Aswath Damodaran's take on the Swiggy IPO - To buy or not?

Summary

In this insightful conversation, the professor provides an in-depth analysis of Swiggy's upcoming IPO, comparing it to Zomato's IPO and broader consumer tech investments. Key points include the challenges of valuing companies based on intangibles like brand value, the importance of assessing fundamental business metrics such as cash flow and risk, and the unique infrastructure hurdles faced by Indian businesses. The discussion also delves into the consumer behavior driving the success of companies like Swiggy and Zomato, particularly their ability to save time for consumers. Ultimately, the professor emphasizes the need for cautious, informed investment decisions in the Indian market.

Takeaways

• 😀 Swiggy's IPO is not just a bet on the company but on India's overall economic growth, as it relies on the growth of urban infrastructure and consumer habits.
• 😀 India's increasing propensity to eat out and the growing middle class provide significant growth potential for Swiggy and other food delivery companies.
• 😀 The success of companies like Zomato is partly due to capitalizing on inefficiencies in urban life, offering time-saving services that cater to convenience-driven consumers.
• 😀 'Quick commerce' is an emerging trend where companies leverage time and logistical inefficiencies, making it possible to provide value through services like pick-ups and delivery of non-food items.
• 😀 When evaluating businesses like Swiggy, it is essential to consider not just the company's financials but also the broader country-specific risks and potential for growth.
• 😀 Intangibles such as brand value only matter if they translate into higher revenues, margins, or lower risks. They must show up in the company's financials to have real value.
• 😀 Zomato’s brand has been strengthened through customer loyalty, which could result in higher app usage and improved margins, but the impact of brand strength must be carefully assessed.
• 😀 Valuation and pricing are distinct; while Swiggy may appear cheaper than Zomato based on revenue multiples, the fundamentals of each company should drive the valuation, not just relative pricing.
• 😀 Pricing discrepancies between Swiggy and Zomato are influenced by Swiggy’s loss-making status and lower margin outlook compared to Zomato’s profitable business model.
• 😀 Global investors should be cautious about Indian stocks, as the equity risk premium in India does not currently appear attractive compared to other markets like the US or Europe.
• 😀 The Indian market has been marked up to the point where finding undervalued stocks is challenging, and investors should focus on the fundamentals and growth potential rather than relative pricing.

Q & A

What is the key factor influencing Swiggy's IPO valuation according to the professor?

The key factor influencing Swiggy's IPO valuation is a bet on India's growth as a country, the increasing propensity of Indians to eat out, and the future of the delivery business in terms of regulation and technology.

What lessons can retail investors learn from the Zomato IPO according to the professor?

Retail investors should focus on understanding what they are actually investing in. It's not just about the company, but also about the country's growth, cultural changes, and the larger ecosystem that supports the business. Investors should make bets based on clear assumptions about the business model and market dynamics.

How does the professor view the concept of 'quick commerce'?

The professor is unsure about terms like 'quick commerce' but acknowledges that companies like Zomato and Swiggy benefit from addressing logistical challenges in urban India. By leveraging time arbitrage, these companies help consumers save time on everyday tasks like picking up groceries or laundry, which adds significant value to their business models.

Why does the professor believe India's infrastructure challenges are significant for companies like Zomato and Swiggy?

India's urban infrastructure is a major challenge. The traffic, parking issues, and congestion in cities make everyday tasks more time-consuming. Zomato and Swiggy are capitalizing on these inefficiencies by offering solutions that save consumers time, such as picking up groceries or laundry, which makes their services attractive.

How does the professor suggest investors should think about intangible assets like a brand?

Intangible assets like a brand can only add value if they translate into higher revenues, higher margins, or reduced risks. While branding can be valuable, it should show up in the company's financial performance. The professor emphasizes that the true value of a brand is reflected in tangible financial metrics.

What does the professor think about the current pricing of Zomato and Swiggy's IPOs?

The professor believes that the market is more focused on pricing companies relative to each other, using multiples of revenue or earnings, rather than understanding their intrinsic value. While Zomato is further along in its life cycle and has turned profitable, Swiggy still faces challenges with margins and reinvestment, which could justify its lower valuation.

What is the professor’s view on investing in Indian stocks?

The professor finds it difficult to invest in Indian stocks right now due to the inflated pricing of many companies. While the long-term India growth story is compelling, the professor believes that the Indian equity market is pricing stocks as if the country's growth will unfold effortlessly, which may not be the case. This makes it harder to find undervalued opportunities.

What risk does the professor see in the pricing of Indian stocks in the global market?

The professor sees that the Indian market is underestimating the risks in the country’s growth story. With high equity risk premiums, Indian stocks may not offer as attractive returns compared to stocks from other regions, like Europe or the US, making it harder to identify truly undervalued stocks.

What makes Zomato's business model different from Swiggy’s according to the professor?

Zomato has been able to turn a profit, showing a more mature business model compared to Swiggy, which is still in a loss-making phase. The professor believes that Zomato’s ability to generate profits gives it an advantage in terms of valuation, as it has already passed a significant growth milestone.

How does the professor think about the future of quick commerce in India?

The professor views quick commerce as a growing opportunity in India, especially in urban areas where people value their time highly. With companies like Swiggy and Zomato offering services that save consumers time, such as food delivery or picking up laundry, quick commerce can scale if these companies can overcome logistical challenges.