HSBC Prefers Shares Of Zomato Over Swiggy, Sees 21% Upside Potential

HSBC Securities and Capital Markets (India) Pvt. has a stronger view on the shares of Zomato Ltd., the market leader in food delivery segment, over its nearest rival Swiggy Ltd.

HSBC, in a note released on Monday, maintained a 'buy' rating on Zomato with a target price of Rs 330, implying an upside return potential of 21%. For Swiggy, it has reiterated a hold rating with a target price of Rs 550 per share, which suggested an upside of 1.6% against the last traded price.

"We prefer Zomato (Buy) to Swiggy (Hold)," the brokerage firm stated in its note.

HSBC's report highlighted that while investor optimism for quick commerce in India remains high, growth projections may be overly optimistic, with the total addressable market likely smaller than anticipated.

The industry currently estimates a $50 billion gross order value by fiscal 2030, implying 60 million customers ordering 8 times per month, a challenging target given that the grocery TAM for India's top 30 cities is around $125 billion, it pointed out.

HSBC noted that the shift from grocery to general merchandise and the entry of e-commerce giants like Flipkart and Amazon into quick commerce could provide growth opportunities beyond groceries, which may help meet GOV targets.

From fiscal 2024 to fiscal 2039, HSBC expects food delivery business of Zomato to accelerate at a 12% compound annual growth rate in terms of orders, and by 12.5% in gross order value. The company's quick commerce business will see much higher climb, with 33% order growth and 35% gross order value growth in the same period.

Zomato also recently acquired Paytm's movie and ticketing business, which will merge into its new "District" vertical. Zomato targets a gross order value of Rs 10,000 crore billion for this business by fiscal 2026, which aligns with the size of BookMyShow's parent Big Tree Entertainment.

HSBC has separately valued the company's food delivery and quick commerce divisions at $5.3 billion (approximately Rs 45,100 crore) and $9.6 billion (about Rs 81,600 crore), respectively. In addition, it has added around $1.3 billion (around Rs 11,050 crore) for other businesses and cash on the company’s balance sheet.

It has projected Swiggy's food delivery business to grow at 16% CAGR in gross merchandise value, with modest improvements in contribution and Ebitda margins. On the quick commerce side, Swiggy has raised its expansion targets for Instamart, planning to double its dark store count by fiscal 2025, which should drive GMV growth, it added.

Swiggy aims to reach Ebitda breakeven by the second quarter of fiscal 2027, HSBC noted. However, the path to profitability will be challenging due to intense competition and rising costs in customer acquisition, marketing, and talent, it stated.