Swiggy coming with IPO to raise upto Rs 11560 crore

Swiggy

• Swiggy is coming out with a 100% book building; initial public offering (IPO) of 29,64,05,248 shares of Rs 1 each in a price band Rs 371-390 per equity share.
• Not more than 75% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not less than 15% of the issue will be available for the non-institutional bidders and the remaining 10% for the retail investors.
• The issue will open for subscription on November 6, 2024 and will close on November 8, 2024.
• The shares will be listed on BSE as well as NSE.
• The face value of the share is Rs 1 and is priced 371 times of its face value on the lower side and 390 times on the higher side.
• Book running lead managers to the issue are Kotak Mahindra Capital Company, Citigroup Global Markets India, Jefferies India, Avendus Capital, J.P. Morgan India, BofA Securities India and ICICI Securities.
• Compliance Officer for the issue is M. Sridhar.

Profile of the company

Swiggy is a new-age, consumer-first technology company offering users an easy-to-use convenience platform, accessible through a unified app - to browse, select, order and pay for food (Food Delivery), grocery and household items (Instamart), and have their orders delivered to their doorstep through its on-demand delivery partner network. Its platform can be used to make restaurant reservations (Dineout) and for events bookings (SteppinOut), avail product pick-up/ dropoff services (Genie) and engage in other hyperlocal commerce (Swiggy Minis, among others) activities. Being among the first hyperlocal commerce platforms, Swiggy has successfully pioneered the industry in India, launching Food Delivery in 2014 and Quick Commerce in 2020, and due to the pioneering status of Swiggy, it is well-recognised as a leader in innovation in hyperlocal commerce and as a brand synonymous with the categories it is present in.

The company augments the value proposition to users through its membership programme called “Swiggy One” providing discounts and offers; in-app payment solutions like digital wallet “Swiggy Money” (a pre-paid payment instrument), “Swiggy UPI”, and Swiggy-HDFC Bank credit card for additional benefits. It offers comprehensive business enablement solutions to restaurant partners, merchant partners (that sell grocery and household items on its platform) and brand partners including its alliance partners such as analytics-backed tools to enhance their online presence and user base; fulfilment services for streamlining their supply chain operations; and last-mile delivery.

It caters to users’ needs of ease, immediacy, quality, variety, reliability and consistency in their food, grocery and household items consumption and other hyperlocal commerce needs. Although Food Delivery and Quick Commerce categories in India are large addressable markets that are witnessing rapid online penetration, they are relatively nascent and have high growth headroom. Due to high frequency, habit formation and recall value, these categories have the potential to unlock additional revenue through monetisation of ancillary services. Its experience, execution capability and network of users and partners, together with its innovation-led approach, positions it well to tap into this growing market opportunity.

Proceed is being used for:

• Investment in its Material Subsidiary, Scootsy, for repayment or pre-payment, in full or in part, of certain or all of its borrowings
• Investment in its Material Subsidiary, Scootsy, for: (a) expansion of its Dark Store network for its Quick Commerce segment through setting up of Dark Stores and (b) making lease / license payments for Dark Stores
• Investment in technology and cloud infrastructure
• Brand marketing and business promotion expenses for enhancing the brand awareness and visibility of its platform, across its segments
• Funding inorganic growth through unidentified acquisitions and general corporate purposes

Industry Overview

The Indian food services market comprises online Food Delivery and Out-of-home Consumption which was Rs 5,600 billion ($70 billion) as of 2023. The online Food Delivery market is the fastest growing segment within the food services market and is expected to grow at 17-22% between 2023 and 2028. In the Out-of-home Consumption market, the organised segment and the online dining out segment are expected to grow at 15-18% and 46-53% respectively between 2023 and 2028. Both online Food Delivery and Out-of-home Consumption markets are growing on the back of rapid increase in share of organised restaurant supply unlocking demand in the Indian market. Traditional cultural preferences of home-cooked food and supply-side constraints of restaurants given higher price per meal have limited the size of the food services market in India which is 9-12% of the total food consumption as of 2023, whereas the same for markets like USA and China, which have higher share of organised supply, is 55-60% and 37-42% respectively.

