Paytm-Zomato deal: What’s in there for investors of the two cos?

Zomato has agreed to acquire Paytm’s entertainment and ticketing business for ₹2,048.4 crore or $244 million, as the food delivery giant aims to strengthen its presence in the “going-out” sector. 

Meanwhile, Paytm, facing challenges, intends to concentrate on its core financial services.

On Thursday, One97 Communications- the listed stock of Paytm’s parent company One97 Communications gained more than 5% in its share price on the back of the news, however at 12:27 pm it was trading at 1% below yesterday’s close. 

Zomato opened 1.5% higher than yesterday’s close but at 12:27 pm it was in the red by 0.48%. 

Invezz takes a look at what analyst forecast for the two stocks:

What’s in there for investors of Paytm?

According to analysts, the deal would shore up One97 Communications cash and cash equivalents ( approximately Rs 8,100 crore), which would possibly be used to scale up rewards/cash-back program to revive its dwindling payment business following the RBI action. 

However, while the net one-off gains adjusted for the earnings outgo would reduce net loss in FY25E, it will hurt future earnings. 

“Based on our rough proforma estimates, net value addition/change in target price due to the deal could be only Rs25/share, far lower than the stock price reaction already seen after the newsflow around the deal (even excluding the expected payment aggregator approval). Currently, we have a REDUCE rating on the company, with discounted cash flow based target price of Rs375/share,” said Emkay Global. 

The brokerage said while it expects the cash to be used for accelerating its cash-back/reward program, or even in any inorganic acquisition complementing its core business, management has not yet shared any plans to deploy the cash which means they will be sitting on the deposits post deal-closure and earn interest income. 

What can Zomato’s investors expect now?

The acquisition of Paytm’s entertainment business will bolster Zomato’s going-out business. 

Post-acquisition, the management estimates gross order value (GOV) of the going-out division to reach more than Rs 10,000 crore in FY26.

The management also expects the going-out business to operate near break-even on an adjusted EBITDA basis, while potentially delivering 4-5% adjusted EBITDA margin as a % of GOV over the medium to long-term.

In FY24, the acquired business generated a combined GOV of more than Rs 2,000 crore with a 29% year-on-year growth by enabling purchase of 78 million tickets by more than 10 lakh unique customers on its platform.

The acquired business reported revenue of approximately more than Rs 300 crore and adjusted EBITDA of around Rs 30 crore in FY24 which translated into 1.5% adjusted EBITDA margin as a percentage of the GOV. 

Dipesh Mehta, senior research analyst from Emkay Global said Zomato plans to launch new app ‘District’ in the next few weeks, to cater to use cases like booking movie tickets, IPL tickets, dining-out table reservations, discovering live entertainment, booking weekend getaways, etc. 

Following this acquisition, the going-out business would be spread across multiple different platforms- Zomato’s existing going out business would continue to run on the Zomato app, and the acquired business which includes movie, sports and event ticketing would continue to run on Paytm’s main app (for a transition period of up to 12 months), along with Insider and TicketNew apps.

In the short term, the District app will duplicate the offerings above and over time; it will gradually nudge customers to move to the District app, he said. 

The brokerage has a ‘BUY’ call on Zomato with a target price of Rs 270.

Jefferies has reiterated its “buy” rating on Zomato and raised the target price to ₹335.

The brokerage firm noted that Paytm’s ticketing business acquisition offers an attractive valuation considering the projected growth and expected margins.

Similar to the food delivery segment, the ticketing business’s low capital requirements suggest a strong return ratio in the long run, according to Jefferies.

The firm also highlighted that this acquisition creates a third distinct growth avenue for Zomato.

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