Swiggy IPO analysis: You can take a shot, but maybe not a big swig

Swiggy’s red herring prospectus (RHP) defines its business as a  ‘consumer-first technology company offering users an easy-to-use convenience platform – to browse, select order and pay for food (Food Delivery), grocery and household items (Instamart) and have their orders delivered to their doorsteps through on-demand delivery network’.

Just little over three years before the RHP of Zomato, its neck-to-neck competitor with a similar business model, defined its primary business as  ‘our technology platform connects customers, restaurant partners and delivery partners serving their multiple needs.’

The difference between the two explains the rapid disruption and expansion in business that has played out for these two players in the last three years.

India has a booming consumer market with a large runway of growth. So too does its digital economy. e-commerce sits right at the intersection of these two forces. There will be bumps along the way, but very few global investors have doubts on the long-term potential and hence it is one of the most sought-after opportunities in their investment playbook. Thus, the doubt as such is not on the growth of the sector, but who will be the winners and losers in this game. There will be mega winners and there will be big disappointments as well and it may take years before the markets reveal it to us.

Can Swiggy be one of the mega winners? That is the $10-billion (₹87,000 crore) question that investors will have to reckon with as the Swiggy IPO opens this week on November 6. The ₹11,327-crore IPO of Swiggy (out of which fresh issue is ₹4,499 crore), will value the company at a market cap of ₹87,000 crore and enterprise value (EV) of ₹78,000 crore. And upon conclusion of this IPO,  the flaming and, at the same time, spirited competition between Swiggy and Zomato will extend into the capital markets as well.

Exciting times ahead! But coming to the most important question – should you go for it?

Brass tacks

Swiggy is still not profitable but, similar to Zomato, has been making consistent progress and the food delivery business was profitable at the adjusted EBITDA (primarily EBITDA adjusted for ESOP costs) level in Q1 FY25, while the quick commerce business is not. It has a strong balance sheet with net cash at around ₹4,800 crore as of June 30, which will get bolstered to over ₹9,000 crore with fresh issue proceeds from the IPO. With low cash burn, it is well positioned and funded to fight it out with existing as well as any new entrants into this attractive space.

Investors betting on Swiggy will get a chance to place their odds on one of the most well-known and established e-commerce player in India with a strong foothold in the booming Indian consumer market. While Zomato had a modest lead over Swiggy in terms of market share in both Food Delivery and Quick Commerce till FY23, the lead widened significantly in FY24 in the quick commerce segment wherein Zomato’s gross order value (GOV) for FY24 zoomed to a 50 per cent lead over that of Swiggy.

Nevertheless, with the IPO priced at 6.5 times EV/Revenue (trailing twelve months -June 2024), at a good 50 per cent discount to Zomato’s current valuation, considering the above factors and more, Swiggy at these levels appears worth a shot. On an absolute valuation basis, while it is not cheap; it is not prohibitively expensive either, given the long run-way of growth. Success is not a certainty, but this offer gives a chance for investors with higher risk-appetite to play the e-commerce opportunity at a valuation that is worth taking the risk on. Hence investors, but only those with a high risk-appetite can consider subscribing to the issue.

Business model

Originally starting in 2014 as a food delivery service, Swiggy has since launched and capitalised on other emerging opportunities in the hyperlocal space such as quick commerce (Instamart launched in 2020), pick-up/ drop-off service (Genie launched in 2020), and dining out service (Dineout launched in 2022).  All these are clustered under what is Swiggy’s B2C business, which accounts for around 61 per cent of revenue. Within B2C, food delivery and quick commerce account for 97 per cent of revenue (59 per cent of consolidated revenue).

Swiggy also has a B2B business that accounts for the balance 39 per cent of revenue housed under ‘Supply Chain and Distribution’, wherein it offers comprehensive supply chain services to wholesalers and retailers. This business aligns with Swiggy’s investments in developing supply chain network and warehouses to enable fulfilment for its quick commerce service. This is one area where Swiggy and Zomato’s businesses differ a bit. Zomato too has a B2B business (Hyperpure), which is focused on fulfilment services for restaurants.  

