Can Zomato's New Deal with Paytm Match Blinkit's Success?

There are two theories of building a sustainable and profitable business.

One is to build a specialised and niche product, around which you base your entire business.

The other approach is to become a jack of all trades. This is done by diversifying your business across different verticals, essentially running multiple businesses under one roof.

Companies following the latter approach hedge themselves against adverse market conditions and business cycles in different industries.

Generally, these companies have different sub-brands for each vertical. The failure of one brand or vertical won't affect the overall brand and the parent company's reputation.

A prime example of this approach is Hindustan Unilever (HUL), with it's various sub-brands such as Lakme, Lifebuoy, Brooke Bond, Dove, Kwality Wall's, LUX, Brylcreem, Close-Up, and Horlicks.

Notably, the branding of the parent company, HUL, is hardly ever found on these products. This strategy shields the parent company's brand from any negative impact or backlash to its products.

Today, we discuss a company which is slowly transitioning from the first category to the second one.

Zomato's Transition

Zomato, a food delivery giant, is gearing up for an acquisition that could potentially turn its fortunes around.

Zomato has garnered interest from new-age investors, due to its extensive database of restaurants and customers, despite having negative earnings until the latest financial year, FY24.

Today, Zomato's focus encompasses online food ordering, restaurant reservations, loyalty programs, consulting services, and more.

It also operates as a food search engine, like Google's search engine, but with a focus on food and restaurants.

From its humble beginnings as a home project, Zomato has grown into one of the world's largest food aggregators.

Lately, the company has been proactive in efforts to increase its market share through the acquisition of Blinkit and events like Zomaland.

To further expand its business operations, the company is in discussions with the fintech giant, Paytm, regarding its movie and event ticketing business.

This indicates the company's strategic focus on growth through acquisitions.

The acquisition of Paytm's movie and event ticketing business presents synergies and diversification opportunities owing to the similarities with Zomato's platform business model.

Zomato views this space as a near-monopoly of Bookmyshow (BMS) and believes it can compete effectively in a duopoly situation.

Leveraging its extensive customer base, Zomato aims to cross-sell its various services.

Although neither Zomato nor Paytm disclosed the valuation of the transaction, the potential deal is estimated to be in the range of Rs 16-20 bn.

This would be Zomato's second-largest purchase since acquiring Blinkit in 2022 for Rs 44.5 bn in an all-stock deal, as reported by Business Standard earlier.

Coming to the current financials of the company, it has been able to achieve topline growth of 71%, in FY24. The growth was largely driven by the growth in the gross order value of the company by 22.5% YoY, in FY24.

In FY24, the company experienced first ever financial year of profitability.

The net margin stood at 3%, while the ROE and ROCE for the year were 1.7% and 1.8%, respectively.

Going ahead, the company expects the advertising revenue in Blinkit to increase. It is also hopeful about achieving the target of 1,000 stores soon, with the plan to add 475 stores in a year.

From the date of this announcement, Zomato's shares gained over 7% on 19 June due to the company's intention to acquire Paytm's ticketing business.

The Road Ahead for Zomato

If the transaction is completed, it could potentially be one of Zomato's biggest buyouts, following its acquisition of Uber Eats in 2020 and its takeover of quick commerce platform Blinkit (formerly Grofers) in 2021 in an all-stock deal worth Rs 44.5 bn.

A successful conclusion of this deal is expected to bolster Zomato's dining-out business, which includes Zomato Live, competing with Paytm's events ticketing vertical.

This deal could elevate Zomato to the second position in the events and movie ticketing space, trailing only behind Bookmyshow.

Paytm does not disclose specific figures for its movie and events ticketing business.

However, as per Zomato's investor presentation, the company reported annual sales of Ra 17.4 bn in FY24 for its broader marketing services segment, which includes credit card marketing and gift vouchers.

The marketing services segment accounted for 17.4% of the total operating revenue in FY24, which stood at Rs 99.8 bn. While it accounts for 14.4% of Zomato's total revenue of 121.1 bn, for FY24.

Is The Grass Really That Greener on The Other Side?

Since its listing, Zomato has been closely followed by analysts. The loss-making company faced criticism for its ambitious market cap valuation until the recent fiscal year of FY24.

However, experts defending the valuation believe it is based more on growth potential and futuristic assumptions rather than traditional parameters.

Even though Zomato posted its first-ever year of net income in FY24, it has often been considered a company striving for profitability until that point.

Furthermore, operating in a duopoly market structure, Zomato faces fierce competition from Swiggy. In such a duopoly setup, both firms are poised to be dependent on each other, reducing Zomato's ability to act independently and adapt to market changes.

The decision to acquire Paytm could either boost their existing capabilities, but only time will be able to answer this question for us.

Conclusion

If the acquisition is completed, Zomato could potentially excel the ticket booking and event space, or it could further weigh down its existing business, which has struggled to achieve profitability in the past.

However, the companies are still in the discussion phase, and no formal announcement has been made. We will share our insights once further notable updates are provided.

Investors should stay informed, diversify their portfolios, and consider both the opportunities and risks associated with such potential acquisitions.

Keep an eye on market trends and company announcements to make informed decisions.

Happy investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...