Swiggy IPO: Food delivery startup likely to command lower valuation than Zomato shares, say analysts

Swiggy IPO: Food delivery giant Swiggy has recently filed its draft red herring prospectus (DRHP) with the capital market regulator Sebi to raise funds via initial public offering (IPO). Swiggy IPO will consist of a fresh issue of shares worth ₹3,750 crore and an offer-for-sale (OFS) component of 18.53 crore equity shares.

Swiggy is reportedly targeting a valuation of $15 billion through the IPO after it was valued at $10.7 billion in its last funding round in 2022 led by asset manager Invesco.

The highly anticipated Swiggy IPO comes at a time when the quick commerce sector is witnessing significant growth. India’s food delivery market is a duopoly with Swiggy and Zomato together commanding over 90% of the industry, while the market is estimated to grow to ₹2 lakh crore by 2030.

Amid high attention on Swiggy IPO, many analysts are drawing comparisons with its primary competitor, Zomato. Zomato shares made a successful public debut in 2021 and have given multibagger returns since then.

Analysts expect Swiggy will likely command a lower valuation compared to its rival, Zomato, as the Deepinder Goyal-led firm has consistently outpaced the IPO-bound company in key metrics such as average order value (AOV), food delivery gross order value (GOV), adjusted revenue growth and orders as well as profitability in the food segment.

“We continue to believe Zomato’s long-term growth prospects remain intact for the food and qCommerce business based on market growth data. It may continue to dominate the food delivery business in terms of growth and profitability by focussing on levers, such as advertising revenue and platform fee to drive higher take rates vs Swiggy,” said Karan Taurani, Senior VP of Elara Securities.

Zomato vs Swiggy

As of FY24, Zomato food delivery posted an adjusted EBITDA of 2.8% versus Swiggy’s loss of 0.2%. Growth-wise, Zomato posted a GOV CAGR of 23.0% as compared with Swiggy’s 15.5% CAGR during FY22-24. Moreover, Zomato outperformed with higher AOV CAGR of 3.7% during FY22-24 against Swiggy’s 2.5%.

Zomato’s food segment is trading at 53x one-year forward EV/EBITDA whereas the qCommerce segment is trading at 5.5x one year forward EV/sales.

“Swiggy may command a discount to Zomato valuation on the back of 1) latter’s scale (27% higher revenue in food delivery & 109% higher revenue in qCommerce vs Swiggy), 2) higher growth rates by Zomato at 55% in FY24 and higher GOV of 93% in qCommerce, 3) Blinkit’s market leadership in qCommerce, and 4) Zomato’s higher profitability in the food segment & break-even in the qCommerce segment,” Taurani said.

According to him, 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 versus Zomato, Swiggy will have to gain market share in food delivery as well as qCommerce side coupled with good execution on profitability to move closer to Zomato’s adjusted EBITDA margin in the food segment and achieve a path to break-even in qCommerce, which may be a long haul.

Akriti Mehrotra, Research Analyst, StoxBox believes Swiggy IPO could intensify competition in the food delivery sector, but Zomato’s established scale and profitability provide a competitive edge.

“Zomato outperformed Swiggy in key metrics. While both companies have similar take rates, Zomato’s food segment trades at a higher valuation. If Swiggy executes effectively post-IPO and improves its market share and profitability, it may narrow the valuation gap, but Zomato’s strong performance will be crucial in sustaining its share valuations amidst this new competition,” Mehrotra said.

Ultimately, Zomato’s ability to leverage its scale and established market presence will play a key role in how the IPO impacts its stock performance and valuations moving forward, Mehrotra added.

Zomato Share Price

Zomato share price has jumped over 9% in one month and more than 37% in three months. Zomato stock has given multibagger returns of over 122% year-to-date (YTD) and more than 170% in one year.

Elara Capital has recommend a ‘Buy’ rating on Zomato shares with a target price of ₹320 apiece, based on SoTP valuations, as it values the food delivery business at 55.0x one-year forward EV/EBITDA, Blinkit at 5.5x one-year forward EV/sales and Hyperpure at 2.5x one-year forward EV/sales.

At 3:10 PM, Zomato shares were trading 1.71% lower at ₹273.50 apiece on the BSE, commanding a market capitalisation of more than ₹2.41 lakh crore.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.