Brokerages see promising long-term growth, but caution on risks

Swiggy’s initial public offering (IPO), priced between INR 371 and INR 390 per share, is drawing significant interest from investors due to the company’s well-positioned food delivery and quick commerce businesses. With a market cap estimated at INR 83,200-87,300 crore at the upper price band, the IPO aims to raise INR 11,300 crore, comprising a fresh issue of INR 4,500 crore and an offer for sale (OFS) of INR 6,800 crore by existing shareholders, including Prosus and Accel. Analysts from InCred Equities and Motilal Oswal Financial Services express optimism about Swiggy’s market opportunity, while also pointing to notable risks in the company’s profitability and growth trajectory.Swiggy’s diversified offerings have helped it establish a strong footprint in the hyperlocal commerce space, according to Motilal Oswal. Swiggy launched its food delivery in 2014 and its quick commerce service, Instamart, in 2020, placing it as the second-largest player in both markets in India. Swiggy’s strategy hinges on leveraging its integrated app approach to consolidate various consumer services, including food delivery, grocery, event booking, and last-mile commerce activities like Swiggy Genie. InCred analysts highlight the company’s food delivery segment as its most profitable vertical, recently turning EBITDA positive with adjusted earnings of INR 57.8 crore in Q1FY25. Swiggy’s 1.4 crore monthly active users as of June 2024 and rising average order value (AOV) underscore a maturing and loyal customer base.Instamart a growth driver
Swiggy’s Instamart, accounting for 12% of its revenue, is poised to be a major growth driver, benefiting from India’s rising demand for convenience and urbanization. Swiggy plans to expand its Instamart operations significantly by establishing additional “dark stores”—micro-fulfillment centers—across India. In H1FY25, the company operated 605 dark stores in 43 cities, with plans to invest INR 1,179 crore through FY28 for further network expansion, brand marketing, and technology upgrades. Analysts from InCred see the cash generated from food delivery as instrumental in fueling Instamart’s rapid expansion, which could bolster Swiggy’s market position against competitors like Zomato.Analysts from both firms highlight Swiggy’s competitive valuation compared to Zomato, which trades at a higher EV/revenue and EV/GOV multiple. InCred Equities estimates Swiggy’s implied EV/revenue multiple at around 6.5x and P/S ratio at 6.7x, while Zomato trades at 11.3x and 11.4x, respectively. This relative discount could make Swiggy an attractive long-term investment, though the IPO is recommended primarily for high-risk investors, given Swiggy’s ongoing losses and uncertainties around achieving sustainable profitability. Motilal Oswal’s analysis shows that while Swiggy’s food delivery vertical is profitable, overall profitability remains out of reach due to heavy investment in growth segments like Instamart and the newly introduced 10-minute delivery model, Bolt.

However, the analysts caution that Swiggy’s financials remain strained, with net losses incurred each year since its inception and continued negative cash flows from operations. Incred Equities and Motilal Oswal highlight risks tied to user retention, the effective management of dark stores, and the company’s capacity to scale operations profitably. If Swiggy fails to retain its user base or manage its costs effectively, it could face financial strain. The potential difficulty of managing dark stores, especially as the company scales its Instamart operations, presents a critical operational risk that could impact profitability.

While Swiggy’s IPO offers substantial long-term growth potential, particularly in high-growth segments like quick commerce, analysts recommend it primarily for investors with a high-risk tolerance. The company’s track record of innovation and extensive user base make it well-positioned for growth, but the path to profitability may be prolonged amid competitive pressures and the costs associated with scaling its dark store network.>