Zomato share tanks 14% post Blinkit acquisition over cash burn issues

Over the weekend, the company announced acquisition of loss-incurring firm Blinkit for Rs 4,447 crore. The payment will be settled through issue of around 629 million Zomato shares (around 6.88 percent equity dilution on fully diluted basis) at the prescribed preferential allotment price of Rs 70.76, and cash acquisition of Hands on Trades Pvt Ltd for Rs 60.7 crore.

Shares of Zomato extended their decline as they shed 7.5 per cent on Tuesday, to hit a low of Rs 61 per share on the BSE. The stock has declined 14 per cent in two days after it announced the acquisition of quick commerce firm Blinkit.

Over the weekend, the company announced acquisition of loss-incurring firm Blinkit for Rs 4,447 crore. The payment will be settled through issue of around 629 million Zomato shares (around 6.88 per cent equity dilution on fully diluted basis) at the prescribed preferential allotment price of Rs 70.76, and cash acquisition of Hands on Trades Pvt Ltd for Rs 60.7 crore.

The deal (after including the incremental ESOP pool created) values Blinkit (EV basis) at $750 million (Rs 5,860 crore), lower than $1.1 billion in August 2021.

“While the company has taken a hair-cut to the earlier paid valuation, we believe Blinkit needs further investment of $250 million, which could be invested over FY23-24.

This will take Zomato’s total investment in Blinkit to $1.05 billion,” according to Kotak Institutional Equities.

Edelweiss Securities, too, said the acquisition at 21x FY22 price-to-sales (P/S) is an expensive proposition with Zomato itself trading at 13x FY22 P/S.

Analysts believe the quick commerce may witness intense competition over FY23-25 with players like Reliance Retail (via Dunzo), Tata’s BigBasket, Swiggy’s Instamart, and Flipkart’s Quick already in the space.

“The recently announced acquisition of Blinkit by Zomato Ltd. is expected to add to its woes of high operating losses. The quick commerce market has become incredibly competitive, and it will take a very long time to figure out the unit economics and turn profitable. Further, the current markets are not conducive for businesses that a growing without showing profits,” said Punit Patni, Equity Research Analyst at Swastika Investmart.