Swiggy gets valuation hike ahead of IPO; here's how it may impact Zomato shares

Ahead of its much-awaited IPO, Invesco recently increased Swiggy's valuation to $12.7 billion from $8.5 billion in October 2023, marking an increase of more than 49 per cent in about only six-months. Invesco has increased Swiggy's valuation for a third-straight time. Invesco holds a nearly 2 per cent stake in  the food delivery services firm.

The global investment banker valued Swiggy at $5.5 billion in January 2023 and then it was increased to 7.8 billion in July 2023, which later came to October 2023 valuation of $8.7 billion. In the last 15 months, Swiggy's valuations have increased by 130 per cent, as valued by Invesco.

Not only Invesco, even Baron Capital values Swiggy at $12.1 billion. Baron Capital also owns a 7 per cent stake in Swiggy, which also operates its quick commerce platform Swiggy Instamart. The revision in Swiggy's valuations is on the back of reducing losses and rising income.

Swiggy posted a revenue of Rs 5,476 crores in the nine-months ending December 31, 2023, while loss at the company narrowed to Rs 1,600 crore during the period from the earlier Rs 4179 crore in FY23, said Reuters. According to other media reports, Swiggy is likely to launch a public offer to raise $1 billion in 2024.

Market participants believe that the valuations pushed by global fund-houses may push the optimism before IPO higher but the company is still making big losses. Investors need to understand fundamentals, financial and operational performance in the highly competitive market.

Experts believe that Zomato has a dominant market share at 54 per cent in comparison to Swiggy at 46 per cent in the food delivery space as of the first half of FY23. If the valuation of Swiggy moves northwards, Zomato shares are bound the move higher as it is the dominant and profitable listed player.

Invesco’s tactical adjustment aims to bring Swiggy's valuation in line with current market expectations and the standing of its competitors, a tactic designed to attract prospective investors. However, it's crucial to distinguish increases in valuation led by genuine investor interest from those based on speculative financial health, said Tarun Singh, Managing Director at Highbrow Securities.

"While predicting Zomato’s share price performance post-Swiggy’s IPO is speculative, it's anticipated that any initial fluctuations will eventually stabilize, anchoring around its current levels, minimizing long-term valuation impacts once the initial IPO excitement for Swiggy settles. Further, my view on new-age companies going public after adjusting for profitability is critical," he said.

According a report from Moneycontrol citing sources from Entrackr, Swiggy is offering shares at a discount of 20 per cent to high-net-worth individuals (HNIs ahead of its IPO. The food delivery platform is selling its shares at Rs 350 apiece and at a valuation of Rs 80,000 crore ($9.6 billion), a concession of 20 per cent over even, said the report.

"The increased valuations for Swiggy and Zepto could put pressure on Zomato's stock price, as investors may perceive these competitors as more attractive investment opportunities. However, Zomato's strong market position and diversified offerings may help it weather the competition," said Atul Parakh, CEO of Bigul

Regarding Swiggy's IPO prospects, the higher valuation could be a positive factor, making the company more attractive to potential investors. However, Swiggy's focus on profitability will be crucial, as investors are increasingly favoring businesses with sustainable growth models. The trend of new-age companies prioritizing profitability before going public could lead to more successful and resilient IPOs in the coming year," he said.

Shares of Zomato scaled its new life-time high if Rs 199.75 on Friday. Shares of Zomato have rallied about 265 per cent in the last one year, while the stock has surged more than 55 per cent in the year 2024 so far. The stock is up 165 per cent from its IPO price, which is zoomed about 350 per cent from its all-time lows.

Kranthi Bathini, Director of Equity Strategy at WealthMills Securities said that the current valuation gap with Swiggy has already been priced in by the market as Zomato's shares have delivered multibagger returns in the last one year, its all-time lows and even IPO price.

Both Swiggy and Zomato are direct peers and competetion of each and post Swiggy's listing, and the Street will evaluate both companies on the various parameters including financials, profitability and operational efficiecy, he said.

Zomato’s quick commerce business Blinkit continues to grow exponentially and there are no signs of it slowing down. A meaningful proportion of these investments will come after Blinkit turns adjusted Ebitda break-even, which is expect to happen in Q1FY25, said JM FInancial.

This will likely ensure that Zomato’s quick commerce business will exceed the size of its food delivery business in GOV terms, much earlier than what we had built in. It will also ensure that Blinkit builds long-term scale moats against continued threats of growing competition, it added with a 'buy' rating and a revised target price of Rs 260 on Zomato.