Swiggy’s IPO: Can it deliver, or will it get lost in the market?

Swiggy, one of India's leading food delivery platforms, is gearing up for its much-anticipated ₹10,000 crore Initial Public Offering (IPO) at a time when expectations are high and scrutiny is growing.

While this is a significant achievement for the startup, the chances of its IPO succeeding are far from certain, as the company is currently not in the best financial health, faces fierce competition from Zomato, and navigates the shifting landscape of India's food delivery and quick commerce sectors. Thus, although Swiggy is a pioneer and is still considered a brand with high recall value, its road to public listing is likely to require considerable effort, which may impact its valuation and investor appetite.

The number game

Swiggy, founded in 2014, is currently positioned as the second-largest player in India’s food delivery sector, with a nearly equal market share to Zomato. However, its financials starkly contrast with those of its main rival.

Zomato's superior revenue growth and operational efficiency have given it an edge, and the numbers Swiggy has reported so far look relatively modest. For example, during FY22-FY24, Zomato's food delivery Gross Order Value (GOV) (the total monetary value of all orders placed through a platform during a specific period) CAGR was 23 per cent, rising from ₹21,300 crore to ₹32,224 crore, while Swiggy's was just 15.5 per cent, growing from ₹18,500 crore to ₹24,700 crore.

Also Read: IPO rush: Hyundai, Swiggy, NTPC among cos looking to raise Rs 60,000 cr in Oct-Nov

“Swiggy may be able to narrow the gap with Zomato on valuation based on market share sustainability (industry average growth) and improved profitability; however, to trade on par or at a premium multiple compared to Zomato, Swiggy will have to gain market share in food delivery as well as quick commerce,” said Karan Taurani of analyst firm Elara Capital.

Disparity

The average order value (AOV) (calculated by dividing the total revenue generated by the number of orders placed within a given period) for both companies stood at ₹428 in FY24, indicating that Zomato’s outperformance is due to higher order volume rather than a pricing advantage. This disparity is even more pronounced in profitability metrics.

Swiggy's food delivery segment reported a slight ,adjusted EBITDA loss of ₹494 crore in FY24, which stands at -0.2 per cent of its GOV. Zomato recorded a positive ₹912 crore EBITDA margin, indicating superior cost management and scale. Swiggy's quick commerce arm, Instamart, has been a cash burner, reporting an EBITDA loss of ₹1,312 crore in FY24 compared with Blinkit's loss of ₹384 crore, despite Instamart having a much larger network and a longer presence in the market.

The growth dilemma

Swiggy's growth trajectory has been impressive. So far, it has expanded its presence to over 650 cities, collaborating with more than 200,000 restaurant partners and 300,000 delivery agents. Additionally, the company has diversified into adjacent services, including Swiggy Genie, a hyperlocal delivery service; Swiggy Minis, a direct-to-consumer marketplace for homegrown brands; and Swiggy Mall, its hyperlocal shopping platform. Yet, these segments remain in their nascent stages and have not yet contributed meaningfully to the company's bottom line.

Also Read: Swiggy gets Sebi approval to raise funds via IPO

The quick commerce segment, where Swiggy's Instamart competes against Zomato's Blinkit, presents both opportunity and risk. Although the market is estimated to grow exponentially, Swiggy still lags behind.

One of the newer players, Blinkit, outpaced Instamart in FY24, achieving a higher Gross Order Value (GOV) of ₹12,469 crore compared to Instamart's ₹8,100 crore, despite Instamart's head start and greater resources.

Impending IPO

Swiggy faces tough questions regarding valuation as it prepares for its impending IPO. Analysts suggest that Swiggy's IPO may not command a price premium like Zomato's. One analyst firm stated that post-IPO, Zomato has successfully shifted its focus to increasing profitability and expects Swiggy to do the same.

While Zomato's food delivery segment is trading at 53x forward Enterprise Value (EV)/EBITDA (meaning that the company’s valuation is 53 times its projected or expected earnings before interest, taxes, depreciation, and amortisation for the upcoming year), it may need to offer a discount due to Swiggy's lower profitability and the underperformance of its quick commerce division. Furthermore, Zomato's market consolidation, including its acquisition of Blinkit, makes it challenging for Swiggy to surpass them.

Also Read: Not Swiggy! Karnataka temple priests on warpath against app orders for prasadam

The funding environment has transformed since its last major round; Swiggy was valued at $9.8 billion (₹80,000 crore) at that time. Public tech valuations have begun to decline, and investor sentiment is cautious. Therefore, Swiggy will have to demonstrate these valuations through clear-cut profitability and growth metrics, something it has not convincingly shown in recent quarters.

Zomato and beyond

Zomato is Swiggy's archrival. It has managed to build a diversified business model ranging from food delivery to B2B supplies through Hyperpure and the "Going Out" vertical, a restaurant and event discovery service. This multi-pronged approach allows Zomato to capture value at various touchpoints, making it more attractive to investors. In contrast, Swiggy is exploring similar ventures like the "Out of Home" vertical but has yet to make significant progress.

New entrants such as Zepto and Dunzo in the quick commerce space complicate the competitive landscape further. Even though Swiggy enjoys a first-mover advantage in several segments, the market is becoming crowded, putting additional pressure on margins and market share. This increasing competition may weigh heavily on investor perception and valuation during the IPO.

Also Read: Food delivery platforms in these states may soon send liquor to your doorstep

Path to profitability

One of the most critical determinants of Swiggy's IPO success is its path to profitability. In this regard, it needs to bridge the valuation gap with Zomato by improving its EBITDA margins in food delivery, where it still lags behind. Moreover, its quick commerce segment, which is tipped for growth but is highly capital-intensive, must be brought onto a relatively stable trajectory without incurring high losses.

Expanding the number of SKUs, entering premium segments, and launching newer services like Swiggy Minis and Handpicked for curated groceries will undoubtedly be positive steps, but these must translate into an overall improvement in the financial equation. Until that happens, Swiggy will need to closely monitor its performance.