Finshots Daily
Unpacking the Swiggy IPO
In today’s episode for 5th October 2024, we take a closer look at Swiggy's much anticipated IPO and what it means for the food and grocery delivery giant.
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- Broadcast on:
- 05 Oct 2024
- Audio Format:
- other
Hello and welcome to FinShots Daily. In today's episode, we take a closer look at Swiggy's much anticipated IPO and what it means for the food and grocery delivery giant. Before we start today's episode, here's a quick message from one of our co-founders. Hey there, my name is Shreeth, one of the co-founders of FinShots and Ditto. And I've been entrusted with an important mission, that is finding talented marketers to join our growing team. If you're someone that has a knack for simplifying the complex and making it fun, we'd love to hear from you. Head over to Toto's career page to apply or share this with someone who would be a great fit. One step, grab a referral from someone on our team to give your application an extra edge. Good luck, we can't wait to hear from you. Now, on to today's episode. A few years ago, if you wanted groceries delivered, you had to wait for hours, maybe even days. And if you ran out of batteries for your remote, the only solution was rushing to the nearest store. That was just how things worked, but then quick commerce swooped in and changed the game. The idea was simple, deliver anything from groceries to snacks in under 10 to 15 minutes, and today platforms like Swiggy Instamart, Blinkit and Zepto have revolutionized the delivery landscape. So, it's no wonder that consumers now expect everything delivered right at their doorstep, and they expect it fast. And one company making waves in this space is Swiggy, and it's gearing up for something big, an IPO, it's eyeing 50 billion rupees in fresh equity from its IPO out of a total offer of over 116 billion rupees. But wait, why are we talking about Swiggy in the quick commerce game? Isn't it primarily a food delivery company? Well, not anymore. Swiggy's future is also heavily tied to its quick commerce arm, Instamart, which accounts for over 9% of its total revenues in just about 3 years. And although that may not seem like much, it's actually Swiggy's third largest revenue stream and it's eager to double down and grow it even further. But here's the thing, quick commerce isn't just about speed. To truly win in this space, companies have to keep their eyes on 3 key areas. Market share, customer acquisition costs, a cap, and average order value. The reasons are pretty simple. Quick commerce runs and raises or thin margins, and it's incredibly capital intensive. Companies have to build an entire logistics network with dark stores, those small, strategically located warehouses that make ultra fast deliveries possible. It doesn't stop there. They also have to keep bringing in new customers while encouraging them to order more frequently. But there's a catch. If their cost of acquiring each new customer keeps climbing and the average order value stays low, they're in trouble. That's why managing cash flows efficiently is vital. With ballooning costs, creating a sustainable business model boils down to finding the right balance between growth and profitability. And that's what Swiggy, blanket, and Zepto are trying to do. They're all battling for dominance in this space. But Swiggy didn't always bank on quick commerce. When it launched in 2014, it was all about food delivery, it dominated the space, going neck to neck with Zomato. But by 2022, Swiggy's leadership noticed something. Food delivery had plateaued, growth was slowing, and margins were thinning even further. So they pivoted to focus on a new segment. Enter Instamart, Swiggy's quick commerce arm, and the pivot has paid off. At least in terms of scale, Instamart's revenues shot up by 100% to nearly 10.8 billion rupees in FY24, far outpacing the 17% growth in Swiggy's food delivery vertical. In terms of gross order value, Instamart surged by 58% in FY24 compared to just 15% for food delivery. But here's the thing again, success and quick commerce doesn't come cheap. Having a successful quick commerce operation requires a network of dark stores, a vast logistics team, and hefty marketing budgets. Swiggy has expanded its dark store network to over 550 locations today. But this expansion, along with rising CAC, with jump to 5,300 rupees in FY24, a whopping 75% increase over the previous year caused Swiggy's expenses to surge. And while Instamart's contribution to Swiggy's stop line has been rising, it's also become Swiggy's Achilles heel, because for the first 3 months of FY25, Instamart accounted for around 90% of Swiggy's EBITDA losses. EBITDA