Synopsis
Bank of America has downgraded Zomato and Swiggy due to concerns over slowing growth in food delivery and increasing competition. The target prices for both companies have also been reduced, highlighting the challenges faced in the quick commerce sector.Key Takeaways
- BofA downgraded Zomato and Swiggy ratings.
- Target prices lowered for both companies.
- Competition in quick commerce is escalating.
- Zomato shows stronger financial health than Swiggy.
- Increased operating costs expected in the sector.
Mumbai, March 26 (NationPress) - Bank of America (BofA) has revised its ratings for Zomato and Swiggy, expressing worries over a slowdown in food delivery growth and intensifying competition in the quick commerce sector.
The financial institution has changed Zomato's rating from 'buy' to 'neutral' and downgraded Swiggy’s from 'buy' to 'underperform'.
In addition to the rating adjustment, BofA has also decreased the target prices for both firms. Zomato’s target price is reduced from Rs 300 to Rs 250, while Swiggy has experienced a more significant cut from Rs 420 to Rs 325.
Nonetheless, analysts maintain a positive outlook on the medium-term prospects for both companies.
BofA notes that the quick commerce industry, once viewed as a rapidly growing sector with increasing profits, is now encountering escalating losses and fierce competition.
Among the two, the brokerage believes Zomato is in a superior position owing to its scale and first-mover advantage in quick commerce.
Zomato boasts stronger financials, enhanced profit margins, and a more robust cash position compared to Swiggy, which is grappling with larger losses in its quick commerce division.
BofA also emphasized that with new entrants populating the market, competition is anticipated to remain intense over the next 12 to 15 months.
Established platforms are encroaching on each other's territories, and newcomers are likely to lure customers with more substantial discounts.
This surge in competition may result in increased marketing costs, larger platform discounts, and reduced delivery charges for consumers.
Moreover, operating costs are projected to rise due to increased rental costs for dark stores and higher wage demands.
The brokerage does not foresee significant hikes in platform fees as growth decelerates. Both Zomato and Swiggy are investing in their own 10-minute in-house cafe services, which leads to slightly elevated expenses.
BofA also indicated that profits from food delivery, a stable revenue stream, are being utilized to offset losses in quick commerce.
Over the past year, Zomato's stock has appreciated by 11.66 percent but has dropped by 26.6 percent in the current year. Swiggy's stock has similarly fallen by 38.3 percent thus far this year.
