Greenfield Expansion Will Erode Margins And Heighten Risks

Key Takeaways

• Expansion into less dense geographies and full inventory ownership heighten investment, margin compression, and risk from fluctuating consumer demand.
  
• Exposure to saturated urban markets and demographic headwinds threatens sustainable growth, while labor and regulatory pressures further erode profitability.
  
• Strong growth in mature markets, operational improvements, and resilient customer expansion indicate lasting scalability, margin enhancement, and revenue diversification despite competition.

Catalysts

Provides e-commerce platform services to restaurant partners, quick commerce merchants, delivery partners, theatres, and event organisers in India and internationally.

• The company's rapid expansion into new geographies relies heavily on building greenfield supply chains, particularly in Tier 2 and Tier 3 cities, which incurs elevated upfront investments and lower initial utilization. Over time, this could structurally compress net margins and delay meaningful profitability as scale and utilization targets may prove harder to achieve in less dense markets.
  
• The move to fully own inventory across the vast majority of stores dramatically increases working capital requirements, heightens exposure to inventory risk, and makes Eternal's model more vulnerable to shocks in consumer demand or changes in consumption mix, raising the probability of negative earnings surprises during down cycles.
  
• An overexposure to the top 20 urban markets exposes Eternal to saturation risk and leaves it highly susceptible to shifts in local regulation, new disruptive entrants, or city-level economic slowdowns, which could sharply reduce occupancy, throughput, and net revenue growth in its core markets.
  
• Intensifying labor inflation, persistent labor shortages, and rising costs associated with maintaining higher health and safety compliance standards are likely to continue eroding profitability industry-wide, and could prevent Eternal from sustaining recent margin improvements, especially as the business grows more complex and geographically dispersed.
  
• Structural demographic headwinds, including slower global population growth and the possibility of rapid digitization and AI-driven alternatives reducing demand for in-person experiences, threaten to suppress long-term demand for Eternal's core offerings, leading to prolonged stagnation or outright declines in organic revenue growth.

Eternal Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Eternal compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Eternal's revenue will grow by 28.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 1.3% today to 5.3% in 3 years time.
• The bearish analysts expect earnings to reach ₹25.8 billion (and earnings per share of ₹2.72) by about September 2028, up from ₹3.0 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 97.4x on those 2028 earnings, down from 998.8x today. This future PE is greater than the current PE for the IN Hospitality industry at 37.3x.
• Analysts expect the number of shares outstanding to decline by 4.45% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.29%, as per the Simply Wall St company report.

Eternal Future Earnings Per Share Growth

Risks

• Eternal is seeing strong growth from existing markets even where geographic coverage is already high, such as a 70% year-on-year growth in mature cities like Delhi, suggesting robust long-term revenue potential as mature markets continue to expand.
  
• The company's move towards inventory ownership (1P model) is expected to drive significant margin improvements within the next few quarters, which, alongside operational efficiencies, could support expansion in net margins and earnings in the long term.
  
• Expansion plans towards 3,000 stores, alongside a growing unique customer base and resilience across both large and small cities, indicate enduring scalability and revenue diversification that may contradict expectations of declining financial performance.
  
• Despite intensifying competition, management states that margin improvement and loss reduction are likely to persist as long as market dynamics remain stable, suggesting competitive advantages that could protect earnings and profitability.
  
• Quick commerce and food delivery businesses both exhibit improving customer retention, increasing order frequencies, and signs of recovering growth, all of which point to positive long-term trends in revenues and potentially sustained earnings recovery.

Valuation

• The assumed bearish price target for Eternal is ₹207.45, which represents two standard deviations below the consensus price target of ₹322.4. This valuation is based on what can be assumed as the expectations of Eternal's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹420.0, and the most bearish reporting a price target of just ₹170.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ₹490.6 billion, earnings will come to ₹25.8 billion, and it would be trading on a PE ratio of 97.4x, assuming you use a discount rate of 15.3%.
  
• Given the current share price of ₹329.15, the bearish analyst price target of ₹207.45 is 58.7% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.