Swiggy needs to answer these key questions before the IPO
Synopsis
Swiggy’s plans to go public may be a smart move. The dust and uproar around previous consumer tech and payments companies have settled and the market understands these businesses better. Investors, however, will ask these key questions because this company has a listed peer in Zomato.
Improved stock-market sentiments around consumer-technology companies or a necessity of shareholders to realise some value? For either of the two reasons Swiggy is now looking to list itself in the public market. It filed its DRHP with the market regulator Sebi last week. Swiggy wants to raise around INR10,400 crore, or USD 1.2 billion, which would entail INR3,750 crore (~USD450 million) through a fresh issue and up to INR6,664 crore (~ USD800
Improved stock-market sentiments around consumer-technology companies or a necessity of shareholders to realise some value? For either of the two reasons Swiggy is now looking to list itself in the public market. It filed its DRHP with the market regulator Sebi last week. Swiggy wants to raise around INR10,400 crore, or USD 1.2 billion, which would entail INR3,750 crore (~USD450 million) through a fresh issue and up to INR6,664 crore (~ USD800 million) as an offer-for-sale. Reports and sources suggest Swiggy’s major investors, such as Prosus (which holds close to 32%) and Softbank (8%) among others are looking to make some cashouts as part of the process. Though the company chose a confidential route, here’s a quick review of Swiggy’s performance over the past year, and the growth that it is projecting over the next few years.How will the stock market view Swiggy given that there is already a big entity, Zomato, trading on the exchanges?Where does Swiggy stand against Zomato in food delivery?Swiggy has lost considerable market share to Zomato in food delivery in recent years, despite being the first to crack the segment, when it started food delivery in 2014. Zomato, which had begun as a restaurant-discovery platform, started food delivery a year later. But since then, Zomato has taken a significant lead. Here’s how things stand, as of December 2023 - 109685401109685411Why has Swiggy’s slice in the food-delivery pie shrunk?Zomato’s lead over Swiggy, as per Bernstein, is driven by “strong execution, wider penetration (Zomato is present in 750+ cities as compared to ~600 cities for Swiggy) and stronger content funnel”. “Zomato has been a gainer in tier II+ cities as well as some tier I cities — which has led to a higher MAU base for Zomato,” the Bernstein report further said. Industry members and restaurant executives who work with both players also say that Zomato has been more actively engaging and hands-on with them over the last few years than Swiggy. Some industry analysts say Zomato has also been sharper in working revenue levers such as ad revenue and loyalty fees etc.But Swiggy's management has told investors and investment bankers that it is confident of profitability and strong topline growth in the next two years, sources say. As per sources, Swiggy is estimated to have closed FY24 with a topline of around INR6,000 crore in its food-delivery business. As per a recent investor note, the food-delivery segment had clocked revenues of INR4,526 crore in the first three quarters of the fiscal. The company expects the vertical to grow between 20% and 25% annually between FY24 and FY26, sources privy to the internal projections say. How would Zomato fare in a similar period? Goldman Sachs says it expects a 32% adjusted revenue CAGR for FY24E-27E for Zomato, which is also reportedly the highest guidance within its global food-delivery coverage. Is Swiggy’s food-delivery business profitable?Swiggy had announced last year that its food-delivery business was profitable as of March 2023. But it still showed Ebitda losses of INR88 crore in the first nine months of FY24, as per a recent investor note. This was, however, a significant improvement from the INR1,008 crore Ebitda losses in FY23. The company is said to have closed the fiscal with a very slight negative Ebitda margin for the food-delivery vertical, sources add.Going forward, the company expects the business to be profitable, according to sources privy to internal projections. This is important because according to Goldman Sachs’ research, Zomato’s food-delivery Ebitda margin is “already the highest among global food-delivery platforms”. Swiggy said it will not comment on “numbers and speculations”. Like Zomato, Swiggy also has Instamart, a quick-commerce business – the current flavour of the season – that flanks its food-delivery business. How does Instamart fare in the quick-commerce space?Instamart, which contributes around 17% to Swiggy’s overall revenue, has been bleeding money over the past year as it fights off tough competition in the quick-commerce space. It saw a topline of a little under INR1,000 crore in the first nine months of FY24, though its Ebitda burn stood at over INR1,000 crore in the same period, as per the investor note cited above. The contribution margin stood at –7.6%.The losses may continue well into FY26, though they will be much smaller, as per sources privy to the company’s projections. This is in sharp contrast with market leader Blinkit, which is expected to operationally break-even in the current quarter, as per Zomato’s guidance. Instamart has also been losing ground in the quick-commerce race to rivals Blinkit and Zepto, as per a recent report by HSBC Global Research, which was done in collaboration with Zepto. Here’s how the market share has changed among the three players, as per the report. 109685451What about valuations?Swiggy was valued at USD10.7 billion in its last funding round in 2022 and has since seen individual investors mark the number upwards or downwards. But after several markdowns, Swiggy has in recent months seen investors up the valuation, with the latest being US-based asset manager Baron Capital Group, which marked up the fair value of the food-delivery platform to USD12.1 billion as of December 2023.Much of the movement has been in tandem with Zomato’s public-market performance, given the Gurugram-headquartered firm saw its market cap soar to USD13 billion on its stock exchange debut in 2021 (up from its IPO price valuation of USD8 billion). After a roller-coaster ride over the past three years, the valuation currently stands at a massive USD20 billion. However, in an interesting turn of events, Blinkit is now been valued at USD13 billion by Goldman Sachs, which pushes the valuation of Zomato’s quick-commerce vertical higher than its food-delivery business.The investor note on Swiggy cited above speculates that the Bengaluru-based firm’s valuation would be anywhere between 20% and 25% discount to Zomato’s.Will public markets think the same? (Graphics by Sadhana Saxena)