The Indian online food delivery and q-commerce industry has been one of the most dynamic and competitive sectors of the Indian economy. Recently, two major players have been under the spotlight: Swiggy and Zomato. The two giants dominated the market, with Swiggy slowly closing the gap between itself and Zomato in terms of scale and profitability. On 26 November 2024, Swiggy’s stock was up by 6% to Rs 456 as UBS, the world’s leading financial group, launched its coverage of the company with a recommendation to buy with an upside at 26% above current levels. That’s the highlight in the Swiggy ride: waves that hit the OFD as well as the Quick Commerce segment.
In this blog post, we will examine the reasons behind UBS’s ‘Buy’ rating on the company, explore Swiggy’s growth prospects, and look at the state of online food delivery and quick commerce in India today. We will also look into how Swiggy is positioning itself against Zomato and why UBS thinks there is huge upside potential in the company’s stock.
UBS’s ‘Buy’ Rating and Target Price of Rs 515
Swiggy’s stock is up following UBS’s ‘Buy’ recommendation. The global brokerage firm has identified the robust growth potential of Swiggy. It has set a target price of Rs 515, which is nearly 27% above the current price of Rs 456. There are several key factors that contribute to their optimistic outlook for the company, as highlighted in the analysis conducted by UBS.
Narrowing the Gap with Zomato in the Online Food Delivery Market
Swiggy had been challenging Zomato for a long period about market share as well as brand leadership. However, while the overall market share was led by Zomato traditionally, the competitive gap had been bridging steadily. UBS believes Swiggy has been performing notably in both margins as well as scale.
Swiggy has indeed been able to show improving unit economics over the last few quarters through increasing order frequency, improving delivery efficiency, and building its restaurant partner network. Scaling with improving profitability is precisely the difference one needs in an industry that has such threatening competition and low margins. This increased operational efficiency has seen Swiggy take the lead ahead of Zomato, given the company’s overall rise in the online food delivery space.
However, UBS also observed an improving edge of Swiggy, considering profitability, which was of earlier concern for investors. So, the company’s ability to invest in technology as well as better logistics and cost efficiencies has enabled this concern to narrow the margin gaps with competitors. Hence, this makes UBS believe Swiggy is on the growth road as a major player in this online food delivery industry.
Swiggy’s Positioning in the Quick Commerce Market
Quick commerce, or q-commerce, is an emerging business category where grocery and essentials delivery takes place within the space of an hour. The company, Swiggy’s foray into q-commerce through ‘Instamart’ seems to have good results so far. It has made significant investments to develop an effective supply chain to facilitate quick deliveries, and partnering with local suppliers has strengthened its presence in the market.
However, UBS admits that Swiggy still has a long way to go in the q-commerce segment. The competition in the q-commerce segment is stiff, with Blinkit (formerly Grofers) and Dunzo also eyeing market share. It would be a challenge for Swiggy to retain its market share while enhancing the scalability of its operations. However, UBS is still positive about the growth prospects of Swiggy’s q-commerce segment, especially as more and more consumers seek to get their daily needs fulfilled through online platforms.
Swiggy’s IPO and the Initial Stock Market Performance
Swiggy debuted on the stock market on November 13, 2024, raising ₹11,327 crores through its initial public offering (IPO). The IPO was a great success with the investors, as the shares were oversubscribed 3.59 times on the last day of the issue. The IPO was priced in the range of ₹58 to ₹61 per share, and the stock was listed at a premium of 5.5% over the issue price, which was a positive sign for Swiggy’s market debut.
The stock saw fluctuation after a positive start since its listing. Swiggy shares were at ₹444, up 3% from the last close on a day when UBS initiated coverage. This also implies that 8% over the last week reflects the long-term sentiment of the market, which has been favourable for the company.
A part of the broader view that UBS has about India’s consumer internet market, which will continue to grow at a strong pace, the bank gave a positive recommendation for the company. Swiggy dominates the food delivery and quick commerce markets. So, it is in an excellent position to capture India’s rapidly evolving e-commerce landscape.
Challenges of Swiggy and Room for Improvement
While UBS’s bull case on Swiggy has solid fundamentals, it would be important to note that the company still faces significant hurdles. One of the key hurdles is competition from Zomato, which is still one of the major players in the online food delivery market. With an established market presence brand loyalty and marketing muscle, Swiggy needs to continually innovate and enhance its services to stay ahead.
This implies a bigger challenge for Swiggy–profitability. Having come closer to Zomato in terms of margins is not easy for these industries, as the food delivery and q-commerce sector would be capital-intensive; such businesses take time to turn into sustainable profitability. Payoffs from the investments of the core technology and infrastructure made should return to Swiggy’s bottom line over a stretch of time for steady returns.
Additionally, the quick commerce market, while growing, is still in its early stages. Swiggy faces competition from other players in this space, and its ability to scale the business while maintaining service quality will be a critical factor in its success.
The Market Outlook: What Does UBS’s Upgrade Mean for Swiggy’s Investors?
In conclusion, the ‘Buy’ rating by UBS, as well as the upside of 27% indicated, reflects a general positivity that will be seen in the prospects of Swiggy. Swiggy shares should still gain in the short run from this analyst report upgrade.
It would be a recommendation of ‘Buy’ to investors. Swiggy is bound to grow through the long term, thanks to the diversified business model where food delivery and quick commerce coexist. Swiggy will definitely stand to benefit more from the increasing digital economy in India. All investments in its technology, infrastructure, and logistics are likely to drive Swiggy’s future growth.
In addition, Swiggy has a strong market position, and the operational efficiency enhanced during the quarter will do well in sustaining and further increasing its market share in food delivery and q-commerce business, which is highly competitive. The challenges still prevail, mainly in achieving profitability and scaling the quick commerce business, but Swiggy’s history of innovation and adaptability makes it a promising investment for long-term growth.
Macquarie’s ‘Underperform’ Rating: A Different Perspective
While UBS is optimistic about Swiggy, Macquarie, a leading global brokerage house, has started coverage with an ‘Underperform’ rating. It has set a target price at ₹325 per share, implying that Swiggy may struggle to achieve profitability on the way. Even though Swiggy’s growth prospects look very positive, Macquarie feels that Swiggy may not be able to sustain its profitability over the near term.
Such divergent views from within the investment community regarding the company’s potential are best demonstrated in Macquarie’s analysis. While UBS projects better growth for the company ahead, Macquarie focuses more on the risks associated with taking the business to the scale-up stage, especially in a cutthroat food delivery and e-commerce space.
Conclusion: Is Swiggy a Good Investment?
Swiggy’s stock did attract the market’s focus, with a 6% rise following UBS’s upgrade. The fact that the company enjoys a high market position in the sectors of online food delivery and quick commerce with a diverse business model is an enticing investment for long-term growth. However, there exist challenges, mainly in the profitability and competition from players like Zomato and others.
Investors should thoughtfully consider the growth potential along with the risk of scalability of Swiggy operations, especially within the context of quick commerce. It is worth mentioning that in the context of UBS’s ‘Buy’ rating the upside potential of Swiggy, needs to cross over a significant hurdle in getting to sustainable profitability.
As Swiggy continues to expand its reach in the Indian market and beyond, its long-term growth story remains promising. For investors looking for exposure to India’s growing digital economy, Swiggy offers a compelling opportunity, albeit with some risks and uncertainties in the near term.
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