The standoff between Swiggy and Zomato is only getting intense with the former now closing the gap with the rival firm in India’s food delivery market. According to a report by BNP Paribas, Swiggy’s quick commerce arm Instamart could emerge as a major value driver in the long run. The brokerage firm has initiated coverage on the company with an “Outperform” rating, citing its improving performance in food delivery (FD) and an impressive growth in potential in the quick commerce (QC) space.
Having created categories, Swiggy has lost ground to Zomato (now Eternal) which has “executed better” and made the right acquisitions”. However, BNP Paribas said, Swiggy is staging a comeback. “At the current stock price, Swiggy’s QC business is getting no valuation, and we expect this to change over the next one year,” it added.
Swiggy currently holds a 43 per cent share of gross order value (GOV) in the food delivery market and is forecast to outpace Zomato in both sales and EBITDA growth through FY28. This, according to BNP Paribas, will be aided by its faster delivery times and improved margins.
What will help Swiggy to outpace Zomato?
According to BNP Paribas, quick commerce could be Swiggy’s next big lever for value market creation. The brokerage firm said that this is being seen as a “free option” with substantial upside as the business scales and losses narrow. Instamart is expected to post a net order value of $5 billion by FY28, despite still being in the red.
To put things into perspective, Swiggy is the second largest player in India’s food delivery (FD) market and the third largest in the high-growth Quick Commerce (QC) segment by daily orders delivered.
BNP Paribas said, “We view FD as a profitable duopoly with continued strong growth and one in which we expect strong cash generation ahead. We see QC driving the transformation of urban retail in India with an expanding target addressable market.” The brokerage firm pegged a 32 per cent sale CAGR for Swiggy over FY25-28 and also expected an improvement in margins for both FD and QC.
A comeback in food delivery segment
Swiggy’s food delivery business is now EBITDA positive and is expected to generate strong free cash flows. Over FY25-28, Swiggy is expected to outperform Eternal’s FD business on sales and EBITDA growth. Due to its low base, BNP Paribas expects Swiggy’s EBITDA growth to be higher at 66 per cent CAGR vs 39 per cent CAGR for Eternal. “The FD business does not have any meaningful capex or working capital requirements and should deliver a strong FCF,” it said.
Quick commerce business will need support from food delivery
The narrative about Swiggy’s QC business has been negative due to its near-term-expected losses. In terms of this business, Swiggy’s net order value (NOV) is expected at $5 billion and EBITDA loss at $150 million in FY28. While loss-making, BNP Paribas view the business as valuable given the long-term opportunity and margin levers. While the quick commerce business requires a lot of investment with dark-store additions, the focus is on the long-term opportunity rather than near-term profitability. With disproportionate rewards for winners, BNP Paribas expects the industry to remain competitive in the medium term.
However, as the dust settles, it added, “we see multiple levers to expand margins”. The report outlined five key levers for QC margin improvement, including higher dark store utilisation, better brand partnerships, ad monetisation, increased average order values, and scale-driven operating efficiencies.
In the interim, Swiggy has the cash on the balance sheet and is generating free cash from its FD business which should help them continue to grow without being forced to raise equity.
To conclude…
While BNP Paribas acknowledged risks—ranging from new entrants like Rapido in food delivery to high cash burn and uncertain unit economics in tier 2 and 3 markets for QC—it maintained that Swiggy is better positioned than Zomato at current valuations, especially given the long-term potential of the quick commerce category.
It, however, maintained that Swiggy’s QC division will remain loss making even in FY28.
“Over FY25-28, we expect Swiggy to deliver better incremental numbers. In FD, we expect Swiggy to grow slightly faster due to its quick delivery initiatives, which Eternal has scaled down. Also, we see a stronger focus on profitability post listing,” it concluded.