Internet: Focus on profitability over market-share gains

1 Dec 2023 , 10:17 AM

In its H1FY24 earnings release, Swiggy’s largest investor Prosus, has published incremental data points on Swiggy’s growth and profitability for H1CY23. In the Food Delivery segment, Swiggy has gained a marginal market share vs Zomato in H1CY23; potentially a function of aggressive pricing of their loyalty plan and higher promotions. Analysts of IIFL Securities believe H2 would potentially see Zomato regaining some of that share, given the success of their Gold program. On quick commerce, Blinkit has potentially surpassed Instamart’s GMV. Swiggy’s overall GMV and revenues grew 23%/9% YoY, on higher share of Quick Commerce; while delivery partners have plateaued. Swiggy’s adj. Ebit loss for H1 stood at USD208mn (-41.7%) vs that of Zomato at -7.9%. However, it has been improving vs a loss of -70.1% YoY. While Zomato seems to have greater focus on profitability, analysts of IIFL Securities believe Swiggy would follow the same strategy in the near term given their IPO ambitions. This should stabilise market share volatility and help both companies improve unit economics. Maintain BUY on Zomato. 

Swiggy’s Food Delivery gains market share: 

In H1CY23, Swiggy’s Food Delivery GMV grew at 17% YoY in local currency vs Zomato at 13% YoY. Consequently, Zomato’s market share (MS) in the largely two-player India Food Delivery market reduced by 70bps HoH. However, Zomato continues to enjoy market leadership with 54% MS. According to Prosus, Swiggy’s GMV growth was led by rise in transacting users that drove double-digit order growth and higher AOV. Analysts of IIFL Securities expect Zomato to benefit from the loyalty program in H2, regaining some of the lost market share. 

Blinkit surpasses Instamart GMV: 

In Quick Commerce, Blinkit’s GMV grew 83% YoY in USD terms in H1, surpassing Swiggy Instamart’s GMV that grew at 63% YoY. The Quick Commerce business made rapid strides as customer adoption drove the order growth. Basket sizes grew well ahead of inflation. Instamart’s store count ended 19% higher. With the platform focused on gaining scale and moving towards profitability in the 25 cities where it operates, Instamart’s H1 contribution losses fell by around 75%. Broader product selection, densification of store network and faster delivery times have continued to aid customer acquisition and retention. 

Zomato closing in faster on Ebit breakeven: 

While both Swiggy and Zomato reduced losses (both sequentially and YoY); Swiggy’s adj. Ebit loss for H1 stood at USD208mn (-41.7%) vs that of Zomato at - 7.9%. While Zomato seems to have higher focus on profitability, analysts of IIFL Securities believe they would see Swiggy follow the same strategy in the near term given their IPO ambitions. According to Prosus, Swiggy’s core food-delivery Ebitda losses in H1 shrunk 89%; led by improvements in the contribution margin and operating leverage. In combination, this reflects customer willingness to pay for convenience and restaurant willingness to advertise for growth. The addition of a platform fee in both the platforms further highlights the improving unit economics. 

Swiggy is spread wider, while Zomato deeper: 

Swiggy continues to have a larger database of active restaurants at 274k, as of H1 vs Zomato’s 226k. However, Zomato is closing in on the gap of number of delivery riders at 352k, as of H1 vs Swiggy’s 369k. This is compared to Swiggy having 44k higher delivery riders than Zomato, as of CY22. Swiggy continues to expand presence across cities and currently operates in 599 cities. On the other hand, Zomato has trimmed the number of cities that it operates in to ~700 from the peak of 1,000. 

Continued industry tailwinds amid profitability focus; Maintain BUY on Zomato: 

Analysts of IIFL Securities believe that India’s Food Delivery industry will continue to benefit from the structural tailwinds of changing customer preferences, while Quick Commerce continues to benefit from newer use cases. With the favourable industry dynamics, particularly in Food Delivery and both the players in a duopoly focusing on profitability, the industry is likely to continue witnessing the improving unit economics. Analysts of IIFL Securities maintain BUY on Zomato.