Eternal Ltd. Shifts Strategy: Transitioning to Inventory Ownership in Quick Commerce

Table of Contents

1. Key Highlights:
2. Introduction
3. Transitioning to Inventory Ownership
4. Impacts on Financial Performance
5. Financial Results of Q1 FY26
6. Launch of Blinkit Foods
7. Market Reactions and Future Outlook
8. Conclusion
9. FAQ

Key Highlights:

• Eternal Ltd. is moving its quick commerce segment from a marketplace to an inventory ownership model, which will affect its Hyperpure business.
• The transition is expected to enhance margins, with a projected 1 percentage point margin expansion over time.
• Despite a dip in net profit for Q1 FY26, revenue surged by 23%, indicating strong growth in the food delivery and quick commerce segments.

Introduction

Eternal Ltd., the parent company of Zomato, is undergoing a strategic overhaul in its quick commerce operations by transitioning from a marketplace model to one of inventory ownership. This shift is set against the backdrop of a promising financial quarter, where the company reported significant growth in revenues despite a drop in net profit. The implications of this change not only signal a new direction for Eternal Ltd. but also highlight the evolving landscape of the food delivery and quick commerce sectors in India. By increasing control over inventory, Eternal aims to bolster its margins and streamline operations, particularly affecting its Hyperpure business, which supplies ingredients to restaurants.

Transitioning to Inventory Ownership

Eternal’s announcement to shareholders indicates a clear intention to redefine its operational model within the quick commerce space. The company stated, “We will be gradually transitioning our quick commerce business from a marketplace model to inventory ownership over the next 2-3 quarters.” This shift is anticipated to lead to a reduction in non-restaurant business activities within Hyperpure, which has previously relied on B2B buyers who were also sellers on the quick commerce platform.

This transition aims to provide Eternal with greater control over inventory, which is expected to enhance its profitability. Chief Financial Officer Akshant Goyal noted that this approach would not only give the firm leverage over margins but also enable expansion in product assortment. The expectation of a 1 percentage point margin increase over time underlines the financial motivations behind this strategic pivot.

Impacts on Financial Performance

The financial implications of Eternal’s transition are multifaceted. Firstly, the company's revenue from quick commerce is projected to align more closely with its net operating value (NOV), suggesting that revenue from this segment will see continued growth. In contrast, the Hyperpure business may face a contraction in revenue due to the scaling back of its non-restaurant operations, which have historically represented a significant portion of its business.

Net working capital dynamics will also change as Eternal begins to own its inventory. Initially, only 3% of its NOV was based on owned inventory, but this percentage is expected to rise sharply in the coming quarters. This increased ownership will likely result in a more stable financial foundation for the quick commerce segment, while also decreasing the net working capital needs of the Hyperpure business.

Financial Results of Q1 FY26

Eternal’s financial performance for the first quarter of FY26 provides further insight into the company's current state and future potential. The company reported a consolidated revenue increase of 23%, reaching Rs 7,167 crore, compared to Rs 5,833 crore in the previous quarter. Despite this growth, the net profit fell by 36% to Rs 25 crore, a significant drop from Rs 39 crore in the preceding quarter and well below analysts’ estimates.

The quick commerce segment experienced a remarkable 40% growth in revenue, reaching Rs 2,400 crore, whereas the Hyperpure business contributed Rs 2,295 crore to the top line—a 25% increase quarter-over-quarter. This juxtaposition of revenue growth against profit decline illustrates the challenges Eternal faces as it recalibrates its business model.

Segment-Wise Financial Performance

In terms of segment performance, Eternal’s food delivery segment saw a net profit increase of 6% sequentially, reaching Rs 465 crore. The quick commerce sector reported a net loss of Rs 42 crore, although this was an improvement from a loss of Rs 82 crore in the previous quarter. The Hyperpure business, meanwhile, recorded a loss of Rs 5 crore, which was also a narrower loss compared to Rs 8 crore in the March quarter.

The mixed results from different segments highlight the transitional phase the company is currently navigating. While quick commerce shows robust revenue growth, profitability remains a key challenge that will need to be addressed as the company moves forward.

Launch of Blinkit Foods

In a bid to further enhance its market position, Eternal announced the establishment of a new subsidiary, Blinkit Foods Ltd., which will focus on the preparation, sale, and delivery of food. This initiative is seen as a direct response to competitors such as Zepto Cafe and is indicative of Eternal's ambition to diversify its offerings and capture a larger share of the food service market.

The formation of Blinkit Foods represents a strategic maneuver to integrate food preparation and delivery services under one roof, aiming to streamline operations and enhance customer experience. As the food delivery landscape becomes increasingly competitive, such innovations may prove essential for sustaining market relevance.

Market Reactions and Future Outlook

The market has responded positively to Eternal's strategic announcements, evidenced by a 7% increase in its share price following the release of Q1 earnings. Investors appear optimistic about the company’s pivot towards inventory ownership and the potential for improved margins, despite the current operational hurdles.

Looking ahead, Eternal's ability to execute its transition effectively will be critical. Ensuring that the shift to inventory ownership does not disrupt existing operations while simultaneously managing the financial implications of this change will require careful oversight and strategic planning. The company's focus on improving margins and controlling inventory could position it favorably within the highly competitive quick commerce landscape.

Conclusion

Eternal Ltd.'s transition towards an inventory ownership model in its quick commerce segment marks a significant strategic shift that carries both opportunities and challenges. The company's recent financial performance indicates robust growth in revenue, yet highlights the need for improved profitability across its various segments. As Eternal embarks on this transformative journey, the development of Blinkit Foods and the anticipated changes in Hyperpure’s operations will be closely watched by investors and industry analysts alike. The coming quarters will be crucial in determining whether this new approach can generate sustainable growth and competitive advantage in an increasingly crowded marketplace.

FAQ

Q: What is the reason behind Eternal's shift to inventory ownership?
A: Eternal is transitioning to an inventory ownership model to gain better control over margins, enhance profitability, and streamline operations within its quick commerce segment.

Q: How will this transition impact the Hyperpure business?
A: The transition is expected to reduce Hyperpure’s non-restaurant business, affecting its overall revenue, while focusing on direct partnerships with brands.

Q: What were the key financial results for Eternal in Q1 FY26?
A: Eternal reported a 23% increase in revenue to Rs 7,167 crore, while net profit fell by 36% to Rs 25 crore. Quick commerce exhibited a 40% revenue growth.

Q: What is Blinkit Foods?
A: Blinkit Foods is a newly formed subsidiary of Eternal that will engage in the preparation, sale, and delivery of food, aiming to expand the company’s offerings in the food service sector.

Q: How did the market react to Eternal’s Q1 earnings announcement?
A: Following the earnings announcement, Eternal's share price increased by 7%, reflecting investor optimism about the company’s strategic transition and growth potential.