There is always hype around big businesses. People believe that investing their money in these businesses is a no-brainer. However, is this always the case?
Aswath Damodaran, a writer on financial services and a professor of corporate finance and valuation at the Stern School of Business at New York University (NYU), has burst the bubble of Swiggy’s IPO hype.
Is the IPO of the online food delivery giant Swiggy worth your money? What are the risks related to it? What other factors should you consider? Here is a dissection of the entire situation.
What Is All The Hype Around Swiggy IPO?
The 2014-founded startup Swiggy has gone for an IPO to raise funds for expansion and technological upgradation.
An IPO, or Initial Public Offering, is when a company sells its shares to the public for the first time. This helps the company raise money that can be used for things like expanding the business, starting new projects, or paying off debts.
When people buy these shares, they become part owners of the company. If the company does well, the shareholders can make money, but if it doesn’t do well, they might lose money. Therefore, investment in a company via IPO comes with its own risks.
The hype around the company’s IPO is linked to investors’ optimism about its long-term success and probable profitability. Since this is the first time Swiggy has gone public, there isn’t enough data to speculate whether the current IPO will meet the high expectations. Moreover, the brand name is also one of the reasons why people are ready to put their stakes in it despite the associated risks.
Experts scrutinising the situation are also cautious. The Head of Research at Arihant Capital, Abhishek Jain said, “For Swiggy, profitability may remain elusive for the next few years, particularly on a consolidated basis. The company’s quick commerce business has yet to show strong performance, and achieving profitability across all segments may take time.”
Adding on, Swiggy has not been steady on the upward slope in the graphs. Although it has doubled its revenues to over Rs 11,000 crore in the previous two fiscal periods, the bottom line remains in the red with a Rs 2,350 crore loss this year.
“Swiggy lacks a clear path to profitability, and its growth prospects are uncertain, which is making investors wary and taking a wait-and-watch stance,” said Director at Wealthmills Securities, Kranthi Bathini.
“While Swiggy’s IPO could unlock new growth potential, especially through its basket size expansion and increased dark store footprint, questions remain about its path to profitability,” reiterated Krishna Patwari, Founder and Managing Director of Wealth Wisdom India Pvt Ltd. “Hence, investors looking for listing gains should avoid the Swiggy IPO,” he further said.
Since the company is operating at a loss, Samco Securities, a trading and investment platform, has advised investors to wait until Swiggy’s current financial conditions improve.
“As of the fiscal year 2024, Swiggy continues to operate at a loss, in contrast to its competitor, Zomato, which has recently achieved profitability. We advise investors to Avoid this IPO until the company’s financial performance and growth outlook improve. Waiting until Swiggy demonstrates improved financial results and a clearer path to sustainable growth would be a more prudent investment approach,” said the company.
Is This Hype Worth It?
Aswath Damodaran aka the “Dean of Valuation” was on The India Opportunity, a podcast featuring conversations with investors, founders, and creators about the potential of India. He explained that Swiggy’s IPO is not just a bet on any food delivery app but an important stake in the future of our country’s economic evolution.
Speaking with the host, Shrishti Sahu, Damodaran explained, “With Swiggy, I would look at the same determinants…it’s a joint bet on India’s growth as a country, because, let’s face it, without India growing into its income, restaurants will not be able to make money, and without restaurants, you will not get restaurant delivery.”
He also weighed in on other factors, such as the presence of Zomato, another food delivery app, saying that both companies are working on a “time arbitrage” model, a trading strategy leveraging short-term price changes that do not reflect a longer-term outlook.
“Zomato is arbitraging that logistics problem and Swiggy might be able to as well,” he said, adding that the companies are facing urban infrastructure challenges in India, due to which even errands are time-consuming.
Concerning the hype around ‘quick commerce’ in which goods are delivered to customers within a very short time frame, Damodran was speculative and said, “I’m never quite sure what to make of words that emerge, like quick commerce.”
He also talked about the additional activities these companies are undertaking, such as the feature of discovering restaurants with ongoing offers or collecting and delivering parcels and other things apart from food, and found them advantageous.
“But if there’s one advantage Swiggy and Zomato have, it’s their existing platform. They already have drivers, and expanding their model—asking drivers to pick up groceries or even laundry—is an extension of what they do,” he said.
Read More: Shocking Stories Of Exploitation Revealed By The Delivery Boys Of Zomato, Swiggy
The Way Ahead
Aswath Damodran also answered consumers’ evergreen question of ‘Swiggy or Zomato’ on the podcast.
Demarcating the difference between “price” and “value” he said, “If you ask me, should Swiggy trade at a lower multiple? I’d say yes. Zomato is further advanced in its life cycle, and has shown it can turn from losses to profits, and Swiggy hasn’t done that.” Trading at a lower multiple means the company’s price is lower than its earnings.
Moreover, he also advised people to read between the lines and not just rely on the present scenario.
“Look past the current numbers. You’re not buying last year’s financial statement…you’re buying potential, the expectation that India’s infrastructure issues won’t disappear, and these companies will leverage that to become first movers,” he said, highlighting the importance of realistic expectations.
There is also tough competition between Zomato’s and Swiggy’s IPOs. Experts consider the former to be more sustainable as it is currently running high on revenue and profits while the latter is operating at a loss.
While Zomato enjoys a larger market share and a big surge in stocks, Swiggy has the potential to redirect funds post this IPO and undertake expansion, thus becoming a tough competitor.
“Swiggy also faces stiff competition from Zomato, among others. Swiggy commands about 45% market share in food delivery, but only about 25% in quick commerce. Therefore, there is uncertainty surrounding Swiggy’s way to profitability.
Zomato is offering proven scale and profitability with solid metrics, such as gross order value (GOV) and average order value (AOV), which makes it the more stable choice in the short term,” said Jathin Kaithavalappil, Assistant Vice President at Choice Broking.
Swiggy has suffered its share of losses and ups and downs. This is why it has opted for an IPO, which received a modest response, to fund technological investments and brand expansion.
Sources: Business Today, NYU, MSN
This post is tagged under: swiggy, zomato, corporate finance, NYU, Aswath Damodaran, dean of valuation, infrastructure, India, expectations, financial, statements, IPO, brand expansion, technology, investments, price, value, quick commerce, time arbitrage model, Stern School of Business, business, New York University, investors, founders, creators, The Indian Opportunity, podcast, infrastructure, capital, Shrishti Sahu
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