Swiggy's share price experienced a noticeable dip of over 3% on its second day of trading, closing at Rs 441.95 on the Bombay Stock Exchange (BSE) after reaching Rs 455.95 the previous day. Despite a solid debut with a 10.67% rise in its first trading session, the stock faced a correction as it came under pressure from broader market conditions and mixed analyst outlooks. This drop reflects concerns over Swiggy's ability to maintain its momentum, especially in the face of stiff competition from industry rivals, and the challenges inherent in its business model.
Brokerage views on Swiggy’s future are varied, with some analysts expressing cautious optimism and others highlighting risks related to the company’s growth trajectory. HDFC Securities, which initiated coverage on the stock with an ‘add’ rating and a price target of Rs 430, suggested that Swiggy may face a slower growth phase relative to its main competitor, Zomato. Specifically, HDFC anticipates that Swiggy’s growth in the next 4-6 quarters may be slower unless the company strengthens its monthly transacting user (MTU) base, which is a critical driver of gross order value (GOV) growth. GOV, a key metric for food delivery companies, has been growing at a slower pace for Swiggy compared to Zomato, particularly in the quick commerce space where Zomato’s Blinkit has outperformed Swiggy’s Instamart in terms of GOV growth for FY24.
HDFC's analysis pointed out several operational challenges for Swiggy, including lower order density and average order value (AOV) compared to Blinkit, which in turn translates into higher fixed costs for Swiggy. Despite these challenges, the brokerage expects Swiggy's sales to grow at a compound annual growth rate (CAGR) of 26% over FY24-27. The brokerage also projected a positive shift in Swiggy's adjusted EBITDA margin, from a negative -15% to a positive 2.5% by FY27, and a significant improvement in return on capital employed (RoCE) from -25% to 1% over the same period.
One of the key strategies Swiggy is pursuing to boost its financial position is increasing its GOV mix by focusing more on discretionary spending, which could help narrow its current 300 basis point gap in take rates with Blinkit. However, the path to profitability for Instamart remains challenging. To break even at the EBITDA level, Instamart requires more than 2,000 daily orders per store, a higher threshold compared to Blinkit, which only needs 1,500. These figures highlight the operational inefficiencies that Swiggy must overcome to ensure long-term success in this highly competitive market.
Despite these hurdles, there is a sense of cautious optimism surrounding Swiggy’s ability to turn things around. JM Financial, another brokerage, issued a ‘Buy’ rating with a target price of Rs 470, viewing Swiggy as a promising play in the fast-growing consumer sector. The brokerage noted that Swiggy’s evolving business model, particularly in the quick commerce space, along with leadership changes at Instamart, could potentially catalyze a stronger growth trajectory. JM Financial emphasized that Swiggy has the potential to benefit from the expanding consumer market, positioning the company for sustained growth as it adapts to the shifting dynamics of the food delivery industry.
Furthermore, Swiggy’s leadership in the Indian food delivery market, coupled with its ability to diversify into the quick commerce space, offers opportunities for growth. However, the company continues to face significant competition, particularly from Zomato, which has been able to maintain a stronghold in the food delivery segment with its Blinkit brand. Zomato’s focus on increasing its market share in quick commerce has proven successful, and Swiggy will need to step up its efforts to close the gap.
Swiggy’s move toward profitability will also depend on its ability to improve operational efficiencies and scale its business without overburdening its infrastructure. It will need to carefully manage its customer acquisition costs and work on increasing the average order size and frequency of orders to offset the high costs associated with last-mile delivery. The company’s strategy to focus more on high-margin discretionary services could be key to improving profitability in the coming years.
As Swiggy works toward achieving sustainable margins, it is clear that the company is at a critical juncture. Investors will be closely watching the company's performance over the next few quarters, particularly in terms of its ability to increase its MTU base, improve order density, and drive GOV growth. With a competitive landscape dominated by Zomato and Blinkit, Swiggy’s path forward will require significant strategic focus and execution to stay ahead in the increasingly crowded food delivery and quick commerce sectors.
Overall, while Swiggy faces challenges in the short-term, its evolving business model and strategic shifts present an intriguing growth story for investors looking for exposure to the fast-growing consumer sector. The company’s potential to turn around its business and achieve profitability in the long term, alongside its continued focus on expanding its product offerings, will likely determine its success on the stock market in the future. For now, the stock remains an interesting but risky investment with the possibility of long-term growth, depending on how well it navigates the competitive pressures and operational hurdles in the food delivery industry.
