How IPO-bound Swiggy stacks up against Zomato

More than three years after Zomato’s listing, its competitor Swiggy is now gearing up to join the primary market wave.As Swiggy, the food and grocery delivery giant, prepares for its highly anticipated initial public offering (IPO), the updated draft red herring prospectus (DRHP) sheds light on key aspects of the over ₹10,000 crore public issue. Here is the analysis of key details that investors should know.ValuationZomato is currently valued at $29bn, while Swiggy is seeking a valuation of $10-13bn. This pegs Swiggy’s valuation at a 55-66% discount to Zomato’s.Let’s dive deeper into the numbers and explore the implications of this valuation difference.RevenueAt first glance, Swiggy’s gross revenue seems close to Zomato’s, with only a 23% difference. However, digging deeper reveals two key business operations:Food deliveryQuick commerceDalal Street now values quick commerce higher than food delivery due to its faster growth rate and revenue potential. Below is the breakdown of the numbers.Food deliverySwiggy is 23% smaller than Zomato in Q1 FY25Growth rate in gross order value: 14% (Swiggy) vs 27% (Zomato) in the first quarterQuick commerceSwiggy is 57% smaller than Zomato in Q1 FY25Growth rate in gross order value: 56% (Swiggy) vs 130% (Zomato) in the first quarterHowever, Swiggy’s B2B business, providing supply chain and distribution services, narrows the revenue gap with Zomato. medium113903677ProfitsZomato stands out in a league of its own when it comes to profitability. The food-delivery business at Zomato has generated profits that are 5.4 times larger than Swiggy’s in the recent quarter. Moreover, Zomato’s quick-commerce business is on the verge of reaching the Ebitda breakeven, while Swiggy is making massive losses. Even in other business segments, Swiggy’s profitability lags that of Zomato. medium113903718Let’s look at how the two companies fare in the key business segments — food delivery and quick commerce.Food deliveryInterestingly, Swiggy once led in average order value, but Zomato closed the gap in FY24. Zomato has grown its food-delivery business faster than Swiggy in recent years, expanding its lead from 15% in FY22 to 36% in Q1 FY25. medium113903777 medium113903791While Zomato boasts better contribution margins, its adjusted-Ebitda margin tells a more impressive story.Zomato’s disciplined operations have yielded adjusted-Ebitda margins of 3.4% as a percentage of gross order value, surpassing Swiggy’s 0.8%. To put it in perspective, for every average food delivery order, Swiggy makes around ₹4, while Zomato earns ₹15.Quick commerceZomato’s quick-commerce business, Blinkit, significantly outperforms Swiggy’s Instamart. The 81% difference in gross order value between the two companies is on account of both number of orders and due to Zomato’s 28% higher average order value, which makes a big difference as the cost of each home delivery is similar.Although the number of dark stores is comparable, revenues differ substantially.Swiggy has many dark stores closing, indicating sub-optimal planning and optimisation. Additionally, SKU (stock-keeping unit) optimisation is crucial in this business. Moreover, Instamart’s brand recall is lower in quick commerce. medium113903830 medium113903837This combination of factors — suboptimal order size, dark store management, SKU management and brand recall — has led to high promotional expenses and logistics costs, resulting in adjusted-Ebitda margins of -11.7% for Swiggy, compared to -0.1% for Zomato.This indicates that Swiggy’s quick-commerce business has not achieved the efficiency levels of Zomato.The managementThe two key founders of Swiggy have a stake of only 8% (worth around ₹7,600 crore) and have sold stakes worth ₹300 crore ahead of the IPO, with plans to sell an additional around ₹150 crore in the issue.Swiggy was once the pioneer and market leader in both food delivery and quick commerce. However, it now lags in both the segments. Investors may seek answers from the management as to why that has happened.Additionally, the company lost the market leader position in quick commerce to Zomato and faces another competitor in Zepto. Given that this business is more prized than food delivery and valued at a much higher price-to-sales ratio, investor focus will be very much on this business.Also, despite various new initiatives like Swiggy Genie, none have scaled or broken out. Thus, it is quite surprising that even in the B2B segment, Zomato is catching up and doing much better in profitability.Issue detailsThe Swiggy issue includes the sale of 18.5 crore share by existing shareholders led by Prosus, the biggest investor in Swiggy. If the issue happens at ₹400/per share, it translates to ₹7,400 crore sales by existing shareholders. This would value the company at around $11.5bn valuation.The IPO consists of a fresh issue of ₹3,750 crore, which will be used as growth funds for the company in the following way. medium113903748The total IPO would amount to ₹11,150 crore, which would make it among the larger IPOs. Around 10% of the issue will be reserved for retail investors with 75% of it reserved for institutional investors.The final cutSwiggy has a duopoly with Zomato in the food-delivery business, but Zomato is extending its lead. In quick commerce, Swiggy lags far behind Blinkit (Zomato subsidiary), necessitating significant changes.The operating metric gap between Zomato and Swiggy remains substantial. While Swiggy’s implied market cap-to-sales discount may seem attractive, it’s not a compelling reason for bullishness unless the company adopts a fresh perspective, improves planning and executes effectively to close the gap with Zomato.