Zomato Blinkit Deal - Is It Profitable For Investors?

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Indian multinational restaurant aggregator & food delivery organization Zomato Limited shares slumped more than 8.2% on 30 June 2022 from the last two consecutive trading sessions after the investors inquired about the rationale of Zomato to own the new startup Blinkit.  

After the acquisition announced by Zomato, that state company set to own Blinkit for 44.47 billion engaged in grocery-delivery business in a bid to augment the business as vying for the fasten-delivery market. The company’s shares fell nearly 14% just after the announcement of the deal came out around the market and impacted Zomato stock’s price i.e Rs 7,678 crores in market cap. To understand the reasons for this can be lower AOVs, overpriced delivery costs, and cash guzzling model that squanders the growth.

The deal follows its acquisition of nearly 9% of SoftBank Group-backed Blinkit in August, with an agreement to invest at least $400 million over the next two years in the Indian quick-commerce market.

One of the Kotak Institutional Equities analysts said in a statement that the new era of the fast-commerce market has the potential to reach nearly Rs 20,400 Crores and Rs 60,300 Crores by FY2025 and FY2030 respectively. “We believe Blinkit will require investments beyond the $400 million envisaged by Zomato,” they say.

Analysis of the Deal

The deal is going to act as a poison pill for zomato shares as It will need more investments to make the company turn profitable. Investors have to wait for more time to see Zomato hitting up the breakeven point.

Blinkit is currently not profitable and is on a cash burn as the company loses Rs. 84 per order. Its annualized cash burn stands at Rs. 1,290 crore and is expected to remain within Rs. 4,150 crore for the next 2 years.

So, it is going to have a direct impact on zomato which will delay the profitability by at least a year due to heavy cash burn and operating losses.

On the other hand, Blinkit recorded 79 Lakh orders for may 22 which is 16% of Zomato’s Q4FY22 run rate with operations in only 15 cities vs 1000 cities Zomato operates in.

There are definitely things that work for and against zomato in this deal which is again a make or break its position in the emerging market.