Shares of India's Zomato Ltd fell as much as 8.2% on Tuesday, extending losses for a second straight day as investors questioned the rationale of the company's deal to buy local grocery delivery startup Blinkit.
The Ant Group-backed food delivery firm said on Friday it would acquire Blinkit for Rs 4,447 crore ($568.16 million) in stock, as it tries to gain a foothold in the fiercely competitive quick delivery market.
The deal comes after it bought a more than 9% stake in SoftBank Group-backed Blinkit for nearly Rs 518 crore in August, with a promise to invest as much as $400 million in the Indian quick-commerce market over the next two years.
"We believe Blinkit will require investments beyond the $400 million envisaged by Zomato, given rising competitive intensity," analysts at Kotak Institutional Equities wrote in a note.
The company's shares fell as much as 14% since the announcement of the deal, shedding nearly Rs 7,678 crore in market capitalisation. They are also down nearly 48% since going public last July.
Issuance of new shares by Zomato to Blinkit, including employee stock option pool, would amount to dilution of about 7.25% of total outstanding shares post acquisition basis, according to a Morgan Stanley client note.
The quick-commerce sector is growing at a rapid clip, with rivals Swiggy, Reliance Industries-backed Dunzo, Tata-backed BigBasket and Zepto making big investments.
The industry was worth $300 million last year and is expected to grow 10-15 times to $5 billion by 2025, according to research firm RedSeer.
"E-grocery economics have been tough to crack given price competition, relatively lower margin nature of the category, high number of products per order which need efficient fulfilment, and very high competition," Kotak analysts said.
Disclosure: Entities controlled by the Kotak family have a significant holding in Business Standard Pvt Ltd.
(Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)