Swiggy, Zomato Get Target Price Cuts, Downgrades From BofA As Turf Gets Tougher

BofA has downgraded Zomato to 'neutral' from 'buy' and Swiggy to ‘underperform’ from ‘buy’. The target price of Zomato has been lowered to Rs 250 from Rs 300 while Swiggy saw the sharper price cut with the target being slashed to Rs 325 from Rs 420.

The analysts remain positive on medium-term prospects, but the downgrades are driven by expectations of slowing growth and slow pace of margin improvement in food delivery.

The quick-commerce story narrative has quickly moved from 'higher growth, improving unit economics' to 'rising losses, high competition market,' according to the brokerage.

Between Zomato and Swiggy, the brokerage finds Zomato better placed with scale and first-mover advantage in quick-commerce.

This has led to better unit economics, higher margins and a stronger cash position of the company. Given Swiggy's higher losses in quick commerce, the brokerage notes that any prolonged price war would delay the breakeven for the firm.

As new platforms launch their services, the brokerage expects the competition to remain high for next 12-15 months. New platform launches is paired with incumbent platforms entering in each other's turf. The brokerage notes that they are likely to offer higher discounts initially.

This scenario puts companies into expansion mode, which may result in higher losses. The high competition is also likely to lead to higher marketing spending, increase in platform-led discounts and consumer delivery charges going down.

This will also result in higher rental expenses for dark stores and higher wages. BofA notes that some of the new platforms may not be aggressive, but the competition will be high due to these new entrants.

As growth slows, the brokerage does not expect companies to meaningfully increase platform fees.

As Zomato and Swiggy invest in their respective 10-min in-house cafe offerings, the brokerage cites marginally higher investments. Food delivery that has been cash-cow has partly funded loss-making quick commerce business in these companies, according to BofA.

Zomato fell as much as 4.71% during the day to Rs 199.9 apiece on the NSE. It was trading 3.01% lower at Rs 203.5 apiece, compared to an 0.02% decline in the benchmark Nifty 50 as of 10:32 a.m.

It has risen 11.66% in the last 12 months and declined 26.6% on a year-to-date basis. The relative strength index was at 51.

Twenty four out of the 30 analysts tracking the company have a 'buy' rating on the stock, two recommend a 'hold' and four suggest a 'sell', according to Bloomberg data. The 12-month analysts' consensus target price on the stock is Rs 284, implying an upside of 39.4%.

Swiggy stock fell as much as 3.26% during the day to Rs 326.5 apiece on the NSE. It was trading 0.98% lower at Rs 334 apiece as of 10:57 a.m. compared to a 0.070% rise in Nifty 50.

It has declined 38.3% on a year-to-date basis. The relative strength index was at 40.

Eleven out of the 17 analysts tracking the company have a 'buy' rating on the stock, three recommend a 'hold' and four suggest a 'sell', according to Bloomberg data. The 12-month analysts' consensus target price on the stock is Rs 515, implying an upside of 54.2%.