Swiggy and Zomato: The focus on food delivery companies has intensified over the past few weeks, particularly with Swiggy making its debut on the Indian stock market. With Zomato as its only competitor, investors are starting to assess both businesses to determine which one presents a better investment opportunity.

A recent report from JM Financial indicates that while India’s online food delivery market is projected to grow at a robust CAGR of around 20% in the near future, the chances of new competition disrupting the market seem minimal at present. This is largely because quick commerce (QC) represents a more lucrative opportunity compared to food delivery. It is anticipated that food-tech companies will likely prioritize their QC initiatives, given that significant differentiation in food delivery is not expected. This dynamic should lead to steady growth in gross order value (GOV) (CAGR of 18-22%) and a gradual shift towards sustainable profitability (4-5% of GOV) for both established players.

“While on an absolute basis Swiggy offers decent upside, we would prefer Zomato if asked to pick only one due to its superior execution in the past and market leadership across key segments. We, however, suggest that investors play both (preferably with higher weightage for Zomato), as in any case both are likely to be amongst the fastest growing consumption names and could, therefore, outperform the broader market returns,” said JM Financial in its report.

Nevertheless, market analysts highlight several key factors to consider that also provide a clearer understanding of each business and assist in gaining perspectives that go beyond just the competitive landscape.

Share price in Focus

Swiggy share price

On Wednesday, November 13, Swiggy share price opened at ₹420 per share on the NSE, which is 7.69% higher than its issue price of ₹390. At the same time, on the BSE, Swiggy share price started at ₹412 each, rising 5.64% compared to the issue price.

According to the Stock Edge app, by the close of November 13, Swiggy’s delivery levels were at 49.9%, whereas on Thursday, November 14, they dropped to 22.1%. Market analysts noted that the delivery volume decreased compared to the volume on the listing day, and there has been a reduction in both overall volume and percentage, leading to a decline in stock value. This indicates that the grey market influence was evident yesterday, with certain vested interests trying to maintain higher prices on the opening day. However, on Thursday, there was a lack of interest since the initial day effects had faded.

Zomato share price, which debuted on Friday, July 23, 2021, has seen an increase of 132% since it began trading. According to data from Trendlyne, the stock price has climbed by 122.37% and has surpassed its sector’s performance by 81.77% over the last year.

An aspect to consider beyond competition

Mohit Gulati, the CIO and managing partner of ITI Growth Opportunities Fund explained that choosing between Zomato and Swiggy is challenging because the competition between them is extremely close. From a pure discount perspective, Swiggy clearly stands out. However, when it comes to operational efficiency and the path to profitability, Zomato is the clear leader.

“My concerns about the delivery space go beyond just this rivalry. The intense competition from well-funded players like Zepto, Tata BigBasket, Flipkart, and eventually Amazon and Reliance could put significant pressure on the already thin margins for both Swiggy and Zomato,” added Gulati.

Additionally, while quick commerce (Q Com) has become a service we all enjoy, it is negatively impacting the livelihoods of around 2.4 crore Indian families who are employed by Kirana stores, meaning close to 10 crore Indians now have to find a way to survive this fierce competition. Any strict regulations against quick commerce could drastically change the dynamics of the industry for everyone involved.

Zomato is well-placed to gain advantages

Arun Kejriwal, the founder of Kejriwal Research and Investment Services favours Zomato over Swiggy based on facts collected by Kejriwal as he differentiates between the two.

In essence, Zomato is positioned to benefit, considering that its business model is quite resilient and it has been generating profits for a few consecutive quarters. Recently, it was announced that Zomato will enter the Futures & Options market starting from November 27. With its entry into F&O, investors can carry their positions on the stock without needing to pay the full cash amount upfront. Additionally, there are speculations that it might be included in the Nifty 50 during the index rebalancing in February. Regardless of whether it gets added to the Nifty 50 or not, this topic will likely resurface repeatedly until February, acting as a favourable catalyst. These elements highlight the positive outlook for Zomato.

A downside for Swiggy is that one segment of its business, the dine-out service, is not profitable and is actually incurring losses, which could put pressure on the overall operations of the company. There is limited action they can take since there is no distinct revenue source from this segment; users must be app members to utilise the service, and income is generated through subscriptions paid by users and advertising revenue from participating hotels. This situation appears to be a losing venture, and there doesn’t seem to be much the company can do to improve it.

Growth catalysts are identical for both

In his comparison of the Swiggy to Zomato, Prashanth Tapse, Senior Vice President of Research at Mehta Equities, indicates that he plans to invest 70% of his funds into Swiggy, as the capital raised from the new IPO can improve its operational performance. He assigns 30% to Zomato, acknowledging that it has already demonstrated its capabilities and is leading the industry in growth. By choosing to invest in both companies, he intends to take advantage of the sector’s expansion instead of confining himself to a single investment. Both companies target the same market, implying that their growth catalysts are also identical.

Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decision.