With Paytm deal, Zomato spices up growth menu

Zomato, which also runs a quick commerce business called Blinkit, will strengthen its ‘going out’ offering but the acquisition may take time to yield results, they said.

“Paytm’s entertainment and ticketing arm will be part of Zomato’s District app, which is due to be launched in the coming weeks.

"On a sum-of-the-part (SOTP) basis, District would hardly move the needle as of now.

"However, Zomato’s vision of creating strong brands across food delivery, grocery, and going out could make it a formidable platform in the long term,” said analysts at Motilal Oswal Financial Services.

Zomato share price rose 2.7 per cent to Rs 267 in intraday trade.

It, however, erased gains to trade flat. Paytm’s share price hit an over six-month high of Rs 604.45, rising 5 per cent in intraday trade.

The BSE Sensex ended the day at 81,053.19, up 147.89 points.

Zomato-Paytm deal

Zomato’s board on Wednesday approved acquiring Paytm’s entertainment and ticketing business (for movies, sports, and events) for Rs 2,048 crore in an all-cash deal.

The deal implies a valuation of around 1x FY24 enterprise value/gross order value (GOV).

At the end of FY24, GOV of the Paytm arm was around Rs 2,000 crore (up 29 per cent year-on-year) and it had 78 million ticket purchase transactions by more than 10 million customers.

Revenue of the business was Rs 197 crore with adjusted ebitda of Rs 29 crore.

Zomato’s going out unit reported annualised GOV of around Rs 5,070 crore in Q1FY25, with 0.8 per cent adjusted ebitda margin as a per cent of GOV.

Acquiring Paytm’s entertainment business will bolster Zomato’s going out business, according to analysts.

They said that while Paytm’s business is at an adjusted ebitda of 1.5 per cent of GOV, higher commissions for exclusive events and cost optimisation could take this higher in the medium term.

The two companies’ boards have decided that the ticketing business will continue to run on the Paytm app for up to 12 months to ensure a smooth transition.

The deal is expected to be closed in Q2FY25.

Integrating the acquired businesses with the new District app could be challenging for Zomato, according to analysts at Nomura.

“Unlike Blinkit acquisition, where the founder Albinder Dhindsa and his team were well known to Zomato management, here the acquired team is completely unknown.

"Secondly, there could be an initial cash burn to incentivise the users to migrate from Paytm’s app to Zomato and District app,” they said.

Nomura maintained a ‘buy’ rating on Zomato’s stock with an unchanged target price of Rs 280, believing the key drivers for the share price will be sustained momentum in quick commerce in the near term and food delivery in the medium term.

Strategic fit

After the acquisition is completed, Zomato would become the second largest entertainment ticketing platform in the country after Bookmyshow.

Zomato’s management expects the going out segment to break even in the near term as the company focuses on growing GOV to over Rs 10,000 crore by FY26 (3x FY24).

Over the medium to long term, the management expects adjusted ebitda margin to expand to 4-5 per cent (as per cent of GOV).

“The management’s strong demonstrated execution in the past and absence of meaningful organised competition (barring Bookmyshow) makes us believe going out could be the next big success out of Zomato in the long-run,” said J M FInancial.

The brokerage has raised the stock’s target price to Rs 300 (from Rs 260 earlier), with a ‘buy’ rating, factoring the deal’s impact.

“Like Zomato’s food delivery segment, the ticketing business has low capital intensity, which promises a high return ratio once it reaches a steady state,” said analysts at Jefferies, giving a higher target price of Rs 335 and a ‘buy’ rating.