Meesho Limited (MEESHO) Earnings Call Transcript & Summary

So I think, like I said, it's early, but we've been seeing good healthy growth on the Meesho Mall front as well. I think last quarter, it grew by roughly about 70% year-on-year. So faster than the platform in terms of NMB growth. And we continue to see good traction from various brands like PNG, EVR, et cetera, which have continued to scale up on the Meesho Mall platform.

Our next question is from the line of Sachin Dikshit from JM Financial.

Congratulations on a successful listing. I had 2 questions. The first one also on Valmor, you highlighted that there was some rapid expansion of Valmor, which is why we saw some cost spikes. How do we think of like what exactly happened? And if you can put some color around how will we take the cost down, right? Because broader understanding is largely a variable sort of supply for you?

Yes. So basically, in this case, what happened was you would see that ours -- I think, around May, June, 1 of our partners stocks like stop being in business and which is why a lot of our capacity in logistics was not available. And that also tend to be like a time, and you just have festive 3, 4 months 3, 4 months away. And at that point in time, basically, we had 2 options, not to build capacity and basically not service many users or basically build capacity but at much inferior cost in a very short period of time because a lot of logistics capacity takes have certain lead times of getting the right node, the partner will do certain investments to get started and so on. And we basically said that, hey, we don't want to, like we've invested in our business over the last 10 years. We want to make sure that we retain the trust of yes. So we've built some of this capacity in a very short period of time to service the demand and because we had to basically do certain short-term contracts, they were more and more expensive. Now that basically flowed into the 2 festive quarters, which is Q2 and Q3. As I mentioned, a lot of that short-term capacity is behind us. We've been unwinding that for the last few months. And by the end of this quarter, also that should go away, and we should get to similar bottom line economics as we were at the beginning of this year. So I think that's basically what happened. We've never had a situation where one of our partners basically goes away. But now I think going forward, we are much better prepared for something like this to ever happen in terms of if we have to basically do this again, we can do it without ever like paying extra for that capacity. But in this case, though we know that it was basically came at a certain cost, but we believe that was the right thing to do for the platform in the long run.

Understood. Is it fair to assume that your in-sourcing would have actually declined because of this quite sharply in this quarter?

Yes, that's right. I think it's declined marginally, but that's the right sort of mix at which the notes that we operate are operating at optimal cost and sort of increasing efficiencies in those existing loans.

Fair enough. My second question is in terms of expenses side. So in the filing, we see a large other expenses line item, is it possible for you to break down that between at least the larger ones, things like logistics and fulfillment expense in advertises maybe?

Yes. So I think if you go to the shareholder letter and that has some of the details of these other expenses, which are kind of broken down into individual components, including add in sales promotion, employee benefit. Server and software tools. The other expenses not directly attributable to place orders, which is the indirect expenses, which come above -- come below the contribution of arginine. I also mentioned there rest everything, which is direct cost goes above the contribution margin and in terms of the cost structure. And that is primarily composed of logistics-related costs. although it will have some other direct variable costs like communication costs, et cetera, built in, which are the attributable to the order. But overall, 90% plus would be logistics transcos.

Possible to have logistics number?

Yes. Overall, it dampens, if you look at the contribution margin bridge that we have been driven Out of the 29.7% cost directly attributable, about 27.5% is related to fulfillment expenses.

Got it. Got it. My last question is on basically user acquisition, right? So we are on a very good trajectory this year, already having acquired 50-odd million. How do we think of this number going ahead, right? Do we expect a similar, let's say, a 50 million plus sort of a number in '27 and '28 as we should expect -- I mean, I do understand that you will want to continue expanding rapidly, but do you get a relative dampening of this number?

