Shares of food delivery gaint, Zomato, tanked for the second day down over 8.2 per cent in Tuesday’s trade. Why is the share falling?
Zomato Share Price Today: Shares of food delivery giant, Zomato, tanked for the second day down over 8.2 per cent in Tuesday’s trade, after the food delivery giant agreed to acquire instant grocery startup Blinkit for Rs 4,447 crore in an all-stock deal.
The deal comes after it bought a more than 9 per cent stake in SoftBank Group-backed Blinkit for nearly Rs 518 crore in August, with a promise to invest as much as $400 million in the Indian quick-commerce market over the next two years.
As part of the deal, Zomato will issue up to 629 million shares, amounting to an equity stake of 6.88 per cent on a fully-diluted basis, at an allotment price of Rs 70.76 per share.
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.
“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.
The company’s shares fell as much as 14 per cent since the announcement of the offer, shedding nearly 76.78 billion rupees in market capitalization. They are also down nearly 48 per cent since going public last July.
Issuance of new shares by Zomato to Blinkit, including employee stock option pool, would amount to dilution of about 7.25 per cent of total outstanding shares post acquisition basis, according to a Morgan Stanley client note.
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.
Shareholders of Blinkit will get about 7 per cent in Zomato at Rs 0.76 per share. The transaction implies a 7.4 per cent dilution in Zomato’s existing share capital and is valued at an enterprise value to revenue of 8.1 times in May 2022, like its valuation.
Zomato shares, which were listed on July 23, 2021, are down 61 per cent from their all-time high of Rs 169 hit on November 16. The stock had rallied as much as 122 per cent from its issue price of Rs 76.
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