Increasing order density could reduce cost per delivery and will be the key driver for synergies, but Zomato’s path to profitability could be stretched for at least a year, said analysts, who believe the deal is a near-term one. There will be period pain and long term gain.
To be sure, Blinkit reported 79 lakh orders for May, which was around 16 per cent of Zomato’s Q4FY22 run-rate. This was impressive, said analysts, considering that Zomato operates in 15 versus 1,000 cities for Blinkit. Also, the average order value of Blinkit is Rs 509, which is 28 per cent higher than Zomato. That is, the company is incurring a loss of Rs 84 per order.
Blinkit deal is on expected lines, said swiss creditWhich said that the acquisition is likely to increase the EBITDA loss for FY23 and FY24.
The stock fell 4.48 per cent to Rs 67.20 on Monday BSE,
Quick commerce refers to the delivery of goods in less than 30 minutes. The exorbitant convenience offered by these companies can create a huge market over time, although in some cities, Kotak Institutional Equities noted.
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Like other delivery formats, Accelerated Commerce requires a significant cash investment in the initial ramp-up phase. noted that Blinkit’s annual cash burn is Rs 1,290 crore (or $165 million) and management expects it to remain well within the $400 million burn it has directed for the next two years.
“While management’s ‘educated estimate’ is that Blinkit will break even at adjusted EBITDA levels over the next three years, we are skeptical,” Edelweiss said.
Edelweiss said Blinkit’s loss per order exceeded its expectations, mainly due to low throughput per dark store (613 orders per day per dark store).
The company has reduced its dark stores 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 in January-May 2022. “Zomato management expects Blinkit to have adjusted EBITDA of three. We believe this to be ambitious,” said Edelweiss. We expect higher order throughput and lower delivery costs to help reduce burn, but profitability in this business will require significantly higher rates and delivery fees, which can hinder scalability.”
Zomato’s proposed acquisition of Blinkit for an EV worth $720 million would be 7.3 percent weak for existing holders. But it will widen its scope of hyper local delivery services beyond food delivery and will go well with the management’s broader ambitions to capture a larger share of India’s commerce, said
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The brokerage said the Quick Commerce space can offer a large complimentary profit pool to players like Zomato, which has built up significant expertise in on-demand services over the years.
“Blinkit’s deal EV is at 1.5 times 5MCY22 annual GMV, indicating a discount of 19 percent to 1QCY22 annual GMV based on 1.85 times Zomato’s current valuation multiplier, which is in our valuation framework for accelerated commerce players. This is marginally less than the 25 per cent discount we have suggested. Considering the intense competitive intensity in the accelerated commerce segment, we believe the path to profitability for the Zomato Group (post acquisition) is at least one year (from FY25 onwards). (FY 26) may be extended,” JM Financial said.
Meanwhile, Credit Suisse said the food delivery business is operating on profitability and Zomato’s cash reserves ensure adequate funding for growth initiatives.
Brokerages still have buy calls on Zomato. JM Financial finds it worth Rs 115. The target price of Edelweiss is Rs 80. Credit Suisse sees it at Rs 90.
(Disclaimer: Recommendations, suggestions, views and opinions given by experts are their own. They do not represent whose views) economic times,