Swiggy, India’s food delivery and quick commerce behemoth, remains in the investor spotlight as Kotak Institutional Equities reiterates a BUY recommendation with a fair value target of Rs 415 per share. As of May 23, 2025, the counter trades at Rs 324, embedding deep pessimism over the performance of its Instamart vertical. However, the research house remains bullish on the company’s long-term fundamentals and improvement in contribution margins (CM), driven by rising average order value (AOV) and operational leverage.

Instamart’s Margin Troubles Rooted in Low AOV, Not Excessive Costs

Instamart’s unit economics are structurally sound from a cost perspective, with per-order expenses closely mirroring those of arch-rival Blinkit. For Q4FY25, Instamart incurred Rs 107 per order in variable and store-level costs, while Blinkit reported Rs 100 per order. Despite the cost parity, Blinkit delivered a positive CM of 3.1% of Gross Order Value (GOV), while Swiggy’s Instamart languished at (-5.6%).

The primary culprit? AOV.

Instamart’s AOV stood at Rs 527**, about 21% lower than Blinkit’s Rs 665, significantly diluting CM potential and revenue leverage. This shortfall emphasizes that the platform doesn’t need cost rationalization as much as AOV expansion to turn profitable.

Megapods and Maxxsaver: The Growth Levers for AOV Expansion

To bridge this gap, Swiggy is ramping up its network of ‘Megapods’—dark stores capable of stocking over 50,000 SKUs. These larger-format stores not only widen product assortment but also boost non-grocery revenue share, a segment with structurally higher take rates.

Swiggy’s introduction of the ‘Maxxsaver’ feature is a nudge toward encouraging larger baskets, especially among price-conscious consumers. A combination of value bundles and aggressive product positioning is expected to catalyze double-digit AOV growth in FY26, setting the stage for CM breakeven by FY27.

Cost Curve Likely to Flatten in FY26

While Q4FY25 showed elevated cost metrics, largely due to a spike in store additions, this expansion rate is expected to normalize in FY26. Swiggy added over 1,000 dark stores in Q4FY25 alone, increasing its fixed overheads. However, the company now expects a more measured rollout, which, coupled with AOV expansion, should sharply improve CM metrics.

According to Kotak, Swiggy’s target of breaking even at a contribution level by H1FY27 is realistic and achievable without needing a major uplift in take rates.

Instamart Valuation: Mispriced and Underappreciated

At its current market price of Rs 324, Swiggy’s valuation implies almost zero value to the Instamart vertical. In contrast, Kotak’s SoTP-based model attributes Rs 218 billion to Instamart, making up Rs 88 per share of the target price.

Here is the breakdown of Kotak’s SoTP valuation:

Contribution Margin Outlook: From Red to Black

Swiggy’s internal projections and Kotak’s modeling point to a drastic improvement in CM from (-5.6%) in Q4FY25 to just (-0.7%) in Q4FY26, driven by a 15% jump in AOV, higher take rates (from 15% to 16%), and improved cost efficiency.

Projected metrics for Q4FY26:

AOV: Rs 606

Revenue per order: Rs 95

Cost per order: Rs 100

CM per order: Rs (-5)

Kotak maintains that these improvements could be back-ended toward H2FY26 but remain central to Swiggy’s breakeven narrative.

Key Financial and Operational Metrics

Swiggy’s overall revenue is expected to grow at a CAGR of 32% from FY25 to FY28, driven by food delivery and the expanding footprint of Instamart. Kotak models a 62% CAGR in Instamart GMV, cementing its role as a high-growth engine.

Some headline metrics include:

FY28 revenue projection: Rs 346 billion

FY28 EBITDA projection: Rs 16.3 billion

FY25 net loss: Rs 31.1 billion (vs Rs 23.5 billion in FY24)

Improving CM in food delivery from 7.0% to 8.3% of GOV by FY28

Instamart CM turnaround from (-4.0%) to 3.7% by FY28

Conclusion: Value Proposition with Patience

Kotak Institutional Equities remains confident in Swiggy’s execution capabilities and growth strategy, reiterating its BUY call with a 12-month target of Rs 415 per share. With Instamart’s contribution margin expected to cross the breakeven threshold in FY27 and food delivery margins improving steadily, the current market price presents a compelling long-term accumulation opportunity.

However, near-term volatility, especially around the intense competitive landscape with Amazon and Flipkart entering quick commerce, could keep valuations in check.

Investment Strategy

For long-term investors seeking growth in India's digital consumption story, Swiggy offers an asymmetric risk-reward proposition. While earnings remain negative, improving margins, operational leverage, and moat-building efforts around Instamart provide significant upside.

Recommendation: BUY
Target: Rs 415
Risk: Execution delays, intensifying QC competition
Timeline: 12 months