Zomato-Paytm deal: Brokerages retain ‘buy’ calls on Zomato, see up to 51% upside

Zomato has jumped over 7 percent in 2 sessions after the food delivery firm confirmed discussions with Paytm regarding acquiring Paytm's movies and events business.

"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 a Board approval and subsequent disclosure under applicable law," it said in a regulatory filing. 

“The above discussion is being undertaken with the intent to strengthen our going-out business further and is in line with our stated position of focusing only on our four key businesses currently,” it added.

Meanwhile, Paytm has also confirmed. "The company routinely explores various strategic opportunities aimed at enhancing shareholder value. The potential transfer of Paytm’s entertainment business, a component of our marketing services, is one opportunity under consideration," it said.

On the back of this latest information, brokerages have retained ‘buy’ calls on Zomato with up to 51 percent upside potential.

In today's deals, Zomato rose as much as 6.4 percent to its day's high of ₹200.90. The stock is just 3 percent away from its 52-week high of ₹207.30. Meanwhile, it has soared 177 percent from its 52-week low of ₹72.55, hit on June 23, 2023.

Brokerage houses JM Financial and Emkay reiterated their ‘buy’ calls on the stock. JM has a target price of ₹250, indicating an upside of over 34 percent, while, Emkay has a price target of ₹280 for the stock, implying a 51 percent potential upside.

JM Financial: As per the aforementioned media reports, the potential deal value could be ₹1,500-2,000 crore, which, as per estimates, would value Paytm's movies and events business at 5x-7x FY24 sales, said the brokerage.

"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. Media reports had earlier indicated that the company was planning to invest ₹100 crore in its wholly-owned subsidiary Zomato Entertainment which operates its live events and ticketing business," it stated.

JM’s BFSI analyst Sameer Bhise says that for Paytm the development is in line with its stated strategy of focusing on the payments and financial services business. Incrementally, cash realisation from this sale should aid Paytm as it re-energises its marketing spends, he added.

Emkay: The brokerage pointed out that India’s organised live event market is valued at ₹8,800 crore as on CY23 (Source: FICCI) and is likely to post a live events ticketing CAGR of 17.6 percent during CY23-26, as per E&Y. The online ticketing market for live events (sports & concerts) is valued at ₹9,900 crore which grew at a CAGR of 50 percent during the past two years.

"India’s live events and ticketing business may continue to report healthy double-digit growth, backed by 1) increased acceptance of live events in Tier II markets, 2) higher ticketing revenue led by price hikes, 3) new sports events, such as Women’s Premier League (WPL), Pro-Kabaddi League (PKL) and Indian Super League (ISL), 4) international format events, such as Lollapalooza, and 5) rising per capita income, leading to growth in comedy performances & other events," it noted.

Zomato’s existing live event business – Zomato Live – is currently posting a revenue run-rate of ₹350-400 crore (annualised Q4FY24), which is primarily led by the events business, wherein the company organises its own events. Zomato Live has a market share of approximately 4 percent in India’s live events business, and no presence in the online ticketing segment. The potential acquisition of Paytm Live will provide an entry into the online ticketing business, thereby competing with incumbents like Bookmyshow, explained Emkay.

Zomato has a healthy cash & investments pile of ₹12,400 crore as on FY24; hence, the potential acquisition of Paytm Live may not have a big negative impact on its liquidity, it added.

Emkay highlighted that Paytm Live could contribute 14.1% to FY24 revenue for Zomato's consolidated business, potentially prompting a revenue upgrade. However, valuations are expected to remain unchanged as the live events and ticketing segment's valuation will likely be lower compared to Zomato's food delivery and Blinkit businesses.

The events (IP) business might incur losses due to market fragmentation and higher artist costs, potentially dampening Zomato's profitability outlook. Despite reporting a consolidated PAT of ₹350 crore in FY24, expected to triple to ₹1,170 crore in FY25E, heightened losses from Paytm Live remain a key monitorable factor.

Zomato has risen around 1 percent in June so far while Paytm has gained almost 13 percent.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.