Swiggy IPO analysis

Swiggy IPO (initial public offering) will open for subscription on November 6, 2024, and close on November 8, 2024. We break down the food delivery and quick commerce giant's strengths, weaknesses, and growth prospects to help investors make an informed decision.

Swiggy IPO in a nutshell

• Quality : Its three-year average ROE and ROCE were nearly -32 and -33 per cent, respectively, during FY22-24.
  
• Growth : Its revenue grew nearly 40 per cent per annum between FY22 and FY24, but it reported net losses (after tax) during the same period.
  
• Valuation : After listing, the stock will be valued at a P/B ratio of around 7 times. The P/E ratio cannot be ascertained as the company is loss-making.
  
• Overview: Swiggy is the second largest player in the online food delivery and quick commerce markets. The tech-driven platform is expected to ride sectoral tailwinds like rapid urbanisation, growing household incomes, and customer preference for time-saving online delivery services. However, it faces intense competition in the quick delivery market, which is still dominated by unorganised retail players that hold a 65 per cent share. Competition among organised players is also high, which makes the industry's market share distribution extremely volatile. These factors along with the industry's low barriers to entry pose threats to Swiggy's growth prospects.

About Swiggy

Swiggy is an online food and grocery delivery platform. It has a strong presence with food delivery services available in over 680 cities and its quick commerce arm, Instamart, operating in 43 cities as of September 2024. Supporting its quick commerce operations are Swiggy's 557 active dark stores (small warehouses) that the company is planning to increase to fuel growth.

Strengths of Swiggy

• Solid brand value : At the second spot, Swiggy holds 43 per cent market share in the online food delivery business. This is due to its strong brand recall that the company has managed to leverage for other segments as well including quick commerce and online event bookings. The strong brand value is also reflected in the lower requirement for marketing. These spends have fallen from nearly 10 per cent in FY22 to around 7 per cent.

Weaknesses of Swiggy

• No profitability: Despite operating for over a decade, Swiggy has been unable to turn profitable. The company reported Rs 2,397 crore of net losses for 12 months ending June 2024. Its EBIT margin was nearly -22 per cent for this period. Its cash flows have also remained negative over the last three years, reflecting the company's reliance on external funds to meet working capital requirements.
  
• Pricing pressure: The quick commerce market, where the company is rapidly expanding, has low entry barriers and fierce competition from large players like Amazon, Flipkart, and Reliance. This adds to the pressure on Swiggy's books as the competitive heat necessitates deep discounts and affords the company low pricing power.

Risk report

Company and business

• Are earnings before tax of Swiggy more than Rs 50 crore in the last 12 months?
  No. The company reported a loss before tax of Rs 2,354 crore in the 12 months ending June 2024.
  
• Will Swiggy be able to scale up its business?
  Yes. The increase in disposable income and growing preference for conveyance of door-to-door delivery of food and groceries will help Swiggy scale up its business.
  
• Does Swiggy have recognisable brands with client stickiness?
  Yes. Swiggy has a recognisable brand with sizable market share in the food delivery and quick commerce segments.
  
• Does the company have a credible moat?
  No. It operates in a very competitive industry with many other large players.

Management

• Do any of the company's founders still hold at least a 5 per cent stake? Or do promoters hold more than a 25 per cent stake in the company?
  No. The company is a professionally managed company and does not have any promoters.
  
• Do the top three managers have more than 15 years of combined leadership at Swiggy?
  Yes. The top three managers, including the managing director, have a combined leadership experience of more than 15 years in the company.
  
• Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
  Yes. There is no information to suggest otherwise.
  
• Is the company's accounting policy stable?
  Yes. There is no information to suggest otherwise.
  
• Is Swiggy free of promoter pledging of its shares?
  Yes. No shares have been pledged.

Financials

• Did the company generate a current and three-year average return on equity of over 15 per cent and a return on capital employed of over 18 per cent?
  No. Its three-year average ROE and ROCE were nearly -32 and -33 per cent, respectively. In FY24, its ROE and ROCE were almost -28 and -29 per cent, respectively.
  
• Was the company's operating cash flow positive during the last three years?
  No. The company reported negative cash flow during FY22-24.
  
• Is the company's net debt-to-equity ratio less than one?
  Yes. The company's debt-to-equity ratio was 0.1 in FY24.
  
• Is Swiggy free from reliance on huge working capital for day-to-day affairs?
  No. The company does not have huge working capital requirements.
  
• Can the company run its business without relying on external funding in the next three years?
  No. Swiggy has been unable to generate positive cash flow from its operations and consistently relied on external funding to run the business. It plans to continue its aggressive spending on expansion, which will result in rapid cash burn. The intense competition in the market may also force it to raise funds similar to how its rival Zomato did recently.
  
• Is Swiggy free from meaningful contingent liabilities?
  Yes. Its contingent liabilities as a percentage of total equity were around 0.02 per cent as of FY24.

Valuations

• Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  No. After listing, the stock will offer an operating earnings yield of nearly -3.2 per cent on its enterprise value.
  
• Is the stock's price-to-earnings (P/E) less than its peers' median level?
  No. Since the company is loss-making, it does not have a P/E multiple.
  
• Is the stock's price-to-book (P/B) value less than its peers' average level?
  Yes. After listing, the stock will be valued at a P/B ratio of over 7.3 times compared to its only listed peer's (Zomato) 10.2 times.

Disclaimer: This is not a stock recommendation. Investors should do their due diligence before investing.

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