Urban Company Limited (URBANCO) Earnings Call Transcript

Good evening, ladies and gentlemen. Welcome to Urban Company Limited's Q1 FY '27 Earnings Conference Call. We have Mr. Abhiraj Singh Bhal, CEO and Co-Founder; and Mr. Abhay Mathur, Chief Financial Officer from the Urban Company management team on the call today. [Operator Instructions] Please note that this call is being recorded, and the audio call and the transcript will be available on the company's website. Additionally this earnings call is scheduled for a -- our results and shareholder letter has been published to the exchanges and uploaded on the company's IR website. Before we begin the call, I would like to remind all the attendees that some statements or comments made on the call today by the management can be deemed as forward-looking and hence, may involve certain risks uncertainties and uncertainties. Such statements or comments are not guarantees of future performance, and the actual results may differ. Over to Mr. Abhiraj Singh Bhal for the opening remarks.

Thank you very much, [ Bala ]. Good evening, ladies and gentlemen, and welcome to Gold Company's Q1 FY '27 Earnings Call. Let me start by saying that Q1 was a very strong quarter for us, one of the best perhaps in the history of the company. Growth was broad-based across the business and our core business became even more profitable. Getting to the specifics. On a consolidated basis, Q1 NPV grew 42% year-on-year to reach INR 1,465 crores and revenue grew 44% year-on-year to reach INR 528 crores. Total orders reached 13.2 million, which is up 79% year-on-year. We also added around 1.2 million new customers, crossing the 1 billion mark for the first time in the quarter, and our annual transacting user base grew to 9.3 million. Now I'd like to highlight four important takeaways or points before we start the Q&A. The first is that our core India services business of InstaHelp is accelerating and is accelerating with margins improving year-on-year. India Consumer Services grew 29% in NTV year-on-year to reach INR 1,056 crores, the first time it crossed INR 1,000 crores of NT in a quarter. This is the fourth straight quarter of acceleration, up from 10% same time last year to 19% to 21% to 26% to 29% year-on-year growth. Adjusted EBITDA margin was 6.9% of NTV, up from 5.2% in the same period last year. Our core business continues to compound well based on consistent quality, customer trust, increasing partner earnings and densification of our -- the second point I want to highlight is that our international business is now scaling fast and profitably and will become the second core profit engine of a company in the coming periods. NTV grew 76% year-on-year to reach INR 237 crores. Both UAE and Singapore delivered profitable growth. Our JV in the Kingdom of Saudi Arabia also grew very well with margin improvement. The third point that I want to highlight is that native continues to demonstrate strong growth with improving margins. NTV grew 51% year-on-year to reach INR 119 crores and net revenue grew 60% year-on-year to reach INR -- adjusted EBITDA loss narrowed to 7.3% of NTV from 11.4% a year back, so an improvement of 410 basis points. As our early water purifier cohorts complete their first replacement cycle, about 75% of them are [ newilters ] to us, which adds a recurring high-margin revenue stream. Fourth, Instant Health is our largest investment today, and this business continues to scale. We delivered 3.82 million orders, up 43% quarter-over-quarter. The adjusted EBITDA loss stood at INR 132 crores Loss improved from INR 447 in Q4 to INR 346 in this quarter as micro market density build up. We are investing aggressively in Health to cement our leadership for a category that we believe is of strategic importance to our company. We have also articulated in the shareholders' letter a better view on the size of the price. We believe the addressable market in the top 15 cities ranges anywhere from INR 7,000 crores to INR 12,000 crores. Given the competitive dynamics, we have shared what we can on Instant Health in the shareholders' letter and will not go beyond that on this call. consolidated P&L, if I talk about that, adjusted EBITDA loss stood at INR 65 crores, but this was almost entirely driven by the loss of INR 122 crores. Excluding Health, the rest of our operations delivered an adjusted EBITDA profit of INR 67 crores, which is more than 100% growth from the same period last year, specifically about 116%. I also want to highlight that we ended the quarter with INR 2,019 crores in cash and treasury investments on our balance sheet, which is only about INR 2 crores lower than where we ended the last quarter. So our balance sheet remains very strong, and we continue to have a very strong and core profitable even as we invest in -- we continue to retain our guidance of consolidated adjusted EBITDA breakeven by Q3 FY '28 and INR 1,000 crores in adjusted EBITDA by FY '21. With that, I will hand it back to [indiscernible] to open the Q&A.

[Operator Instructions] The first question is from the line of Mr. Gaurav Rateria Morgan Stanley.

Congratulations on great performance. My first question is on your proposition around cheaper, faster, better that you talked about and the flywheel is working visible in the last 2 quarters in acceleration. At what point in time we can make a very bold statement that the growth trajectory has shifted north side from a India Consumer Services NV growth perspective because this flywheel is suddenly now giving you results that we have been waiting for some time.

