Swiggy's IPO debut sees strong gains, but competition challenges loom

Swiggy will have to convert growth into profitability

The Swiggy initial public offering (IPO) saw a  retail subscription of 1.14 times and qualified institutional buyer segment subscription of around six times. The stock listed at a premium of 8 per cent and ended the day’s trade with nearly a 17 per cent gain over the issue price. The Rs 11,327 crore issue included an offer for sale of existing equity worth about Rs 6,828 crore and a fresh equity issuance of Rs 4,499 crore. The proposed breakup of allocation is dark store expansion (about 26 per cent), brand promotion (24.8 per cent), tech and Cloud (15.6 per cent), and funding inorganic growth plus general corporate expenses (29.7 per cent). This makes the priorities clear for Swiggy, which is likely to face increasing competition, albeit in under-penetrated markets. Quick commerce (qcom) is a major focus area and the company is open to acquisition for expansion.

 

Swiggy is one of two leaders in food delivery and one of the three current majors in qcom. Zomato is a direct rival, with Blinkit, which it acquired, holding leadership in qcom. In qcom, Zepto is another significant player. Zomato plus Blinkit is ahead of Swiggy plus Instamart on many counts. But Swiggy was the first mover in qcom and is trying to open up a new category of quick food delivery. Between 2018 and 2023, the food delivery and qcom markets expanded at a compound annual growth rate of 42 per cent and 148-169 per cent, respectively. Given an under-penetrated qcom market, Instamart may regain market share. Swiggy was offering qcom in 32 cities as of the first quarter 2024-25 (Q1FY25). Swiggy’s active dark store count (Q1FY25) was 557 stores versus 639 for Blinkit. Gross order value (GOV) metrics indicate Zomato’s market share was 64 per cent in Q1FY25. Swiggy’s average order value (AOV) is also lower than Blinkit’s. Instamart has a negative margin; Blinkit is marginally positive.

 

In food delivery, Zomato’s market share was around 58 per cent in Q1F25. AOVs are similar but Swiggy has lower margins. Swiggy’s dineout service is present in 52 cities and this segment is running at a loss of 2 per cent of GOV. Margins are inherently low. Zomato reported Rs 351 crore as profit after tax on revenues of Rs 12,114 crore in FY24, which is a 3 per cent net margin, while Swiggy had losses of Rs 2,350 crore on revenues of Rs 11,634 crore in FY24. On the plus side, Swiggy has an integrated app, which users may find more convenient. GOV per monthly transacting user is higher than Zomato’s. Quick food delivery may be a new revenue stream, but it is also low-margin.

 

The biggest concern for both leaders is new competition in qcom. At least four companies — Flipkart, Amazon, Reliance, and Big Basket — are entering or have entered qcom. All have deep pockets. This raises competitive intensity. The business of qcom requires a strong tech backend, plus a good dark-store network and smart deployment of delivery personnel. Increased competition will reduce margins, which are anyway low. Zomato is listed, which gives a sense of comparative growth and valuation. Swiggy is loss-making. Zomato is valued at an astronomical price-to-earnings ratio of over 300, and market valuation of Rs 2.27 trillion. After listing, Swiggy is valued at Rs 1.02 trillion. Building a moat in these businesses will not be easy or cheap, but Swiggy investors would hope it is up to the task.