In a significant move for the e-commerce food delivery sector, the Goods and Services Tax (GST) Council has proposed a reduction in the GST rate on food delivery services provided by platforms like Zomato and Swiggy from 18% to 5%. This change is expected to take effect from January 1, 2024. As this news circulated, shares of these two companies gained considerable attention in the stock market.

What does this mean for the food delivery giants? On December 17, 2024, Zomato’s shares closed 2% higher, settling at INR 294.25, while Swiggy’s shares surged by an impressive 11.7%, reaching INR 594.80. Such price movements underscore the immediate investor optimism surrounding the proposed tax cut.

The Implications of GST Changes

The prospective reduction in the GST rate is significant, especially for companies that have been operating in a taxed environment that many have argued hampers growth. This updated rate will increase affordability for consumers, potentially driving more order volumes for these platforms. Also notable is that under the proposed plan, food delivery platforms will not be able to claim tax credits, which could influence pricing and overall strategy moving forward.

A recent report highlighted how the lower tax could be a boon for the underpenetrated food delivery market in India. Axis Capital, a domestic brokerage firm, has initiated coverage on Swiggy with a target price of INR 640. They see it as an ideal investment opportunity as the food delivery and quick commerce segments grow in tandem with evolving consumer behavior.

Stock Performance and Market Sentiment

Stock performance for Zomato and Swiggy offers vital insights into market sentiment. Since Swiggy’s stock listing in November 2023 at a price of INR 420 on the NSE, its price has escalated by 41.6%. Similarly, Zomato’s shares have witnessed a formidable increase of 138% over the last year, which speaks volumes about its market resilience and investor confidence.

In the previous three months alone, Zomato’s stock rose by 6%, signifying steady growth. This share performance can serve as evidence of the food delivery market’s potential, especially as consumer reliance on home delivery services continues to rise, primarily due to busy lifestyles and enhancements in service convenience.

The Future of Food Delivery Companies

Forecasts suggest a long growth runway for Zomato and Swiggy, with more consumers adopting online food delivery options. The tax cut is expected to incentivize this adoption further, thereby fueling more growth. E-commerce platforms have been gaining an increasingly significant share in the Indian retail landscape, and both Zomato and Swiggy are well-positioned to capitalize on this trend.

Moreover, as reported by various analysts, the food delivery market in India remains underpenetrated. Growth drivers like changing consumer preferences, urbanization, and the overall increase in smartphone penetration continue to amplify the potential for growth. Companies must now formulate dynamic pricing strategies that align with the new tax structure, as well as streamline operations to capture more market share.

Conclusion

The GST council’s proposal to cut the food delivery tax to 5% could mark a pivotal moment for companies like Zomato and Swiggy. It not only enhances consumer affordability but also positions these businesses favorably amidst a rapidly growing market. As sector dynamics shift and potential investors show bullish interest, the coming months may very well reveal whether this anticipated regulatory change will yield the expected outcomes in stock performance and overall market growth.

Investors should closely monitor these developments and prepare for possible shifts in strategies from leading food delivery services. The stock market will likely reflect investor confidence as developments continue to unfold.