So I think it's hard to predict, click very accurately. But if I kind of think about the trends that we are seeing, our return on investment in terms of a ad dollars that we kind of spend leading to new user acquisition continues to be fairly healthy. Plus the more importantly, organic traction of people who kind of discover us present family kind of share and get others to kind of install the app also continues to be on an upward trend. So I think where we're sitting right now, we see pretty healthy trends in terms of user acquisition. I think it will be premature to forecast specifically the number over the next year or so. But like I mentioned earlier, initial part of, let's say, a 4-, 5-year journey, growth would come more from addition. And then towards the latter part, we expect to come from more frequency addition of existing user base.

The next question is from the line of Vijit Jain from Citi.

And congratulations for the numbers and all of you and for the IPO. My first question is, if I look at platforms outside India, like PM, et cetera, they have user bases -- significant user bases across income curves. Right? For you guys, is -- do you think there is a path towards that where, say, top 5%, 10% households in the country also you more extensively than the and now -- that's my first question.

So I think even now, we have a good share of our business come from like 11 cities. So if you look at the top 6 cities would be close to like 25 million. So about 25 million plus people buy from us every year from the big cities and these people are split across income segments. They may be buying different categories, and you see the same thing globally. So they may not buy apparel on our platform because they tend to buy a part from certain brands which are higher. But a lot of them, we see even high income households in India by a lot of home and kitchen products because of a large selection and certain unique selection. So we are seeing that, and we believe it will continue to get better. I think we will keep expanding across all segments. Our focus is not just in one city or the other, but basically to expand across all cities, all segments and eventually have everyone on plan.

My second question is with Valmor. With the things you described just now to the question -- you've also said in the past and in this letter that you will remain asset-light there. So I'm just wondering, as you build out Valmor further, in terms of the workflow of logistics I know you do network design, network orchestration, node design and all of those kinds of things, which are more technology investments -- just trying to understand, as you build it out further, are there other aspects of that design that you could undertake? And would there be any kind of capital involved within that? And relatedly, over time, in the mid mile or even in the mid mine, especially things like automation or tractor trailers, there could be some benefit if someone can procure it at scale on behalf of your partners in the logistics network, would you be involved would you get involved in something like that if and when it makes sense for Valmor. That's my second question.

Yes. So I think our philosophy is very simple. We tend to invest in mostly technology. Now that technology could be software. As you said, some of that technology could be around automation in certain notes and technology tends to have very good ROI. So that we will do. But now going out and doing CapEx across the board, building our logistics capacity like warehousing, et cetera, that tends to have lower ROI, we may not do it ourselves as we have done so far. So they are seeing asset-light makes sense. So even today in Valmor, the entire software stack end-to-end is our own. So the entire technology is our own because that's where we believe the majority of experience, value, better pricing lines. And we continue to, by the way, we have a team which is focused on automation. Can we bring more robotics eventually can we bring -- I don't know, maybe 5, 10 years down the line, autonomy is possible many other things will be possible. So we will bring all kinds of technology, not just software. And there, we have to invest, we will do investments but again, some of this is happened at this stage. As we have something, we'll come forward and tell you that, hey, we are doing this. But broadly, as I said, directionally, we'll invest in technology. Other assets may not be something that we want to invest in. We believe there are enough players out there who are ready to partner with us and offer a very good service.

My next question is on the seller side growth, right? So you had -- I mean, a pre-seller growth here, 81% Y-o-Y. My first question is, when you see expansion in seller community of this space, are there any seller side incentives also that you're doing in terms of maybe lower fulfillment charges for a short period of time or whatever the case might be as you try to kind of ramp up this -- the seller community.

So today, we don't do this. Like there's no like incentive in the beginning for anyone to come on board. But in general, I think if you look at our overall penetration on the seller side, India is actually lower than the user side. On the use side, we have 250 million people out of and now potentially 1 billion people or maybe more. But on the seller side, there in India, about 60 million, 70 million sellers altogether, and we have less than 1 million annual transacting. So the because the penetration potential is quite large enough, they said now even non-GST sellers are allowed to sell online, which is a large mix of overall tele-based in India. We believe just by the need of people reaching every consumer this base, we expect will continue to grow at a faster base posting as people want to get access to this distribution channel. And we continue to invest more in product rather than incentives. Just make sure that people who come from any part of the country know any kind of language should be -- should find a product very easy to use and come online and start selling very quickly. So that's what we are focusing on, less on incentives.

