D-Street Rivalry: Is Swiggy’s IPO a threat to Zomato’s success on the stock markets?

As Swiggy prepares for its Rs 10,000 crore ($1.2 billion) initial public offering, its fierce rivalry with Zomato will spread to Dalal Street, with both companies likely to compete for investor interest.

With a market share of around 58% in the food delivery business and 40-45% in fast trade, Zomato It is currently the market leader in both segments. However, the competitive landscape could change once Swiggy hits the public market and improves its performance under greater scrutiny.

Zomato, once dismissed as overvalued due to its losses, has achieved a remarkable financial turnaround, posting four consecutive profitable quarters and achieving positive EBITDA in its fast commerce business. This has caused a strong rally in its shares, which have risen up to 120% this year.
Meanwhile, Swiggy remains in the red, with a loss of Rs 2,350 crore in FY24. Zomato has also significantly outperformed Swiggy in key metrics such as gross order value (GOV) and average order value (AOV). ). During FY22 and FY24, Zomato’s food delivery segment recorded a GOV CAGR of 23%, compared to 15.5% for Swiggy. Additionally, Blinkit’s GOV was 54% higher than Instamart’s in FY24.
Despite intense competition, potential growth opportunities are significant. According to a report, the online site food delivery market It is expected to grow 20% over the years 23-28, largely driven by a user CAGR of 8-10%. Groceries will continue to be the dominant category for quick commerce with a 60% share. However, fast commerce, which currently accounts for just 0.3% of India’s retail market, could increase its share to 2-3%, driven by growth rates of 60-80% (Source: Elara Capital). After its IPO, analysts believe that Swiggy aims to turn EBITDA positive in the short term by reducing its spending on promotion and advertising.

“If we look back, Zomato post-IPO has quickly shifted its focus on improving profitability, which has yielded good results. We expect Swiggy to do the same,” said Atish Matlawala, senior fundamental analyst at SSJ Finance & Securities.
Brokerage Elara Capital noted that Swiggy can get a discount on Zomato’s valuation, given Zomato’s higher growth rates across segments.

Currently, Zomato has a market capitalization of around Rs 2.42 lakh crore ($29 billion). In comparison, a small recent investment of Modern insulators valued Swiggy at around $10.2 billion. In the unlisted market, Swiggy shares are trading at a value of $13 billion.

Swiggy may be able to close the valuation gap with Zomato, but it has a lot of catching up to do.

“To trade at par or at a premium multiple to Zomato, Swiggy will need to gain market share in both food delivery and express commerce, while also performing well on profitability to approach the adjusted EBITDA margin of Zomato in the food segment,” Elara Capital said.

In FY24, Zomato’s adjusted EBITDA margin in the food segment was 2.8% in Q1FY25, compared to Swiggy’s loss of 0.2%. However, Swiggy has improved its margins from -4.8% in FY23 and -7.6% in FY22.

StoxBox’s Akriti Mehrotra says if Swiggy is valued higher in its IPO, it could boost investor confidence across the sector, which could lead to a positive rerating of Zomato stock. However, given the current growth dynamics of both companies, this is unlikely.

Whatever the outcome, analysts believe that Swiggy’s public offer will keep Zomato on its toes.

“We will have to see if things change after Swiggy’s IPO, particularly in terms of how they are executed. Investors will closely follow the performance of both companies quarter by quarter, monitoring metrics, guidance and overall execution.” said Karan Taurani, senior vice president at Elara Securities.

Swiggy plans to use its IPO proceeds invest in its subsidiary Scootsy in material, technology and cloud infrastructure, as well as brand marketing and business promotion, for 4-5 years.

“If Swiggy effectively leverages its new capital to innovate or expand, it could pose a threat to Zomato’s market share, particularly in the food delivery and quick commerce sectors,” Mehrotra said.

Initially, Swiggy’s IPO is likely to have a positive impact on Zomato, given the latter’s stronger profitability matrix. In the long term, it remains to be seen which company will outperform the other, says Matlawala.

Most brokerages have recently increased their price targets for Zomato, given its strategic positioning and strong leadership in the quick commerce segment. Bernstein has an ‘outperform’ rating on Zomato with a target price of Rs 330. UBS also has a ‘buy’ rating on the stock, with a target price of Rs 320.

Meanwhile, Jefferies and JPMorgan are also bullish on Zomato, noting that the company is leading a rapid transformation in retail consumer behavior through its quick commerce offerings focused on convenience and selection.

Overall, there is near consensus among analysts that Zomato is best positioned at the moment to capture growth opportunities in the highly competitive food delivery and quick commerce markets.

“Zomato is the benchmark for evaluating food aggregation companies. We believe investors will evaluate the performance metrics of both companies and select the best one,” Matlawala said.

However, if Swiggy performs well post-IPO and narrows the valuation gap, Zomato will need to maintain its strong performance to sustain its share price amid this new competition.

“Ultimately, Zomato’s ability to leverage its market presence will be critical in determining how Swiggy’s IPO affects its stock performance and valuations going forward,” Mehrotra added.

(Disclaimer: The recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)