ADVERTISEMENT

Will The Market Blink At The Zomato-Blinkit Deal?

Will investors take the view that on a consolidated level, Blinkit's losses will prolong Zomato's path to profitability?

<div class="paragraphs"><p>A Zomato delivery executive. (Photo: Ravi Sharma/Unsplash)</p></div>
A Zomato delivery executive. (Photo: Ravi Sharma/Unsplash)

The much-speculated acquisition of Blinkit came through with Zomato acquiring the company in a stock deal of Rs 4,447.5 crore and some cash of Rs 60 crore for Blinkit's warehousing operations. The acquisition of a loss-making company by another unprofitable company in stock could bother the public markets as it bloats up the red ink on the books of the food aggregator startup, especially with a company that has drawn frowns for its approach to disclosures of operational metrics.

Valuation: Number And Process

The Zomato board approved the issuance of 62.85 crore shares at Rs 70.76 apiece to 12 investors of Blink Commerce Pvt. Ltd., the parent of Blinkit. That is a 6.88% equity dilution for Zomato’s shareholders. Zomato will issue 19,036 shares to the investors of Blink Commerce for every one share they hold. In the end, Zomato will acquire 33,018 shares of Blink Commerce and make it a subsidiary. It currently holds 1 equity share and 3,248 preference shares in the company.

How Zomato valued Blink Commerce is not disclosed either in the media release, the letter to the shareholders, or the postal ballot seeking approval for the preferential allotment.

Blink Commerce's valuation has halved since it was a unicorn last year, but so has Zomato, which saw a peak value for its shares at Rs 169.10 apiece and is currently languishing below its IPO price of Rs 76/share.

Blink Commerce ended the fiscal year 2022 with a revenue of Rs 236.3 crore (audited). Zomato had not provided what the contribution profit for the fiscal is, Ebitda or profit after tax, though the financials are already audited. In its letter to the shareholders, it has provided operational metrics for the months of January and May 2022, which indicated its contribution margin and Ebitda are negative and indicate a scale-up of the model.

As JM Financial pointed out in a recent brokerage note, a majority of new-age companies still incur losses and traditional valuation comparisons such as earnings multiples can't be computed. As a result, the sales multiple has become the preferred metric for investors looking to evaluate valuations across these companies.

In this transaction, Zomato paid 18.8 times Blinkit's fiscal 2022 revenue to acquire a loss-making quick commerce company. The only justification for the valuation has been that the Blinkit team has extensive experience in building a significant business, and Zomato wouldn’t have had the bandwidth to execute on quick commerce without weakening the quality of its current talent pool.

Dolat Capital questions this approach of a high 'convenience fee' being paid to 'buy' a business rather than 'build/make' it organically which makes the terms too generous in favour of private equity and venture capital investors.

5-Month Old Business Model

Blinkit became a pure-play quick commerce company in January 2022 and had a next-day delivery model earlier. A relatively new model i.e. 5 months, which is yet evolving and still to prove its profitability, is valued at Rs 4,500 crore. Why?

In January this year, Reliance Industries, through its retail unit, led a $240-million round of fund infusion in the quick commerce platform Dunzo to acquire a 25.8% stake. Swiggy raised $700 million in January led by investment firm Invesco to invest in quick commerce. There is no doubt that quick commerce is the area of focus and competition is intense, but will companies be able to achieve profitability sooner is a big concern.

Zomato informed its shareholders that Blinkit's losses have reduced between January and May 2022, led by operational leverage, improved execution, and closure of unviable dark stores which reduced from over 450 in January 2022 to 400 in May.

Zomato argues that many new dark stores are on the path to profitability and hopes meaningful dark stores to be profitable in the next year or so. It appears to be making an educated guess, not offering guidance, that the business becomes Ebitda-positive in the next three years. The company does not see this deal moving its envisaged timeline of profitability.

Will investors take the view that on a consolidated level, Blinkit's losses will prolong Zomato's path to profitability?

Further Investment

Zomato says it had envisaged Rs 3,000 crore cash investment in quick commerce business in calendar years 2022 and 2023. It had already committed Rs 1,125 crore toward Blinkit via debt and since Blinkit will be a subsidiary, it plans to invest an additional Rs 1,875 crore in the operations to bring the company toward a path of profitability.

Zomato says “this capital would be funded from the Rs 12,219 crore cash on [its] balance sheet (as of March 31, 2022).”

Perceived Conflict Of Interest

Another issue being raised by the market that the management has not clarified yet is perceived conflicts of interest on more than one front. One is in the form of a common investor in Blinkit and Zomato: Sequoia. The second is that Blinkit founder Albinder Dhindsa is married to Zomato’s co-founder and Chief People Officer Akriti Chopra. Chopra has been working with Zomato since 2011, and her co-founder designation comes with responsibility at the time of presenting the company to potential investors during fundraising rounds. Many startups have provided co-founder status to employees who have been part of their core team.

To be clear, co-founder does not mean promoter or co-promoter as Zomato does not have any identifiable promoter as per disclosures to the regulator during IPO and stock exchanges. Chopra has Zomato shares through the company's employee stock option plan to the tune of 1.8 crore shares. But the company's co-founders are not its promoters. Deepinder Goyal, who is the founder and managing director, is classified as public too and holds 4.69% of the company at the end of March 2022.

While Zomato had announced that it will spend only $400 million or Rs 3,000 crore on quick commerce, a Rs 4,447-crore stock deal is also an exchange of currency in the form of shares. The street will ask—is this the best and judicious use of that currency?

Sajeet Manghat is Executive Editor at BQ Prime.