Paytm, Zomato Shares Recommendations: Is Rs 2,048 Cr Deal A Win-Win For The Two New-Age Tech Giants, Or...?

Zomato and One97 Communications share prices witnessed a volatile movement on August 22, after the duo entered into an agreement where the online food delivery giant is going to buy Paytm's entertainment ticketing business for cash of Rs 2,048 crore. It's a win-win deal for both Zomato and Paytm. The acquisition is going to drive Zomato's 'going out' business and make the company the second largest ticketing platform after BookMyShow. The sale will support Paytm to focus on its dwindling core business.

Paytm Share Price:

Paytm shares opened higher at Rs 585 apiece and shot up to touch an intraday high of Rs 604.45 apiece. Paytm stock gained by at least 5.5% on BSE in the early trade before taking a U-turn.

Currently, Paytm shares are down by 0.8% to trade at Rs 568.70 apiece, with a market cap of Rs 36,191.18 crore. The stock is near its intraday low of Rs 565.50 apiece.

Zomato Share Price:

A similar trend was seen in Zomato shares as well. The stock opened higher at Rs 264.95 apiece and surged to hit an intraday high of Rs 267 apiece on BSE, with overall gains of 2.71% before correcting.

At the time of writing, Zomato shares dipped by 0.4% to trade at Rs 259 apiece, which is also near its 52-week low of Rs 257.95 apiece. Currently, Zomato has a market cap of Rs 2,28,710.01 crore.

The Mega Deal:

As part of the agreement, Paytm will transfer its entertainment ticketing business to Zomato by 1) Transfer of OCL's entertainment ticketing business to its 100% subsidiaries, Orbgen Technologies Pvt Limited (OTPL) and Wasteland Entertainment Pvt Ltd (WEPL), and 2) Selling 100% stake in its subsidiaries OTPL and WEPL, which operate the TicketNew and Insider platforms, respectively to Zomato.

As per the regulatory filing, the transfer will also include ~280 existing employees from the entertainment ticketing business.

During the transition period which is up to 12 months, Paytm said that the movie and event tickets will continue to be available on the Paytm app, as well as on the TicketNew and Insider platforms, ensuring a smooth and uninterrupted experience for users and merchant partners.

How Zomato, and Paytm Win From The Deal?

As per Motilal Oswal, as a part of its going-out business, Zomato currently offers dine-out table bookings and a few live ticketing events whereas Paytm's platform offers ticket bookings for movies, sports and live events, which will significantly solidify Zomato's impending launch of its "District" app.

Motilal added, "We believe that, in the context of Zomato's scale, discussion around fair valuation for the business is too premature. Zomato has demonstrated its capability to unlock value from its acquisitions earlier (most notably Blinkit). As we mentioned above, on its own, the District app could be a small part of Zomato's business, but if executed correctly, it could give Zomato a strong mind share in the spending patterns of urban consumers across key forms of recreational or staple spending: groceries, food, and recreational "going out" activities spanning dining, movies, sports, and music."

In the case of Paytm, Motilal believes that the sale would enable a sharper focus on core business, travel, deals, and cashback services, which are crucial for expanding the merchant base and growing overall sales. This strategic move could enhance shareholder value by concentrating efforts on high-growth areas.

It added, "The sale of its entertainment business would provide a financial boost, as this transaction will generate significant profits for Paytm, allowing it to reinvest in other high-potential areas. Cash proceeds will further strengthen the balance sheet. We estimate Paytm's EBITDA to turn positive by FY27."

Zomato is in for a big win and would compete against BookMyShow, but execution is key.

In JM Financial's opinion, post-M&A, Zomato would become the second largest entertainment ticketing platform in the country, behind only Bookmyshow. The deal would enable Zomato to offer its customers a wide range of booking use cases spread across movie tickets, IPL tickets, dining-out table reservations, live entertainment and weekend getaways, through a dedicated app 'District' (to be launched in the next few weeks)."

Further, JM's note added that "the all-cash deal value is INR 20.48bn, implying a valuation of ~1x FY24 EV/GOV (~7x Sales /~71x Adj. EBITDA), towards the higher end of our expectation (refer our report). The going-out segment will likely operate at break-even levels in the near term as the company will likely focus on growing GOV to INR 100bn+ by FY26 (3x FY24), over the medium to long term management expects Adj. EBITDA margin to expand to 4-5% (as % of GOV)."

Moreover, Emkay Global added, "The deal would shore up Paytm's cash and cash equivalents (~Rs81bn exPML funds), which would possibly be used to scale up rewards/cash-back program to revive its dwindling payment business following the RBI action. The net one-off gains adjusted for the earnings outgo would reduce net loss in FY25E, but hurt future earnings."

On Zomato, Emkay said, "Post-acquisition, the management estimates going-out GOV at >Rs100bn in FY26. Mgmt. expects the going-out business to operate near break-even on an adjusted EBITDA basis, while potentially delivering 4-5% adjusted EBITDA as a % of GOV over the medium-to-long term. Mgmt's strong execution track record grants confidence that going out will add further value over the long term."

Zomato is going to benefit more than Paytm.

Chirag Jain, CA and an Equity Investment Analyst The acquisition aims to strengthen Zomato's presence in the "going-out" sector, including movie and event ticketing." Adding he said, "The move expands Zomato's portfolio beyond food and grocery delivery, tapping into the growing demand for online ticketing."

For the fintech, Jain added, "Paytm will focus on its core financial services, divesting its assets in the ticketing space."

Motilal cited that Zomato is expecting to complete its acquisition in Q2 of FY25.

BUY/Sell PAYTM, Zomato Shares?

Zomato:

Maintaining BUY with Rs 300 target price on Zomato, Motilal Oswal said, "Zomato's food delivery business is stable, and Blinkit offers a generational opportunity to participate in the disruption of industries such as retail, grocery and e-commerce." Adding, it said, "We value the business using a DCF methodology, assuming 12.5% cost of capital."

Whereas, JM added, "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. We maintain 'BUY' with revised TP of INR 300 (vs. INR 260 earlier) derived basis 75x FY27 PER."

Emkay as well has retained BUY on Zomato for a target price of Rs 270.

Paytm:

Motilal Oswal has maintained a Neutral Rating On Paytm with a target price of Rs 550 apiece.

On the other hand, Emkay recommends 'REDUCE' on Paytm stock. It added, "Based on our rough proforma estimates, net value addition/change in TP due to the deal could be only Rs25/share, far lower than the stock price reaction already seen after the news flow around the deal (even excluding the expected payment aggregator approval). Currently, we have a REDUCE rating on the company, with DCF-based TP of Rs375/share."