In Food Delivery and Quick Commerce, Swiggy earns revenue by way of (i) commission charged from restaurant/merchant partners for sales enabled via the Swiggy App; (ii) advertising revenue from restaurant/merchant partners/brand partners (enabling advertising/prime placement of product or service on the app when customers search);  (iii) fees charged from users and delivery partners for use of the technology platform; and (iv) subscription revenue from Swiggy One membership programme. The primary contributors here are (i) and (ii).

One way in which the Quick Commerce business differs from food delivery is that Swiggy incurs costs by way of investing in supply chain and distribution networks encompassing warehouses and dark stores to provide fulfilment services to consumer brands and franchisees (distributors) for enabling delivery of groceries and other products.

In the B2B supply chain business, the business model is different with bulk of revenue coming from sale of goods to wholesalers and retailers, and balance from services for fulfilment for now, while company intends to increase the service component from here with a focus on margins.  

What’s the opportunity?

A lot of Swiggy’s success hinges on growing its count of users/subscribers, increasing their engagement/transactions with current offerings in the Swiggy App and also monetising this user base with newer innovative offerings and taking a larger pie out of the consumers’ wallet share. Expanding a food delivery customer to also a quick commerce customer is one such innovative offering that has succeeded well. More customer engagement also means more advertising revenue, which can further boost growth. In FY24, Swiggy had 14.29 million Monthly Transacting Users (MTUs), up from 10.26 million in FY22.

According to a report in the RHP, the online food delivery market in India was at ₹60,000 crore or $710 million in FY23 with a potential to grow at around 20 per cent CAGR to ₹1.5 lakh crore by FY28. Players like Swiggy and Zomato can grow at or above the industry growth rate if they execute well.

At the same time, it estimates potential for an even more staggeringly-high CAGR of 60-80 per cent in Quick Commerce sector (from FY23 levels of ₹22,400 crore) till FY28.

It is not clear if Swiggy or Zomato can grow at or above industry growth rate in this segment, given the presence of new competitors such as Zepto, BigBasket and possibly aggressive entries by Amazon and Reliance as well. Nevertheless, Swiggy is well positioned to tap this huge opportunity and Quick Commerce is one aspect where a large part of the answers to what is the growth that Swiggy can deliver lies in.. Around 45 per cent of IPO proceeds is earmarked for investments directly related to the Quick Commerce business with company planning to expand dark stores count in existing as well into new cities.

Financials, valuation

In Q1 FY25, Swiggy’s B2C GOV (monetary value of orders executed on platform) increased 23 per cent year on year to ₹10,189 crore, while B2C revenue increased 35 per cent to ₹1,954 crore. The main costs associated with this revenue are delivery and related charges (about 50 per cent of B2C revenue), employee benefit expenses, depreciation and amortisation and advertising/sales promotion expenses. The key thing to note here is that while delivery and related charges is a variable cost, the other items mentioned above are more like fixed costs and the company can benefit from operating leverage as business grows.

Including B2B business, consolidated revenue was at ₹3,222 crore, up 34 per cent year on year. While net loss was at ₹611 crore, adjusted EBITDA was - ₹347 crore. While these losses cannot be ignored, performance of Zomato indicates that with benefits of operating leverage, Swiggy can reach break-even too. For example, Zomato moved from adjusted EBITDA of - ₹175 crore in Q4 FY23 to break-even in Q1 FY24.

Good growth and prospects of profitability apart, the question of valuation is still debatable. Ultimately, it will depend on growth and sustainable net profit margins that Swiggy can achieve. Globally, the net profit margin for profitable retail e-commerce companies largely ranges between 1 per cent and 8 per cent, most in the 2-5 per cent range. For example, even if Swiggy reported 30 per cent revenue CAGR between FY24 and FY29 and was able to achieve a net profit margin of 5 per cent, its valuation would be around 42 times FY29 EPS. Whereas, if it is able to reach a net profit margin of 8 per cent, its valuation works out to around 26 times FY29 EPS. A lot depends on how fast it can grow and what margins it can scale up to. The road ahead will be challenging and the range of outcomes wide, hence our recommendation that only high-risk investors subscribe to the IPO.