rewrite this title and make it good for SEOEternals’ FII cap signals stronger push into quick commerce with inventory-led strategy: Karan Taurani

“I think going ahead even they have plans to come up with an IPO for the sole reason that they may want to move towards inventory based model because the quick commerce business is very different versus the e-commerce,” says Karan Taurani, Sr VP, Elara Securities. I just wanted to understand what is the significance of this move, the fact that they have capped the FII ownership, the board has approved for that, there will be a shareholding voting on this. But what is your take on this and what does it mean for Eternals?Karan Taurani: This is indeed good news. What this does is that it paves the way for growth in quick commerce business, it paves the way for running an inventory-led model. If you look at Eternals right now, they do not own the inventory of Blinkit on their books, but if one were to expand in a quick commerce business, you need to hold inventory for the different types of verticals that you will cater to, look at the medicine category which is quite sensitive in nature for example.

So, this is good because it clearly shows their focus as far as a quick commerce business is concerned and they want to be top-notch over there and having control on the inventory is good because you can actually deliver the product in a faster manner, you have the control over the quality, the pricing, you can also kind of promote your private label.

So, there are multiple advantages as far as inventory control is concerned. The second thing here is the data localisation norms, so many of the e-commerce companies globally and in India emerging markets as well are facing lot of issues in terms of privacy data localisations and if you look at the recent bill which is the DPDP bill also kind of gives some kind of clarity in terms of how things are going to go ahead as far as the data is concerned for the e-commerce company because they have got a large customer base data, they can kind of cross-sell, upsell, use this data for multiple ways in terms of monetisation and also to drive ad revenues on the platform.

So, it kind of gives them a good cushion here because they are local company, because they are owned by domestic funds, it will kind of cater to the India data localisation norms as well and not the global ones that is the second thing. The third thing is that basically if you look at the likes of large e-commerce giants like Amazon, Flipkart, they have been into the e-commerce business since more than about 8 to 10 years. They are typically operating in a marketplace model. Now, I think going ahead even they have plans to come up with an IPO for the sole reason that they may want to move towards inventory based model because the quick commerce business is very different versus the e-commerce. In e-commerce business the lead times are higher, so if you do not have an inventory based model, you have marketplace based model, you can deliver the product within two to three days. But in the case of quick commerce, things are quite dynamic, you need to have a control on inventory and as I said in case you are moving to sensitive sectors like pharmacy, medical, wellness, other put together, it is better to have a control on inventory.

So, these are three major reasons in terms of why an Eternals is trying to make sure that they are an Indian origin company and having a lesser exposure towards the foreign investments.

While yes, of course, this decision aims to align with the Indian regulatory norms and like you rightly mentioned that nothing changes fundamentally, but help us understand that one topic is that it will actually lead to a lot of outflows and adjustments to be made in the passive index and case in point being adjustments made to the MSCI as well as FTSE, the kind of exposure that Eternals has in their index, what is your sense that how much outflow will it lead to as well as in the near term do you believe that the stock will actually be a bit under pressure and given this overhang the upside could be actually capped.Karan Taurani: So, there could be certain amount of outflows if you look at the number right now, the capping is at 49.5% and currently if you look at the FII holding it is somewhere close to about 44% and this number has been coming down consistently.

After they have announced the QIP in the last about four to five months in the month of November-December around that time, the holding has come down by 4% to 5%. So, there could be some kind of pressure in the near-term basis these kind of adjustments, but as I said these are solely near-term, on the long-term and medium-term basis you are going to test the business hypothesis, I think this is the right way to go ahead.

You have to be an Indian origin company if you have to scale up in the quick commerce market. Blinkit is already a market leader as far as quick commerce is concerned and that will continue. Second, there has always been a lot of interest on the domestic institution side as well.

So, at lower levels when valuations kind of move more towards 1-1.5 times sales for Blinkit bases the SOTP backed calculation, investors have aggressively bought Zomato at 200 and 205 kind of levels.

So, we are somewhere closer to the bottom in terms of those levels are concerned as far as valuations are there for the quick commerce business which is very compelling right now.

So, even if there is some kind of pressure, domestic investors will buy in aggressively because this is a good tactical name to hold from medium to long-term perspective given the market leadership in quick commerce business and currently if you look at the FII holding it is somewhere close to about 44% and this number has been coming down consistently. I think after they have announced the QIP in the last about four to five months in the month of November-December around that time, the holding has come down by 4% to 5%.

So, there could be some kind of pressure in the near-term basis these kind of adjustments, but as I said these are solely near-term, on the long-term and medium-term basis you are going to test the business hypothesis. This is the right way to go ahead.

You have to be an Indian origin company if you have to scale up in the quick commerce market. Blinkit is already a market leader as far as quick commerce is concerned and I think that will continue.

Second, there has always been a lot of interest on the domestic institution side as well, so at lower levels when valuations kind of move more towards 1-1.5 times sales for Blinkit based the SOTP backed calculation investors have aggressively bought Zomato at 200 and 205 kind of levels.

So, we are somewhere closer to the bottom in terms of those levels are concerned as far as valuations are there for the quick commerce business which is very compelling right now.

So, even if there is some kind of pressure, domestic investors will buy in aggressively because this is a good tactical name to hold from medium to long-term perspective given the market leadership in quick commerce business that Blinkit has got and given the kind of large opportunity quick commerce business can have and the impact it can have on the e-commerce business in India.

So, given the fact that all in all if you look at this sort of a move coming in it will be positive for Blinkit given the fact that they will go into this inventory based model which means that this would aid their numbers also going ahead. Have you done any of your calculation, did you recheck the numbers now that one should expect when you talk about the margins, the ebitda performance coming in for Eternals?Karan Taurani: So, typically if you look at the inventory based models, let us look at the likes of Nykaa today which is a large e-commerce company, in the BPC segment their entire category is run through inventory-led model.

Now, inventory-led model comes with its set of own pros and cons. The pros as I mentioned control in terms of pricing product, lower lead times; the con is basically the disadvantage is that, you basically can have a situation wherein the inventory becomes obsolete, wherein you have a lot of dead stock which is there, especially because quick commerce is more perishable in nature you could have inventory risk as well, even for Blinkit for that matter, so that is the only risk I would say in terms of how things pan out but how the numbers we see an impact, what kind of inventory levels they are at currently that is not known, all we know are the numbers, the store data numbers, and where they stand in terms of revenue as far as quick commerce is concerned, but what is the exact inventory, what is the breakup of this inventory in terms of perishable, non-perishable, how will this impact cash flow balance sheet that is something we will get to know basically with time.