Brokerages bullish on Zomato’s acquisition of Paytm’s ticketing business

In the last one year, Paytm stock has plunged over 53 percent, underperforming benchmark Nifty which delivered returns of 25 percent during this period.

Shares of Zomato gained over 5 percent on June 19 as the company's intention to acquire Paytm's ticketing business receives strong endorsements from brokerages. Target prices for Zomato are now as high as Rs 280.

“We acknowledge that we are in discussions with Paytm for the aforementioned transaction; however, no binding decision has been taken at this stage that would warrant board approval and subsequent disclosure under applicable law,” Zomato stated on June 18.

The discussion is being undertaken with the intent to further strengthen the company’s going-out business and align with its “stated position of focusing only on the four key businesses currently", the aggregator said.

UBS has issued a buy call on Zomato with a target price of Rs 250 per share as it believes this acquisition aligns well with Zomato's 'going-out' offering. Preliminary calculations suggest that the valuations for this acquisition are reasonable, the brokerage said.

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Although neither Zomato nor Paytm disclosed the valuation of the transaction, the potential deal is estimated to be in the range of Rs 1,600 crore to Rs 2,000 crore, according to media reports. If confirmed, this would be Zomato's second-largest purchase since it acquired Blinkit in 2022 for $569 million in an all-stock deal

According to JM Financial, the successful closure of such a deal will likely strengthen Zomato’s going-out business, which includes Zomato Live which competes with Paytm’s events ticketing vertical.

"The deal could catapult Zomato to second position in the events & movie ticketing space, behind only Bookmyshow," the brokerage said as it maintained a 'buy' call on the stock with a target price of Rs 250 per share.

JM Financial analysts said that the deal would potentially add only around 2.5 percent to Zomato’s FY24 consolidated revenue. "On the other hand, the impact on profitability is difficult to ascertain at the moment as annual subsidiary-level disclosures come with a lag," the brokerage said.

It also noted that Zomato’s balance sheet remains healthy to facilitate the deal with a net cash balance of Rs 12,200 crore as of March 2024.

Also Read | Zomato says talks on with Paytm over movie ticketing business, but no binding deal yet

Elara Securities has also maintained its bullish call on Zomato. According to the brokerage house, Zomato has a healthy cash and investments pile; "hence, the potential acquisition of Paytm Live may not have a big negative impact on its liquidity," it said.

The brokerage recommended 'Buy' on Zomato with a target price of Rs 280 based on a SOTP valuation, implying a 48 percent upside from the last closing price.

Elara values Zomato's food delivery business at 55.0x one-year forward EV/EBITDA, Blinkit at 5.5x one-year forward EV/sales and 2.5x to Hyperpure.

In the previous session, shares of Zomato ended 1.4 percent higher at Rs 188.85 on the National Stock Exchange (NSE). In the last one year, the stock has surged 148 percent, more than doubling investors' money. In comparison, benchmark Nifty 50 delivered returns of over 25 percent during this period.

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