Can Swiggy Replicate Zomato’s IPO Success?

When Zomato filed for its IPO in July 2021, there were no earlier examples of the food delivery market—Zomato had posted a loss of INR 886 Cr in FY21 and was not profitable, which was a key consideration for investors looking at a fresh IPO.

Yet, despite all the uncertainty, Zomato’s market sentiment was positive. Before Zomato, a few large tech companies or startups had gone the IPO route and as a brand known to many Indians in I, IInd and III cities, Zomato managed to create more than enough interest.

The IPO was subscribed 38.25 times, and Zomato was subscribed at a premium of 51% over the offer price.

Since then, Zomato has recovered from its earlier losses and is trading at an all-time high. An investment of Rs 1 lakh a year ago can yield returns of over 200% today, indicating that investors are confident in the business.

And now, the focus is on Swiggy, which fortunately or unfortunately has to look at Zomato as its benchmark.

Going the IPO route, food and snack delivery chain Swiggy has won approval from market regulator, SEBI for a proposed $1.25 billion public offering marking the increasing appetite for new-age investment options in a market that is witnessing a consumer boom.

The Bengaluru-based company had filed documents for the IPO with the Securities and Exchange Board of India (Sebi) through a private filing channel in April this year.

Swiggy will then have to file an updated red herring prospectus (UDRHP) with the market regulator. Prior to the IPO, the public will be given a 21-day period to respond to the UDRHP.

The bankers said the IPO is expected to raise ₹3,750 crore ($450 million) in additional capital, and an offer-to-sale (OFS) component of up to ₹6,664 crore ($800 million) and the size could be increased before the launch.

Large investors such as Prosus, Swiggy’s largest shareholder with a 33% stake, and SoftBank will be able to sell part of their stake through OFS.

Other major shareholders include Accel, Elevation Capital, Meituan, Tencent, Norwest Venture Partners, DST Global, Coatu, Invesco and GIC.

In the first half of the financial year, Swiggy posted a loss of ₹1,600 crore on revenue of ₹5,476 crore. Its main competitor Zomato posted revenue of ₹12,114 crore for the year ended March 31, 2024, while simultaneously becoming a profitable net profit of ₹351 crore.

Zomato raised ₹9,375 crore through an IPO in July 2021. The stock rose 192% last year compared to Nifty’s 32% gain. Initially offered at ₹76 during the IPO, Zomato shares closed at ₹291.70 on Tuesday.

SEBI introduced ‘pre-filing’ mechanism by 2022, which allows companies to keep the details of the original filings confidential.

This approach allows companies greater flexibility in determining the scope of the transaction. The amount of new shares may be adjusted up to 50% until an updated DRHP is submitted.

What Are Swiggy’s Plans?

The primary objectives of Swiggy’s initial public offering (IPO) are multifaceted, reflecting the company’s strategic objectives and aspirations for future growth, these objectives include-

1) Raising capital for expansion: One of the main objectives of the IPO is to raise sufficient funds to scale up Swiggy’s expansion plans.

This includes strengthening its presence in existing markets, entering new geographies within India and potentially exploring international opportunities.

The funds will also be used to enhance its distribution system, technology platform and logistics capabilities, to ensure a seamless customer experience.

2) Diversification and innovation: Swiggy aims to diversify its service offering beyond food delivery, such as its Instamart (food delivery) and Swiggy Genie (pick-up and drop services) verticals which will expand.

The IPO proceeds will enable Swiggy to invest in new technologies, partnerships and new business models that can drive long-term growth and profitability.

3) Debt reduction and strengthening of financial position: Part of the IPO proceeds can be used to reduce the existing debt of the company, and strengthen its capital structure.

A strong financial position will be provide Swiggy the ability to continue to operate and invest in growth opportunities and manage market fluctuations with greater flexibility.

4) Funding for existing investors: The IPO will provide exit opportunities for Swiggy’s early investors, including institutional investors and private investors, who have supported the company through and on the development phase.

This will not only reward early sponsors but also set a benchmark for future investments in the Indian primary ecosystem.

5) Enhancing brand visibility and market credibility: Going public will enhance Swiggy’s brand visibility and market credibility.

As a listed company, Swiggy will have greater access to the stock market in the future, improve its corporate governance standards and increase its transparency in order to attract more institutional investors.

6) Accelerating growth in a competitive market: The IPO will equip Swiggy with the resources it needs to compete effectively in the increasingly competitive foodservice and broader online services markets.

This includes investments in customer acquisition, marketing and strategic planning to increase its market share and leadership position.

Swiggy’s IPO aims to strengthen its market leadership, promote sustainable growth and position the company for long-term success in India’s fast-growing digital economy.

Zomato VS Swiggy

For Swiggy, the situation is much clearer since Zomato is already listed, there is no room for overpricing.

Thus’ if Swiggy’s valuation is correct and the market remains healthy, the IPO could easily be oversubscribed.

Drawing a parallel with Zomato, UnlistedZone co-founder Umesh Chandra Paliwal said the current scenario is favorable for companies looking to raise funds through IPOs.

The success of Zomato which has delivered excellent profits and recently turned a profit is a good example for Swiggy and if Swiggy is to repeat the success of Zomato, the obvious barometer will be the company’s performance in the unlisted market.

So how do grey market traders view Swiggy?

One caveat before we look at the analysis— currently Swiggy stocks are only available in tranches. With limited supply, inventories are not traded even more widely, say grey market analysts.

If we look at six unlisted marketplaces trading Swiggy stocks we find share prices ranging from INR 320 to INR380.

