ICICI Securities maintains a 'BUY' recommendation on Swiggy, setting a target price of Rs 740, reflecting a 77% potential upside from the current price of Rs 418. The company's Q3 FY25 results showed a revenue increase of 31% YoY, though profitability pressures remain due to rising expenses in its quick commerce (Instamart) segment. Food delivery remains strong, with improved contribution margins and higher transacting users. Quick commerce, however, faces challenges related to store expansion, competition, and customer acquisition costs. Despite near-term setbacks, ICICI Securities expects positive adjusted EBITDA by Q3 FY26, supported by operational efficiencies.

Q3 FY25 Performance Review

Swiggy's revenue increased significantly, but losses widened.
Revenue for Q3 FY25 rose by 31% YoY to Rs 36 billion, with adjusted revenue reaching Rs 42.6 billion, up 29.3% YoY. However, EBITDA losses widened to Rs 7.3 billion, while net losses totaled Rs 8 billion. The EBITDA margin deteriorated to -18.2%, down 279 basis points from the previous quarter.

Cash position remains strong.
As of December 2024, Swiggy reported a robust cash balance of Rs 81.8 billion, providing a cushion to navigate current challenges.

Food Delivery Business Gains Momentum

Growth in Gross Order Value (GOV).
Swiggy’s food delivery segment reported a GOV of Rs 74.4 billion, a 19.2% YoY increase. Revenue from food delivery reached Rs 18.6 billion, with contribution margins improving by 80 basis points to 7.4%.

Improved profitability metrics.
Adjusted EBITDA for the food delivery business grew to Rs 1.8 billion, representing a margin of 2.5% of GOV, an 87-basis-point improvement from the previous quarter. Operational efficiencies, driven by scale and cost optimization, contributed to this performance.

Expansion in restaurant partnerships and digital tools.
Approximately 65% of Swiggy's restaurant partners are now utilizing the platform’s self-service advertising tool, enhancing engagement and stickiness.

Quick Commerce Faces Margin Pressure

Instamart records high growth but faces profitability challenges.
Quick commerce GOV surged by 88.1% YoY to Rs 39.1 billion, while adjusted revenue reached Rs 6 billion, up 105.8% YoY. Despite the growth, contribution margins fell to -4.6%, impacted by increased marketing, store expansion, and customer acquisition costs.

Operational hurdles in scaling up Instamart.
Swiggy expanded its Instamart footprint with 96 new dark stores, increasing the total store count to 705 by the end of Q3. Average store size grew to 3,475 sq. ft. as smaller stores were replaced by larger formats to accommodate up to 20,000 SKUs.

Long-term prospects for quick commerce.
Management maintains its outlook for breakeven in the quick commerce segment by Q3 FY26. Densification of operations within existing cities is expected to improve last-mile delivery costs and drive future profitability.

Key Operational Developments

Instamart standalone app launched.
Swiggy introduced a separate Instamart app to analyze user behavior while benefiting from cross-engagement across its main platform. Over 30% of users engage with multiple services, boosting loyalty and lifetime value.

Focus on tier-2 cities and non-grocery categories.
Swiggy continues to expand in tier-2 cities, where new stores typically achieve breakeven within six months. Non-grocery categories have shown impressive growth, contributing 14% of Instamart’s GOV, up from 3.5% YoY.

Megapod expansion strategy.
The company is adopting a megapod model, which allows for a broader product assortment, including electronics and general merchandise, without significantly increasing the store count.

Financial Outlook

ICICI Securities expects a steady improvement in Swiggy's margins.
Despite near-term pressures, Swiggy's adjusted EBITDA is forecasted to turn positive by Q3 FY26. Revenue is projected to grow from Rs 1,12,474 million in FY24 to Rs 3,01,558 million by FY27. The company anticipates a return to profitability with a net income of Rs 3,304 million in FY27.

Valuation and Investment Risks

Valuation remains attractive.
ICICI Securities' valuation model employs a three-stage discounted cash flow (DCF) analysis, resulting in a target price of Rs 740. The current market cap stands at Rs 972 billion, with a free float of 9%.

Potential risks to growth.
A slowdown in discretionary spending, increased competition, and regulatory changes could adversely impact Swiggy’s performance. Negative external factors, such as disruptions to business operations, also pose a risk.

Technical Analysis of Swiggy's Stock Performance

Price trends and key levels.
Swiggy’s stock is currently trading at Rs 418, with a 52-week high of Rs 617 and a low of Rs 389. The stock faces resistance at Rs 450, with support around Rs 400. Technical indicators suggest potential consolidation in the near term.

Relative Strength Index (RSI).
The RSI is hovering around neutral territory, indicating neither overbought nor oversold conditions. A decisive move above the resistance level could signal a bullish trend reversal.

Bottomline: Long-Term Potential Amid Near-Term Challenges

Swiggy’s Q3 FY25 performance underscores a dynamic growth story tempered by margin pressures in its quick commerce segment. While food delivery remains a cornerstone of profitability, the company is aggressively investing in operational expansion and customer acquisition for Instamart. ICICI Securities’ 'BUY' recommendation, with a target price of Rs 740, reflects confidence in Swiggy’s ability to navigate near-term challenges and deliver sustainable long-term growth.