As the highly anticipated initial public offering (IPO) of Swiggy opens for public subscription on November 6, investors are faced with a crucial decision: should they subscribe to this new IPO or opt to invest in the stock of its major competitor, Zomato? This question is particularly relevant given Zomato’s robust performance in the market this year, which is reflected in a significant increase in its stock price. Although Zomato’s share price has recently experienced a 9% decline over the past month, it has managed to deliver an impressive 95% return year-to-date (YTD), making it a compelling option for many investors.
Zomato’s quick commerce business, known as Blinkit, has also been a focal point of attention due to its rapid growth trajectory, further enhancing the positive sentiment surrounding Zomato’s stock. Numerous brokerage firms have highlighted this growth as a pivotal factor contributing to their optimistic outlook on Zomato, as it positions itself as a leader in the food delivery and quick commerce sectors. In stark contrast, Swiggy has found itself lagging behind Zomato in terms of market share and operational efficiency, prompting investors to carefully consider the potential risks and rewards associated with investing in Swiggy's upcoming IPO.
Krishna Patwari, the Founder and Managing Director of Wealth Wisdom India, has provided valuable insights into the competitive landscape that exists between these two food delivery giants. He emphasized that Swiggy trails Zomato by approximately 4 to 6 quarters in both food delivery and quick commerce, which indicates Zomato's superior operational efficiency and execution in the market. Patwari noted that Swiggy’s projected Gross Order Value (GOV) for the fiscal year 2025 is set at $3.3 billion, which is about 25% lower than Zomato’s figures. This substantial gap is significant and underscores the challenges that Swiggy faces in becoming a more competitive player in the space.
When it comes to user engagement, Swiggy currently boasts 14 million monthly transacting users, while Zomato has managed to attract 20 million users. Although the order frequency on both platforms is relatively similar, Swiggy's average order value is slightly higher, suggesting that there is potential for increased revenue per transaction. However, Patwari cautioned that the primary challenge lies in Swiggy’s journey toward profitability. While the IPO could indeed unlock new growth potential through an expansion of its offerings and a greater presence of dark stores, there are significant questions surrounding the sustainability of its business model, particularly in light of its recent financial losses.
Investors might be enticed by the IPO’s appealing pricing structure, yet Patwari urged a degree of caution. While the IPO’s valuation appears reasonable at first glance, concerns regarding Swiggy’s long-term financial sustainability and profitability raise red flags for potential investors. In a competitive landscape where Zomato has established a stronger foothold, Swiggy faces an uphill battle as it attempts to navigate the complexities of its market. Patwari emphasized that Swiggy's competitive positioning after the IPO will heavily depend on how effectively the company can leverage its resources and capabilities to close the existing gap with Zomato.
Adding to this narrative, Gaurav Garg, a research analyst at Lemonn Markets Desk, also highlighted that Swiggy has substantial work to do in order to effectively compete with Zomato. He pointed out that Swiggy’s valuation being nearly 50% lower than Zomato’s does provide some reassurance to investors, but this should not be misconstrued as an opportunity for guaranteed profit or arbitrage in valuation.
Garg elaborated that if Swiggy can improve its earnings before interest, taxes, depreciation, and amortization (EBITDA) margins in the food delivery business to the range of 3-4%—currently, it is hovering around 1%—and elevate its Average Order Value (AOV) in the quick commerce segment to the Rs 550-600 range, particularly with a higher share of non-grocery items, there could be a potential narrowing of the valuation gap. However, he cautioned that such significant improvements should not be expected to materialize in the near term, as the challenges of scaling operations and enhancing profitability remain formidable.
Swiggy’s IPO is set to open for subscription on November 6, 2024, and will remain available until November 8. The total issue size is Rs 11,327 crore, with a price band established between Rs 371 and Rs 390. Investors can bid for a minimum of 38 shares in a single lot, making it essential for them to carefully consider these insights and the competitive landscape before making any investment decisions.
As the IPO date approaches, potential investors must weigh these insights against the broader market dynamics and the competitive positioning of both companies. Ultimately, the decision to invest in Swiggy’s IPO versus Zomato stock will hinge on individual investors' risk tolerance, their outlook on the food delivery sector, and how they perceive the future growth potential of both companies in a rapidly evolving marketplace.Â
Given the fierce competition and continuous innovations in the food delivery sector, each company is striving for operational excellence and efficiency. Investors need to remain vigilant and informed, as the dynamics of this sector are likely to undergo significant changes, making it a fascinating area for investment and strategic developments. With both companies vying for market share, the outcome of Swiggy’s IPO and its subsequent performance will be closely watched, as it could potentially reshape the competitive landscape of the food delivery industry in India.
Â
