The quick commerce shares may be the toast of the town but BofA Securities is not convinced. The international brokerage firm has downgraded ratings for Zomato and Swiggy. It has cut the rating on Zomato to Neutral from Buy and Swiggy to Underperform. It expects losses to rise in the Q-com business over the next 12-15 months and believes that the pace of margin growth in the food delivery business will be slower.
Both Swiggy and Zomato shares saw a sharp slide intra-day. BofA Securities has given a target price of Rs 250 for Zomato, implying a 16.6% cut. The target price for Swiggy is Rs 325 per share and this indicates a 22.6% slash in price target.
BofA on Zomato and Swiggy: Rising competition, discount pressure
Not only is the competition rising, but there is also the pressure of discounts. According to BofA Securities, the companies have to roll out more discounts and Amazon is yet to launch, which will disrupt the profitability further. Incumbent players are unlikely to let go of their high-end users and are likely to respond with a focus on first-mover advantage. “We expect incumbent platforms to be in expansion mode, leading to higher losses in the near term (till these stores scale up),” said BofA.
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Compared to Swiggy, BofA finds Zomato better placed due to scale and first mover advantage in Q-com. This led to better unit economics, higher margins, and a stronger cash position, hence a ‘Neutral’ rating. Given Swiggy’s higher losses in quick commerce, any prolonged price war would delay the breakeven, hence the ‘Underperform’ rating.
It also downgraded the stocks on the back of a cut in its consensus estimates, which are 20-50% below FY26 and FY27 EBITDA estimates for Zomato and Swiggy. “We expect food delivery GOV growth in the next few quarters to slow to 16-18% yoy from the market expectation of c.20%. As growth slows, we don’t expect companies to meaningfully increase platform fees,” said BofA.
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Following the report, the share price of Zomato fell 3% in Wednesday’s trade to Rs 203.20.
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