Emphasizing this, UnlistedZone Paliwal said that Swiggy stock is being traded very low in the unlisted market and hence the traction is still not enough to gauge a possible IPO sentiment.

In January 2022, it raised about $700 million at a valuation of $10.7 billion by the U.S.-based asset management firm. It was led by Invesco and Dutch investors Prosus Ventures

However, Invesco reduced the value of Swiggy twice by 2023, before increasing the value of its investment in Swiggy to more than $12.7 billion. Accordingly, Barron Capital also upped the value of its investment in Swiggy by more than $15 billion this week.  

Currently, on the grey market, Swiggy is valued between $9 Bn and $9.5 Bn, which could see some changes to Baron Capital’s markup.

Abhishek Ginodia, co-founder of pre-IPO platform Altius Investech, said that when Swiggy shares are brought into the unlisted space, they trade in the range of INR 320-INR 350, and are valued at $9 Bn-$9.5 Bn.

Trading is also restricted as the check size is restricted to INR 5 Cr and above.

Based on available information, Paliwal estimates the value of Swiggy with an IPO price of around $10 Bn. On the other hand, Ginodia expects the IPO price to be around $11 Bn-$12 Bn, which is about 30-40% lower than Zomato’s current market cap.

Swiggy IPO: A Profitable Exit or Overpriced Gamble?

A managing partner of an auditing firm with close ties to Swiggy suggested that the company’s upcoming IPO is the ultimate exit strategy for most investors, particularly those who joined in the later stages.

To provide them with a profitable exit, Swiggy’s valuation could range between $12 billion to $14 billion, depending on the outcome of its pre-IPO round.

“This could also cause Swiggy’s stock to drop initially, as many investors might view the valuation as inflated,” they added.

Swiggy vs. Zomato: A Comparison of Giants

Although Swiggy outpaced Zomato in revenue through FY23, Zomato has consistently led the way in shaping the food delivery industry and was the first to go public.

As Swiggy prepares for its IPO, it must inevitably compare itself to Zomato in terms of bottom line and scale, where it falls short. Zomato posted an impressive 67% increase in revenue for FY24, putting further pressure on Swiggy.

Zomato vs. Swiggy: Food Delivery Metrics

Swiggy trails Zomato in several key areas, such as monthly active users (MAUs) and gross order value (GOV). Zomato boasts over 30 million MAUs, while Swiggy has around 24 million. Similarly, Zomato’s GOV stands at $3.1 billion, compared to Swiggy’s $2.6 billion.

Analyst Ginodia notes that Swiggy’s quick commerce arm is a significant differentiator.

“While both Swiggy and Zomato are growing at similar rates, Zomato has managed its losses better. Zomato reduced losses by streamlining Blinkit, whereas Swiggy’s quick commerce division hampers its contribution margin by 50%. This could result in Swiggy’s IPO being valued lower than Zomato’s,” Ginodia added.

Despite making its food delivery services profitable, Swiggy’s quick commerce business, particularly Instamart, continues to bleed money, despite seeing revenue growth.

Quick Commerce: Swiggy vs. Zomato vs. Zepto

As of September 2023 (H1FY24), Swiggy has reached a revenue of INR 4,735 crore from both food delivery and quick commerce. Riding on this momentum, Swiggy is expected to report over 20% higher revenue in FY24, up from INR 8,260 crore in FY23.

However, Swiggy’s financial losses remain concerning. The company reduced its net loss to $207 million (INR 1,730 crore) in the first nine months of FY24. Although the final figures for FY24 remain unclear, Swiggy reported a staggering net loss of INR 4,179.3 crore in FY23, raising questions about whether it can end FY24 in the black.

The Confidential IPO Route: A Double-Edged Sword?

Swiggy has opted for a confidential IPO filing, which means its draft red herring prospectus (DRHP) is not immediately available for public scrutiny. This allows Swiggy to control the narrative for a little longer. However, the DRHP will still be shared with institutional investors, ensuring transparency where it matters most.

An auditing partner explained that this confidential filing method is unlikely to hurt investor confidence.

“Investors fall into three categories: QIBs, HNIs, and retail. QIBs have access to detailed financials, while HNIs and retail investors often rely on grey market premiums (GMP). Thus, we don’t expect this move to negatively affect investor sentiment,” said Paliwal.

Swiggy and Zomato: An Intertwined Future

Analysts believe that Swiggy’s timing for the IPO is ideal, especially with Zomato’s stock trading at all-time highs for several weeks. However, Zomato shares have dropped about 12% recently, signalling that the stock is still subject to market volatility.

Paliwal feels that Swiggy’s IPO timing is favourable, particularly when compared to market conditions from a year ago.

With the IPO market buzzing and Zomato’s strong performance over the past year generating handsome returns for investors, Swiggy’s lower valuation might attract investors seeking value buys. Some may even sell their Zomato shares to invest in Swiggy, hoping for equally robust returns.

However, Ginodia cautions that despite the IPO excitement, Swiggy faces significant hurdles in its core business. As competition intensifies in quick commerce—exemplified by Zepto’s rise and the looming entry of giants like Reliance Jio and Flipkart—Swiggy must tread carefully.

The Path Forward

Strategic partnerships and operational efficiency will be critical for Swiggy as it battles rising competition and works to improve customer experience, where it has fallen behind.

Ultimately, Swiggy’s IPO success hinges on the company’s ability to communicate a clear growth strategy and demonstrate a path to profitability—similar to Zomato’s journey. After years of competing with its archrival, Swiggy is realizing that its future is more entwined with Zomato than it may care to admit.