Shares of India’s Zomato Ltd fell as much as 8.2% on Tuesday, extending losses for a second straight day as investors questioned the rationale of the company’s deal to buy local grocery delivery startup Blinkit.
The stock has fallen from Friday’s close of Rs 70.35 to an intraday low of Rs 60.45 today, translating into a loss of 14.07 percent in two sessions. Zomato stock is trading lower than 5-day, 20-day, 50-day, 100-day, and 200-day moving averages.
The stock has fallen 55.47 percent in 2022 and lost 1.37 percent in a month. Shares of Zomato hit a 52-week high of Rs 169.10 on November 16, 2021, and a 52-week low of Rs 50.35 on May 11, 2022.
A total of 61.79 lakh shares of the firm changed hands amounting to a turnover of Rs 38.03 crore on BSE. The market cap of the firm fell to Rs 48,068 crore on BSE. Zomato did not disclose details of the size of its latest stake in Blinkit.
The Ant Group-backed food delivery firm said on Friday it would acquire Blinkit for ₹ 4,447 crores ($568.16 million) in stock, as it tries to gain a foothold in the fiercely competitive quick delivery market.
The deal comes after it bought a more than 9% stake in SoftBank Group-backed Blinkit for nearly ₹ 518 crores in August, with a promise to invest as much as $400 million in the Indian quick-commerce market over the next two years.
“We believe Blinkit will require investments beyond the $400 million envisaged by Zomato, given rising competitive intensity,” analysts at Kotak Institutional Equities wrote in a note.
Blinkit operates in a highly competitive sector, which would elongate the path to profits. “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.
Brokerages Word
UBS assigned a buy call to the stock with a target price of Rs 95 on June 27. Zomato reiterated earlier guided upper limit of US$400 million over the next two years. The integration will drive synergies, it added.
Bank of America Securities has assigned a neutral call with a target price of Rs 82. It said the deal was well flagged in advance. The competition impact will be felt over time. It also faces risks in form of breakeven delay. Price of $578 m lower than the price indicated in media of $700m & last round valuation of $1 billion.
Analysts believe a deal with Blinkit will delay Zomato’s path to profitability, thus hurting the stock. “Given the intense competitive intensity in the quick commerce space, we believe that the path to profitability for Zomato group post-acquisition can be extended by at least a year from FY25 to FY26,” said Swapnil Potdukhe, an analyst at JM Financial.
