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00:00Thanks so much for tuning in to Profit Insights.
00:11Consumption has become a big talk point, especially because we are entering the busy season.
00:16But not just that, the idea is to try and talk about the emerging trends or trends which
00:20have already emerged maybe, but have a very long duration.
00:24And while to the minds of the skeptic, it may seem that some of these have already run
00:29their course, to the mind of the optimist, maybe there is a long runway left and I think
00:35that is what I am going to try and probe today with somebody who looks at this space amongst
00:40others very, very closely, Rohit Chaudhary, he is Director Investments at Ytalk Capital
00:45and joins us right now in our studios to talk about that.
00:47Rohit, great having you.
00:49Thanks so much for taking the time out.
00:50Thank you Neeraj for having me.
00:51The pleasure is entirely ours.
00:52So I am told that you look at all things consumption amongst others.
00:56I do.
00:57And I will try and talk about two or three aspects of consumption.
01:01The first one is, let's say quick commerce, because ever since Swiggy's balance sheet
01:05has been released or the papers have been released, people have started comparing what
01:09is happening in that space, what is Zomato doing versus Swiggy doing and of course, what
01:14are the investing implications for this from a really long term perspective.
01:17Now my starting question is, are we looking at a space that has done a little bit but
01:28the larger runway of growth is still ahead of us?
01:32I think that would be true of all things consumption in India.
01:35There is a long runway ahead for pretty much everything.
01:38So I have a very strong belief and I think we at Ytalk share this belief that Indians
01:43will consume more and consume better of pretty much everything as long as of course GDP growth,
01:51etc. etc.
01:52The macros remain favorable.
01:54This is going to be the long term trend, right?
01:56So we are only at the cusp of the beginning of the consumption journey.
02:00That's point number one.
02:02Number two, as consumption grows, the business models around consumption will also evolve.
02:08The quick commerce space that you spoke about is really on the retail side.
02:14So even on the retail side, if you were to look at it, right, and compare India to a
02:17lot of other markets, whether developed or other developing markets, right, the development
02:22of modern trade, e-commerce, we are still a few years behind a lot of other markets.
02:27So as these new business models emerge and quick commerce is going to be one of those
02:31and it solves, quick commerce specifically solves a few India specific problems, which
02:36is why you've seen the rapid takeoff once.
02:39So proof of concept now is delivered.
02:41Question on how long is the runway going to be?
02:44Probably decades.
02:45Probably decades.
02:46Probably decades.
02:47Yeah.
02:48Very interesting.
02:49Probably at the tip of the iceberg here.
02:51How does this typically work out?
02:52So if we are at the tip of the iceberg, and some people would argue that the J curve has
02:56already been seen, so maybe food delivery or other dine out might be moderating a little
03:03bit to some people's minds.
03:04But then suddenly there is food delivery and then ancillaries crop up as well.
03:08So how does, how do to your mind, these businesses, let's say I'm using examples of Zomato and
03:12Swiggy, I'm not trying to nail down a particular company, or some of the others.
03:16How does the business model evolve to your mind, let's say, over the course of the next
03:20few years, since we can't talk about decades, really?
03:23Yeah.
03:24So let's take a step back, right?
03:25And you use the words skeptics and optimists, right?
03:29So even I was a skeptic, I would like to call myself an open minded skeptic, till a couple
03:36of years back on whether QuickCommerce would succeed or not as a business model.
03:41There is no question, or there was no question in my mind even then, on whether this is a
03:48use case, right, that is needed by the consumers.
03:52And as I was saying, it does solve a few India specific problems.
03:58I mean, the sheer population density that we have, traffic density, right?
04:02So while your nearest E-Mart, or a Reliance retail store, would probably be one and a
04:06half, two kilometers away, it is probably, you know, half an hour of effort to go to
04:11the store and come back to your house.
04:13QuickCommerce solves that problem.
04:16India has a lot of, in addition to stock up at the beginning of the month, you have a
04:20lot of top up spending through the month on grocery and other items.
04:25That's again a very, very unique Indian phenomenon in terms of the degree of top up as a percentage
04:30of overall basket, right?
04:33Again QuickCommerce solves for that, your last minute requirements, et cetera, et cetera.
04:37Now what changed my mind on QuickCommerce, right, what changed my mind really was sitting
04:42at one of these dark stores in Ahmedabad a couple of years back, through the day.
04:47I just wanted to see the thing in operation.
