Red-Hot IPO or Burnt Offering? Swiggy's Losses Raise Eyebrows

Introduction

In the India's tech industry,?Swiggy has woven itself into the daily lives of millions,?becoming synonymous with convenience and culinary satisfaction.?As the company prepares to step onto the grand stage of the public markets with its Initial Public Offering (IPO),?it's an opportune moment to dissect the elements that have fueled its remarkable ascent,?the hurdles it confronts,?and the prospects it offers to potential investors.?

The DRHP outlines the specifics of the offer,?providing a clear picture of the investment opportunity.

• Offer Size:?Swiggy plans to raise a substantial sum of?INR 48 billion?through its IPO,?with a combination of fresh equity issuance and an offer for sale by existing shareholders.?This capital infusion will bolster the company's financial position and fuel its ambitious growth plans.
• Fresh Issue:?A significant portion of the IPO proceeds, INR 37.5 billion,?will come from a fresh issue of equity shares.?This fresh capital will be deployed strategically to strengthen Swiggy's core businesses and drive expansion into new markets and service offerings.
• Offer for Sale:?The IPO also includes an offer for sale of up to?185,286,265?Equity Shares aggregating up to?INR 10.5 billion?by existing shareholders,?providing them with an opportunity to liquidate a portion of their holdings.This component of the offer doesn't directly benefit the company financially but enhances liquidity for its shares in the market.

Investor Categories: A Diverse Mix

Swiggy's IPO is structured to cater to a diverse range of investors,?from institutional giants to retail individuals.?The DRHP outlines the allocation of shares across different investor categories,?ensuring broad-based participation in the offering.

• Qualified Institutional Buyers (QIBs):?A significant portion of the offer, 75%,?is reserved for QIBs,?including mutual funds,?insurance companies,?and foreign portfolio investors.?These institutional investors bring substantial capital and long-term investment horizons to the table.
• Non-Institutional Investors (NIIs):?The offer also includes a portion, 15%,?for NIIs,?who typically invest larger amounts than retail investors.?This category includes high-net-worth individuals,?corporate bodies,?and trusts.
• Retail Individual Bidders (RIBs):?A portion of the offer, 10%,?is set aside for RIBs,?allowing individual investors to participate in Swiggy's growth story.?This democratization of the IPO process is a positive trend,?enabling wider participation in India's capital markets.

Use of Proceeds: Fueling Growth and Expansion

The DRHP outlines how Swiggy intends to utilize the proceeds from the fresh issue,?providing a roadmap for its future investments and growth initiatives.

• Strategic Acquisitions:?A portion of the proceeds will be earmarked for potential acquisitions,?allowing Swiggy to expand its service offerings and enter new markets.
• Technology and Infrastructure:?Investing in technology and cloud infrastructure is a key priority for Swiggy.?The company plans to utilize up to?INR 5,862.00 million?of the net proceeds for this purpose.
• Brand Building and Marketing:?Building and maintaining a strong brand is essential for any consumer-facing company.?Swiggy plans to allocate up to?INR 9,295.00 million?of the net proceeds towards brand marketing and business promotion activities.
• Debt Repayment:?A portion of the proceeds,?up to?INR 1,374.14 million,?will also be used to repay or pre-pay existing debt of its material subsidiary,?Scootsy.
• Expansion of Quick Commerce:?Swiggy plans to invest a substantial amount,?up to?INR 9,824.00 million,?in its material subsidiary,?Scootsy,?for the expansion of its dark store network and making lease/license payments for these dark stores.

Swiggy's Strategic Vision: Building a Convenience Empire

Swiggy's vision isn't confined to the realm of food delivery; it's about constructing a sprawling convenience empire,?a digital ecosystem where urban Indian consumers can seamlessly access a diverse array of services that cater to their ever-evolving needs.?This strategic vision is not just a lofty aspiration; it's a tangible reality,?vividly reflected in the company's bold strides into new verticals.

