India’s online food ordering and quick commerce industry has become one of the most closely tracked corners of the domestic stock market. Anyone following the Eternal share price will notice how sharply sentiment can shift with every quarterly result, regulatory remark, or competitor announcement. Retail investors, mutual fund managers, and market commentators now treat these companies as proxies for urban consumption itself. Meanwhile, the Swiggy share price has drawn similar attention since the company’s public listing, because its performance helps investors judge whether platform businesses can turn scale into steady earnings.
The Appeal of Urban Convenience
Indian cities are evolving. Rising income levels, nuclear families, long commuting hours and smartphone adoption have made apps for ordering meals and groceries a regular part of life as opposed to an indulgence. A working couple in Pune or Hyderabad routinely orders breakfast, medicines and groceries through an app using the same platforms within a day. This is the backdrop to the investment case.
For investors, the debate is not about demand, but value and cost. Increase in order frequency, average order value and cities covered are important variables for projecting growth. Many analysts calculate the TAM (total addressable market) or the percentage of household spend on food and daily needs that can be digitised; even if it is a conservative 5% figure, it represents revenues of immense scale and explains why the sector has seen consistent speculation.
Stock price drivers
There are no clear drivers for stocks in this space as most factors are intertwined. Quarterly reports focusing on gross order value, delivery costs and advertising income provide direction, but interest rates, foreign institutional investor (FII) inflows or outflows and the overall mood on Dalal Street also impact prices. A cautious outlook on benchmark indices usually drags down stocks of loss-making companies or those which have just turned profitable, as their valuations are guided by long-term earnings expectations.
Another important consideration is the commentary on operations by the management. Any guidance on aggressive discounting, welfare costs of delivery partners, expansion of dark stores (retail outlets for e-commerce) or competitive dynamics has an impact. Improvement in contribution margins can propel stocks of a player in the space within hours, while indications of higher customer acquisition costs can have the opposite effect. Regulations pertained to levies on digital commerce, gig economy and food safety also form part of the discussion.
Nuances in business models
While the businesses are similar on the surface, subtle differences exist. For instance, one company has focussed on building a high growth grocery vertical and has expanded into ticketing and dining while the other has built its reputation on its restaurant and delivery ecosystem and has aggressively launched its own grocery segment. Such distinctions need to be understood as they dictate capital requirements and timelines for profitability.
Coming back to valuation, one should not assume that similar stocks have to necessarily trade at comparable levels at all times. Nuances such as promoter holdings, cash reserves, experience of management and the composition of revenues (commissions, delivery fees, advertising, subscriptions) also play a role. A stronger balance sheet allows a company to stay in a price war longer while better unit economics helps it achieve profitability faster.
Risks
Most discussions on stocks overlook risks. The intense competition in the sector from conglomerates and private equity backed start ups can erode profitability. The dependence on delivery partners makes them vulnerable to labour laws and attrition. The Indian consumer is not invincible to cyclical slowdowns and even middle class households will cut down on discretionary spends such as restaurant dining during inflationary periods.
Valuations are also a consideration. For many growth stocks, valuations are at a premium and a correction in multiples on sensing difficulty in meeting growth targets can inflict heavy losses. Investors who understand this dynamic space out their buying and do not allocate large sums of money in one go.
A balanced approach
The cautious investor will take a call on the basis of a thorough understanding of the business and not get carried away by social media hype or projection of a few quarters. Cross comparing operating metrics of similar stocks and understanding one’s own risk appetite based on time horizon for deploying funds is a good starting point. Someone with a 10 year view on life and the ability to bear short term pain can take a larger position in the segment compared to someone who needs liquidity in the near term. Reducing risk through diversification across sectors and making systematic buys as opposed to impulsive ones and seeking advice from a registered financial adviser are other measures.