Cash me outside with Zomato, Swiggy & Zepto

Author’s note: I’m experimenting with essay lengths and would love to get your feedback as a comment or as a reply on this email.

Diwali is a great time to celebrate with family and friends. And if you’re leading investor relations at Swiggy/ Zepto/ Zomato (including Blinkit), you’re looking to celebrate with incoming wire transfers.

Swiggy surges: Earlier in October 2024, I wrote about Swiggy’s plans to hit the public markets. Swiggy’s shareholders approved the resolution to lift the primary fundraise from ₹3,500 crore to ₹5,000 crore. This proposed ₹11,664 crore IPO (offer for sale component of ₹6,664 crore) will rank among India’s 10 largest IPOs with the recent Hyundai IPO #1 with its INR 27,870 crore fundraise. However, nothing is promised in this capital cycle.

Zepto dips: And so, mere months after Zepto raised $1 billion in 3 months (June to August 2024), it is set to raise an additional $100 million from domestic sources (Indian family offices and high networth individuals). It is allegedly also prepping for a 2025 IPO and is in talks with investment bankers.

Zomato held ₹12,539 crore as cash in hand at the end of Q1 FY 2025. Accounting for the ₹2,048 crore cash purchase of Paytm Insider, its net cash balance is ₹10,491 crore. With Swiggy and Zepto rapidly filling their coffers, Zomato is taking a decisive step as its board considers a Qualified Institutional Placement (QIP) proposal on October 22, 2024. This QIP is allegedly aimed at enabling a $1 billion fundraise (₹8,500 crore) to ensure Zomato is not left behind as it fights across multiple fronts (food delivery/ QC/ live events/ B2B marketplace).

The Indian public market is in a historic bull market phase. For context, ~₹119,000 crore was raised in the equity markets in 2021. IN CY 2024, ~₹90,000 crore has been raised and ~₹30,000 crore of equity fundraise lined up in Q4 2024 can mark a new lifetime high.

Zomato IPOed in July 2021 with a share price band of ₹72-₹76. Its share price spiked to ₹298.05 in September 2024 and at its present ₹260 levels, the company is objectively richly valued vis a vis present earnings. A company would be wise to buy back its shares when it deems them priced cheaper than their underlying value. Similarly, it should sell its shares when the market values them above its internal valuation and it has use of these funds.

Zomato’s presumed warchest of $2 billion+ (assuming a $1 billion QIP) sets the stage for its next level of growth. Acquisitions like Paytm Insider help it grow faster and capex requirements are easier to sign off when the stock is not oscillating between extremes. The market leader in food delivery and QC has to maintain distance from #2 and #3 players, and cashing in equity at an elevated share price is smart even if near term it hits the share price.

The next 6-12 months will be fascinating. Every meaningful QC player (Swiggy/ Zepto/ Blinkit) is planning to grow its store count. This growth will have to be achieved along with the ramp up of Flipkart Minutes, BBNow and Amazon’s Q1 2025 unnamed QC offering. This expansion will be capex heavy and existing store profitability may not be sufficient near term to cover the upfront expansion costs.

The incumbents can justify this scale-up by aggressively pursuing each other’s primary QC markets. For example, Blinkit should see heightened pressure in Delhi and Bengaluru as other players woo existing power users. Discounts and incentives are unsustainable long term but can suffice near term to claw away users. Counter intuitively, brand building can yield greater dividends over performance marketing if the brands have patience to see it through.

The average order value (AOV) is a key QC battleground metric. Blinkit presently leads the AOV charts and can press its advantage further with increased coverage of the top Indian cities. This takes the QC fight to the ecommerce duopoly (Flipkart and Amazon). Higher AOVs indicate user trust in platforms and are margin accretive over conventional QC grocery orders. 

Out of left field, the 10 minute food delivery offering can shake up the Swiggy & Zomato’s set duopoly. Swiggy’s Bolt garnering early traction may also invite investments by Zepto. Presently, Zepto Cafe offers a limited menu with 10 minute fulfilment. If 10 minute food delivery proves habit forming, Zepto may join in a meaningful way and tap into its loyal QC user base to upsell them on food delivery.

The race has just begun and capital infusions will nourish these players beyond market cycles. This is good news for consumers. The Indian consumer will be pampered at a reasonable price by incumbents and new entrants. They will value their time marginally more than their money, and as long as this dynamic holds, Indian QC will flourish.

Arjun’s picks

• Fun read from Matt Levine about how much more X will cost Musk beyond $44 Billion

• Charlie Munger in conversation with one of my favourite podcasters David Senra

• Interesting read by Will Guidara that was featured in my favourite 2024 comedy show (The Bear)

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PPS: I will start publishing Q&A columns for readers every 4-6 weeks. If you have a query, please reply to this email or leave a comment below! I’ll compile the best questions and will publish my answers in a single post