Motilal Oswal initiates coverage on Swiggy, sees 16% upside; here’s what the brokerage says

Swiggy, the recently-listed food tech company, has garnered significant attention from leading domestic brokerage firms. After HDFC Securities and JM Financial, Motilal Oswal Financial Services (MOSL) has become the third domestic brokerage to initiate coverage on the stock. The firm believes that Swiggy’s quick commerce business could disrupt consumption patterns in India and has assigned it a ‘Neutral’ rating with a target price of ₹475 per share, implying a 16 per cent upside potential.

Swiggy’s Position in a Competitive Market

According to MOSL, Swiggy distinguishes itself within a competitive landscape where Zomato currently holds a strong position. The brokerage emphasised that Swiggy’s strategic advantage lies in its all-in-one app approach, which enables seamless cross-utilisation of services and drives operational efficiency. This integrated approach could be a key differentiator as the company navigates the food delivery and quick commerce sectors.

“Swiggy stands out in terms of its multi-service platform, which could boost user engagement and operational efficiencies,” MOSL highlighted in its report.

Quick Commerce: A Transformative Opportunity

Motilal Oswal described quick commerce as a “once-in-a-lifetime opportunity” that could revolutionise organised retail in India. Swiggy's foray into this space positions it to be among the top three players, a development that MOSL believes could be significantly rewarding given the rapid growth of the sector.

“While Swiggy might not emerge as the No. 1 player, being a key contender in an exponentially growing market could provide substantial benefits,” MOSL stated. The brokerage underscored quick commerce as the perfect middle ground between traditional, low-cost retail and high-cost kirana stores, with the potential to expand into diverse categories like electronics and general e-commerce.

Challenges and Strategic Imperatives

Despite its innovation-driven DNA, Swiggy faces challenges in regaining lost ground. “Swiggy was an early innovator in both food delivery and quick commerce but has seen its leadership erode over time. Improved execution and better use of its platform could help Swiggy regain its footing,” said MOSL.

The firm also pointed out that Swiggy’s food delivery unit has reached stable unit economics, a positive sign for future profitability. However, the path forward involves scaling its customer base, increasing order volumes and average order values (AOVs), and refining overall unit economics to achieve long-term growth.

Risks to Watch

Motilal Oswal identified several downside risks that could impede Swiggy's progress. These include challenges in efficiently managing its quick commerce operations and scaling its dark stores—key factors that could impact profitability. The company also faces high user acquisition and retention costs, which could weigh on its margins.

Other risks include limited room for expanding margins in its core food delivery and quick commerce segments, potentially delaying any upward re-rating of its valuation. Moreover, the highly-competitive nature of the food delivery and quick commerce markets adds pressure on Swiggy to maintain and expand its market share.

Swiggy’s Market Performance

The brokerage also discussed Swiggy’s stock performance, noting that the share price has fallen back to its IPO level after an initial spike. Following its debut at ₹420 per share—a 7.69 per cent premium—Swiggy's stock was trading ended at 409.70 on Tuesday. The decline is attributed to profit-taking at higher levels.

“Swiggy’s growth potential remains strong, but persistent fiscal challenges reflect that the road to profitability is not without obstacles,” MOSL noted.

The Battle with Zomato

MOSL drew a comparison between Swiggy and Zomato, its primary competitor. While Zomato currently holds a leadership position in both food delivery and quick commerce, Swiggy’s user base appears more mature and loyal. “Although Zomato has captured more market share in food delivery, Swiggy’s cohorts demonstrate higher stickiness and better GOV/MTU ratios,” the brokerage stated.

Despite Swiggy’s innovation with Instamart, Blinkit has taken an early lead in the quick commerce segment, and new entrants like Zepto are executing their strategies effectively. MOSL emphasised that the market is still in its nascent stages, leaving ample room for differentiation based on stock-keeping units (SKUs) and business strategies.

Motilal Oswal concluded that while Swiggy’s future in quick commerce presents significant opportunities, the company must overcome current challenges to fully leverage this potential. Swiggy’s ability to scale its operations, execute better, and manage costs efficiently will determine its path to sustainable profitability.

“Swiggy’s re-rating will likely depend on accelerating its GOV growth, increasing AOVs, and enhancing execution in the quick commerce business,” MOSL stated. While the company’s innovation and multi-service platform offer a competitive edge, it will need to balance these advantages against the backdrop of fierce competition and operational challenges.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.