Swiggy has filed a draft red herring prospectus (DRHP) to raise USD 1.2bn (offer for sale [OFS] and fresh issue) via the IPO route on September 26, 2024; we have tried to assess business growth prospects of food and quick commerce (qCommerce), and its impact on Zomato (ZOMATO IN, Buy, CMP: INR 282, TP: INR 320) valuation. India’s online food and qCommerce annual transacting users are at a mere 80mn and 20mn, respectively, out of an online shopping base of 230mn, which means both segments have a huge opportunity to penetrate further. The shift toward a nuclear family (CY23 at 60% & CY28P at 68%) and increasing women’s working population (FY18 at 23% and FY23 at 37%) are mega trends to enhance the growth of online food delivery and Commerce.
The online food delivery market can potentially grow at ~20% during CY23-28P, largely led by user CAGR of 8-10%, which is in line with our estimates of ZOMATO’s food delivery Gross Order Value (GOV) estimated to post a CAGR of 22% during FY25E-27E. Grocery would remain the dominant category for qCommerce with a 60% share; however, qCommerce, which is a mere 0.3% of India’s retail market, can grow a share of 2-3%, led by 60 80% growth rates. Our estimates for Blinkit are at a 74% GOV CAGR during FY25E-27E, higher than 71% annual market growth, given rapid expansion plans and the potential to gain market share. We continue to believe further clarity of qCommerce scaling up beyond the metros with favourable unit economics will drive earnings compounding opportunities for ZOMATO.
India demographics well suited for online consumption
Among India’s 339mn households in CY23, 32% are upper and high-income class, which is set to rise to 41% in the next five years (Source: Swiggy DRHP), thereby driving consumption spend; further, lower middle-income households are also likely to increase to 32% contribution by CY28P from 31% in CY23, and this will only have an incremental positive impact on online consumption. This shift toward a nuclear family and women working are big trends, which will enhance online food delivery growth prospects as double-income-household growth picks up pace; the share of nuclear households in India is at 60.0% currently, which is estimated to form 68.5% of households by CY28P, whereas the female workforce share has grown from 23.0% of the population to 37.0% in the past five years. Further, as of CY23, India’s online commerce user base is 230mn (set to grow at 7.8% annually to 335mn users by CY28P), which is a mere 28% of internet users vs China’s online commerce user base of 850mn CY23, which is 80% of internet users. This implies significant penetration opportunity and ensures steady user growth for India’s online platforms in the medium to long term.
Online food delivery market to grow at 19% per annum by CY28P
India’s online food market is at USD 8bn (11% of the overall food services market), and it is estimated to grow at 19% per annum by CY28P, led by 1) an increased user base of 1.5x by CY28P, 2) higher Average Order Value (AOV) and increased monthly order frequency with India at 4.0x, China at 7.5x and the US at 9.0x. In terms of users, the online food segment has 83mn annual transacting users, which is a mere 10% of India’s internet users, and it is poised to grow at a 7.9% CAGR by CY28P. Further, food delivery AOV is currently at INR 425, and price hikes by food services firms and increased ordering from premium restaurants would drive online food AOV CAGR of 7% in the medium term. Online food delivery frequency for India is still at a mere 4.0x per month, which is well below the US’ 9.0x and China’s 7.0x per month. Based on these factors, the online food delivery market in India is estimated to grow at 19%-20% in the medium term, which is largely in line, as we have estimated ZOMATO GOV CAGR of 22% during FY25E-27E.
qCommerce – the big opportunity
Grocery continues to form a lion’s share as it is 61% of India’s retail market, while fashion and electronics form a share of 10% and 5%, respectively. The qCommerce market size is at USD 2.8bn as of CY23, which is 0.3% of India’s retail market and can move to 2-3%, given qCommerce’s growth prospects of 71% CAGR during CY23-28P. Further, qCommerce, eCommerce and modern retail are estimated to grow as a channel, at the cost of the unorganized retail market, which is likely to come off from 80% in CY23 to 67% by CY28P. qCommerce segment is a mere 4.8% of India’s online retail market, which may move to 21% by CY28P, given its expansion into several untapped niche categories (gifting, beauty & personal care [BPC], pet care, and apparel) beyond grocery. Within grocery, which forms the largest share for qCommerce companies, grocery brands derive 1.5% of overall (qCommerce and eCommerce) sales online, which can also grow toward 4-5%, given qCommerce expansion. We expect Blinkit to report a GOV CAGR of 74% during FY25E-27E, higher than 71% industry growth, led by rapid expansion and market share gains.
ZOMATO growth prospects intact; continues to outperform
We continue to believe that ZOMATO’s long-term growth prospects remain intact for the food and qCommerce business based on market growth data. It may continue to dominate the food delivery business in terms of growth and profitability by focusing on levers, such as advertising revenue and platform fee to drive higher take rates vs Swiggy. Food delivery growth drivers will continue to be dominated by user additions, as AOV and frequency may report muted growth. Within qCommerce, we do not see a big negative impact, due to the entry of eCommerce firms into qCommerce, given the latter’s high growth penetration opportunity; we believe eCommerce giants entering this segment will only help enhance the growth of qCommerce, as the latter is not a discount-led business, but a convenience-led approach.
Key profitability drivers for qCommerce include: 1) the increased number of categories, 2) delivery & platform fee, and 3) big untapped potential on ad revenue, as eCommerce gains significant traction within digital advertising. We recommend Buy with a TP of INR 320 based on SoTP valuations, as we value the food delivery business at 55.0x one-year forward EV/EBITDA, Blinkit at 5.5x one-year forward EV/sales and Hyperpure at 2.5x one-year forward EV/sales; we continue to believe further clarity of qCommerce scaling up beyond the metros with favourable unit economics will drive earnings compounding opportunity. Further, Swiggy also would need to execute better on growth, scale and profitability vs ZOMATO, to command the latter’s premium valuation, as stated in our report Long haul released on 13 September 2024.
The author has been with Elara Capital since more than six years; focusing on media, entertainment, consumer and internet sectors.