Swiggy, the leading provider of online food delivery services and quick commerce in India, is back in the limelight. However, this time, Swiggy will not attract attention due to its service offering. Instead, a major strategic shift can give new momentum to the firm in terms of growth, which can positively impact its stock price by up to 24%. The latter was estimated by global investment bank CLSA.
The Strategic Move Behind the Scenes
Swiggy has always been known for its aggressive strategy. As a rule, the firm would spend huge amounts of money on attracting new customers, expanding its operations, and competing with other companies in the segment, such as Zomato, Blinkit, and Zepto. At present, things may start changing.
CLSA notes that Swiggy’s new focus is shifting from growing the customer base at any price to creating a sustainable business model. To achieve that objective, the firm needs to reduce discounts, minimize delivery expenses, and prioritize unit economics instead of focusing solely on order volume growth.
Why CLSA Sees a 24% Upside
CLSA sees no reason for concern even after the worries about profitability and increasing losses. The brokerage believes that a variety of challenges have affected Swiggy’s valuations, creating room for upside potential if execution improves.
There are three main reasons behind the brokerage’s optimism regarding the stock:
1. Huge Addressable Market Potential
The food delivery market and quick commerce in India are still at a very early stage of development, with CLSA estimating the markets to see huge growth in the coming years.
In particular, the Quick Commerce market is forecasted to see exponential growth, and this segment is an area where Swiggy’s Instamart business can thrive.
2. Improved Unit Economics
By focusing on improving unit economics through sustainable margins, without any excessive discounts, Swiggy made a tremendous strategic decision. Although it could mean slower growth in the near term, it will be beneficial in the long run.
As brokerages mention, Swiggy’s choice to improve unit economics “is a tough call but definitely a mature one by management.”
3. Valuation Comfort
Swiggy currently offers more value compared to its peers based on discounted stock prices because of its lagging behind competitor Zomato in some indicators. However, according to CLSA, all these risks are already accounted for, meaning that if Swiggy manages to perform, its stocks are quite a bargain.
The Risks: Growth Slowdown and Increased Competition
While there is plenty of upside potential, navigating through the risks will not be easy for Swiggy.
For instance, the company’s pivot faces some of the following challenges:
Growth Slowdown: With reduced discounts, there could be a slowdown in orders, particularly in regions sensitive to prices.
Increased Competition: There is intense competition in the quick commerce sector, with players using large investments to acquire market share.
Low Profitability: Although the company has grown its top line, profitability has been an issue, with losses growing alongside the revenues.
This means that if the pivot is to succeed, the company needs to execute flawlessly.
Quick Commerce: The True Battle Ground
Among the many initiatives of Swiggy is its quick commerce business, Instamart, which the company hopes will drive growth going forward. This segment is likely to be the hardest to manage.
However, profitability will continue to elude this category owing to high logistics expenses and cutthroat competition. The performance of Swiggy in achieving a proper balance between growth and profitability will determine its future prospects.
Swiggy vs Zomato: The Enduring Competition
Comparing Swiggy to Zomato becomes inevitable despite the fact that Swiggy is the early bird. Currently, Zomato dominates several indicators such as the number of customers and the average ticket size.
Although CLSA recognizes Zomato’s superiority, it argues that the market is vast enough for more than one winner. Swiggy does not necessarily have to surpass Zomato to reap significant returns—what it requires is to perform better on both fronts.
Interestingly, CLSA regards the discount in Swiggy’s stock price as an added advantage for investors.
Market Sentiment: Skeptical Yet Optimistic
Market sentiment regarding Swiggy has fluctuated in the past few months. Despite being optimistic about the company’s future because of favorable industry conditions, brokerages are wary of its losses and poor execution.
Recent changes in the company’s strategy have introduced a new variable to this equation. The market is eagerly awaiting Swiggy’s transformation into a profitable entity after operating as a high-growth company for several years.
The Verdict
The gamble that Swiggy made by opting for more budget-conscious spending is nothing but a gamble.
The prediction by CLSA of a potential 24% stock gain rests on one variable only: successful execution.
Should Swiggy succeed in achieving the following:
1. Improvement in profitability
2. Consistent growth
3. Resistance to competition
There will be nothing standing in the way of the upside.
On the other hand, should the pivot result in a reduction in growth or losses in market share, then the company could be setting itself up for failure.
At this stage, Swiggy is at a critical turning point.