04:50And it opened my eyes to the kind of use cases I had not thought about.
04:56Maybe if you want to get into examples, the first thing I saw when I entered the store,
05:00and this is Ahmedabad we're talking about, right?
05:02You eat a lot of farsan and all that.
05:04So these 15 kg tins of edible oil, of edible oil, not something I would have expected to
05:11see in a QuickCommerce store, because in my mind, this was really, you know, serving customers
05:17or households, top up.
05:21When I reached the store at 8.30 in the morning, and the first order I saw, you know, come
05:26in was for a contraceptive, 8.30 in the morning, right?
05:30So there was these unique business cases or, you know, business cases that are use cases
05:34from a customer perspective that I saw.
05:36I saw an order for just a single pack of lees.
05:39Now this, of course, must be a cranky kid at home, you know, with maybe only one parent
05:46around, busy, et cetera.
05:48She didn't have the time to go down.
05:50So she actually paid 30 rupees delivery charge to get a 20 rupee pack of lees.
05:56I saw many such use cases that opened up my mind.
05:59The second one was really a personal experience where, you know, my kid, he was in, I think,
06:048th grade at that point in time, needed a lab coat for the next morning.
06:10And he totally forgot about it and asked me to get one at 10.30 in the night.
06:15Checked blanket, it was there, right?
06:18So that really opened, in some sense, the world of use cases that this model was going
06:23to serve.
06:25And being an open-minded skeptic, you know, started working more on the theme and saw
06:31a business case evolving.
06:33Yeah.
06:34Okay.
06:35So what is this business case now going ahead?
06:37Let's say the next few years.
06:39What's the kind of growth that you envisage?
06:42Is this a winner-takes-all market or the top two or three players are breaking the lion's
06:47share?
06:48And do we have those established already or could newer entrants come and challenge it?
06:52There are two or three questions there.
06:54One is, you know, what could be the growth rate?
06:56Now, very, very difficult to say.
06:58So even the best of crystal balls would not be able to do justice to this question, but
07:02let me give it a shot.
07:03We are talking about a broader time.
07:05If I were to look at grocery plus plus, there are certain other use cases that have emerged,
07:08whether it is electronics, toys, games, etc.
07:11You know, that quick commerce guys have started serving, right?
07:14We are probably talking about somewhere between a 700 to 900 billion dollar overall spending
07:19on categories that quick commerce companies now stock, essentially, right?
07:25This is of a total, you know, if you were to look at total consumer spending, that's
07:30upwards of two trillion dollars, right?
07:31That's your private final consumption expenditure.
07:33So we are talking about a 700 to 900 billion dollars overall, you know, sizes of the categories
07:39that these guys are now serving.
07:41Now you'll have to then start taking cuts to this, right?
07:44This model needs a certain level of population density, requires a certain, you know, density
07:50of SECA population class, maybe B+, right, which it appeals to and serves well.
07:56If you were to do all those cuts, take the city cut, which, you know, offers that population
08:01density, take the population cut from, you know, by SEC classes, etc., etc., you're probably
08:05looking at maybe a tenth of the market being serviceable today.
08:09Now that's your serviceable addressable market.
08:11You can apply then another cut to it, which is profitable serviceable addressable market,
08:15right?
08:16You know, your dark stores have to be viable as independent units.
08:20That's really the core of retail.
08:21Right.
08:22The core of retail is your model has to be profitable at a store level.
08:25Yeah.
08:26Yeah.
08:27Now how many such dark stores can be there?
08:28We already have, you know, a blanket which has crossed 600 stores, Swiggy is close to
08:32560, Instamart, Zepto probably somewhere between 350, 400 at this point in time.
08:37So you're probably big basket, add big basket, add, you know, a couple of others who've tried
08:40Flipkart minutes and all, we're talking 2000 stores, right?
08:43Now this number can be materially higher.
08:45You have Blinkit's own guidance at 2000 stores in the next couple of years.
08:50I think others have similarly aggressive plans as well.
08:54As use cases emerge now, how will this market grow?
08:59You will have new households adopting, you know, or warming up to QuickCommerce as a
09:04service because the utility is there for a lot of households.
09:08And then once it becomes a habit, you also get higher frequency of orders from households
09:14who are already using the service.
09:15This is how the market will expand.
09:16And we have seen improvement in both these metrics, new households coming in as well
09:21as frequency going up for the last few quarters.
09:23It has actually been a J curve, right?