And just my last question, if I can squeeze one in. So just thinking about the assortment available on the platform. And if I bring that into branded and unbranded, do you think that branded and unbranded can both coexist and both do fairly well. And in that context, could you partner more effectively bridge with branded manufacturers as well going forward? I'm just trying to understand if that category of assortment you think can do equally as well on the platform? Or if there's anything that kind of next these 2 things not exist that well?

Yes. And [indiscernible] Meesho Mall that we're just talking about is a very good example of that. It exists on our platform. All the big brands now are available across most categories, and they are continuing to grow at a very good pace. So I think it's less about branded unbranded. It's more about like serving use cases. So consumers who come into our platform for different use cases, prefer brands are unmanned. As I said, for Personal Care, like people even very deep into the country prefer brands all the time because they don't want to put something on their face, and they don't know. But in many other categories, like woman apparel, even [indiscernible] see a lot of people because they care about more variety, they tend to buy from all kinds of sellers. So I think it's consistence is not a question. Meesho Mall continues to grow at a very, very good pace, more brands come on board. They tell us that they're able to reach an audience for the first time that they could not before. So we will keep investing on both. We look at this as a problem of learning every single use case that our customers have across all price points and categories.

The next question is from the line of Aditya Suresh from Macquarie.

And congratulations on the listing. So 3 questions all around logistics. The first one is just on an absolute rupee broader basis. Can you talk through the movements in your logistics cost this quarter versus last? And are there any kind of accounting impact here for us to work through or can adjust for?

Sure. So I think directionally, there was a I think we've mentioned it in the RRP subsequently as well. There was a treatment change for some of our last mile costs related to Valmor which were part of which were between the periods, April 25 until September 25, but not part of either the revenue or the cost. And then subsequently, we had kind of brought them into the revenue as well as the cost base is the GST law change that has kind of happened. So on a Q-o-Q basis for the October, November, December quarter, you would see that increment sort of come in both revenues as well as costs. On a Y-o-Y basis, this was the same treatment that we had last year as well. So no change in terms of Y-o-Y trends. But on Q-o-Q trends, you will see this difference kind of be there.

The second piece of our delivery times, right? So like going back to as again, I understand that I think the average delivery time was anywhere between, say, 5 to 7 days. Is there any kind of desire or thrust towards moving this down more towards, say, 1 to 2 days? Or are you happy with the current kind of pace of delivery? I guess what I'm in to get it is, are we servicing is a completely unique different use case compared to what some of the other logistics play e-commerce players are catering to.

Yes. So I think I'll take that question. So I think what's happening is as a platform is getting diversified both on user and seller side. Now we have sellers across the country and users across the country. So on average, basically, that means that our network continues to get more and more complex. A lot of consumers in like one city would be buying from a very to more part of the country and the seller will ship from there in each here and vice versa. So I think in general, if nothing else changes, our split should slow down because we are serving more interline and more products are being picked some smaller places. What we have done is we have ensured that the speed stays in the same area. I think 1 to 2 days, unless people do, for example, where housing close to the customer, which many platforms do, you cannot do. I don't think it's possible in a marketplace format, so that's not a goal that we take. Our goal is obviously to be better than the last year, and we do that as our network gets stronger, better, more density as our business keeps growing. But our aspiration is not to be the fastest because we want to give access to the best products, best quality products, best price products to people and to have that last selection, people and the buying from sellers anywhere in the country.

And the final question I had was on -- a philosophical question, but how do you think about logistics, right, in terms of, let's say, kind of we invest in Valmor kind of it settles, we placed out, let's say, over the next say 12 months. any savings in logistics cost efficiency gains. Should we think about this as -- how do you think about pricing logistics -- is it -- should we think about this as a 2% to 3% spread on your actual cost? Or are you thinking about kind of keeping the gains and we see margin expansion. Just if you can talk through kind of philosophy how you think about logistics versus what you report as contribution margin.

