Twinning Tunes: How Swiggy & Zomato Leave Upside Room for Investors?

Ever since the IPO of Swiggy was announced, the food delivery platform attracted eyeballs from analysts to investors leading its comparison to its direct peer and arch rival Zomato. The latter one, listed at the bourses since November 2021, has survived the bumpy rides of Dalal Street and is set to become part of Sensex by next month.

Brokerage firms and analysts continue to remain positive on both the stocks, considering their respective positives. In a nut shell, they believe that Zomato will continue to perform well in terms of financial masculinity and expansion, while the recently listed Swiggy has a potential to achieve a lot in terms of market share and positive bottomline.

Swiggy's gross order value (GOV) of $3.3 billion is 25 per cent below leader Zomato. Swiggy's monthly transacting users (14 million) lag Zomato ( 20million), while order frequency is in-line and average order value is slightly higher. Swiggy's contribution margin is 100 basis points behind Zomato due to higher discounts.

Read More | Zomato Launches Rs 8,500 Crore QIP, Sets Floor Price at Rs 265.91 

The Quick Commerce Game

To put things in perspective of the quick commerce space, Zomato's Blinkit is a fast growing platform with improved margin, while Instamart has a higher average order value (AOV) with higher cost but lower dark stores. However, Instamart is a loss making business while Blinkit has a positive bottomline.

Earlier this week, overseas brokerage firm UBS initiated coverage on Swiggy, finding it to trade at a discounted rate to Zomato. It believes that the food-tech player is well positioned to benefit from the rapid growth in India's food delivery and quick commerce markets with an estimated Gross Merchandise Value (GMV) and revenue CAGR of 35% and 29% over FY24-27E.

It also mentioned that Swiggy is catching up with Zomato on margins and scale in the duopolistic online food delivery market. However, quick commerce (QC) leaves room for a lot of work to be done with encouraging signs. Quick commerce business has three players dominating the market with Zepto being the third force.

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"While the company lost market share in CY23, data from UBS Evidence Lab food delivery receipts shows signs of market share stabilisation; the same is visible in the Q1FY25 results as well, " said the brokerage. After adjusting for its lower scale versus Zomato, we believe the stock's price is 35-40% discount to Zomato," it added with a 'buy' and a targe price of Rs 515 on Swiggy.

Swiggy, Zomato Growth Outlook

To recall, Swiggy launched its mega IPO of Rs 11,327.43 crore, which was open for bidding between November 6-8. The company sold its shares for Rs 390 apiece, which was listed on November 13. In the first fortnight of its innings at Dalal Street, the stock has delivered a 25 per cent return to investors, with a total market capitalization of Rs 1.1 lakh crore.

Domestic brokerage firms remain 'neutral' on Zomato as it values business using DCF methodology for food delivery, quick commerce, supply chain, and distribution, assuming WACC of 12.5 per cent and a terminal growth rate of 6.5 per cent. It has a target price of Rs 475 on the stock  but higher 1AOVs in QC space with higher GOV growth, improving take rates in quick commerce; and faster-than-expected GOV growth in food delivery may lead to an rating upgrade, it said.

Read More | Swiggy Hits Rs 1 lakh Crore in Market Capitalisation on Debut

On the contrary, inefficient management; inability to scale dark stores as planned; high user retention and acquisition costs; limited ability to expand margins in food delivery and quick commerce businesses; and rising competition in the key areas are the key concerns for Swiggy, that may dent its position, said Motilal Oswal.

At a headline level, Swiggy appears 4-6 quarters behind Zomato in food delivery and quick commerce, said Macquarie in its report last month. "For Swiggy, the path to catch-up in Food Delivery is relatively more straightforward, while that for Quick Commerce is more complex," it said.

After Swiggy went public, Zomato’s board also approved a fund raise of Rs 8,500 crore via qualified institutional place (QIP) at a price of Rs 265.91. The proceeds from QIP shall be used over FY 26-28 for expansion of dark store and warehouse capex (Rs 2,100 crore); advertising, branding and marketing initiatives (Rs 2,500 crore); and Rs 1,800 crore for technology infra.

Read More | Ahead Of Its Public Listing, Swiggy Expands Its Top Leadership

Kokak said that  Zomato’s current QC infrastructure will require Rs 700 crore of capex to replicate. Investments toward customer acquisition, branding, technology and cloud will be over and above, it said. As of September 30, 2024, Blinkit had a network of 791 dark stores across 48 cities. Kotak has a fair value target of Rs 315 on Zomato with a 'buy' rating on the stock.

Adding to the optimism, Morgan Stanley also sees Zomato as a potential doubler in next three-to-four years. "Rising share of quick commerce in India's retail market, strong execution in food delivery/quick commerce, deep balance sheet and large profit pool by 2030 keep us 'overweight' on the stock," it said with a revised target price of Rs 355 (Rs 278 earlier).