Swiggy vs Eternal: Bernstein sees up to 52% upside in one food delivery stock

Bernstein sees India’s food delivery market at an early stage

Bernstein said India’s food services market is roughly one-twelfth the size of China’s, while its food delivery market is even smaller at around one-twenty-second of China’s market. The brokerage noted that despite this gap, Indian food delivery companies currently operate with higher margins than their Chinese counterpart did at its peak.

The difference, according to Bernstein, comes partly from who is ordering food and how much they spend. The brokerage said Indian platforms currently serve a more affluent consumer base, which allows revenue per customer to run ahead of the cost associated with serving that customer.

“When you serve the top-of-pyramid customers, the revenue/commission rates are driven by income of that cohort. But the cost to serve is driven by the average per-capita income. The bigger this gap between the ‘revenue-generating cohort’ and ‘cost cohort’, the larger the margin profile, structurally,” Bernstein explained.

Bernstein said this advantage could change as food delivery reaches a broader section of Indian consumers. The brokerage’s analysis suggests that deeper penetration could bring more customers into the market, but the economics of serving lower-income consumers would also be different.

China’s $30 billion food delivery battle offers a warning

Bernstein’s comparison with China forms a key part of its assessment of the competitive threat facing India’s food delivery companies. The brokerage said China’s food delivery market was once relatively sheltered, but the convergence of food delivery, quick commerce and e-commerce changed the competitive dynamics.

“Almost $30bn spent later, Meituan has retained its leadership position in the higher value end of the market. But the act of delivering goods in 30 minutes has become available on multiple platforms, and the low-end market has become a user traffic acquisition channel for e-commerce platforms. Strategically, the convergence of food delivery, quick e-commerce, and e-commerce in China looks permanent to us,” Bernstein noted.

The brokerage said the scale of spending required to challenge Meituan’s position showed how strong the incumbent’s business had become. It also suggested that the Indian market may not follow exactly the same path because domestic food delivery companies do not have comparable profit pools to finance a prolonged competitive battle.

Bernstein therefore expects greater competition in India to put pressure on industry margins, but said the effect could emerge gradually rather than through an immediate collapse in market shares.

Bernstein says Indian challengers face three structural hurdles

Bernstein said an entrant looking to take on the existing food delivery platforms would need to address three issues at the same time. The first is relatively shallow food service demand in India, with annual per-capita spending on food services far below China’s levels.

The second is the concentration of lower average order value demand in larger cities, which Bernstein said limits how far customer acquisition and servicing costs can fall while still supporting the economics of delivery.

The third is that simply charging lower commissions may not be enough to build a sustainable alternative business model.

“If the intent is to unlock demand at a lower price point and include more consumers into food delivery space, the challenger needs to solve 3 structural issues simultaneously,” Bernstein said.

The brokerage then pointed to shallow food-service demand, the concentration of lower average order value demand in larger cities and the need for a fundamental change in the cost structure as the three issues a challenger would have to address.

Bernstein said it does not yet see a convincing answer to these three problems for an alternative food delivery business model. The brokerage expects the size of the prize to remain relatively small in the near term because overall food services penetration is still low and consumers do not eat outside the home frequently enough.

Swiggy gets 52% upside, Eternal also retains Outperform

Bernstein has retained its ‘Outperform’ rating on both Eternal and Swiggy. The brokerage’s target price for Swiggy Ltd. stands at Rs 430, implying around 52% upside, while its target price for Eternal is Rs 350 indicating an upside of around 9%.

The report’s valuation table shows that Bernstein expects both companies to remain positioned around the higher-value end of India’s food delivery market. The brokerage also expects their existing scale and consumer base to provide some protection as competition increases.

Bernstein concluded that it retains its estimates and ‘Outperform’ rating for both incumbents, citing their position in the existing food delivery market.

“We retain our estimates and Outperform rating for the incumbents Eternal and Swiggy as having the best position to fend off any competition,” Bernstein said.

Why Bernstein expects competition to play out differently in India

Bernstein’s broader argument is that India’s food delivery market remains much smaller and less penetrated than China’s. The brokerage said Indian food delivery spending per capita is still low, while food services account for less than 2% of gross domestic product.

That gives the market room to grow, but Bernstein also believes the economics of reaching new consumers will become more difficult as platforms move beyond the higher-income customer base.

The brokerage observed that Indian food delivery companies currently have stronger margins than Meituan had at its peak despite the much smaller market, largely because of the customer mix. A broader consumer base could therefore bring growth while also putting pressure on margins.

Bernstein’s assessment is that new entrants could increase competitive pressure, but the path may be more gradual than the intense battle seen in China’s food delivery market. For the existing platforms, the brokerage expects their scale, customer base and current profitability to remain important as competition develops.

Disclaimer: This article is based on the analysis and estimates published by Bernstein in its report on India’s food delivery sector. The target prices, ratings, market comparisons, margin observations, industry estimates and comments on competitive intensity in this article represent Bernstein’s views and assumptions and should not be treated as guaranteed outcomes. The 52% upside for Swiggy is derived from Bernstein’s reported target price of Rs 430 and the closing price cited in the brokerage report, and actual returns may differ depending on subsequent market prices and other factors. Bernstein’s comparison between India and China, including its discussion of Meituan’s competitive position and the spending by Chinese e-commerce companies, is part of the brokerage’s analytical framework and does not establish that India’s food delivery market will follow the same path. Readers should consider the assumptions, risks and limitations underlying the brokerage’s estimates before making any investment decision. This article is intended for informational and news-reporting purposes only and does not constitute investment advice or a recommendation to buy, sell or hold any security.