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Zomato's proposed acquisition of Blinkit (at an EV of USD 720mn, ~7.3% dilution for existing holders) 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 (USD 1.3 trillion). As highlighted in our recent report Quick Commerce: The Business of Instant Gratification, we believe the 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. Blinkit’s deal EV is at ~1.5x basis 5MCY22 annualised GMV (JMFe of ~USD 475mn), indicating ~19% discount to Zomato's current valuation multiple of ~1.85x basis 1QCY22 annualised GMV, marginally lower than the 25% discount we had suggested in our valuations framework for Quick Commerce players in our earlier report (refer exhibit 1). Given the intense competitive intensity in the Quick Commerce space we believe that the path to profitability for Zomato group (post-acquisition) can get extended by at least a year (from FY25 to FY26). Despite management optimism, we conservatively build forecasts for Blinkit due to limited data and basis DCF, ascertain that the acquisition can add >8% value to our published TP of INR 115 for Zomato.

Conservatively estimate Blinkit to turn profitable by FY27:

We anticipate strong growth for Blinkit in the near-medium term and forecast GMV of USD 4.5bn by FY27 (May’22 annualised GMV of USD 620mn). Managment believes that a meaningful number of dark-stores can turn profitable at contribution level within next 1 year. In fact, it believes entire Blinkit business can turn profitable (on adj. EBITDA levels) in less than three years. However, due to limited financial and operating data, nascent operational history and intense competitive intensity, we conservatively forecast Blinkit to turn profitable only by FY27. As a result, 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).

Expect significant synergies:

As indicated in our report Quick Commerce: The Business of Instant Gratification, we believe Quick Commerce is highly complementary to food delivery. Customers who order food online due to reasons of convenience, wider selection, discounts and standardised customer support are also likely to be more amenable to ordering convenience items online for the very same reasons. Consequently, food-techs like Zomato can derive several synergy benefits such as cross utilisation of existing delivery fleet, lower CAC, cross-sell opportunities, better customer retention and enhanced tech-stack for end-to-end deliveries. Plus, Blinkit’s experience of managing product-supply chain operations, experience in merchandising and established relationships with various brands/third-party suppliers also adds to deal benefits.

Remain bullish on Zomato but near-term overhangs can limit upside:

We believe 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 Jul '22, may limit near-term upside for the stock.

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