Once derided as an expensive mistake, this Zomato bet is having a dream run
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Synopsis
Zomato acquired Blinkit for around USD568 million in August 2022. Last week, Goldman Sachs valued Blinkit at USD13 billion. In terms of per-share valuation, the brokerage is valuing Zomato at INR98 and Blinkit at INR119. Zomato’s current market cap is USD20 billion. But does that make Zomato stock attractive?
Kshitij Kaji is a fund manager of large and mid-cap portfolio at Pune-based INR4,000 crore Sageone PMS Fund. He admits that Blinkit's success in quick commerce has astonished him. However, he says that his fund is still not an investor. While Kaji can see the growth potential in Zomato stock with every quarter, he says he already has a list of 20 other stocks in large and mid-cap space that are available at cheaper valuation and better
Kshitij Kaji is a fund manager of large and mid-cap portfolio at Pune-based INR4,000 crore Sageone PMS Fund. He admits that Blinkit's success in quick commerce has astonished him. However, he says that his fund is still not an investor. While Kaji can see the growth potential in Zomato stock with every quarter, he says he already has a list of 20 other stocks in large and mid-cap space that are available at cheaper valuation and better profitability. In the same breath, he adds that he takes note of Zomato's business performance each quarter. And Kaji isn't the only one with a complex opinion on this stock. Over the past one year, Zomato is up 200% at INR194. A part of the reason is Blinkit – which is growing at a faster rate and eventually might get bigger than the parent company. In August 2022, Zomato acquired Blinkit for around USD568 million. Last week, Goldman Sachs valued Blinkit at USD13 billion — that’s a whooping 22x rise in value of the acquired asset. In terms of per-share valuation, Goldman Sachs is valuing Zomato at INR98 and Blinkit at INR119, suggesting that Blinkit has a higher per-share implied value than the parent company. The present market capitalisation of Zomato is USD20 billion. But does that make Zomato stock attractive? The answer isn’t simple. 109762507The valuation gameLooking at the growth prospects of Blinkit, Zomato does look attractive but overvalued, especially in the absence of profitability. According to Trendlyne, Zomato trades at a price-to-sales multiple of 16x, which is much higher than FSN E-commerce’s (Nykaa) 8x and significantly lower than 31x of InfoEdge (Naukri/Matrimony). Interestingly, both Nykaa and InfoEgde are profitable. Zomato, on the other hand, is not, much like PB Fintech and Paytm. PB Fintech is valued at 17x price-to-sales. Domestic institutional investors have cut their stake in Zomato at the end of March by 40 basis points from December end to 11.96%. Neelesh Surana's Mirae Large and Midcap Fund also sold over 3.6 million shares of Zomato from over 23 million in March, shows data from Trendlyne. However, there are large international brokerages that are setting progressively higher 12-month target prices. At present, Goldman Sachs has set a 12-month target price of INR240 per share, higher than 24% from INR193 at Tuesday's market close. This is steeper than 12-month target assigned by another big international brokerage CLSA at INR227 per share in February. 109762512Profit playShares of loss-making Zomato, which got listed in July 2021 at a premium of nearly 100% to its IPO price, touched their lifetime low of INR40.55 a year later. The year2022 was bad for startups and tech globally as central banks around the world started to tighten monetary policies to rein in inflation. As excess liquidity dried out, investors stopped chasing growth stocks and paid only for profitability. Some 13 days after hitting a lifetime low on August 10, Zomato acquired Blinkit, another loss-making business. What made investors more jittery about Blinkit or quick-commerce, in general, was that no one thought the 15-minute delivery of groceries was a bankable idea. But it is this acquisition that has really worked for the company. Perhaps investors underestimated the affluent customer’s willingness to pay for convenience.Here are three ways in which Blinkit is going to drive Zomato. Store expansionRight after announcing plans to buy out Blinkit, Deepinder Goyal had made it clear that Blinkit’s quick-commerce was focused on tier-I cities. Around 90% of Blinkit’s gross order value (GOV) comes from the top eight cities, Albinder Dhindsa, CEO of Blinkit, told investors in February. To capture more growth, the company is looking to go deeper in the existing markets than spreading wider. The company is adding stores to existing neighbourhoods where a store is running beyond its capacity or experimenting in new neighbourhoods of the same top 8 cities.The success of this strategy is visible in how quickly new stores can touch the milestone of getting 1,000 orders per day. Four quarters ago, new stores took more than 5 months to reach 1,000 orders per day, now it takes 2 months, data from Zomato shows. Compare this to Radhakrishna Damani’s offline grocery retailer DMart, whose new stores in non-metro cities take a year to get 1,000 orders per day and metro stores takes 6 months to reach the same figure, according to CLSA. More SKUsQuick-commerce platforms like Blinkit are expanding the range of products available in their dark stores. According to the Goldman Sach’s report, quick-commerce platforms keep up to 7,000 SKUs as compared to about 2,000 SKUs in kirana stores (mom-and-pop stores).Keeping more SKUs and being able to sell more creates a network effect. A retail platform selling to more customers will attract more brands, which will eventually offer a cheaper price to get companies like Blinkit to stock more of their products.“There's something called a take rate, which is basically the commission a platform charges to its suppliers. In Blinkit’s case, this commission used to be around 14% of the revenues two years back has now almost gone up to 18%. It shows they have some bargaining power,” says Kaji. While the pricing of these products is still higher than other organised retailers like DMart and JioMart, platforms like Blinkit beat kirana stores on pricing simply because of fewer intermediaries. Scaling up for profitsAt the time of Blinkit’s acquisition, Goyal had said that the business was profitable on per-transaction basis, if fixed costs were removed from the equation.And this is where Blinkit’s rising customer volumes help. In May 2022, the platform recorded 2.3 million transactions, which increased to 5.4 million by the end of December 2023. Add to this the rationalisation of fixed cost. In January 2022, Blinkit had a dark store count of more than 450 stores. As of December end, the company had 451 stores. This is because in the past two years, the quick-commerce company has shut down unviable dark stores, which were not scaling and added them in locations where existing store has higher utilisation. Thus, while some new stores were opened, other old stores were closed.“We expect Blinkit to reach adjusted Ebitda breakeven by the June 2024 quarter, with 5.8% Ebitda margin (as % of GOV) by FY30E, higher than our 5.3% margin forecast for food delivery,” Goldman Sachs said in its report last week. The brokerage added that it expects the margins to improve driven by “higher take rates (better gross margin, higher advertisement income, handling fees) and fixed cost operating leverage (both dark store and replenishment) and indirect costs”. 109762519The final cutThe global brokerage sees Zomato making an Ebitda of around INR8,700 crore (by FY29), 48% of which will come from Blinkit — exceeding 45% expected from the food-delivery business. Currently, Zomato is expected to post an Ebitda of INR400 crore in FY24.With improvement in profitability driven by robust topline growth, perhaps the decision for fund managers like Kaji will become easier — that is if the valuations don’t run ahead of actual reported numbers. (Graphics by Sadhana Saxena)
