Zomato Blinkit deal: What does acquisition announcement means for stock price, investors? Brokerages divided, check target prices

Shares of Zomato fell narly six per cent in Monday's intraday trade after the food aggregator's board approved the acquisition of quick commerce start-up Blinkit in an all-stock deal for Rs 4,447 crore. Since the deal announcement, brokerages and analyst are divided on the stock. They believe the acquisition may hurt the price movement of the stock in the short-term, however, it will help Zomato in the long run.  

Shares of Zomato, which have been hovering around their 52-week low, are still available at over 60% discount from their one-year high. The counter traded on a 52-week high value of Rs 169.10 on November 16 last year. On Monday, the stock dropped around six per cent to Rs 65.50 per share in BSE intraday trade.  

What do brokerages say?  

As per brokerage house JM Financial, Blinkit acquisition is a near term pain, but long-term gain. The brokerage house maintained a buy on Zomato shares with a target price of Rs 115 per share. On Monday's opening price of Rs 73 per share, the upside is …. 

We believe Zomato is well-placed to gain from robust industry tailwinds for hyperlocal delivery services, it said. "Zomato's proposed 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 pegged at $1.3 trillion," JM Financial said.  

Meanwhile, global brokerages were divided on the stock post acquisition announcemnets.  

CLSA marinated a buy rating on the stock with a target price of Rs 90 per share, while Bank of America (BoFA) retained neutral call on the stock. BoFA pegged the target price of Rs 82 for Zomato.  

Similarly, Jefferies maintained a buy target price of Rs 100, however, Macquarie sees further correction in the stock from current levels. Giving an "underperform" rating, the global brokerage firm sees a target price of Rs 55.  

Credit Suisse and UBS retained their 'Outperform' and 'buy' ratings for target prices of Rs 90 and 95 respectively.  

What should investors do?  

Meanwhile, Punit Patni, Equity Research Analyst, Swastika Investmart Ltd, believes the recently announced acquisition of Blinkit by Zomato Ltd. is expected to add to its woes of high operating losses.  

The Blinkit is synergistic to Zomato’s food delivery business and the management expects the business to grow significantly in the future, said Punit. 

The quick commerce market, however, has become incredibly competitive, and it will take a very long time to figure out the unit economics and turn profitable, he said.  

"Further, the current markets are not conducive for businesses that a growing without showing profits. Thus, we believe that this company is suitable only for investors having a high-risk appetite and a long-term view," added the expert. 

This is a segment where profitability is a few years away, says VK Vijayakumar, Chief Investment Strategist at Geojit Financial.

"Some of them might do well in the long run. But retail investors, instead of chasing hope, will be better off chasing solid stocks with strong fundamentals now. Leading banks will report very good Q1 FY 23 results next month. That's a bird in hand; e-commerce companies are birds in bushes," the expert advised. 

"Zomato’s acquisition of Blinkit for Rs.4,447 crore in an all-stock deal marked its entry into the emerging sector of “quick-commerce”. This deal shall provide cross-selling opportunities to Blinkit by gaining access to the 15mn active monthly users of Zomato and vice-versa. Further, the merger might yield synergies in terms of better utilisation of Zomato’s hyperlocal delivery fleet and consequently reducing their cost of delivery," says Shivam Bajaj, Founder & CEO at Avener Capital.

However, this high cash burning sector houses fierce competition from the likes of Zepto, Dunzo, Swiggy Instamart BigBasket, etc and it will be interesting to see how this expensive investment by zomato pans out in the future, says Bajaj.

"Moreover, whether Ola’s decision to exit food delivery space to focus on its core streams of strength amidst the current market conditions should have been a learning lesson for zomato too, is a question which might be answered in the near future," he added.