BofA downgrades Zomato and Swiggy, cites slowing growth, high competition

Bank of America (BofA) has downgraded its ratings on Zomato and Swiggy, citing concerns over slowing growth in food delivery and rising competition in quick commerce.

The brokerage has lowered Zomato's rating from 'buy' to 'neutral' and Swiggy’s from 'buy' to 'underperform'.

Along with the downgrade, BofA has also reduced the target price for both companies. Zomato's target price has been cut from Rs 300 to Rs 250, while Swiggy has seen a sharper reduction from Rs 420 to Rs 325.

Despite these changes, the analysts remain positive about the medium-term prospects of both companies.

According to BofA, the quick-commerce industry, which was earlier seen as a high-growth sector with improving profits, is now facing rising losses and intense competition.

Between the two companies, the brokerage believes Zomato is in a better position due to its scale and first-mover advantage in quick commerce.

Zomato has stronger financials, better profit margins, and a healthier cash position compared to Swiggy, which has been dealing with higher losses in its quick-commerce segment.

BofA also highlighted that as new players enter the market, competition is expected to remain high over the next 12 to 15 months.

Established platforms are expanding into each other's areas, and new entrants are likely to attract customers with higher discounts.

This increased competition could lead to higher marketing expenses, greater platform discounts, and a drop in delivery charges for consumers.

Additionally, operating costs are expected to rise due to higher rental expenses for dark stores and increased wages.

The brokerage does not expect companies to increase platform fees significantly as growth slows. Zomato and Swiggy are investing in their own 10-minute in-house cafe services, leading to slightly higher expenses.

BofA also pointed out that profits from food delivery, which have been a stable revenue source, are being used to cover losses in quick commerce.

In the last 12 months, Zomato's stock has gained 11.66 per cent but declined 26.6 per cent so far this year. Swiggy stock has also fallen 38.3 per cent so far this year.