Strong growth, improving profitability bode well for Eternal's stock

The Eternal Food Delivery business (EFD) is also seeing improving profitability in the duopoly FD market

While competition continues to intensify in quick commerce with the entry of Amazon Now, incumbents Eternal (Blinkit), Swiggy (Instamart) and Zepto may still be better placed since they are already high-recall for users and have put their warehousing and delivery chains in place.

 

Blinkit, for example, has hit significant scale in terms of dark stores and consumer base. The company has superior unit economics, leading to better EBITDA margins. Eternal also has ₹18,860 crore of cash to push marketing and dark store rollout.

 

Eternal’s food delivery business, Zomato, is also seeing improving profitability in the duopoly market. The industry may see 15-20 per cent growth rates (Y-o-Y) and improving EBITDA margins as business scales. The segment is also a cash generator for the firm, with Gross Order Value (GoV) likely to see mid-teens growth in FY26 and contribution margin seen standing at 8.6 per cent (up 60 bps Y-o-Y). There are also hopes the GoV will rise 21 per cent and contribution margin will expand to 9 per cent in FY27.

 

Blinkit had added over 1,000 stores in the past five quarters, and plans to add 500 more by December 2025 to hit 2,000 stores. It will target 3,000 in future. Blinkit management has said it would transition to an inventory-led model over the next two to three quarters, after becoming an Indian owned and controlled company (IOCC).

 

This could lead to 100 bps margin expansion, according to the management (if the entire business transitions) and working capital days increasing from five, currently, to 15-20. The long-term contribution margin estimate would be around 6.9 per cent.

 

Blinkit’s transition to an inventory-led model may also lead to meaningful increase in revenue. Net Order Value (NoV) has to be adjusted down for GST, but adjusted up for advertisement income in the new model. Depending on the speed of transition to inventory-model, the revenue could increase two times or more over the next two or three financial years. Gross margins, as in revenue less cost of goods sold, should be similar to the take rate estimates. 

 

Blinkit management expects lower absolute growth of adjusted EBITDA in coming quarters, as it is rationalising marketing spend. The firm may break-even at adjusted EBITDA level in Q4FY26. The higher competitive intensity is a key risk however.

 

The quick commerce platform’s store count is expected to double over the next two to three years, and this could lead to market share and margin expansion. EBITDA breakeven could occur by Q3FY26 and that would be a big trigger.

 

Assuming higher working capital for Blinkit, in line with guidance of about 14 days increase in net working capital and 8 per cent interest cost, this would mean 30 bps drag on net margins from working capital.

 

Also, about 60 per cent of Hyperpure’s revenues (in Q4FY25) were to Blinkit’s sellers, which as per Eternal, will scale down as the transition progresses. Hence, Hyperpure revenue and long-term EBITDA estimates reduce.

 

Analysts are expecting growth acceleration in both quick commerce and food delivery in Q2FY26. There has been a 20 per cent Q-o-Q rise in Blinkit’s app downloads. In the food delivery business, strong MTU additions imply around 18 per cent Y-o-Y GoV growth in Q2FY26, and there has been an estimated 8 per cent Q-o-Q growth in Zomato app downloads, which could translate into upside. The platform fee has increased by ₹2.5 per order, which could mean 60 bps higher take rate. Food delivery adjusted EBITDA margin may increase to 5.7 per cent of NoV.

 

Valuation is tricky, with Zomato trading at 120 times the expected FY27 PE. Analysts mostly use a sum-of-the-parts model for food delivery and quick commerce, with a very small share allotted for Hyperpure. Assuming the food delivery duopoly will stabilise at 15-20 per cent Y-o-Y growth, and in quick commerce, expansion of new categories will continue even while there’s a model transition, what EV/ EBITDA valuations or EV/GoV ratios can one reasonably assign?

 

Since the start of September, 10 of the 11 analysts polled by Bloomberg are bullish, while only one is bearish, with an average one-year target price of ₹357.8. The stock closed at ₹336.6 apiece on Friday on BSE, indicating potential upside of 6.3 per cent.