Yes. So I think philosophically, this is Dhiresh. We tend to keep the logistics margin in a certain range. Now obviously, the last couple of quarters were different, but if you look at the historical trajectory as well as what we intend to do going forward, we keep the logistics margin in a certain trajectory, which is about 1.5% of NMD from a contribution perspective. And anything we gain in terms of efficiencies we have historically and expect to pass on in the future as most of the contribution margin growth that we expect in the future would come from monetization through other forms like ads and other services, value-added services that we provide to our status.

Our next question is from the line of Abhishek Bhanji from ICICI Securities.

First on growth [indiscernible] you have explained that there was a festive season ship in this year. But from what I understand, the overall e-commerce market would have actually grown at a faster pace in Q3 than Q2. So is there any reason why -- so is it slightly different for you guys in terms of lead times, et cetera, why the growth has panned out the way it has done?

So I think there's no different trend, obviously, given we have sort of slightly longer delivery time lines and our festive season sales starts sort of earlier or, let's say, in line with other kind of horizontal e-commerce platforms. That's why you see some of this shift like last year, for instance, our festive season sales started on 27 September, which was pretty much the end of that quarter versus it started in '19 September. So both in the baseline as well as kind of in current year numbers, this shift is kind of reflected. And that's why you had Q2 NMV growth of about 51%, which was which wasn't kind of the normalized sort of case. And in this quarter, you'd see about 26% growth. But on an aggregated basis, let's say, this is about 37% growth and that's the trend that we kind of continue to see.

That's very clear. In terms of the ad monetization bit, right. So I can let what you spoke about in terms of getting smaller sellers to really pay for things is very difficult. But do you think there is some room for some annual intervention on the ground series, people who can go and push for ad monetization. And will that come into your manpower costs going ahead?

Yes. So with it here, the way we think of our ad product because we have such a large seller base, I think we have taken a very clear approach of building out a product but it's very easy to use self-serve so that we do not have to go out and sell any product to them. And so far, actually, it's been a rig since we build our product. All of our distribution of our product is via our platform, which is basically the via app and web product, and there's no salespeople, and we see very good adoption. As long as you are giving great outcomes in terms of return on ad spend to our sellers, they easily figure this product out and keep ramping up their ad spend. So we see no need of having any sales team. We don't have a sales team. We don't plan to add sales team. And even in our -- any of our experiments and scale up so far, we haven't had the need and we believe that if you want to build a product that millions of businesses in India will use for us, you have to build a great product. I think sales is unscalable, like you can't get to 1 million people in cellars -- you have to do it via product only, and that's the prostate take.

Understood. And just one last question, if I can, which is, see, you have spoken about how a reduction in the cost of delivery is one of the key goals for you going ahead? [indiscernible] new launch around gig workers, et cetera, do you think that the last mile part of that cost is becoming more sticky? And does that impact your thoughts on how the cost of delivery can basically go down over the next 3 to 4 years?

Sure. I think just starting the impact of the [indiscernible] court that has kind of come in things still some degree of confusion that exists on different state versus central kind of loss. Having said that, I think a large expectation that we have in terms of reduction in the cost going forward does not come from any specific reductions on the last-mile delivery partner kind of [indiscernible] As I think in general, has the density of orders in a given time period increase and the earnings potential of those partners increase, there will be opportunities to kind of reduce that cost. But that's -- I think the overall expectation that we have going forward is coming more from overall network optimization, having a better design kind of network, more automation coming in, some more innovative models around how we can do last mile deliveries, et cetera, as well. And so we don't expect any sort of change in the expectations that we have on reduction of overall logistics cost even with the new court coming in.

We will take that as a last question, ladies and gentlemen. Thank you all for joining us on the Meesho Earnings Conference call. On behalf of Kotak Securities, that concludes this conference. You may now disconnect your lines.