Swiggy, Zomato shares down up to 46% from 52-week high; are they worth buying?

Shares of Swiggy Ltd and Zomato Ltd have tumbled up to 46 per cent from their 52-week highs amid concerns over margin contraction in quick commerce segment due to rapid store expansion, intense competition and consumption slowdown, which led to a lower-than-expected sequential growth. Analysts are cautious a bit, even as a few have 'Buy' ratings on the two stocks.

The expansion by competitors may hamper near-term profitability and also cloud medium-term profit expectations, said Kotak Institutional Equities. Anand Rathi said the lag in quick commerce may persist, but will stabilise once expansion pauses. This would lead to margin expansions for both companies, it said.

On Wednesday, ICICI Securities said its channel checks indicated waning competitive intensity in quick-commerce customer acquisition spends, which it said is positive for medium-term margin outlook.

Given slowing growth in the overall e-commerce space over FY24 and FY25, companies are now looking at upping value proposition for price conscious consumers, which would be positive for overall shipment volumes, it said.

"D2C brands and online platforms are trying to increase proportion of same day and next day delivery to bridge the gap in customer experience with quick commerce platforms. We maintain Swiggy and Zomato as our top picks – each rated BUY – in the space with meaningful upside from here," it said.

This brokerage suggested 'Buy' ratings on both Zomato and Swiggy with price targets of Rs 310 and Rs 740, respectively.

JM Financial also suggested 'Buy' ratings on both the stock. This brokerage has a target of Rs 280 on Zomato and Rs 500 on Swiggy.

Swiggy, in a recent filing with the exchanges, mentioned that Instamart, its quick commerce (QC) business, was now operational in 100 cities across the country. The company also highlighted that demand for QC deliveries is improving in tier 2 and 3 cities.

"Our primary checks suggest Zomato-owned Blinkit, Zepto and Bigbasket-owned BB Now too are expanding their presence in lower tier cities, with operations live in 90/70/60 cities, respectively. We believe the lower tier city focus of Swiggy is part of a well-crafted strategy to circumvent competitive intensity in tier 1 cities where Instamart has evidently lost market share in recent quarters, whereas tier 2+ markets remain underserved," JM Financial said.

"In our opinion, this strategy is based on historical precedents wherein players who were either late to start operations or had limited firepower to burn cash, first focussed on scaling up their presence in the long tail of underserved cities, which on a cumulative basis add up to form a substantial market opportunity. However, it’s too early to foretell if the strategy will pay dividends for Instamart as competition, especially Blinkit, too seems to be following it," JM Financial said.

Anand Rathi has Zomato among its top picks. Being the market leader in both segments, it expects food delivery and quick commerce for Zomato to grow at 23 per cent and 75 per cent compounded annually over the next 2-3 years.

"We, therefore, remain optimistic on the company and maintain a 'Buy' rating with a target of Rs 385," it said.

MOFSL, meanwhile, has a 'Neutral rating on Swiggy with a target of Rs 460 and a 'Buy' rating on Zomato with a target of Rs 270. Kotak has 'Buy' rating on Zomato. It suggested a fair value of Rs 270.

BoFA Securties, however, has downgraded Zomato to 'Neutral' and cut its target price to Rs 250 from Rs 300. It also downgraded Swiggy 'Underperform' suggesting a target of Rs 325 from Rs 420 earlier.