The Swiggy share price has fallen nearly 2% in early trade after the company announced selling its entire Rapido stake for Rs 2,400 crore to Prous and Westbridge Capital. Nomura has maintained its Buy on Swiggy as they believe that this monetisation raises the cash balance and gives it enough financial resources to weather the current burn phase of its Quick commerce.
Nomura has a target price of Rs 550 per share. This implies 24% upside for the Swiggy share price from current levels. The brokerage house believes that, at the current price, the market is ascribing only 0.3x EV/GOV to its quick commerce business Vs 0.9x for Eternal.
Nomura on Swiggy: Monetising Rapido investment
Swiggy had acquired a 12% stake in Rapido for Rs 1,000 crore in April 2022 and company now sold its 12% stake in Rapido to Prosus and Westbridge. It raised Rs 2,400 crore from the stake sale. Nomura believes that “this monetisation raises the cash balances of Swiggy.” They also explained that the funds at this juncture gives Swiggy “enough financial resources to weather the burn” seen in its quick commerce – Instamart business.
Nomura on Swiggy: Instamart ownership restructuring
Swiggy, subject to the approval of its shareholders, has approved the sale and transfer of its Quick commerce business under the brand name ‘Instamart’ to Swiggy Instamart. This is an indirect step-down wholly-owned subsidiary of the company. Before this restructuring, Instamart was held directly by the parent, listed company, Swiggy.
According to Nomura, this “restructuring is a step in the direction of enabling Instamart to own inventory in its Quick commerce business once Swiggy becomes an Indian Owned and Controlled Company (IOCC) when its domestic shareholding crosses 51%.”
Nomura on Swiggy: What competition indicates
The brokerage house also pointed out that how Eternal, another key food delivery business, had also announced a change of business model for its quick commerce subsidiary (Blinkit, unlisted) recently. They have also changed the business model after becoming an IOCC.
Nomura explained that switching to an inventory-led model “can help improve the contribution margin of Swiggy’s Instamart business, as Eternal expects 100 bps improvement from the same.”
But it’s not an absolutely easy path ahead for Swiggy. Highlighting the risks, Nomura pointed out that competition in the quick commerce business due to aggressive expansion by other players could “delay the company’s path to profitability, and a macro slowdown could also pose a risk to growth assumptions for the online food delivery business of Swiggy.”