Can Swiggy’s Instamart spice it up in quick commerce?

For the September quarter (Q2FY25), both companies saw about 5% and 24% growth in their respective gross order values (GOV) of the food delivery and quick-commerce businesses. However, the key differentiating factors between the two are Swiggy’s relatively smaller size and its loss at the adjusted Ebitda level. Ebitda stands for earnings before interest, taxes, depreciation, and amortization.

In Q2FY25, Swiggy’s GOV was ₹10,600 crore against ₹15,800 crore of Zomato in both the main businesses, i.e., food delivery and quick commerce together. Swiggy’s shares trade at 2.8x of the annualized GOV of Q2FY25, whereas the same for Zomato is 4.1x. Zomato’s premium valuation may be simply attributed to its better profitability.

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Its adjusted Ebitda in Q2FY25 in the two businesses was ₹333 crore, whereas Swiggy’s was negative at ₹247 crore, mainly due to losses in its quick-commerce arm Instamart. If Swiggy demonstrates that it can catch up in terms of profitability, then there is scope for the valuation gap to narrow in the future.

Can Swiggy improve profitability?

It depends on its ability to raise revenue as a percentage of GOV apart from the benefits of a larger scale and lower expenses.

First, the food delivery business. The management said in the post-earnings call that it expects further improvement in revenue or take-rate (total of commission from restaurants, delivery fees and advertising revenue) as a percentage of GOV for food delivery business by 150 basis points (bps) in the medium term from 25.1% in Q2FY25. Though it has come off by 25bps QoQ, it is still higher by 100bps than that of Zomato.

Interestingly, higher revenue as a percentage of GOV has not helped Swiggy make a relatively higher contribution (revenue minus variable costs) margin versus Zomato in Q2FY25 (6.6% versus 7.6%). This indicates that variable costs for Swiggy are higher than those for Zomato.

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Second, the quick-commerce business where the revenue or take-rate (commission from sellers, delivery fees and advertising revenue) as a percentage of GOV could increase to 20-22% in the medium term from 15.2% in Q2FY25. Here, Swiggy is far behind Zomato, which is at 18.9%.

Commenting on the path to increase Instamart revenue as a percentage of GOV, the management highlighted that it could be a combination of possible increases in delivery fees, advertising revenue and business enhancement services provided to the sellers on the platform.

Instamart wants to differentiate itself from other players by offering a wider selection in top cities. This is possible thanks to more than doubling the store size to 8,000 square feet from 3,000 to 4,000 feet earlier. Swiggy plans to reach the store count of about 1,050 by FY25 from 609 now.

It is clear that quick commerce is a bigger opportunity than the food delivery business. Therefore, the incremental value for Swiggy lies in Instamart business. Going by Motilal Oswal Financial Services’ report, Zepto has become the second biggest player with a 29% market share after Blinkit of Zomato at 46% based on annualized financials of Q1FY25. Instamart’s 25% market share means it will have to invest aggressively to boost its share. This might delay Swiggy’s plan of achieving positive adjusted Ebitda for the company as a whole by Q3FY26—a deciding factor for the long-term trajectory of the stock.

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For now, the investors in Swiggy’s public issue can hardly complain, having already seen about a 33% gain from the issue price of ₹390 in less than a month.