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These days, Dalal Street is witnessing a lot of turmoil due to heavy selling by foreign institutional investors and global economic uncertainties. From retail investors to big fund managers in Mumbai, Delhi, Bengaluru, Ahmedabad and Kolkata, they are cautious about how to protect their portfolios from losses. In such a delicate market scenario, a recent research report by leading global brokerage house JP Morgan has attracted the attention of retail traders and wealth investors. The brokerage firm has expressed its strongly bullish view on shares of leading new-age tech and quick-commerce giant Swiggy Ltd. The firm believes that after the recent market correction, valuations of many companies with excellent fundamentals have reached very attractive levels and Swiggy is emerging as one of the most powerful options among them.
Swiggy’s stock has been seen trading around Rs 255 in recent days due to broader market pressure and profit booking in tech stocks. This level is well below the company’s 52-week high of Rs 460 and it is trying to recover very close to its 52-week low of Rs 235.85. JP Morgan in its detailed report has maintained Overweight rating on this counter and has set a new price target of Rs 360 per share. If this new target price is calculated from the current market price, then investors see a direct possibility of huge profits of up to 41.18 percent. The brokerage believes that the downward trend in the stock is now on the verge of stopping and from here the risk-to-reward ratio is completely tilted in favor of buyers.
The shopping habits of people in India’s metro cities like Delhi-NCR, Mumbai, Pune, Hyderabad and Chennai have changed rapidly in the last two years. The quick-commerce model of delivering essential goods within 10 to 15 minutes has shaken the entire structure of the retail industry. JPMorgan’s main thesis is based on Swiggy’s aggressive expansion of quick-commerce vertical Instamart. According to the report, the company is focusing on increasing volume and density to take its quick-commerce business to adjusted EBITDA break-even. The company aims to grow its current business size by approximately two and a half times, with a clear roadmap to achieve a positive contribution margin of around 4 percent. As the capacity and order density of dark stores increases, the losses in this segment will reduce rapidly.
Tech companies are often accused of burning cash excessively in the pursuit of growth, but in the case of Swiggy, its core food delivery segment is acting as a strong shield. JPMorgan analysts estimate that the company’s food delivery business will continue to grow at a compound annual growth rate of 18 to 20 percent in the coming quarters. The company’s operating margin in this segment has remained at a stable level of around 5 percent, due to which the company is receiving regular and sustainable cash flows. This cash flow gives the company complete freedom to reinvest in its quick-commerce and other innovations without any external debt or heavy equity dilution. This strong base of core business makes Swiggy fundamentally safer than many other loss-making listed tech companies.
Swiggy is not limited only to the big 8 or 10 metros of the country, but the company is also registering a huge surge in orders in fast-growing Tier-2 and Tier-3 cities like Lucknow, Indore, Surat, Chandigarh and Kochi. The order frequency is increasing every month due to the increasing purchasing power of the middle class in these cities and the expansion of smartphones. Along with this, Swiggy is aggressively using modern generative AI and machine learning algorithms in its logistics, delivery route optimization, demand forecasting and hyperlocal inventory management. AI-based predictive tools are reducing delivery times and increasing rider efficiency, thereby reducing delivery costs per order and supporting the company’s overall profitability.
Whenever a new stock is listed in the stock market, there are fluctuations in the initial months and selling related to the end of the lock-in period. Swiggy’s stock has also seen similar pressure in recent weeks, which has brought the stock to a discounted valuation. JP Morgan’s analysis shows that Swiggy’s valuation multiple has now become quite balanced and attractive compared to rival companies in its sector. Even on technical charts, the stock is coming out of its oversold zone and entering into base building formation. For value investors with a long-term perspective, this is seen as an opportunity where there is a solid expectation of strong capital appreciation over the medium to long term with limited downside risk.
Even though a leading international brokerage firm like JP Morgan has taken a very positive stance on Swiggy, investors should not ignore the underlying risks of the market. Increasingly cut-throat competition in the quick-commerce space between players like Zomato’s Blinkit, Zepto and Tata’s BigBasket could put pressure on margins in the future. Apart from this, the rise in crude oil prices and possible changes in gig worker rules related to delivery partners can also affect the operational costs of these companies. Therefore, instead of investing huge lump sum amount in any stock in the Indian equity market, it is always considered a wise move to adopt a systematic investment plan i.e. SIP or a phased buying strategy in decline. Before entering any trade, please consult your SEBI registered financial advisor.