As Swiggy gears up to launch its highly anticipated initial public offering (IPO) tomorrow, the online food ordering and delivery company has garnered mixed response from brokerages, with some saying that the issue is “overvalued”. Brokerages remained skeptical about Swiggy’s negative bottomline and cash flows; and intense competition from fierce rival Zomato as well as Zepto and other new players in the quick commerce space.
The three-day IPO of Indian foodtech unicorn Swiggy, backed by SoftBank and Prosus, will open for subscription on November 6, looking to raise ₹11,300 crore at a price band of ₹371-390 per share. The pre-IPO market capitalisation of the new age technology company is estimated to be around ₹87,299 crore. The stock will make its debut on the BSE and NSE on November 13, 2024.
The issue comprises a fresh issue of shares worth ₹4,500 crore and an offer for sale (OFS) of ₹6,800 crore by promoter and existing shareholders. The company intends to use capital raised from fresh equities to invest in its material subsidiary, Scootsy, for repayment of certain borrowings and expansion of its dark store network for the quick commerce segment. A part of the capital will be invested in technology and cloud infrastructure; brand marketing and business promotion expenses; and funding inorganic opportunities.
SAMCO Securities has advised investors to “AVOID” the IPO of Swiggy until the company's financial performance and growth outlook improve. “Waiting until Swiggy demonstrates improved financial results and a clearer path to sustainable growth would be a more prudent investment approach,” it says in a note.
The brokerage highlights that Swiggy has been reporting consistent net losses since its establishment in 2014, primarily due to high operational costs. In contrast, its listed competitor, Zomato, has recently achieved profitability in the food delivery segment and break-even in the quick commerce business. It is notable that Deepinder Goyal-led Zomato’s business is bigger than that of Swiggy, commanding around 58% market share in the food delivery business and 40-45% in quick commerce.
“As of the fiscal year 2024, Swiggy Limited continues to operate at a loss, in contrast to its competitor, Zomato Limited, which has recently achieved profitability. Given Swiggy’s current financial position, competitive pressures, associated risks, and valuation, its IPO appears overvalued. Therefore, We advise investors to AVOID this IPO until the company’s financial performance and growth outlook improve,” SAMCO says in a note.
Another brokerage, Bajaj Broking in its report says the issue appears “aggressively priced”, citing consistent financial losses and negative price-to-earnings (P/E) ratio. The brokerage house has recommended “Subscribe for Long Term”, saying that food delivery and quick commerce are large and rapidly growing markets in India, and they are still relatively young and have significant growth potential.
Over the past three fiscal years, Swiggy has consistently reported losses on a consolidated basis. In FY22, the total income was ₹6,119.78 crore, with a net loss of ₹3,628.90 crore, followed by top and bottom line of ₹8,714.45 crore and minus ₹4,179.31 crore in FY23. However in FY24, the total income rose to ₹11,634.35 crore, while the net loss reduced to ₹2,350.24 crore.
“In the first quarter of FY25, ending on June 30, 2024, the company recorded a total income of ₹3,310.11 crore and a net loss of ₹611.01 crore. These figures indicate that the company has been experiencing continuous financial losses over the reported periods,” the report noted.
The report also highlighted that Swiggy reported an average earnings per share (EPS) of minus ₹14.90, and an average return on net worth (RoNW) of minus 35.39%. “The issue is priced at a price-to-book ratio (P/BV) of 11.60 based on its NAV of ₹33.61 as of June 30, 2024, and is at a P/BV of 7.31 based on its post-IPO NAV of ₹53.36 per share (at upper cap). If we attribute annualised FY25 earnings to post-IPO fully diluted equity base, then the asking price is at a negative P/E, and based on FY24 earnings also it is at a negative P/E, as the company has posted losses for the reported periods.”
Meanwhile, SBI Securities and Deven Choksey Research have given “SUBSCRIBE” recommendations to Swiggy IPO, while Capital Market has a "NEUTRAL" view on the issue.
SBI Securities has recommended investors to “SUBSCRIBE” the IPO for a long term investment perspective, saying that the issue appears to be “fairly priced”. “Swiggy, at an upper price band of ₹390, is valued at Price/Sales, EV/Sales and P/BV multiple of 7.8x/7.3x/7.1x respectively of its FY24 financials on post issue capital. While comparing with Zomato, the issue appears to be fairly priced on all these parameters.”
Deven Choksey Research has also assigned a ‘SUBSCRIBE’ rating, citing the company’s strengths and the projected growth of the online food delivery and quick commerce markets. “At the upper price band the company is valued at 8x Price to Sales, offering a 76% discount to its competition. Hence, we assign a ‘SUBSCRIBE’ rating.”
The Indian online food delivery market grew from ₹11,200 crore in CY18 to ₹64,000 crore in CY23 at a CAGR of about 42%. It is further expected to grow at a CAGR of 17%-22% between CY23-CY28P to reach ₹1,40,000-1,70,000 crore by CY28P. Of the total market in CY23, the share of top 60 cities (metro and Tier 1) is 75-80% which shows the large untapped potential beyond these cities which will drive growth as penetration of online food delivery increases. Growing availability of organized restaurant supply and increased online penetration is expected to drive growth in the online food delivery market beyond the top 60 cities.
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