Zomato loses nearly $1 billion in 2 days. Is Blinkit deal the culprit here?

Food delivery firm Zomato launched its IPO on July 23, 2021. People believed buying its shares would be a great investment.

On Tuesday, shares of Zomato Ltd fell as much as 8% which lead to losses of nearly USD 1 billion (Rs 7.8 thousand crore).

The company made its debut in the share market at Rs 116 on the NSE, a 52.63 per cent premium to its final offer price of Rs 76.

Zomato's share prices had touched Rs 169.10 on November 16, 2021. Then a major fall was recorded in May 2022. The share prices were as low as Rs 50.35 on May 11, 2022. The stock prices of Zomato on Tuesday were Rs 60.45.

WHAT LED TO THIS MAJOR DROP

The recent drop in Zomato share prices started after Zomato's deal to buy grocery startup Blinkit.

Earlier on Friday, the online food delivery app announced that it will acquire Blinklit for Rs 4,447 crore (USD 568.16 million) in stocks.

Blinkit, formerly known as Grofers, is a grocery delivery firm that promises to deliver items in 10 minutes. Blinkit operates in more than 30 cities. It was launched in December 2013.

Zomato announced this deal to enter the quick grocery delivery market. Zomato already held a 9% stake in Blinkit. In August 2021, Zomato bought 9% of Blinkit shares for Rs 518 crore.

However, the big deal failed to provide a push to Zomato's stake.

Since the announcement of this acquisition, Zomato's shares have dropped by 14%.

WHAT'S WRONG WITH BLINKIT?

Analysts at Kotak Institutional Equities have highlighted that this deal has the potential to reach Rs 20,400 crore by the financial year 2025 and Rs 60,300 crore by the financial year 2030.

"We believe Blinkit will require investments beyond the $400 million envisaged by Zomato, given rising competitive intensity," the analysts said.

But Blinkit is a loss-making startup. The average order value of Blinkit is 28% higher than that of Zomato which is Rs 509.

Still, Blinkit is losing Rs 84 per order. The Blinkit business is hyper-competitive in nature. There are many players in the quick business market these days like Swiggy,BigBasket, Zepto, Dunzo and more.

Deepinder Goyal, founder and chief executive of Zomato, in a blog post, said that investment in quick commerce has been the company's strategic priority since last year. "We have seen this industry grow rapidly, both in India and globally, as customers have found great value in quick delivery of groceries and other essentials. This business is also synergistic with our core food business, giving Zomato the right to win in the long term," he said.