Instamart: Redefining Grocery Delivery

Swiggy's foray into grocery delivery through Instamart is a prime example of its commitment to convenience.?In a country where grocery shopping is often a time-consuming and cumbersome chore,?Instamart has emerged as a game-changer.?By leveraging its existing delivery network and technology infrastructure,?Swiggy has been able to offer lightning-fast grocery delivery,?often within 15-30 minutes.?This has resonated strongly with busy urban consumers,?who value the convenience of having groceries delivered to their doorstep in a matter of minutes.

Dineout: Elevating the Dining Experience

Swiggy's acquisition of Dineout,?a leading restaurant reservation platform,?further underscores its ambition to become the ultimate convenience platform.?Dineout allows users to discover and book tables at their favorite restaurants,?access menus and reviews,?and even avail of exclusive discounts and offers.?This integration into Swiggy's ecosystem not only enhances the user experience but also creates a powerful synergy between food delivery and dining out,?allowing users to seamlessly transition between the two.

SteppinOut: Curated Events at Your Fingertips

Swiggy's venture into event planning with SteppinOut is yet another testament to its expansive vision.?SteppinOut offers a curated selection of events and experiences,?ranging from food festivals and music concerts to workshops and stand-up comedy shows.?This addition to Swiggy's platform caters to the growing demand for unique and engaging experiences among urban Indian consumers.

The Unified App Approach: A Strategic Linchpin

Underlying Swiggy's expansion into new verticals is its strategic commitment to a unified app approach.?By offering a diverse array of services on a single platform,?Swiggy is able to leverage its existing user base,?delivery network,?and technology infrastructure to drive growth and engagement across its various offerings.?This approach not only enhances customer convenience but also creates powerful network effects,?as the growth in one vertical fuels the growth in others.

The Road Ahead: A Multifaceted Journey

Swiggy's strategic vision is ambitious and far-reaching.?The company is not content with being just a food delivery giant; it wants to be the ultimate convenience platform for urban Indian consumers.?This journey will undoubtedly be challenging,?requiring significant investments in technology,?logistics,?and marketing.?However,?the potential rewards are immense.?As India's digital economy continues to expand,?Swiggy is well-positioned to capture a larger share of the consumer wallet and become an integral part of the daily lives of millions.

The company's foray into new verticals like Instamart,?Dineout,?and SteppinOut is a clear indication of its commitment to this vision.?By offering a diverse array of services on a single platform,?Swiggy is creating a powerful ecosystem that caters to the evolving needs of urban Indian consumers.?As the company gears up for its IPO,?its strategic vision and execution capabilities make it a compelling investment opportunity for those looking to participate in India's burgeoning convenience economy.

Key Performance Indicators (KPIs): The Pulse of Swiggy's Growth

Swiggy's DRHP provides a wealth of KPIs that act as a window into the company's operational and financial health.These metrics,?ranging from Gross Order Value (GOV) to Average Monthly Transacting Users (MTU) to Contribution Margin,?tell a story of a company experiencing rapid growth while simultaneously grappling with the challenges of achieving profitability in a fiercely competitive market.

GOV Growth: A Multi-Faceted Expansion

Swiggy's GOV has experienced remarkable growth across its diverse segments,?particularly in Quick Commerce and Food Delivery.?This surge is a testament to the robust demand for its services and its ability to capture a larger share of the consumer wallet.

