Zomato’s Blinkit Deal: What Analysts Make Of The Acquisition

Zomato has agreed to acquire Blinkit, building on synergies it sees in the food and grocery delivery businesses. But analysts expect a “roller-coaster” in quick commerce, delayed path to profitability and high convenience fees.

Zomato will buy 100% in the grocery delivery startup formerly known as Grofers for Rs 4,447 crore in an all-stock deal. It held around 9% in Blinkit.

In a letter to shareholders, Zomato said the two brands will be kept and run separately. But it remained evasive on when it sees profitability for Blinkit citing “the early stage of the business”.

“It’s very hard to commit to a timeline for profitability. We expect that a meaningful number of the dark stores should become contribution break-even within the next year or so,” Zomato said in the letter.

“Overall profitability will also be a function of how aggressively we expand and open new dark stores,” Zomato said. “It’s possible that this business becomes adjusted Ebitda break-even in less than three years. This is an educated guess at this stage and not a guidance.”

Kotak Institutional Equities downgraded the Zomato stock citing that Blinkit will require more investments and rising competition. While Jefferies maintained ‘buy’, it too flagged quick commerce as “more challenging than food delivery given high competition”.

Shares of Zomato Ltd. shed as much 6.9%, the most in nearly three weeks, before ending 6.4% lower. Of the 19 analysts tracking the company, 15 maintain a ‘buy’ and two each suggest a ‘hold’ and a ‘sell’, according to Bloomberg data. The 12-month consensus price target implies an upside of 24%.

Here’s what analysts made of the Zomato-Blinkit deal:

• Maintains ‘buy’ with a target price of Rs 100 apiece, implying a potential upside of 42%.

• Quick commerce, while growing rapidly, is at an early stage and business model is yet to be proven. Blinkit is in this space for only five months so far. Unlike food tech, the market is crowded and take is low but management sees better medium-term profitability.

• Blinkit increases Zomato’s total addressable market and makes the business more defensible. Peak delivery times for food delivery are also complementary to quick commerce, this should help improve delivery fleet utilisation.

• Blinkit is in a high growth space, but the business model at least for now, is more challenging than food delivery given high competition, lower take rates presence of strong consumer packaged goods brands.

• Zomato also fears the potential competition from hyperlocal players into its food tech and is probably taking a long-term view which may be at odds with those investors who may have short-term focus.

• Separate apps imply higher customer acquisition cost than Swiggy. Expects roller coaster in quick commerce.

• Maintains ‘sell’ with a target price of Rs 48, implying a potential upside of 32%.

• Zomato valued Blinkit at EV/Rev multiple of 8 for a business that was struggling to fund its operations and at a time investor money is only looking for profitable option.

• Although the rationale for purchase is explained well, the “convenience fees” for “make vs buy” decision for quick commerce business is too generous in favour of PE/VC investors.

• Blinkit has recently moved from salary model to per-order basis incentive for riders, resulting in lower rider income, rising attrition, leading to lower availability and in turn increased time for delivery and a declining customer satisfaction score. The company will see increased pressure in terms of order frequency or increased customer acquisition/retention cost.

• Zomato’s fixation to create brands and its quest for better service to customer has become significant hindrance to any kind of business optimisation. For example, Zomato doesn’t intent to batch orders in food delivery business resulting in higher delivery cost subsidies.

• Similarly for Blinkit, Zomato doesn’t intend leveraging rider fleet (unlike Swiggy-Instamart) and more tangible plans to better customer acquisition cost are conspicuous. Plans to run both apps as separate brand and lack of private labels makes costs more visible than margin trajectory.

• Zomato’s path to profitability would now get further delayed post this integration.

• The mark-down in valuation seen in Blinkit is in line with that seen by most growth companies in the current macro environment.

• Management is confident on quick commerce profitability potential given higher revenue per order than food delivery, low customer acquisition cost, efficient last mile costs versus food delivery given a higher number of deliveries per hour and higher operating leverage versus food delivery.

• The stores are made with a throughput of 2,500-3,000 orders per day in mind (current average is 600+ per dark store per day), after which some of the dark stores are breaking even, reflecting profitability potential with scale.

• The overlap of Blinkit customers with Zomato customers is large, but what is interesting is that there are sets of incremental new users coming on Blinkit that are not Zomato customers and hence can be leveraged.

• It plans to right now to continue the super brand strategy (rather than super app) where Zomato and Blinkit will continue as separate apps, but it did not rule out the possibility of experimenting with multiple aspects such as integrating them into each other’s apps.

• Downgrades Zomato from ‘buy’ to ‘add’, cuts fair value from Rs 83 to Rs 77, implying a potential upside of 8.5%.

• Blinkit will require investments beyond the $400 million envisaged by Zomato given rising competitive intensity.

• E-grocery economics have been tough to crack given price competition, relatively lower margin nature of the category, high number of products per order which need efficient fulfillment, and very high competition. Blinkit itself has changed its business model several times in an attempt to get to better unit economics.

• Quick commerce may witness competitive intensity over FY23-25 similar to that witnessed by food delivery in FY2018-20. Players like Reliance Retail (via Dunzo), Tata’s BigBasket, Swiggy’s Instamart, Flipkart’s Quick, etc either have hyperlocal delivery experience or strong grocery inventory supply chains.

• With a large upfront investment, Kotak doesn’t see immediate value accretion from Blinkit acquisition.

• Maintains ‘buy’ at a target price of Rs 115, implying a potential upside of over 63%.

• Acquisition of Blinkit not only widens its scope of hyperlocal delivery services beyond food delivery but also highlights management’s broader ambitions of capturing a larger slice of India's commerce market.

• Quick commerce space in the long run can offer a large complimentary profit pool for players like Zomato that over the years have built significant expertise in on-demand services.

• Given the intense competitive intensity, the path to profitability for Zomato group (post-acquisition) can get extended by at least a year (from FY25 to FY26).

• Due to limited financial and operating data, nascent operational history and intense competitive intensity, JM conservatively forecasts Blinkit to turn profitable only by FY27.

• Zomato is well-placed to gain from robust industry tailwinds for hyperlocal delivery services. However, the volatile market environment, relatively cheap valuations of global peers, investor focus on profitable names and the lock-in expiry for the company’s pre-IPO investors in July 2022, may limit near-term upside for the stock.