Eternal Ltd Q2 FY2023 Concall Summary

Key Takeaways

• Growth sacrificed for economics: Food delivery GOV grew just ~3% QoQ as the company deliberately traded lower-quality growth for contribution margin, compounded by softer macros and seasonal rains.
• Contribution margin surged, but pace will slow: Contribution as a percentage of GOV jumped from 2.8% to 4.5% QoQ, a pace management explicitly warns will not continue.
• Blinkit integration is on track and trending well: The business made good progress on both top and bottom line, with store economics improving and contribution margin moving from -17% to -7% in three months before hitting break-even during the festive period.
• Dining-out reset is a near-term drag: Transition to a new in-app payment monetization model caused expanding losses that will persist for at least one to two more quarters.
• What to watch next quarter: Whether the GOV growth slowdown stabilizes, the magnitude of the contribution margin expansion deceleration, and any signal on the Blinkit store expansion pace decision.

Growth & Demand Environment

• GOV slowdown was deliberate and macro-driven: Low ~3% QoQ food delivery GOV growth stemmed from trading some lower-quality growth for better economics, plus general macro weakness leading to lower app opens and intent to spend, with seasonal rains adding to the impact.
• Frequency dipped slightly: The same factors that slowed GOV growth also pushed frequency down marginally.
• Market share held steady: Management does not believe the company lost market share during the quarter.
• Power user share was stable: The share of power users as a percentage of total annual transacting users remained constant.
• New user addition pace is intact: Roughly one million new users continue to join the platform with little or no marketing spend, a trend that held true this quarter.
• Long-term view unchanged: The recent GOV growth slowdown does not impact management's bullish medium-to-long-term view on the food delivery opportunity.

Akshant Goyal: "We are not going to compromise good quality growth just to get to that milestone faster."

Unit Economics & Margin Trajectory

• Contribution margin leaped, but the pace is unsustainable: Contribution as a percentage of GOV grew sharply from 1.7% in Q4FY22 to 2.8% in Q1FY23 to 4.5% in Q2FY23, driven by opportunities on both revenue and cost sides. Management does not expect that pace of improvement to continue, at least for now.
• Improvement was broad-based: Contribution margin improvement was seen pretty much uniformly across multiple cities; cities still contribution-negative are mostly recently launched ones or those where the restaurant food-ordering flywheel has not yet kicked off.
• Future levers remain: Enough growth is left to improve revenue per order and drive costs down through scale and leanness; all levers are expected to play out over the next few quarters.
• Take rate is a work in progress: There may be some improvement going forward, but management would not specifically discuss that lever.
• Long-term margin philosophy prioritizes dollar profits: Beyond a point, it may be a higher ROI to leave money on the table for restaurants to grow faster and pay riders more for higher retention, rather than maximizing percentage margin; the goal is more dollar profits, not maximum percentage margin.
• Q3 baseline: Management hopes contribution margin can go up from the 4.5% level, but does not commit to it.

Akshant Goyal: "Our comment is simply telling everyone that we don't expect that pace of improvement to continue, so that pace of improvement will slow down. But that doesn't mean that it's either revenue improvement slowing down or its cost. We continue to work on all the levers where we see an opportunity to improve margins, but the overall margin expansion pace, we want the shareholders to know, will slow down going forward, at least for now."

Blinkit (Quick Commerce)

• Integration has gone well: No surprises in the business so far, with good progress on both top line and bottom line; management expects that trend to continue.
• Store economics depend on throughput: With the same infrastructure and people, economics are similar irrespective of store size or ownership (own vs partner). Partner stores receive support in early months, but if they were own stores, the cost would be taken in idle manpower anyway.
• Net store deletions are declining: Net store deletion numbers were higher earlier due to opening stores in suboptimal locations; the pace of net additions stays roughly the same each month, and the net deletion pace is going down as more stores succeed.
• Brand effect is accelerating store ramp: As brand recognition and value go up, the time for stores to reach a certain number of orders is getting faster, and partners start making money faster.
• Contribution margin improved rapidly: The same pattern that took Blinkit contribution from -17% to -7% over three months also drove contribution break-even during the festive period; no single driver was isolated.
• Store expansion pace under internal debate: With the store network now around 400, management is debating whether to open more stores given more opportunities or reduce the CAGR of store openings as the store count grows; a decision will wait until the overall existing store like-for-like network is breaking even.
• Rider integration is a medium-term plan: Integration with the food delivery fleet is currently limited to leveraging a common tech stack; cross-utilizing fleets is not happening now because the scale of the two businesses' last-mile fleets and order density per locality are not similar.
• Hyperpure synergy is in fresh produce sourcing: Primary integration underway is joining forces for direct-from-farm sourcing of fresh produce for Blinkit sellers and Hyperpure's restaurant supply.

Albinder Singh Dhindsa: "It's still a question internally for us, as our store network is fairly large now - the number is around 400; at this pace, should we be opening more stores because we have more opportunities... Or should we be reducing the CAGR of store openings as the number of stores go up, that's something that is still at a stage that we are debating whether we should be investing behind it."

Dining-Out & New Initiatives

• Dining-out transition is a deliberate near-term loss: Losses in the dining-out segment are expanding in the short term because the company transitioned to a new monetization model where customers pay through the Zomato app at restaurants, discontinuing erstwhile monetization streams including Zomato Pro membership sales and ad sales to restaurants; all costs remain but revenue was lost.
• Losses will persist: The transition losses are expected to continue at least in the next quarter and maybe one more quarter after that before the business starts generating profits again.
• Zomato Instant is live in pilot: The 10 to 15-minute food delivery service is live in a few locations across Gurgaon and Bangalore.
• Intercity Legends launched: The service delivering food from legendary restaurants across cities is seeing good traction and customer love.
• Zomato Pay is a nascent investment: Launched a few weeks before the call; monetization strategy is ad sales with more tangible ROI for restaurants.
• All new initiatives stay organic: All new initiatives are planned to be done organically within the company.

Restaurant Supply & Customer Dynamics

• Restaurant partner count was flat: The net number of restaurant partners remained flat at ~200,000 for three quarters because, while thousands of new restaurants are added monthly, a decent number of low-order-volume restaurants churn out or shut down, keeping the net number flat or slightly down.
• Supply is not a concern: Supply in number of restaurants is expected to continue increasing in the medium and long term; management is not concerned about supply being constrained at this point.
• AOV trends by customer maturity: New customers' AOV is lower than repeat customers; as customers mature, AOV goes up before settling. Metro AOVs are larger than smaller cities.
• Pro Plus phase-out had limited impact: The company stopped selling new Pro Plus memberships; for more frequent customers whose memberships expired, there has not been much fall in frequency post-expiry; overall impact on order volumes is hard to isolate among multiple variables.
• Loyalty program in development: Management is working on creating something more differentiated than current market loyalty programs, aiming to get the benefit of customer loyalty without losing a lot of money.

Delivery Fleet & Cost Structure

• Insourcing is near-total: The portion of deliveries done by Zomato's own fleet is now more than the previously stated 94%; the majority is done directly.
• No outsourcing planned: Management sees little merit in outsourcing more than the current very small outsourced portion and believes Zomato is the cheapest delivery service in the country today.

Akshant Goyal: "We are not planning to outsource a meaningful portion of our delivery fleet to third parties. There is a very small portion of the delivery fleet which is outsourced. But as far as we know, we are the cheapest delivery service in the country today."

Guidance & Commitments

Key Metrics