• Overall B2C GOV:?The overall B2C GOV,?which encompasses Food Delivery,?Quick Commerce,?and Out-of-home Consumption,?has witnessed substantial growth,?reaching ?101,895.86 million in the three months ended June 30,?2024,?compared to ?82,771.86 million in the same period in 2023.?This represents a significant 23.12% increase,?highlighting the growing popularity of Swiggy's services.
• Food Delivery GOV:?The Food Delivery segment's GOV has also seen impressive growth,?reaching ?68,083.44 million in the three months ended June 30,?2024,?a 14.31% increase compared to the same period in 2023.?This sustained growth underscores the continued demand for food delivery services in India.
• Quick Commerce GOV:?The Quick Commerce segment,?driven by Instamart,?has witnessed explosive growth,with its GOV surging by a remarkable 56.42% from ?17,415.15 million in the three months ended June 30,?2023,?to ?27,240.47 million in the same period in 2024.?This meteoric rise reflects the rapid adoption of quick commerce services in India,?particularly in urban areas.
• Out-of-home Consumption GOV:?The Out-of-home Consumption segment,?encompassing Dineout and SteppinOut,?has also seen significant growth,?with its GOV increasing by 14.00% from ?5,769.28 million in the three months ended June 30,?2023,?to ?6,571.95 million in the same period in 2024.?This indicates a growing appetite for dining out and curated experiences among Indian consumers.

MTU Expansion: The Power of Attraction and Retention

The company's MTU base has also been expanding steadily,?demonstrating its ability to not only attract but also retain users.?This is a cornerstone for any platform-based enterprise,?as a substantial and engaged user base acts as a magnet for partners and fuels the powerful engine of network effects.

• Swiggy Platform Average MTU:?The Swiggy platform's average MTU has grown from 13.88 million in the three months ended June 30,?2023,?to 15.99 million in the same period in 2024,?a 15.20% increase.?This growth is a testament to Swiggy's ability to attract new users and keep them engaged with its platform.
• Food Delivery Average MTU:?The Food Delivery segment's average MTU has also seen a healthy increase,?rising from 12.56 million in the three months ended June 30,?2023,?to 14.03 million in the same period in 2024.?This 11.71% growth indicates that Swiggy continues to be the preferred choice for food delivery among Indian consumers.
• Quick Commerce Average MTU:?The Quick Commerce segment's average MTU has witnessed a substantial jump,?increasing by 34.71% from 3.89 million in the three months ended June 30,?2023,?to 5.24 million in the same period in 2024.?This rapid growth highlights the increasing popularity of quick commerce services,?particularly Instamart.

Contribution Margin Improvement: A Glimmer of Profitability

While Swiggy is currently navigating a landscape of losses,?its contribution margin has been steadily improving,?hinting at a journey towards profitability.?This is a beacon of hope for investors,?as it signals that the company's business model is becoming increasingly streamlined and efficient.

• B2C Contribution Margin:?The overall B2C contribution margin,?which represents the profitability of Swiggy's consumer-facing businesses before accounting for fixed costs,?has improved significantly.?It increased from 3.65% in the three months ended June 30,?2023,?to 2.39% in the same period in 2024.?This improvement is a positive sign,indicating that Swiggy is making progress in optimizing its cost structure and improving its unit economics.
• Food Delivery Contribution Margin:?The Food Delivery segment's contribution margin has also seen a notable improvement,?rising from 5.24% in the three months ended June 30,?2023,?to 6.40% in the same period in 2024.This suggests that Swiggy's core food delivery business is becoming more profitable.
• Quick Commerce Contribution Margin:?The Quick Commerce segment,?while still in its growth phase,?has also shown signs of improvement in its contribution margin.?It decreased from (7.50)% in the three months ended June 30,?2023,?to (3.18)% in the same period in 2024.?While still negative,?this improvement indicates that Swiggy is making progress in optimizing the cost structure of its quick commerce operations.

The Numbers Tell a Story

These KPIs,?when viewed collectively,?paint a vivid picture of Swiggy's journey.?It's a story of rapid growth,?fueled by a strong brand,?expanding network,?and innovative offerings.?It's also a story of challenges,?as the company strives to achieve profitability in a fiercely competitive market.?However,?the improving contribution margins and expanding user base offer a glimmer of hope,?suggesting that Swiggy is on the right track.