09:26As things stand today, I think last year all these players put together did about four
09:29odd billion dollars in GMB.
09:31This year probably we could see all these players combined hit seven to eight billion
09:35dollars.
09:36Now, if I talk about the overall TAM that I spoke about, we are probably looking at
09:40maybe 1% share of this 800 odd billion dollar TAM, but more cuts that needed to be applied.
09:46You are still high single digit maybe.
09:48And this number can keep growing.
09:50So you effectively saying then it may or may not, we don't know, but it wouldn't surprise
09:55you if we actually see between a 50 to 100% CAGR for the next five, seven years.
10:03Tough to say lower end of that probably, because we are talking seven years over a
10:08seven year period.
10:09There is a huge difference between what is there right now, but still between 25 to 50%
10:15CAGR won't surprise you.
10:16Won't surprise me.
10:17Won't surprise me.
10:18In fact, next couple of years should be even better.
10:20Okay.
10:21Are the established players the ones which will take the lion's share of this growth
10:24or could newer entrants come in because they will also be need to be deep pocketed.
10:27So I'm guessing even anybody who thinks of this will also be a deep pocketed player.
10:31Are the players established?
10:33So what we are really talking about is, are there barriers to entry in this industry?
10:37Are there barriers to scale in this industry?
10:38Are there barriers to thrive in this industry?
10:41So I mean, often we talk only about entry barriers, right?
10:44Certain industries, certain sectors, it's easy to enter, difficult to scale.
10:49Certain sectors it is easy to enter and scale if you have capital, but then it is very difficult
10:53to thrive.
10:54Right.
10:55One other example from the retail universe that I can think about is QSRs.
10:59Very easy to enter.
11:00A lot of money.
11:01Right.
11:02Easy to scale as well if you have capital.
11:05But how many players have succeeded?
11:06Exactly.
11:07It's very difficult to thrive.
11:08So if you have to apply the barriers to thrive, I think that is where things will become difficult
11:13for new entrants.
11:14And you have some deep pocketed, you know, players in the industry, I don't want to name
11:19them, who've, you know, started, who've already either entered in a small way or are thinking
11:24of entering because their business models are getting challenged.
11:27If you think of horizontal e-commerce companies, think about, you know, modern retail, there
11:32is some delta or impact on growth rate even there.
11:35Right.
11:36So some of these players will enter the space.
11:38Now, what makes this business, in my view, difficult to thrive in?
11:41Because there is a huge, is because there is a huge learning curve involved.
11:46No amount of capital can, you know, sort of short change or short, you know, give you
11:52a shortcut to that learning curve.
11:54Got it.
11:55Right.
11:56Okay.
11:58So that is the moat, if I can use the term, that some of the incumbents have.
12:02Okay.
12:03Right.
12:04Whether it is learning curve on the tech side, whether it is learning curve on understanding
12:08the consumer.
12:09And you have to remember that you try and understand consumers at a hyperlocal level
12:13in this business.
12:14So it's at a pin code level that you start understanding the consumer dynamics.
12:20And the fact that AI and data helps you.
12:22Yeah.
12:23Even in a Mumbai, what sells in Borivali could be completely different from what sells in
12:26Colaba.
12:28Absolutely.
12:29And that learning over time.
12:30Got it.
12:31Accumulates.
12:32And that is difficult to duplicate.
12:33Got it.
12:34So my last question on this, before we move to retail, is that when you are making an
12:37investment case, you're building out a hypothesis, you hope that it will work out as well.
12:42So in your investment hypothesis, I heard you say at the start that it's decades of
12:47growth ahead of us.
12:49Maybe it's hyper in the first next four or five years, six years, then maybe cools off
12:53a little bit as well.
12:55But would you reckon that outsized investment returns in some of the well-managed quick
13:03commerce companies over the course of the next few years is a distinct possibility?
13:11I would think so.
13:12It's, you know, returns are not just a function of how fast an industry grows.
13:17It depends on a lot of other factors.
13:19You know, you're starting valuations.
13:21Yeah.
13:22Right.
13:23How does profitability shape up?
13:24How does the, how do the ROC characteristics of the business shape up?
13:27I want an easy answer here.
13:28You know the starting valuations now.
13:30To your question.
13:31Swiggy IPO.
13:32There is a Zomato out there.
13:33There's Zepto, private markets valuations.
13:34So from here on, do you reckon that investors?
13:36Since you asked me whether it is a possibility.
13:39Possibility.
13:40Yes, it is.
