Swiggy Vs Zomato: After listing, can loss-making Swiggy deliver return like now-profitable Zomato?

Swiggy, which filed an updated draft red herring prospectus (DRHP) with the market regulator SEBI on September 26 for its initial public offering (IPO), highlighted a few risks relating to its business and the industry. In the public document, the food delivery firm said that they have incurred net losses in each year since incorporation and have negative cash flows from operations.

“If we are unable to generate adequate revenue growth and manage our expenses and cash flows, we may continue to incur significant losses,” Swiggy said in the DRHP. Data showed that Swiggy reported a loss of Rs 2,350.24 crore for the financial year ended March 2024, narrowed down from losses of Rs 4,179.30 crore in FY23 and Rs 3,628.89 crore in FY22.

Will it deliver returns to investors on listing? Sharing his views, Kranthi Bathini, Equity Strategist, WealthMills Securities said, “Considering the retail exuberance and euphoria in the primary market, there can be a possibility of listing gains for Swiggy considering the duopoly of players and strong futuristic business models.” In the unlisted market, shares of Swiggy have already jumped to Rs 515 on September 27 from Rs 450 in the last month.

Another key risk mentioned by Swiggy in its DRHP further highlighted that if it fails to retain the existing user base or fails to acquire new users in a cost-effective manner, the business, financial condition, and results of operations could be adversely affected.

Swiggy is expected to raise Rs 10,000 crore through its IPO. The company is aiming to raise Rs 3,750 through fresh issue of share while the remaining amount is expected to come from an offer for sale (OFS) of up to 18.5 crore shares by existing investors.

On the other hand, competitor Zomato reported a consolidated profit of Rs 351 crore in FY24 against a loss of Rs 971 crore in FY23 and a loss of Rs 1,208.70 crore in FY22.

Shares of Zomato, which made their debut on bourses on July 23, 2021, have rallied 273% since listing. The scrip traded at Rs 283.85 on September 26, 2024, against the issue price of Rs 76. Kotak Institutional Equities, in a research report issued on September 23, projected Zomato’s fair value at Rs 315.

“Blinkit’s rapid expansion to new cities is a strategy to gain first-time users and also to better utilise its mother warehouses. Several new initiatives underway to increase customer wallet share include: (1) pilot for product returns, especially for branded apparel; (2) larger dark stores and split shipments; and (3) new category addition. Competitive intensity is high, with potential price competition in select cities. We upgrade FY2024-27E Blinkit GMV CAGR to 81% and maintain a ‘Buy’ rating with a revised fair value of Rs 315 (Rs 270 earlier),” the brokerage said.

In its quarterly updates, Zomato has guided to 1,000 stores for Blinkit by March 2025 and 2,000 stores by December 2026 on a base of 639 stores as of June 2024. “Store area increase would likely be higher as Blinkit seems to be adding larger sized stores. We thus increase Blinkit GMV CAGR to 81% over FY2024-27 from 70% earlier. The resultant FY2027 GMV for Blinkit is now Rs 74,100 crore compared to forecasted FY2027 revenue of Rs 87,300 crore for Dmart,” Kotak Institutional Equities said.

Sharing its view on quick commerce (QC), Kotak Institutional Equities added that QC will continue to have a tilt toward convenience-focussed customers. In that backdrop, larger, say top-50, cities should ideally be the key consumption market for QC companies. These top-50 cities, per our estimates, contribute to a whopping 45-50% of India’s overall retail consumption. “We assume that they contribute to a similar proportion of food and grocery consumption as well,” it said, adding, in the next five years, they believe that QC companies could account for 6-7% of the share of food and grocery consumption in top-50 cities. This is a reasonable share in the retail industry today, which is still dominated by unorganised players.