Swiggy stock: MOFSL shares target price, Zomato comparison

MOFSL in its initiation report on Swiggy Ltd said the online food aggregator's innovator DNA is crucial to its success, but it  needs better execution to catch up to its rivals. The brokerage said quick commerce is a once-in-a-lifetime opportunity to disrupt how Indian consumers shop for not just groceries but a variety of essential and non-essential goods. It believes Swiggy could be a top 3 player in an exponentially growing market. 

"Current numbers, however, suggest that despite being an innovator and a category inventor across both food delivery and quick commerce, Swiggy has let its leadership slip away. Tight execution and better leveraging its platform can fix these issues, in our opinion, though, the brokerage said.

The online food aggregator, MOFSL said, is well-positioned to capitalise on growth by expanding its customer base, increasing the order volumes and values, and improving its unit economics and profitability. 

The brokerage initiated coverage on Swiggy with a 'neutral' rating and a target price of Rs 475.

While Zomato currently holds the lead in food delivery and quick commerce businesses, MOFSL said Swiggy’s all-in-one app strategy enables strong cross-utilisation across services and better operational efficiency.

Swiggy’s food delivery business has achieved stable unit economics and MOFSL expects margins in this business to improve gradually. It sees contribution margins for the FD business to improve from 6.4 per cent currently to 9 per cent in FY28. Zomato in contrast has contribution margin  of 7.6 per cent at present and is seen rising to 8.7 per cent by FY28.

MOFSL noted that before its IPO, Zomato’s food delivery business had a contribution margin of minus 11.2 per cent in FY20, which improved to 6.9 per cent by FY24.

"This increase in profitability can be attributed to higher commission (platform fees) and reduced variable costs. Additionally, the adjusted EBITDA in FY20 was minus 20.5 per cent, and it has now turned positive, reaching 2.8 per cent in FY24," it said.

MOFSL said Swiggy’s food delivery business model is now established, and similar to Zomato, it sees only a gradual, but continual, improvement in profitability for Swiggy over the medium to long term.

The gap between Instamart and Blinkit, however, is enormous, it said.

"Instamart’s 3.2 per cent contribution margin pales in comparison to 4 per cent for Blinkit. On a closer analysis, however, the gap is entirely attributable to lower AOVs and lower take rates. On mid-mile and last mile variable costs, Instamart is, strikingly, better than Blinkit," MOFSL said.

The brokerage said Swiggy’s unified platform should allow it to mine its customers better and extract higher AOVs for its Instamart business. 

Further, it needs to monetise this platform better for ad-sales and other value-added services for FMCG brands, MOFSL said.

"We expect fixed costs to remain elevated as it invests in opening more dark stores," it said.