Increased order density may lead to lower cost per delivery and will be the key driver for synergies but Zomato’s path to profitability may get extended by at least a year, said analysts, who believe the deal will be a near-term pain and long-term gain.
To be sure, Blinkit reported 79 lakh orders for May, which were nearly 16 per cent of Zomato’s Q4FY22 run-rate. This, analysts said, was impressive, considering Zomato operates in 1,000 cities versus 15 for Blinkit. Also, Blinkit’s average order value stands at Rs 509, which is 28 per cent higher than Zomato. That said, the company is losing Rs 84 per order.
The Blinkit deal is on expected lines, said Credit Suisse, which added that the acquisition will likely raise Ebitda loss for FY23 and FY24.
On Monday, the scrip fell 4.48 per cent to Rs 67.20 on BSE.
Quick commerce refers to the delivery of items in under 30 minutes. The extreme convenience offered by these companies can create a sizable market over time, albeit in a few cities, Kotak Institutional Equities noted, the initial ramp-up phase, like in other delivery formats, requires significant cash investments.
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noted that Blinkit’s annualised cash burn stands at Rs 1,290 crore (or $165 million) and the management expects it to remain well within the guided $400 billion burn for the next two years.
“While management’s ‘educated guess’ is that Blinkit will break even at adjusted Ebitda level over the next three years, we are sceptical,” Edelweiss said.
Edelweiss said Blinkit’s loss per order is higher than its expectations, largely on account of lower throughput per dark store (613 orders per day per dark store).
The company has scaled down its dark store from 450 to 400 in the last 6 months, which has helped it reduce its monthly burn from Rs 200 crore to Rs 110 crore over Jan-May 2022. “Zomato management expects Blinkit adjusted EBITDA breakeven in three years, which we believe is ambitious. We do expect higher order throughput and lower delivery costs will help reduce the burn, but profitability in this business will require significantly higher take rate, and delivery fees, which may impede the scalability,” Edelweiss said.
Zomato’s proposed acquisition of Blinkit at an EV of $720 million will be 7.3 per cent dilutive for existing holders. But it would widen its scope of hyper local delivery services beyond food delivery and would go well with the management’s broader ambitions of capturing a larger slice of India’s commerce, said
.
The brokerage added that the quick commerce space can offer a large complimentary profit pool for players like Zomato that over the years have built significant expertise in on-demand services.
“Blinkit’s deal EV is at 1.5 times basis 5MCY22 annualised GMV, indicating 19 per cent discount to Zomato’s current valuation multiple of 1.85 times basis 1QCY22 annualised GMV, marginally lower than the 25 per cent discount we suggested in our valuations framework for quick commerce players. Given the intense competitive intensity in the quick commerce space we believe that the path to profitability for Zomato group (post-acquisition) can get extended by at least a year (from FY25 to FY26),” JM Financial said.
Credit Suisse, meanwhile, said that the food delivery business is trending on profitability and that Zomato’s cash reserves ensure sufficient funding for growth initiatives.
Brokerages still have buy calls on Zomato. JM Financial finds it Rs 115 worthy. Edelweiss has a target price of Rs 80. Credit Suisse sees it at Rs 90.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
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