Eternal shares in stress on Q-comm cash burn quest

ET Intelligence Group: Online delivery company Eternal lost nearly 9% in just two trading sessions after its December quarter results, despite gains in its key business units. The stock’s decline reflects investor concerns about the company’s ability to maintain its operating performance in the face of escalating competition. This could force Eternal, which also operates fast trading platform Blinkit, to ramp up discounts and promotional activities, hurting profitability. Additionally, investors believe that slower-than-planned store expansion during the quarter could have driven better-than-expected profitability due to reduced cash burn.

With a greater need to accelerate the rapid expansion of trading activities in the face of competitive pressures, profitability may suffer in the coming quarters. Although analysts have given the stock a ‘buy’ rating, some have lowered the 12-month price target by up to 14%. In the December quarter, Eternal’s consolidated adjusted revenue and operating profit before depreciation and amortization (Ebitda) rose 19.5% and 62.5% sequentially to ₹16,692 crore and ₹364 crore, respectively. On an annual basis, turnover almost tripled, while Ebitda grew by 28%. Net profit rose 57% sequentially and 73% year-on-year to ₹102 crore. The growth was largely driven by a multiple jump in Blinkit’s revenue to ₹12,256 crore, compared to ₹1,399 crore a year ago.

Blinkit added 211 stores in the quarter, taking its total to 2,027, although it fell short of its target of 2,100 stores due to operational restrictions due to the festive season and pollution-related measures in Delhi NCR. The lower store rollout could have reduced cash burn, supporting sharp earnings growth.

Eternal maintains its target of 3,000 stores by March 2027, which could increase to 3,500-4,000 stores due to intense competition. Given the slower growth pace last quarter, the company will need to increase the pace of new store openings in the current quarter to achieve 100% year-on-year net order value (NoV) growth.

This, in turn, could increase cash burn, negatively impacting profitability in the March quarter. The food delivery business under the Zomato brand continued its steady recovery, with adjusted Ebitda margin increasing to 5.4%. While losses in the entertainment segment widened during the quarter due to continued investments, they are expected to decline sequentially and break even over the next four to six quarters. Sales of Hyperpure, Eternal’s business-to-business retail unit, grew 4.6% sequentially to ₹1,070 crore. Eternal is targeting $1 billion in revenue and an adjusted Ebitda margin of 4-5% over the next three years.

Emkay Global Financial Services and Motilal Oswal Financial Services cut their target prices by around 14% to ₹370 and ₹360 respectively, while maintaining a buy rating on the stock. On January 23, the shares were trading at ₹258.7 each on the BSE. The markets were closed on Monday for Republic Day.

Emkay noted in a report that while Eternal delivered a strong profitability surprise at Blinkit, the industry is still in a land-grabbing phase, which could force the company to trade margins for market share.

According to Motilal Oswal, while Blinkit’s breakeven is encouraging, the reprieve is short-lived as peers adopt aggressive discounting and promotional spending. It expects increased competitive intensity to slow Blinkit’s profitability trajectory and has cut FY28 adjusted Ebitda estimates by 15%.