The online Food Delivery market in India grew from Rs 112 billion ($1.4 billion) in 2018 to Rs 640 billion ($8 billion) in 2023 and is expected to become a Rs 1400-1700 billion ($17-21 billion) market by 2028P, growing at a CAGR of 17-22%. Of the total market in 2023, the share of top 60 cities (metro and Tier 1) is 75-80% which shows the large untapped potential beyond these cities which will drive growth as penetration of online Food Delivery increases. Growing availability of organised restaurant supply and increased online penetration is expected to drive growth in online Food Delivery market beyond the top 60 cities. Within the top 60 cities, the urban consumer base is still underpenetrated and a rise in the number of users along is expected to grow the market. The growing need for convenience and variety fuels demand, while the rapid expansion of the restaurant industry, driven by increasing number of organised restaurants, strengthens supply.

With the rising prominence of these platforms and urban migration, new user acquisition is steadily happening in metro cities and is expected to continue. In the around Rs 2.3-2.6 trillion ($29-33 billion) food services market beyond the top 60 cities as of 2023, hyperlocal commerce platforms are seeing rapid growth as the market is underpenetrated (5-6% online penetration) and presents a large untapped opportunity for growth in the long run. The absence of a robust restaurant network and diverse culinary options in smaller towns and rural areas dampens consumer interest in online food ordering. However, these challenges represent an untapped market potential for online Food Delivery platforms in the long term. By addressing supply gaps and enhancing consumer awareness, online Food Delivery platforms can unlock significant growth opportunities beyond the top 60 cities, thereby expanding their market reach and driving revenue growth. Based on these confluence of factors, the MTUs in Online Food Delivery are expected to increase to 35-45 million by 2028.

Pros and strengths

Pioneers of high-frequency hyperlocal commerce categories driven by an innovation-led culture: Being among the first hyperlocal commerce platforms, the company has successfully pioneered the industry in India, launching Food Delivery in 2014 and Quick Commerce in 2020, and due to the pioneering status of Swiggy, it is well-recognised as a leader in innovation in hyperlocal commerce and as a brand synonymous with the categories it is present in. Innovation is an integral part of its DNA which encourages it to ideate, experiment and iterate constantly. The core of its innovation approach is to identify and address convenience needs of users, thereby increasing the frequency with which users interact on its platform. It actively focuses on addressing gaps in convenience needs of users by adding new offerings or supplementing existing services in its ecosystem, and spurring innovations across its value-chain.

Consistently growing network of users: In its tenth year of operations, it has reached a milestone of 112.73 million users that have transacted on its platform (ever transacted users) on June 30, 2024. Its unified app, growing offerings and wide network of partners drive greater selection and faster delivery times, all of which enhance user experience on its platform and encourages more users to transact with it. As a result, it has witnessed a consistent growth in its base of Monthly Transacting Users, both for Food Delivery and Quick Commerce individually, as well as for the overall platform.

Rising user engagement on its platform: Given the high-frequency nature of its offerings and its unified app, users on its platform transacted more frequently per month compared to hyperlocal commerce players in Fiscal 2024. The company’s customer focussed approach to developing its platform across offerings, habit formation due to the seamless user experience, and increasing propensity of users to pay for convenience continues to drive higher engagement and user stickiness on its platform. This is visible through an increase in average monthly transaction frequency and Gross Order Value retention across cohorts as they age.

Swiggy brand delivered through a unified app with consistent user experience: Swiggy is unique as the only unified app in India that fulfils through its own platform all food-related missions of urban users of ordering-in, eating-out and cooking-at-home, as of June 30, 2024, and captures the largest share of consumer wallet in terms of Monthly GOV per MTU in the hyperlocal commerce use-cases, in the three months ended June 30, 2024. The combined effects of its brand recognition, unified app approach and high frequency offerings helps it to increase user engagement across multiple offerings on its platform, ensures user stickiness, and enables the quick introduction of adjacent and new offerings cost-effectively. This also creates an opportunity for it to cross-sell its offerings which serves as an attractive tool for user acquisition at low costs and also allows its partners to cross-promote their products across the various offerings it has.

Risks and concerns

Limited experience in operating its business at its current scale: The company started its operations in 2014 as a Food Delivery service and have since launched multiple services on its platform, such as Quick Commerce in 2020, Dineout in 2022, pick-up/drop-off service Genie in 2020, and engage in other hyperlocal commerce through Swiggy Minis. It has limited experience in operating its business, specifically its Quick Commerce, Out-of-home Consumption and Platform Innovations businesses, at their current scale, scope, and complexity and in a rapidly evolving market and economic environment. Due to its limited operating history, the nascency of these hyperlocal industries in India and its rapid growth profile, its future operating results may be hard to predict, and its historical results may not be indicative of, or comparable to, its future results.