stands for earnings before interest, taxes, depreciation and amortization. Its operating losses increased to 3.2 billion rupees, which is a huge chunk of Swiggy's total operating loss of 3.5 billion rupees. These numbers paint a stark picture of the cash-burning nature of the quick commerce business. Also, you can't forget the fierce competition in this space. In just 2 years, Quick Commerce in India has exploded, with GMV, a gross merchandise value surging from $0.5 billion in FY22 to $3.3 billion in FY24, a staggering 280% growth. And Blinkett now owned by Zomato has outperformed Instamart, even though Swiggy was the first major player to dive into Quick Commerce in India. In FY24, Blinkett's average auto value was 35% higher than Instamarts. It stood at around 610 rupees compared to Instamart's 460 rupees. Plus, Blinkett's customer retention rates are better. It also holds a 40% market share, while Instamart trails with 32%. And then, there's Zepto, which has quickly grabbed 28% of the market by offering aggressive pricing and launching private labels. And that's exactly why Swiggy's core food delivery business remains a crucial pillar for its financial stability as it accounts for about 50% of its total revenues with a 247 billion rupee gross auto value. In FY24, Swiggy reported an operating revenue of 112.5 billion rupees, a 36% jump from the previous year, while reducing its net losses by 44% to 23.5 billion rupees. Swiggy's are promising signs that Swiggy's food delivery vertical is edging closer to sustain profitability. Offering a buffer as the company bears the high cost of expanding Quick Commerce. So yes, Swiggy's upcoming IPO is a critical moment for the company as it mainly wants to use the funds to expand its dark store network and optimize delivery infrastructure. And this investment is essential if Swiggy wants to lower its unit costs and make Instamart profitable in the long run. But there's a twist, a significant chunk of the IPO, over 66 billion rupees is an offer for sale or OFS, meaning its structure to give an exit to existing investors. While the fresh equity will provide Swiggy with much needed capital, potential investors might wonder if enough of the funds will be used for future growth. And Swiggy's road ahead is not without challenges. Zomato has outperformed Swiggy in food delivery in FY24. It has delivered more food with a gross order value of 320 billion rupees compared to 247 billion rupees of Swiggy's. It has a higher contribution margin of about 7% compared to 5.5% for Swiggy's, plus its profitable with an EBITDA of 9 billion rupees versus Swiggy's loss of 472 million rupees. And it has more transacting users on its platform, 18 million versus 13 million. In the quick commerce space, Blinkit is nearing break even and Zepto is scaling rapidly. You can't say the same for Instamart just yet. As it reported operating losses of 1.4 billion rupees in FY24 compared to Blinkit's smaller loss of 3.8 billion rupees. On top of that, regulatory scrutiny around the environmental impact of rapid 10-minute deliveries could pose risks to the entire quick commerce model, particularly as sustainability concerns rise. And finally, you can't ignore the deep-pocketed retail giants like Reliance, Tata, and Walmart who are eyeing the quick commerce space. These conglomerates have extensive supply chains and resources that could easily out-muscle Swiggy if they decide to ramp up operations. So to stay in the game for now, Swiggy is relying on its tried and tested strengths. Its tech-infra, logistics, brand recognition, and large customer base to navigate this landscape. It has a decade of experience under its belt and it has built an extensive logistics framework that it can leverage to expand Instamart further. For investors eyeing Swiggy's IPO, the message is clear. This is a long-term play. Swiggy's IPO is undoubtedly a big step for the company, especially as it looks to expand its dark-store network and improve its delivery systems. But with strong competition and rising expenses, the road ahead won't be easy. The company is also counting on its core food delivery business to provide stability as it dives deeper into quick-comers. With the IPO on the horizon, Swiggy is banking on a solid financial boost to help its stay competitive and keep growing. And whether it can balance its rapid growth with sustainable profitability remains to be seen. And we'll only know more about the company's valuations when the IPO price ban is announced soon. So, will the Swiggy IPO pop the markets? Thank you for listening to today's episode. And if you want to share your feedback or suggestions, do drop us an email to high@theratefinshots.in. Until next time. (upbeat music)