What Zomato's acquisition of Blinkit means for the stock. Should you buy

27 Jun , 2022 By : Kanchan Joshi

Online food delivery platform 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 Rs4,447 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 Rs70.76 per share.

“Blinkit increases Zomato's TAM and makes the business more defensible. Both apps will remain separate and Zomato will explore ways to leverage its existing customer base. Peak delivery times for food delivery are also complementary to quick commerce, - this should help improve delivery fleet utilisation," Jefferies said in a note.

The global brokerage has Buy rating on Zomato shares with a target price of Rs100. “Quick commerce, while growing rapidly, is at an early stage and business model is yet to be proven - Blinkit is in this space for only 5 months so far. Unlike food tech, market is crowded & take rates are low but management sees better medium-term profitability."

Zomato also acquired Blinkit’s warehousing and ancillary services business HOTPL for $8 million. It would, however, not acquire the B2B trading business as that no longer fits strategically into its plans.

Another brokerage Edelweiss has maintained its positive stance on the core business, considering long growth runway and path to profitability. It has maintained ‘Buy’ rating with a DCF-based target price of Rs80.

“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. We expect Zomato will be able to generate 5-10% synergies on the delivery costs," Edelweiss said in a note.

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.