Yet to identify the exact locations or properties for the setting up Dark Stores: The company is yet to identify the exact locations or enter into agreements for lease of suitable properties for setting up Dark Stores for which it intends to utilise the amount from Net Proceeds. These locations will be finalised by it after conducting a detailed analysis of the consumer demand clusters identified by data analytics on its platform, demographics, user demand, lease rentals and other business and market considerations in order to help merchant partners deliver products to the users within the expected delivery time and fulfil orders more efficiently. If it is unable to find suitable locations or if the lease / license payments for these locations are in excess of its estimates, its operations and financial conditions may be adversely impacted.

Relies on many third-party providers in connection with its business operations: The company relies on many third-party providers for some of its operations. These include back-end support services such as outsourcing support (including call centre operations, menu digitisation and other manpower support services), supply chain management services (such as warehouse management and operations), technology and cloud infrastructure services (such as delivery partner onboarding and cloud storage and infrastructures services, data management, processing and analytics services, digital map platform services and communication services) and other payment gateway solutions. If its third-party service providers fail to perform their obligations on time and as agreed contractually, it could cause a material adverse impact on its operations.

Seasonality, occasions and holidays may cause fluctuations in its sales: Seasonality, occasions and holidays may cause fluctuations in both the number of orders and Gross Order Value for its businesses, as well as in its advertising and other revenue. For example, the company experiences higher order volumes and increase in advertising during festivals or holiday seasons in India, such as New Year’s Eve, Diwali and Christmas, among others, and during occasions such as sporting events and concerts. In addition, during periods of inclement weather such as the monsoon season, it is possible that the number of available delivery partner’s decreases, while the number of orders from users may increase, which may impact order volumes and lead to increased delivery times, decreased service quality and increased requests for refunds on its platform. Moreover, other seasonal trends may develop, or these existing seasonal trends may become more extreme, causing a change in user behaviour, which would contribute to an increase in the fluctuations in orders completed on its platform, and in turn affect its results of operations.

Outlook

Swiggy provides its users with an easy-to-use platform that they can access via a single app to search, select, order, and pay for food (Food Delivery), grocery and household goods (Instamart) and have orders delivered to their homes via an on-demand delivery partner network. As of June 30, 2024, Swiggy's Instamart operated a large network of 557 Active Dark Stores across 32 cities in India and as of September 10, 2024, Instamart operated a network of 605 Active Dark Stores across 43 cities in India. On the concern side, the company has limited experience in operating its business at its current scale, scope, and complexity. In a rapidly evolving’ market and economic environment, its failure to operate its business successfully could adversely impact it. Moreover, the company relies on many third-party providers in connection with its business operations and it depends on the interoperability of its platform across third-party applications and services that it does not control.

The company is coming out with a maiden IPO of 29,64,05,248 equity shares of Rs 1 each. The issue has been offered in a price band of Rs 371-390 per equity share. The aggregate size of the offer is around Rs 10996.63 crore to Rs 11559.80 crore based on lower and upper price band respectively. On performance front, the company’s total income increased by 33.51% to Rs 116,343.49 million in Fiscal 2024 from Rs 87,144.53 million in Fiscal 2023, primarily due to an increase in its revenue from operations by 36.09% to Rs 112,473.90 million in Fiscal 2024 from Rs 82,645.96 million in Fiscal 2023. The increase in its revenue from operations was primarily due to an increase in its revenue from its Food Delivery, Supply Chain and Distribution, Quick Commerce and Out-of-home Consumption businesses. Moreover, its loss for Fiscal 2024 decreased to Rs 23,502.43 million from a loss of Rs 41,793.05 million for Fiscal 2023.

The company intends to continue to increase the density of its Quick Commerce network in the cities it currently operates, as well as in new cities it may choose to expand to in the future, and increase its Dark Store footprint in terms of aggregate area, to enable its merchant partners to offer a wider selection of products on its platform to meet consumer demands, and get closer to consumer demand clusters in order to fulfil orders more efficiently and within expected delivery time. Going forward, the company’s aim is to build innovative solutions that deliver unparalleled convenience to urban users. The online Food Delivery market and the Quick Commerce market in India are expected to grow at a CAGR of around 1%7 to 22% and 60 to 80%, respectively, from 2023 to 2028. Further, the penetration of Quick Commerce in overall retail market in India is expected to become more than six times to around 2-3% by 2028, with Quick Commerce as a percentage of overall online retail expected to increase from 4.8% in 2023 to between 17 and 30% in 2028, with a significant headroom for future growth.