Swiggy, one of India’s major food delivery and grocery platforms, is set to enter the stock markets soon after the bidding window for its retail shares closes on November 8.

What is the one key item of interest to prospective retail investors? The challenges on its path to profitability is key to its valuation. In the first quarter of FY25, Swiggy’s Gross Order Value (GOV) from its B2C (Business-to-Consumer) segment rose by 23 per cent year over year, reaching ₹10,189 crore. This metric indicates the total monetary value of orders executed on the platform. Additionally, Swiggy’s B2C revenue saw a growth of 35%, amounting to ₹1,954 crore for the quarter.

This may highlight Swiggy’s expanding market share and consumer base in India’s competitive online food and grocery delivery landscape; however, such revenue generation comes with significant costs, primarily in the form of delivery and related charges. These delivery costs, constituting nearly 50 per cent of Swiggy’s B2C revenue, are highly variable and fluctuate with order volume. Other notable expenses include employee benefits, depreciation and amortisation, and marketing expenses. Unlike delivery charges, these items tend to be more fixed, creating potential for operational leverage.

In other words, as Swiggy scales and increases order volume, it may achieve higher margins by distributing these fixed costs over a larger revenue base, a trend that has been evident in comparable businesses in the industry.

Path to profitability - much like Zomato’s?

Swiggy’s consolidated revenue, which includes its B2B (Business-to-Business) operations, reached ₹3,222 crore in Q1 FY25, marking a 34 per cent year-over-year increase. Despite the positive revenue growth, Swiggy reported a net loss of ₹611 crore for the quarter. However, the company’s adjusted EBITDA, a measure of operational profitability, stood at a negative ₹347 crore, reflecting potential improvement compared to prior periods. This trend indicates that Swiggy might be on a path similar to that of its competitor, Zomato, which reached adjusted EBITDA break-even in Q1 FY24 after a period of losses. As Swiggy continues to benefit from operational leverage, it may also approach break-even in the foreseeable future, provided it sustains its revenue growth and cost management.

Valuation

From a valuation perspective, Swiggy’s future growth and profitability margins remain key determinants. Estimations suggest that if Swiggy achieves a revenue compound annual growth rate (CAGR) of 30% from FY24 to FY29 and manages a net profit margin of 5 per cent, its valuation could reach 42 times its FY29 earnings per share (EPS). In a scenario where Swiggy achieves an 8% profit margin, this valuation ratio would drop to 26 times FY29 EPS, reflecting increased profitability. Globally, net profit margins for profitable retail e-commerce companies range between 1% and 8%, with most companies operating within a 2-5% margin band. Achieving higher profit margins would thus enhance Swiggy’s appeal to potential investors and justify higher valuations.

While Swiggy’s growth trajectory and operational improvements may promise potential, the challenges associated with attaining sustainable profit margins introduce a range of potential outcomes. Swiggy’s valuation will be influenced by its pace of growth and ability to scale profitability, making it a complex consideration for investors who must weigh high growth potential against the risks associated with Swiggy’s evolving financial profile.

(This article was generated using AI and reviewed by a journalist)

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