13:41Okay.
13:42But a decent possibility.
13:43There is a decent possibility because, you know, it's not just businesses alone.
13:46So, you know, our assessment of businesses sometimes is limited by what we see and the
13:52limitations of our own imagination.
13:54Yeah.
13:55Right.
13:56These businesses evolve.
13:57So.
13:58Most certainly.
13:59I get your point.
14:00By the way, viewers, keep in mind, nothing out here, any chance we will not discuss stocks,
14:03but nothing out here will be an investment recommendation.
14:06More a fleshing out of a thought process that Rohit has.
14:10So, Rohit, so lovely talking about this first aspect.
14:12I would like to dovetail a little bit into the other aspect of consumption, which is
14:19retail, because there is a connection out here.
14:21Now, fascinating developments in retail in the recent past.
14:25If Trent has done to the shopping experience, what it did just this week, we also learned
14:33about they also venturing into lab-grown diamonds.
14:35And I don't want to make this a Trent conversation, but I'm saying that modern retail is evolving
14:39into categories that we didn't think were possible some time ago and creating giant
14:45businesses out of them.
14:47How do you look at retail currently when you look at it from an investability perspective?
14:52Sure.
14:53And since you mentioned Trent, I am making an assumption that your question is specific
14:57to physical retail.
14:59For now.
15:00Let's start with that.
15:01So, the obituary of physical retail has been written many a times in the last at least
15:0620 years.
15:07And it has been partly true.
15:10You know, you've had a large number of businesses fail in this space.
15:15If you look at the U.S., right, a lot of these places like ghost malls and all, you
15:21know, have entered the lexicon in the last couple of decades, right, so partly true.
15:25But then at the same time, there are retailers who have thrived, physical retailers who have
15:29thrived.
15:30They've reinvented themselves and have thrived.
15:32Now, what are the vectors on which you can thrive in physical retail, right?
15:35You have to offer the consumer who has the choice of shopping on an Amazon or a similar,
15:42you know, e-commerce platform.
15:43You have to give that consumer a strong reason to come to your store and shop, right?
15:49That's really what your job is as a physical retail player, right?
15:54Now, what could these reasons be for the consumers to come and shop, right?
15:59And I've thought through this, I and the team at Y2, we've thought about this a lot.
16:05And we have sort of, you know, seen that retailers who have done well, physical retailers in
16:10the last couple of decades, despite the threat of e-commerce, a very real threat, right,
16:15is retailers who have offered the consumers either superlative experience or superlative
16:22value.
16:23If you're caught somewhere in the middle, and there is an author consultant called Steve
16:30Dennis, he calls it the boring middle.
16:32The boring middle.
16:33So you can't be in the boring middle and thrive or even survive in the long run.
16:39So as a retailer, you know, the spot you need to not be in or avoid is the boring middle.
16:46Either differentiate on experience, think of Tanishq, right, superlative experience
16:50in the sector that it operates in.
16:52As a jewellery player, right, Tanishq really differentiates, among other things, on experience.
16:58Or think of a DMart, which is on the value axis, right?
17:01Ultimately, you have to deliver a wow on one of these two.
17:06What DMart delivers is a positive sticker shock.
17:10You look at the price and you go wow.
17:12True.
17:13What Tanishq delivers is a positive experience, right, a differentiated positive experience.
17:19So if you stand for one of these two, the second aspect is retail is also about making
17:28a lot of choices in terms of what your business model is going to be, what are you going to
17:31sell, to whom are you going to sell.
17:33The more sure you are of each of these aspects, and you keep becoming better than your competition
17:39on the choices that you've made.
17:42And you mentioned Trent.
17:43Trent is a classic case study on being very clear about what they do, and at the same
17:49time being very clear about what they do not do.
17:52And they've kept on getting better at what they do.
17:54And that shows up in the way Trent has outperformed its peers.
17:58Interesting.
18:00So do you reckon that companies by and large which have chosen either end and successfully
18:06kept on expanding their moat or the entry barrier or their expertise into that have
18:12a larger chance at longevity?
18:14Because in physical retail, yes, the obituary for the format may not have turned out to
18:19be true, but individual obituaries have turned out to be true.
18:23And companies which were once thought to be infallible have fallen by the wayside.
18:27So what is the learning here?
18:29How does one bet on companies or how does one build a hypothesis that this is a business
18:35that is likely to survive the test of time?
18:37Of course, if it doesn't, then you change, which is fine.
