Shares of Swiggy Ltd and Zomato Ltd have witnessed a significant decline of up to 46% from their 52-week highs, largely due to concerns over margin contraction in the quick commerce segment. This decline has been driven by factors such as rapid store expansion, increased competition, and a slowdown in consumer spending, all of which have contributed to lower-than-expected sequential growth. While analysts remain cautious about the near-term outlook, some still hold a positive long-term perspective, maintaining a ‘Buy’ rating on both stocks.
Kotak Institutional Equities has expressed concerns that aggressive expansion by competitors could weigh on short-term profitability and cloud medium-term earnings expectations. Anand Rathi, however, believes that although the quick commerce segment may continue to lag in the short term, margins are expected to expand once the pace of expansion slows. Meanwhile, ICICI Securities notes that competitive intensity in customer acquisition spending for quick commerce is waning, which is a positive indicator for medium-term margins. JM Financial remains optimistic about the sector, maintaining a ‘Buy’ rating on both Swiggy and Zomato, with target prices of Rs 500 and Rs 280, respectively.
In a recent filing, Swiggy reported that its quick commerce arm, Instamart, has expanded operations to 100 cities, with growing demand in tier 2 and tier 3 cities. At the same time, competitors such as Zomato-owned Blinkit, Zepto, and BigBasket’s BB Now are also expanding their reach, with operations now active in 90, 70, and 60 cities, respectively. JM Financial suggests that Swiggy’s strategy of focusing on underserved markets in smaller cities could be a well-thought-out move to sidestep intense competition in tier 1 cities, where Instamart has reportedly lost market share in recent quarters. However, the success of this strategy remains uncertain, as Blinkit and other competitors are adopting a similar approach.
Brokerage firms have varied opinions on the stocks. Anand Rathi maintains Zomato among its top picks, forecasting a 23% compounded annual growth in food delivery and a 75% growth in quick commerce over the next two to three years, leading it to maintain a ‘Buy’ rating with a target price of Rs 385. Kotak Institutional Equities has also assigned a ‘Buy’ rating on Zomato, estimating its fair value at Rs 270. MOFSL remains neutral on Swiggy with a target of Rs 460 while recommending a ‘Buy’ for Zomato at Rs 270. However, Bank of America Securities has taken a more cautious stance, downgrading Zomato to ‘Neutral’ and cutting its target price from Rs 300 to Rs 250, while Swiggy has been downgraded to ‘Underperform’ with a reduced target of Rs 325 from Rs 420.
While analysts acknowledge the long-term potential of both Zomato and Swiggy, concerns over near-term margin pressures, increased competition, and profitability challenges persist. Investors will need to carefully evaluate growth prospects against short-term risks before making any investment decisions.
