Zomato’s stock price declines 14% in just 2 days

After announcing a plan to acquire local grocery-delivery startup Blinkit, Zomato’s shares fell more than 7 percent to 61 per share on the BSE in Tuesday’s early trades, setting the company up for a second straight session of losses. In the previous two trading sessions, the stock’s decline was nearly 14%.

As investors wait to see how this pricey investment by Zomato will turn out in the future, large investments in Blinkit, uncertainty over its profitability, and a crowded market are some unsettling considerations. Zomato is contributing a large amount of capital to a market where the level of competition may force investments to rise.

“This high cash burning sector houses fierce competition from the likes of Zepto, Dunzo, Swiggy Instamart, BigBasket, etc and it will be interesting to see how this expensive investment by Zomato pans out in the future,” said Shivam Bajaj, Founder and CEO at Avener Capital.

As part of its goal to engage in rapid commerce businesses, Zomato Ltd. recently announced that it has agreed to purchase Blink Commerce Pvt Ltd (previously known as Grofers), where it currently owns an 8–9% interest, for $4,447 crore in a share swap arrangement.

At an allocation price of 70.76 per share, Zomato will issue up to 629 million shares as part of the agreement, representing an ownership stake of 6.88 percent on a fully diluted basis.

The intense competition in the industry where Blinkit works would make the road to profitability longer.

“Swiggy’s success in grocery has given it an upper hand. Hence, 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,” said brokerage Edelweiss.

The brokerage considers this acquisition to be pricey given Zomato’s current valuation of 13x FY22 P/S, even though the acquisition price and dilution are mostly in line with our estimates. Blinkit continues to incur significant losses in a highly competitive environment and only reported a 20 percent CAGR in revenue during the FY20-22 period.

Analysts at Edelweiss remain dubious, despite management’s “informed assumption” that Blinkit will achieve break-even at adjusted EBITDA level during the next three years.