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Zomato Ltd has finally announced the acquisition of Blink Commerce (or Blinkit), earlier known as Grofers India. However, investors are visibly unhappy, with the stock falling by 6.6% on Monday when the Nifty 50 index was up by nearly 1%.

Big investments in Blinkit, uncertainty on its profitability, and an overcrowded sector are some factors troubling investors. Blinkit is a quick commerce marketplace delivering groceries and other essentials, instantly (say 15-20 mins) versus the traditional ‘next day delivery’ grocery model. Zomato is making a fairly substantial investment towards a business where investments can increase because of competitive intensity, according to Kotak Institutional Equities. “Zomato’s investment in Blinkit will amount to $1.05 billion comprising of $100 million (paid in August 2021), $700 million (announced in June 2022, subject to approvals), and $250 million to be invested over FY2023-24," said a report by Kotak on 26 June.

Fast, but not furious
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Fast, but not furious

The $250 million mentioned above is a part of the $400 million (upper bound) that Zomato has earmarked for its growth plans in quick commerce business over CY22 and CY23. According to Zomato, most of this capital will go towards funding losses in Blinkit over the next two years. Zomato has already extended $150 million as debt to Blinkit.

As of now, Zomato owns 9% of Blinkit and 8.4% of Hands On Trades, whose warehousing and ancillary services business is also a part of this deal, expected to be completed by August. According to Kotak’s estimates, the deal entails an enterprise value to sales ratio of 8.4 times as of June 2022.

The Blinkit deal was expected, but the acquisition of a loss-making firm at a time when Zomato is also incurring massive losses adds to the uncertainty. In FY22, Zomato reported consolidated net loss of 1,222 crore.

“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, and the presence of strong consumer packaged goods (CPG) brands. Blinkit itself is fine-tuning the business model and has closed about 12% dark stores in the past five months," Jefferies India analysts said in a report titled Blinkit Acquisition: Some Knowns & a Lot of Unknowns. In May, Blinkit’s dark store count was about 400. Zomato reckons that overall profitability will also be a function of how aggressively it expands and opens new dark stores. “It is possible that this business becomes adjusted Ebitda breakeven in less than three years," it said. However, Zomato maintains, “This is an educated guess at this stage and not a guidance."

Some analysts are sceptical about this assessment. Post this deal, the Blinkit app and brand will operate separately from Zomato, offering cross selling opportunities. However, the customer acquisition costs would be higher versus Swiggy, as it has food delivery business and quick commerce vertical, Instamart, in the same app, which means customers use a single platform for availing food and grocery delivery services.

There are some bright spots, too. The deal would result in better utilization of the delivery fleet and reduce the delivery cost. Further, Blinkit’s average order value (AOV) in May was 509 vis-a-vis Zomato’s 398 in FY22. Blinkit’s higher AOV could help boost Zomato’s gross order value, eventually. Also, the advertisement revenue is higher in quick commerce versus food delivery as CPG firms spend higher on digital advertisements. However, instant gratification takes Zomato on a long road to profitability. JM Financial Institutional Securities forecasts Blinkit to turn profitable only by FY27 because of the limited financial and operating data, nascent operational history, and intense competitive intensity. “We believe that the path to profitability for Zomato group (post the acquisition) can get extended by at least a year (from FY25 to FY26)," said JM’s analysts.

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