18:40But right now, when you think of a business, how do you decide what are the determining
18:43factors and are starting valuations a concern?
18:47Because again, I'm just using this as an example.
18:49But every single point of time, people have called out Trent valuations as being expensive.
18:53The stock has delivered phenomenal returns over the next few, right?
18:57So I'm just trying to understand how do you approach this space, therefore?
19:00Sure, I'll probably start with a quote I read sometime back and has stuck with me.
19:05This was a German philosopher, I forget the name, he said, you know, talent, it's a target
19:12that no one else can hit.
19:14But genius, it's a target that no one else can see.
19:18So what you your job as an investor, really, right?
19:22If you can separate geniuses from talents, and talents from non-talents, right?
19:28Even this latter, which is just to identify talent, right, will, you know, will stand
19:33you good as an investor in terms of finding attractive investment opportunities.
19:37But if you can find that, you know, those one or two geniuses that will emerge, right?
19:42And while it's not a winner-take-all market, right?
19:45The geniuses do end up creating disproportionate value.
19:49It's easier said than done.
19:50There are no, I mean, there's no, let's say, set of characteristics necessarily, I think
19:56it differs by subsectors that you're assessing or the company that you're evaluating is present
20:02in.
20:03Right?
20:04So what Trent has done in apparel, the sort of choices they've made, right, being laser
20:08focused on what they do and what they do not do, as I said, right, may or may not apply
20:14in some other, you know, subsector within retail itself, right?
20:18So Trent may not succeed as a QSR player, just saying that, right, hypothetically, yeah.
20:24So you need to be clear on what you think are, you know, sort of the factors that will
20:33determine winners in the space that a particular company has chosen.
20:39And this, again, as I said, will be an evolving list, right, as businesses evolve, consumers
20:44also evolve, competition also evolves.
20:47So what geniuses do well, right, is they lead this evolution.
20:54They shape the curves, right?
20:57Talent can follow the curve very well, do well.
21:00Geniuses actually shape, shape curves in whether you're talking about FMCG companies, they'll
21:04shape their categories.
21:05For any company, right?
21:06For any company.
21:07Any business.
21:08In any business, right?
21:09So what you're looking for is some of those characteristics and it is a lot of soft factors.
21:14I think the most important is, I think you have to look at the choices being made.
21:18If you see any confusion there, in terms of what to do, what not to do, generally not
21:22a good idea to think of that company as a long-term winner.
21:27Clarity of business model, clarity of choices, and retail is a business of, you know, a number
21:33of choices that you need to make, right, from, you know, it's a business of detail, right?
21:38So right from what store format, store sizes, what are you going to stock, who are you serving,
21:43what are your price points going to be, shop, lot of stuff.
21:47So it's a business of detail.
21:48There are a million ways to die in retail, and companies that can avoid all of those
21:52million ways have a chance at succeeding.
21:55But that's difficult.
21:56So now we have one and a half minute left on the show.
21:57What I want to understand is, do you believe that the genius that you may have identified,
22:04if the starting valuations are a hindrance, it might still be okay to bet?
22:07Because like I said, I mean, a lot of these genius companies, and let's say a retail investor
22:11watching this right now would look at it and say that, okay, this company seems to
22:15have done okay.
22:16But I hear every time on television that it's an expensive one.
22:19Yeah.
22:20How does it approach that?
22:21We have 60 seconds.
22:22So a couple of things.
22:23One is, you know, clarity on what metric you're evaluating these companies on.
22:27What would the right metric be?
22:28So you need to, one, you need to have a long term view.
22:30Second, you need to think of the cash flow characteristics of the business as opposed
22:33to the more popularly used, you know, valuation metrics like PE, EBITDA, et cetera.
22:38So once you take that cash flow centric view, once you have a long enough time horizon,
22:42right, and think of where a particular business could be five years out, 10 years out, as
22:48opposed to, you know, just focusing on the next one or two years, I think, I think it
22:52will be fine.
22:53Even navigating this valuation challenge, which what you're saying is absolutely right.
22:58It's a challenge.
22:59Got it.
23:00Right.
23:01Fabulous.
23:02But this leaves me wanting for more.
23:03So we should try and do this more often.
23:04But thank you so much for joining us today and giving us your thoughts.
23:05Thank you, Neeraj.
23:06Thanks for having me.
23:08My pleasure was ours.
23:09And viewers, thanks for tuning in to this leg of Profit Insights.