Alibaba To Sell Zomato Shares Worth $200 Mn

China’s Alibaba is reportedly set to sell 3% of its stake, or shares worth $200 Mn, in foodtech startup Zomato via a block deal on Wednesday.

The development comes more than two months after Zomato saw a sell-off in July and August this year after several of its pre-IPO investors partially or fully exited the loss-making venture post its lock-in expiry.

Alibaba’s deal tomorrow is likely to offer a 5%-6% discount on Zomato’s last closing price, as per CNBC Awaaz. Zomato shares ended Wednesday’s session at INR 63.55, down 1.3% from Tuesday’s close on the BSE.

As of September 2022, Alibaba’s Antfin Singapore Holding and Alipay Singapore Holding held a total of 12.98% stake in Zomato. As per the latest report, Alibaba is likely to hold a 10% stake in the startup post tomorrow’s deal.

Morgan Stanley is likely to be the broker for the deal.

After Zomato’s lock-in expiry in July, its pre-IPO investors like Moore Strategic Ventures and Uber sold their entire stake in the startup. Later, Tiger Global and Sequoia also offloaded their stakes in Zomato.

It is pertinent to note that the latest development comes at a time when overall investor sentiment is negative, especially for new-age tech companies, amid the current global macroeconomic conditions and fears of a looming recession. The inability of many of these companies to turn profitable has further led to investors dumping their stocks.

The expiry of the lock-in period for new-age tech startups Paytm and Nykaa earlier this month saw many of their major pre-IPO investors selling their stakes in the firms. 

While global investor SoftBank Group sold 4.5% of its stake in Paytm worth about $200 Mn, Lighthouse India Fund III Limited sold Nykaa shares in multiple bulk deals till last week. CA Swift Investments of Carlyle Group also sold 18 Mn shares of Delhivery last week.

Despite this, a large number of domestic as well as global brokerages have expressed confidence in these Indian new-age tech stocks, betting on their long-term growth trajectory.

Brokerages’ Take On Zomato

With an ‘outperform’ rating on the stock, Bernstein chose Zomato as its top pick in its internet coverage. The brokerage has a target price of INR 90 for the stock, implying an upside of over 41% to its last close.

Bernstein recently increased its estimates for Zomato’s FY24 consolidated revenue to $1,649 Mn while also increasing its estimates for its quick-commerce subsidiary Blinkit. 

While there are some concerns among investors pertaining to Zomtao’s competitive edge over Swiggy in the duopolistic food delivery market in India, brokerage Jefferies, in a recent research note, said that the latter was fast losing its market share to Zomato despite offering heavy discounts.

Based on Prosus’ half-yearly financial report, the brokerage noted that Swiggy grew 40% while Zomato’s growth rate was at 55% during the period.

Kotak Institutional Securities also said that as per its analysis, Zomato seems to have captured incremental market share against Swiggy. While the Zomato-Swiggy food delivery GMV market share was 50:50 in the first half of 2021, the ratio was at 54:46 in the first half of 2022 in favour of Zomato. It reflected the startup’s strong execution and customer stickiness.

“Zomato’s market share gain, in what has been a tight and duopolistic market, is a positive,” said analysts at Kotak Institutional Securities. The brokerage has a ‘buy’ rating and INR 100 fair value on the stock.

Despite the volatility in stock prices, Zomato seems to be clearly winning the market share in the segment, which is turning out to be difficult for new entrants to crack. As per reports this week, Amazon is planning to wind up its food delivery business, which it offers in some parts of the country, by the end of the year.

Morgan Stanley in its latest research note on Zomato said that the potential exit of Amazon from the food delivery business highlights barriers to scale business for a new entrant. The brokerage maintained its ‘overweight’ rating on Zomato with a price target of INR 92.

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