As the company gears up for its IPO,?these KPIs will be closely scrutinized by investors.?They offer a quantitative lens through which to assess Swiggy's past performance,?present health,?and future potential.?While the numbers tell a compelling story,?it's important to remember that they are just one piece of the puzzle.?A comprehensive understanding of Swiggy's business model,?strategic vision,?and competitive landscape is essential for making an informed investment decision.

The Path to Profitability: Navigating the Financial Tightrope

Swiggy's journey towards profitability is akin to a high-stakes balancing act on a financial tightrope.?On one side,?Swiggy must continue to invest in expansion,?broadening its geographical footprint and diversifying its service offerings to capture a larger slice of the market.?This necessitates substantial investments in technology,?logistics,marketing,?and talent acquisition.?On the other side,?the company must meticulously optimize its cost structure and enhance its unit economics to ensure that each transaction contributes positively to its bottom line.

The DRHP as a Financial Scorecard

Swiggy's DRHP serves as a revealing financial scorecard,?offering a glimpse into the company's progress on this challenging path.?The numbers tell a story of a company that is making strides towards profitability,?albeit with a few hurdles yet to overcome.

• Revenue Growth:?Swiggy's revenue from operations has witnessed a robust Compound Annual Growth Rate (CAGR) of 85.2% from Fiscal 2020 to Fiscal 2023.?This impressive growth trajectory is a testament to the company's ability to capture the burgeoning demand for convenience services in India.
• Expanding Losses:?However,?the flip side of this rapid growth is the widening losses.?Swiggy's net loss for Fiscal 2023 stood at a substantial ?3,822 crores,?a significant increase from ?1,614 crores in Fiscal 2022.?This reflects the heavy investments the company has made in expanding its operations and launching new services.
• Contribution Margin Improvement:?A silver lining in this financial picture is the steady improvement in Swiggy's contribution margin.?This metric,?which measures the profitability of each transaction before accounting for fixed costs,?has been on an upward trend,?indicating that the company's business model is becoming more efficient.
• Adjusted EBITDA:?Swiggy's Adjusted EBITDA,?another key profitability metric,?has also shown signs of improvement.?While still negative,?the company has managed to reduce its Adjusted EBITDA loss from ?3,910 crores in Fiscal 2023 to ?1,836 crores in Fiscal 2024.?This suggests that Swiggy is making progress in controlling its costs and moving closer to breakeven.

The Balancing Act in Action: Strategic Investments and Cost Optimization

The DRHP reveals how Swiggy is actively pursuing both growth and profitability through a combination of strategic investments and cost optimization measures.

• Investing in Growth:?Swiggy is channeling a significant portion of its resources towards expanding its quick commerce business,?Instamart.?The company plans to invest heavily in setting up new dark stores and expanding its product assortment to cater to the growing demand for fast and convenient grocery delivery.
• Optimizing Costs:?At the same time,?Swiggy is taking steps to optimize its cost structure.?This includes improving the efficiency of its delivery network,?reducing customer acquisition costs,?and streamlining its operations.?The company's improving contribution margin is a testament to the effectiveness of these efforts.
• Exploring New Revenue Streams:?Swiggy is also actively exploring new revenue streams to diversify its income and reduce its reliance on commissions from restaurant and merchant partners.?Advertising is one such avenue that the company is betting on,?leveraging its large and engaged user base to attract advertisers.

The Marathon to Profitability: Challenges and Opportunities

While Swiggy's progress towards profitability is encouraging,?the road ahead is likely to be long and arduous.?The company faces several challenges that could impede its journey.

• Intense Competition:?The hyperlocal commerce market in India is fiercely competitive,?with several well-funded players vying for market share.?Swiggy needs to continue to innovate and differentiate itself to maintain its leadership position.
• Regulatory Hurdles:?The regulatory landscape for the gig economy and food delivery platforms is evolving,?and Swiggy needs to navigate these changes carefully.?Compliance with regulations around data privacy,?labor laws,and food safety is crucial for its sustained growth.
• Macroeconomic Headwinds:?The broader macroeconomic environment,?including inflation and rising interest rates,?could impact consumer spending and increase Swiggy's operating costs.?The company needs to be prepared to adapt to these challenges and maintain its financial discipline.

