Zomato profits could look hazy with Blinkit: Analysts

Food delivery firm expected to be profitable by FY27 due to competition, says report

Zomato could take longer to make profits after it acquires Blinkit for a pricey ~4,447-crore amid intense competition in the quick commerce industry, said analysts on Monday.

Concerns about the acquisition pulled down the online food delivery firm’s stock 6.4 per cent to ~65.8 apiece on the BSE on Monday. In comparison, the benchmark Sensex settled 0.8 per cent higher.

Zomato expects a meaningful number of Blinkit’s dark stores — used to serve rapid online deliveries — to turn profitable within the next one year and make the entire business viable on adjusted Ebitda (earnings before interest, tax, depreciation, and amortisation) levels, in less than three years.

"However, due to limited financial and operating data, nascent operational history, and intense competition, we forecast Blinkit to turn profitable only by fiscal year 2026-27 (FY27). As a result, we believe that Zomato's path to profitability may get extended from FY25 to FY26," said a note by JM Financial.

Blinkit has more than 400 dark stores, down from more than 450 in January 2022. "While the average order value (AOV) of ~509, and 14.4 per cent take rate is impressive, the contribution profit per order, at ~ 84, is weak. Increased throughput, along with reduced cost per delivery, will be the key driver of profitability," said analysts at Edelweiss Securities.

Global brokerage Credit Suisse said as Blinkit's business is in its early stage, the deal will likely raise Ebitda loss for Zomato in FY23/FY24.

Expensive deal

According to the terms of the deal, the purchase consideration of ~4,508 crore will be paid to Blinkit equity holders in the form of all-stock acquisition of Blinkit Commerce Pvt Ltd for ~4,448 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 ~70.76, and cash acquisition of Hands on Trades Pvt Ltd for ~60.7 crore.

The deal (after including the incremental ESOP pool created) values Blinkit (EV basis) at $750 million (~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, including the current deal, and investment done in August last year," said analysts Kotak Institutional Equities in a report.

Those at 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.

"Blinkit has reported only 20 per cent revenue CAGR over FY20-22, and continues to make heavy losses in a hyper competitive environment. The average P/S multiple across various industry verticals in 2021 was about 17x P/S. Faltering execution, leading to integration issues, and higher up cash burn are the key risks," it said.

Increased competition

Analysts believe 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. "With a large upfront investment, we don’t see immediate value accretion from Blinkit acquisition. We bake in merger-related dilution, and continue to provide for $400 million of Blinkit-related losses, resulting in a revised fair value of ~77 (from ~83). This drives a downgrade in our rating to ADD from BUY," said KIE.

VK Vijayakumar, chief investment strategist at Geojit Financial Services, says, "This is a segment where profitability is a few years away. Some of them might do well in the long run. But retail investors, instead of chasing hope, will be better off chasing solid stocks with strong fundamentals now. Leading banks will report very good Q1 FY 23 results next month. That's a bird in hand; e-commerce companies are birds in bushes."