Eternal Ltd Q1 FY2024 Concall Summary

Key Takeaways

• Strong quarter, broad-based growth: Consolidated Adjusted Revenue grew 11% QoQ, driven by food delivery GOV growth and improving take rates, with management confident the worst of the demand slowdown is behind.
• Blinkit is the growth engine, profitability in sight: 60%+ GOV growth expected for the foreseeable future, with a clear path to Adjusted EBITDA breakeven within the next 4 quarters, powered by ad sales and operating leverage.
• Take rates and ad sales are the margin story: A 100-bps QoQ take rate improvement, fueled by aggressive ad spending from small restaurants, is a key lever for the journey to a 4-5% food delivery margin.
• Cost base is now rightsized: Employee expenses have declined for two straight quarters post-rightsizing, and the organization is lean, with future cost growth expected to track a multiple of inflation.
• What to watch next quarter: The impact of annual appraisals on the lean cost base, the linearity of the margin path to 4-5%, and any early signs of a World Cup demand bump.

Financial Performance & Levers

• GOV growth drivers: The 11% QoQ GOV growth was broad-based, with seasonality (weather, school holidays) a bigger factor than the IPL, which management says historically has very limited impact.
• Take rate dynamics: The 100-bps QoQ improvement was driven by multiple factors, but management declined to break out the specific contributions from ad income, restaurant commissions, or Zomato Gold.
• Ad sales surge: Growth in ad sales on the food delivery platform has been largely volume-led, not price-led, leaving the price lever available for the future. Small restaurants, after 6-9 months of stagnant business, are now spending aggressively on the platform to drive growth.
• Employee cost reset: The decline of over 1,000 bps in employee cost as a percentage of revenue is partly due to synergies between Blinkit and Zomato and reduced supply-side challenges. The organization is now rightsized, with severance payouts from the December quarter fully reflected in the P&L.
• AOV improvement: Blinkit’s average order value improved this quarter; 25% of the improvement was due to supply constraints, with the rest from seasonal changes and consumption patterns. Management expects AOV to show variability, not a consistent trend.

Akshant Goyal: "A lot of small restaurants, given the lack of growth in their business in the last six to nine months, we are seeing are spending aggressively on ad sales on our platform to grow right now."

Blinkit: Growth & Path to Profitability

• Store expansion: The company guided for 100 net new store additions in FY24, primarily in existing high-confidence geographies, with cautious expansion into new areas including some Tier 2 cities.
• Profitability levers: The aim is to reach Adjusted EBITDA positive over the next 4 quarters, with significant operating leverage expected. Meaningful gains in ad sales on Blinkit are expected to drive a large part of this progress.
• Delivery cost stability: Delivery cost per order did not decrease significantly this quarter. The April changes brought all delivery partners onto the same payout structure for fairness, not cost reduction. Management does not expect delivery cost per order to change dramatically going forward.
• GOV per store variability: GOV per store depends on the pace of new store openings and the quality of polygons; it may go up, down a little, and then come back up, with no steady-state target provided.
• Disruption recovery: A disruption in Delhi NCR in April/May caused some stores to shut for a few days, and the recovery of delivery partners took time, leading to a weaker April and May before a recovery started in late May/early June.

Albinder Singh Dhindsa: "The changes that we made in April was to bring all our delivery partners onto the same kind of payout structure so that it was more even across the board, and we have not made any changes beyond that."

Food Delivery: Margins & Monetization

• Margin target: Management is targeting a 4% to 5% Adjusted EBITDA margin as a percentage of GOV in the next few quarters, with an interim goal of an 8% contribution margin. The journey from the current ~2.5% is expected to be non-linear due to demand seasonality and competition.
• Growth outlook: The 11% sequential GOV growth and 15% revenue growth in Q1 supports the view that 25-30% revenue growth for food delivery is achievable this year and next, per an analyst's math. Management did not officially endorse this target but noted the strong quarter as a proof point.
• Zomato Gold dynamics: The changes to Zomato Gold, once perceived as a risky bet, have paid off. Gold members have slightly higher AOVs and significantly higher ordering frequency, partly due to clubbing of orders from multiple users in the same family.
• Platform fee: No platform fee has been introduced on the Zomato platform. Management is aware of competitors doing so and will take a call if it is the right thing for the business, but no decision has been made.

Akshant Goyal: "So hard to predict the exact path, Vivek. I think we'll play it by the year. It's a highly competitive market. There are multiple variables at play here, including the demand seasonality and competition."

Hyperpure & Other Bets

• Hyperpure growth: The business is growing on both sides: the core restaurant supplies business is growing over 100% YoY, and it is now also supplying to sellers on Blinkit.
• Profitability improvement: Increasing the minimum order value for restaurants caused some churn of small, unprofitable restaurants, but overall revenue increased as remaining restaurants raised average order values, positively impacting profitability. Wallet share from existing partners is gradually increasing.
• Dining out experiment: Management is experimenting with a separate app for dining out, but the service will continue to be available on the main Zomato app regardless. The decision on whether the separate app stays is open.
• Delivery fleet strategy: Cross-utilizing the delivery fleet across different segments or entities is not part of the company’s strategy, as both the food delivery and quick commerce platforms are growing quickly and need dedicated rider supply.

Capital Allocation & Competitive Landscape

• Cash preservation: Management is not considering shareholder returns at this point, preferring to maintain cash on the balance sheet. This position will be reconsidered as the business scales and competitive dynamics change.
• Inflation response: Food inflation is impacting restaurants, but they are responding by spending more on advertising to grow their business, a dynamic that benefits Zomato’s ad revenue. This is viewed as a characteristic all businesses must deal with.
• Regulatory watch: On the Rajasthan gig-worker compensation bill, management has no full clarity yet and is waiting for more details before assessing any potential impact.

Akshant Goyal: "Not at this point, Manish, we have thought about that. But at this point, we want to maintain the cash that we have. But down the line, we continue to reconsider that position as our business scales and as competitive dynamics change around us."

Guidance & Commitments

Key Metrics