However,?amidst these challenges lie immense opportunities.?The Indian food services and retail markets are still in their early stages of online penetration,?offering significant headroom for growth.?Swiggy's strong brand,?expanding network,and focus on innovation position it well to capitalize on this potential.

The Investor's Dilemma: A Calculated Gamble

Swiggy's IPO presents a unique investment opportunity,?but it's not for the faint of heart.?The company's path to profitability is fraught with uncertainties,?and investors need to carefully weigh the risks and rewards before taking the plunge.

Swiggy's Positioning:

• Convenience-led economy?involves broader services beyond food delivery (Instamart for groceries, Genie for errands). This business model aims to create an?ecosystem of convenience?that serves everyday consumer needs.
• However, the?convenience market?is crowded with well-funded competitors like?Amazon,?BigBasket, and?Dunzo, which have deeper pockets and broader infrastructure. While Swiggy’s logistics infrastructure from food delivery could be leveraged, the?barriers to entry are relatively low, and customer switching costs are minimal, which makes it harder to maintain long-term loyalty unless Swiggy offers unique value.

Financial Health: Profitability and Cash Flow

• According to the?DRHP, Swiggy is still in a?cash-burn phase, investing heavily in growth and market share. The company is?not yet profitable, with cash flow being negative as it scales its convenience services. The?high capital investment?in expanding new services like?Instamart?and?Genie?might take time to yield returns, and there is no immediate pathway to profitability outlined in the DRHP.
• Swiggy reported revenues from operations of ?112,473.90 million for FY2024, a 36% increase from ?82,645.96 million in FY2023. However, despite impressive growth in revenue, the company remains unprofitable with a significant loss of ?23,502.43 million in FY2024, following a larger loss of ?41,793.05 million in FY2023 . A key indicator I focus on is?consistent earning power. Swiggy’s losses despite its revenue growth indicate that the business model may not be generating enough margins to cover expenses. Swiggy has high operating costs, particularly in advertising, employee benefits, and delivery charges, which drive up total expenses.
• Swiggy’s total expenses for FY2024 are ?139,473.84 million, which exceeds its total income of ?116,343.49 million . This -24% operating margin is concerning to me because the company does not have clear plans for improvement.
• Swiggy’s total liabilities in FY2024 were ?27,379.60 million . I looks for companies with manageable debt levels, preferring companies that do not rely heavily on debt for growth.Though Swiggy's debt is relatively moderate compared to its total assets of ?105,294.21 million, I might still be cautious given the high cash burn rate and lack of profitability. Companies that are burning through cash while accumulating liabilities without clear profitability are risky from my perspective, as it increases the likelihood of needing future capital infusions, which dilutes shareholder value.

Valuation: Is the IPO Overpriced?

According to the DRHP, Swiggy is seeking to raise??37,500 million?(~ ?3,750 crores) from the IPO, with a significant portion going toward?expansion.As a retail investor, you need to critically evaluate whether this?IPO price?accurately reflects?Swiggy’s long-term growth potential?or whether it is being inflated due to?market hype.

Conclusion: A Glimpse into the Future

As a valuation professional, I will not invest in Swiggy based on the following reasons:

• Lack of a durable competitive advantage (moat)?in the convenience economy, with intense competition from larger players.
• Negative cash flow?and an uncertain path to profitability, which violates Buffett’s principle of investing in companies with consistent earnings.
• Management quality?concerns if insiders are cashing out, signaling a potential misalignment with long-term shareholders.
• High competitive risks?and?thin margins?in the convenience economy, making it a risky investment for value-focused investors.

The?convenience-led economy?strategy may offer short-term growth potential, but it comes with?high uncertainty?and lacks the financial stability that I prioritize.