Swiggy vs Zomato: Which stock should be in your portfolio based of valuations, profitability?

Swiggy has officially announced its initial public offering next week, opening on Wednesday, November 6. The announcement of this mega IPO has sparked chatter of ongoing comparison with its arch rival Zomato. Investors are chasing the answer which of two will be a better proposition for their portfolio.

Dalal Street analysts believe that both companies have their own pros and cons, with Swiggy being an IPO to draw investors' interest for some listing gain chances, while the already listed-Zomato appears to be an attractive bet after the recent correction. However, Swiggy has its own challenges including financials and stiff competition.

Prima facie, analysts said that Swiggy has kept the valuations attractive but the loss-making nature of business and negative cash flows are a major concern for the company. Besides this, customer acquisition will be a challenge for the company. It can dent or re-route the path to profitability.

Kranthi Bathini, Director of Equity Strategy at WealthMills Securities said the Swiggy's valuations are definitely attractive and there will be some fancy for this much anticipated IPO. However, Swiggy and Zomato have a duopoly in their business as a lot of players failed to survive and now both of them have a dominant position.

"Swiggy may have a 45 per cent market share in the duopolistic food delivery business but it has only 25 per cent market shares in the strategically important quick commerce business, where Zepto is another competitive force. The margins in these businesses are thin and there is no customer loyalty. So, investors need to focus on the path to profitability for Swiggy in the coming year," he said.

The much-anticipated IPO of the new age food-tech player shall be sold in the range of Rs 371-390 per share with a lot size of 38 equity shares. The three-day bidding for the issue shall conclude on Friday, November 8 while the anchor book for the issue shall open on Tuesday, November 5.

Karan Taurani, Senior Vice President at Elara Capital in an interaction with Business Today TV said that Zomato's appears to be more attractive based on their performance. He said the investors should 'overweight' on Zomato Ltd but allocate some capital in Swiggy, waiting for a turnaround and chasing its growth journey.

As far as investment opportunities go, Zomato now has a competitive advantage over Swiggy because of its existing scale and profitability. Despite the possible competition from Swiggy's impending IPO, Zomato performs better in key metrics like gross order value (GOV) growth and average order value (AOV), said Akriti Mehrotra, Research Analyst at StoxBox.

Although Zomato's food business trades at a greater valuation, suggesting stronger market confidence, both companies have comparable take rates. Swiggy may close the value gap if it performs well after going public and increases its market share and profitability. Also, it will be crucial for Zomato to continue performing well in the face of this fresh competition, she said.

"Zomato's proven market presence and better KPIs make it a more appealing alternative for investors in the short term, even though Swiggy's IPO may cause a stir in the market. The execution of Swiggy's IPO and Zomato's capacity to successfully capitalize on its advantages will determine its true impact," Mehrotra added.

The Rs 11,327.43 crore IPO of Swiggy includes a fresh share sale of Rs 4,449 crore, which will be used for repayment of debt, investment in subsidiaries, expansion of dark stores, investment in digital infrastructure, strategic acquisitions and more. Remaining Rs 6,828.43 crore is an offer-for-sale (OFS) of up to 17,50,87,863 equity shares by the existing shareholders.

Hitesh Dharawat from Dharawat Securities, a Mumbai-based boutique firm said that pre-IPO shares of Swiggy were frozen/locked from trade on Tuesday, October 29. However, the stock was last traded around Rs 370, which is the lower end of the price band.

"Valuations are attractive but the consistent loss-making nature of business is denting the sentiments. One should expect a flat listing from as per current market sentiments. We expect some action in the stock once it announces its September 2024 quarter results post listing," he said.