Eternal’s investors can prepare for more positive earnings surprises
AI Summary
Eternal's Q1FY27 results show strong net order value (NOV) growth for Zomato, with food delivery NOV up 20% y-o-y and Blinkit’s NOV soaring 86% y-o-y. Despite high fixed costs and margin pressures, management remains optimistic about Blinkit's growth strategy, targeting an increase in store count and NOV per store. Analysts are cautious about the competitive landscape and its impact on margins, but the company has not revised its long-term Ebitda guidance.
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Eternal’s June quarter (Q1FY27) results demonstrated that competition has not dented its key performance metric of net order value (NOV) growth.
For Zomato, its food delivery business, NOV rose 20% year-on-year (y-o-y) to ₹10,769 crore, while that of quick commerce segment Blinkit soared 86% to ₹17,132 crore. The upshot: Ebitda jumped over 400% y-o-y to ₹594 crore.
Both segments are still in varying phases of growth and require investment. Fixed costs generally remain high due to expenses related to expansion, suppressing the Ebitda margin. So, the contribution margin, i.e., revenue minus variable costs, can give important takeaways.
Zomato’s contribution margin grew 30 bps y-o-y to 10.2%. The expansion was relatively muted considering the 321-bps surge in Zomato’s take rate—commissions and platform fees as a percentage of NOV—to 32.84%. The gap between better take rates and the contribution margin indicates higher delivery and other operating costs as some states have increased minimum wages.
Earlier this month, Rapido co-founder and chief executive officer (CEO) Aravind Sanka pointed to the exorbitant commissions from restaurants and other fees charged by food delivery companies. This worried investors of Eternal and Swiggy Ltd.
However, if the charges are really high, it should reflect a fat (high) margin, which is not the case, going by Zomato’s contribution margin. Even if it is assumed that delivery costs can be lowered with scale benefits, the viability of the business would be questionable at a lower take rate.
During Eternal’s Q1 earnings call, analyst concerns were centred on Blinkit’s margin pressure after rivals upped the ante. Blinkit’s contribution margin declined 10 bps sequentially to 5.3%.
The management said competitive intensity is near its peak because it is relatively more difficult to sustain discounting in quick commerce versus e-commerce. The management believes near-term margin pressure is abating.
Analysts also raised the issue of Blinkit’s flattening of average order value (AOV). Higher AOV increases the profitability per order as delivery and fulfillment costs remain constant.
The management believes that the AOV declines as order frequency rises, with customers becoming more comfortable with the platform. Flattening of AOV does not mean that Blinkit is not targeting higher wallet share from customers.
Blinkit is on course to reach 3,000 stores by FY27-end by adding 200 stores per quarter in the rest of the year. The current store count is 2,443.
The management has changed Blinkit’s store economics and expects NOV to be far higher. While capex per store has risen from ₹1 crore to ₹2.5 crore, the expected annual NOV per store is now at ₹40 crore versus ₹25 crore earlier. This implies, at the Ebitda margin of 5%, absolute Ebitda would grow by about 57%.
For now, Eternal has not revised its FY29 Ebitda guidance of $1 billion given after the Q4FY26 results. Thus, earnings could surprise positively.
Elara Securities’ estimate for FY29 Ebitda is at almost $1 billion (at a rupee-dollar rate of 92). Based on this, Eternal shares trade at EV/Ebitda of 30x, which doesn’t appear too demanding.
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