Buy Swiggy Ltd for the Target Rs 350 by Emkay Global Financial Services Ltd
Swiggy’s 1QFY27 Quick Commerce (QCom) NOV growth (3.1% qoq) was lower than street estimates; however, per guidance, the company just about achieved contribution margin (CM) breakeven in the Quick Commerce (QCom) business. While this is positive news, Management expects CM to track the 0 to -1% range for the next couple of quarters as it chases growth. The 17.4% yoy growth in Food Delivery GOV was below street’s estimates of 18.5%, while seasonality resulted in 22bps qoq drop in adj EBITDA margin. We believe Swiggy’s QCom growth challenges stem from its focus on improving unit economics, hyper competitive intensity in the sector, and leadership changes. However, it is ahead of peers, ex Blinkit, in the journey to create a profitable QCom business; maintain BUY and DCF-based TP of Rs350.
QCom - CM break-even achieved; focus on growth
Swiggy reported weak QCom GOV growth (0.3% qoq vs 6.6% consensus expectations). CM improved by 160bps qoq to -0.2% (of GOV), with break-even in May, on the back improvement in take rate. Management now aims to focus on growth and expects CM to range at 0% to -1% for the next couple of quarters. The company added 28 dark stores during the quarter, with plans to add another 75 in the next quarter. Adj EBITDA loss was Rs-7.78bn (street expectation: Rs-7.2bn). Management expects adj EBITDA breakeven at a scale of ~ Rs600bn annualized NOV run-rate and 4-5% margin at Rs1trn run-rate.
Food Delivery - Steady performance amid seasonal headwinds
Food Delivery reported 17.4% yoy GOV growth (street: 18.5%), with growth impacted by LPG-led disruptions. Adj EBITDA grew 52.3% yoy to Rs2.9bn, with margin declining by 22bps qoq to 3.1% of GOV, driven by seasonal drop in delivery partner availability and annual wage hike. The company sees a huge market expansion opportunity in the price-conscious customer which it is tapping via Toing. Swiggy has expanded Toing to ~50 cities in 1Q and expects to unlock the next 100mn users in the segment. This has resulted in an increase in adj EBITDA losses in the Platform Innovations segment to Rs1.3bn from Rs0.6bn in 4QFY26. While Toing unlocks a new segment, we await more clarity on the eventual unit economics. The Out-of-Home Consumption and Supply Chain and Distribution businesses continue to scale up well, with 44.8% yoy growth in GOV and 41.4% growth in revenue, respectively.
Outlook and valuations - QCom optionality riding on Food Delivery annuity We see Swiggy as a strong food delivery franchisee, with optionality to extend scale in the QCom business. While Swiggy has reached break-even in the QCom business, we would watch out for its scale-up versus competition. We maintain BUY on the stock, and DCF-based TP of Rs350. We value Swiggy’s Food Delivery business at Rs573bn (Rs208 per share), which implies 31.6x EV/adj EBITDA on FY28E food delivery adj EBITDA. We value QCom business at Rs180bn (Rs65/sh), implying 0.54x EV/NOV on FY28E QCom NOV.
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