HDFC Securities has initiated coverage on stock debutant Swiggy Ltd with an 'Add' rating and a stock price target of Rs 430, which suggests a 6 per cent potential downside from Wednesday's closing price of Rs 455.95.
Swiggy appears to be 4-6 quarters behind Zomato, the brokerage said adding that unless it increases MTU additions, Swiggy may continue to lag Zomato in gross order value (GOV) growth as other KPIs seem maxed out.
The brokerage said Swiggy was once a market leader in convenience-based use cases but has lost ground over FY22-24 in its core offerings Food Delivery and Quick Commerce.
"An eventual convergence of fortunes with the leader is likely in the long run (courtesy of the duopoly structure). However, the jury is still out on the path to convergence in Quick Commerce (QC). We project a 26 per cent sales CAGR, with adjusted Ebitda margin improving meaningfully (from -15 per cent to 2.5 per cent) and RoCEs improving from -25 per cent to 1 per cent over FY24-27," it said.
HDFC Securities said Swiggy's Instamart has fallen behind Zomato's Blinkit in both growth (FY24 GOV YoY growth at 58 per cent against Blinkit’s 93 per cent) and efficiency.
"Its GOV/order density is 40 per cent/18 per cent lower; AOVs are 25 epr cent lower; and average MTUs are 17 per cent lower, resulting in sub-optimal fixed cost absorption compared to Blinkit," it said.
That said, the brokerage noted that Swiggy has continuef to make improvements in its discretionary salience in GOV mix, which should lift AOVs. The take rate differential (currently 300bps) between the two platforms, should narrow over time through higher commission and ad income, it said.
Besides, it sees fixed cost absorption by Swiggy with increasing order density.
"We suspect Instamart’s path to Ebitda margin breakeven is complex but plausible. At current scale, it needs over 2,000 orders per day per store to hit Ebitda margin breakeven against Blinkit’s 1,500 orders," it said.
Shares of Swiggy closed at Rs 455.95 on BSE, up 10.67 per cent.
A successful IPO and leadership revamp at Instamart could just be the catalyst Swiggy needs for a successful turnaround in its fortunes, JM Financial said earlier.
:Despite having ceded some space to competition, it is one of the fastest growing consumption plays with multiple levers to move towards sustainable margins," JM added while initiating coverage on Swiggy with a ‘buy’ rating and target price of Rs 470.