Swiggy vs Zomato: which is a better choice for investment?

With Swiggy listing on the stock exchanges on November 13 at a premium, the debate intensifies over whether Swiggy or Zomato offers the better investment in India’s booming food delivery market

Investors are keenly comparing Swiggy to its main competitor, Zomato, which has already experienced two years in the public market. Both companies are key players in India’s food delivery industry, valued at approximately $4.5 billion in 2023 and projected to grow at a compound annual growth rate (CAGR) of 25% over the next five years. This analysis compares the financials, growth potential, and strategic directions of Swiggy and Zomato, shedding light on which platform may offer stronger returns.

Market position and financial performance

Both Swiggy and Zomato have carved out significant shares in the Indian market, with Zomato accounting for approximately 55% and Swiggy for about 45% of the market by 2023. However, the companies differ significantly in revenue composition and business models, which influence their respective investment potential.

Swiggy’s diversification strategy

Swiggy’s revenue model spans multiple verticals, including its core food delivery service, Swiggy Instamart (grocery delivery), and Swiggy Genie (parcel delivery). This diverse service portfolio has helped Swiggy generate a gross revenue of ₹5,705 crore in the fiscal year 2023, representing a year-over-year growth of 40%. Swiggy Instamart alone contributed over ₹1,500 crore to Swiggy’s overall revenue, showcasing strong traction in the quick-commerce grocery sector.

However, this broad approach comes with challenges. Swiggy’s operational expenses reached ₹7,280 crore in FY 2023, resulting in a net loss of ₹1,575 crore, a slight improvement from ₹1,850 crore in FY 2022. While Swiggy’s diversified model spreads risk, it also requires heavy capital investment, and the quick-commerce segment, in particular, has yet to show consistent profitability.

Zomato’s focused business model

Zomato, on the other hand, has opted to maintain a streamlined focus on food delivery, while experimenting selectively with quick-commerce following its acquisition of Blinkit. In FY 2023, Zomato reported a revenue of ₹6,300 crore, marking a 68% increase from ₹3,750 crore in FY 2022. Despite exiting grocery delivery early on, Zomato’s recent acquisition of Blinkit has contributed to its revenue and may provide additional growth potential if it successfully scales.

Zomato’s net loss in FY 2023 was ₹450 crore, a notable improvement from ₹1,200 crore in FY 2022, reflecting its commitment to reducing operational inefficiencies and enhancing profitability. Unlike Swiggy, Zomato’s operating expenses were more concentrated, allowing it to streamline costs in food delivery. For investors, Zomato’s focused approach, coupled with this reduced net loss, demonstrates potential for achieving profitability earlier than Swiggy.

Profitability remains a major concern for both companies, though they have made strides toward improving their unit economics.

Swiggy’s expansion strategy and cost structure

Swiggy’s operational strategy relies heavily on scaling its quick-commerce and parcel delivery arms, making its cost structure complex. As of FY 2023, Swiggy recorded an average order value (AOV) of ₹310 for food delivery, while grocery delivery through Instamart averaged ₹400 per order. Swiggy’s rapid expansion into Instamart and Genie resulted in higher delivery and logistics expenses, contributing to its overall burn rate.

In an effort to streamline, Swiggy has introduced AI-based route optimisation and delivery allocation, reducing average delivery times by 15% year-over-year. The company also has a loyalty program, Swiggy One, which, with over 1 million subscribers, has helped boost order frequency and retention rates. For investors, Swiggy’s approach offers the promise of diversified growth but requires cautious monitoring of operational costs.

Zomato’s profit-first approach

Zomato’s AOV stood at ₹290 in FY 2023, slightly lower than Swiggy’s, yet its operational costs were more controlled due to strategic focus. Zomato has optimised its fleet management and reduced fixed costs by integrating cloud kitchens and adopting a hybrid model. Additionally, its dynamic pricing during peak hours has helped in balancing demand with fleet availability, contributing to a 22% improvement in delivery margins.

Notably, Zomato has managed to decrease its burn rate, reducing the average cost per delivery by 18% over the past year. For long-term investors, Zomato’s focus on refining its core business may translate to quicker returns, with the company likely to achieve break-even sooner than Swiggy if current trends continue.

Valuation and investor sentiment

Swiggy’s pre-IPO valuation is pegged between $10-12 billion (approximately ₹83,000-₹99,600 crore), backed by leading investors such as Prosus Ventures, SoftBank, and Accel. This valuation reflects investor confidence in Swiggy’s potential, particularly with its Instamart division forecasted to grow by 50% in the next year.

Analysts suggest that if Swiggy’s IPO is priced conservatively, it may appeal to investors who are optimistic about long-term growth in diversified service models. However, those looking for quicker returns may find Swiggy’s expansion into capital-intensive areas, like quick commerce, a riskier investment due to the associated operational costs.

Zomato’s market performance and valuation

Zomato’s post-IPO performance has been marked by volatility, with its market cap currently around ₹60,000 crore, down from a peak of ₹1 lakh crore in 2021. While stock fluctuations reflect the challenging environment for tech stocks, Zomato’s efforts to cut losses have helped stabilise its stock price recently. Investors with a higher risk tolerance might find Zomato’s stock attractive at its current valuation, as its ongoing cost-reduction measures and Blinkit acquisition provide avenues for future growth.

Since Zomato’s public listing, institutional investors like Tiger Global and Fidelity have bolstered their stakes, indicating confidence in Zomato’s long-term trajectory. For those prioritising stability, Zomato’s relatively straightforward business model and transparency may be more appealing than Swiggy’s diversification strategy.

Investment outlook: Swiggy vs. Zomato

The choice between Swiggy and Zomato as an investment depends on individual risk profiles and growth expectations. Growth-oriented investors with a tolerance for potential volatility may favor Swiggy’s diversified approach, with the expectation that its expansion into grocery and parcel delivery could generate synergistic revenue streams. However, the cost-heavy nature of Swiggy’s business model necessitates a careful watch on profit margins.

On the other hand, Zomato offers a more focused investment with a clearer path toward profitability. Its progress in reducing costs, increasing AOV, and selectively expanding into new segments, such as quick commerce through Blinkit, strengthens its long-term investment case. Investors who prefer a relatively stable stock and a potentially faster timeline to profitability may find Zomato’s disciplined approach and established market presence to be a safer option.

Conclusion

Both Swiggy and Zomato are pivotal players in India’s food delivery market, which remains ripe for growth. Swiggy’s forthcoming IPO provides an attractive opportunity for investors to tap into a diversified digital platform, albeit with operational risks linked to its grocery and parcel services. In contrast, Zomato’s established market share, disciplined expansion, and transparent cost-cutting strategies may resonate with investors seeking a more direct path to profitability.

Ultimately, investors must weigh their risk tolerance, evaluate each company’s operational focus, and consider how Swiggy and Zomato align with their broader investment goals. In a high-growth but competitive market, both companies present compelling cases, albeit with different risk-reward profiles.