issue up to 629 million shares at an allotment price of Rs 70.76 per share, representing an ownership stake of 6.88 percent on a fully diluted basis.

Zomato notified the stock exchanges on June 24 after market hours that its board has approved the purchase of up to 33,018 equity shares from fast commerce startup Blink Commerce (BCPL) (formerly known as Grofers India) for Rs 4,447.48 crore in an all-stock transaction. The business also disclosed that it has modified some rights related to its current investment in HOTPL by entering into an amendment to the definitive agreement, dated June 28, 2021, with Grofers International Pte. Ltd., Hands-on Trades Private Limited (HOTPL), and Albinder Singh Dhindsa (agreement). After the corporation has fully acquired BCPL, the agreement will go into effect.

What Do Analysts Say?

"Blinkit raises Zomato's TAM and strengthens the viability of the company. Both apps will continue to be independent, and Zomato will look for methods to make the most of its current user base. Quick commerce and peak food delivery hours complement each other, which should increase the efficiency of the delivery fleet "wrote Jefferies in a note.

Zomato shares are rated "Buy" by the international firm, with a target price of Rs 100. Although it is expanding quickly, quick commerce is still in its infancy and Blinkit has only been active in this market for five months. In contrast to food technology, the market is competitive and take rates are low, but management anticipates improved medium-term profitability."

In its note, JM Financials stated: "We believe the Quick Commerce area, over time, can offer a significant supplementary profit pool for firms like Zomato that have developed significant competence in on-demand services. A 19% discount to Zomato's existing valuation multiple of 1.85x on 1QCY22 annualized GMV (JMFe of USD 475mn) is indicated by Blinkit's deal EV, which is slightly less than the 25% discount we had recommended in our valuations framework for Quick Commerce players in our earlier study. Given the fierce competition in the Quick, the Commerce industry thinks that the Zomato group's (post-acquisition) road to profitability can be prolonged by at least a year (from FY25 to FY26). Despite the management's optimism, we cautiously build Blinkit predictions because the data is sparse and the base DCF indicates that the purchase can increase Zomato's value by more than 8% over our published target price of Rs. 115.

With a long growth runway and a clear road to profitability, another brokerage, Edelweiss, has maintained an optimistic outlook on the core business. It still has a "Buy" rating with an 80 target price based on DCF.

"The Blinkit purchase is essential for Zomato to realize cost-saving synergies on deliveries. The management of Zomato has set an upper limit of $400 million for investments in fast-moving consumer goods over the next two years (CY22, CY23E). Any departure from this would pose a serious threat to our theory. According to a note from Edelweiss, "We anticipate Zomato will be able to realize synergies of 5–10% on the delivery costs.

Analysts at Edelweiss remain dubious, despite management's "informed assumption" that Blinkit will achieve break-even over the next three years at an adjusted EBITDA level.

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