Yes, that's a good question, Gaurav. I think the -- I'll just take a minute to talk about this slide that you referred to. As we've articulated in the letter as well, our India Consumer Services business is not a single marketplace. It is actually 50-plus service categories across hundreds, if not thousands of micro markets. And therefore, we have to build up this density across all of those service micro market combinations, while ensuring that our quality is not just consistent, it actually improves year-on-year, earnings for partners improve year-on-year and the overall fulfillment times keep coming down. Now this is a flywheel that starts to retain better with densification. As the category across micro market combination densifies, partners end up getting utilized much better. Consequently, their earnings improve and the churn comes down. Partners tend to then spend a lot longer on the platform, they become more tenured. And because their earnings are improving and they're more dependent on the platform, our ability to invest behind their quality, their training, the SOPs, the tooling and the technology that improves further. This improves the end user quality builds on trust and very interestingly also brings down the fulfillment time. And this has allowed us through the last 2 quarters to roll out UC Instant, which is basically getting all our core services, be it salon, cleaning, repair, nutrition plumber, carpenter, et cetera, et cetera, between 30 to 60 minutes. So users don't have to wait and plan. And that further improves the word of mouth, improves usership, improves user retention and frequency. Now this is what we're seeing play out -- it has been playing out for the last few quarters. At what point can we go out there and make a bold statement around our growth. I think as management, we have always refrained from giving any forward-looking guidance on this business. We believe the business is compounding really well. We believe the growth is accelerating. And more importantly, this is not coming as a trade-off with margins, it's actually coming with improving margins. Our long-term guidance of this business was 9% to 10% adjusted EBITDA margin as a percentage of NPD. And this quarter, we've already demonstrated that we are at 6.9%. So we feel fairly confident of reaching that long-term guidance. I do want to highlight a couple of things so that we also don't get ahead of one is that year-on-year growth that we are seeing the base, which is in the previous same quarter last year, the growth was a bit muted because of unseasonal rains and monsoon. So there's a little bit of that impact as well in the acceleration. Yet we feel on the whole the acceleration is broad-based, secular and strong. The second point I do want to highlight is that our margins in this business tend to have a certain spikiness in the AMJ quarter as well as in the O&D quarter. And therefore, margins are best visual -- year-on-year also, the business has delivered a very healthy 170 basis points improvement in adjusted EBITDA margin. So overall, I think we are very happy with where things are. We want to continue to focus on what is in our control, which is focus on user quality, focus on fulfillment, focus on partner excellence and enablement. Growth is an outcome of that. It's not really in our control. And we are obviously chasing as fast growth as we can.

My second question is on the InstaHelp segment. I saw that you have put out a TAM estimate this time. And you also made very transparent and prudent comments around structural why should margins be lower in this business compared to the core India consumer business, right? And -- so just trying to understand why this segment should deserve this much of time and attention and bandwidth of the management. Is it also the fact that the competition using this segment can start venturing into the other core categories that we have? Do they get any right to win in the core categories just because they are present in this segment? So just trying to understand various strategic aspects of how we are thinking through from a medium-term perspective on this business.

Yes. Gaurav, so -- a, we think is strategically very relevant to our platform. It is a high-frequency category, allows us to enter the home on a weekly basis rather than a monthly or quarterly basis, which is the frequency that our core consumer services business enjoys. if we invest ahead of the curve in this category, I think it creates a very strong moat around our core business, allows us to use the app multiple times a month. And long term, we think that will be very beneficial for the overall platform. So the first point I want to make is that our investment in we see beyond just the ROI from the category itself because we visualize the category in the larger scheme of the platform that we are -- the second point is our view of the TAM. And we've given a bottom-up assumption on where we think the TAM is in the top 15 cities and our view is it's anywhere from INR 7,000 crores to about INR 12,000 crores. Given that view of the TAM, I think it is even more important for us to be aggressive and capture that TAM and capture a disproportionate share of the profit pool of that TAM. And that's one of the reasons why we have been aggressive and we will continue to be with the scale of...

Got it. Last question from me on capital allocation framework. By 3Q FY '28, you would get to close to breakeven at the consol adjusted EBITDA level, right? So would that be a time when you would start thinking about allocating more capital to new segments within the existing categories like native or trying to figure out what could potentially help you to further expand the overall addressable market in each of the places, like maybe new geographies in international business. So just trying to understand like how are you thinking through from a capital allocation perspective from a 2-year perspective?

Yes. So -- from a 2-year perspective, if I go segment by segment, I think the India Consumer Services business will continue to remain profitable and cash out. We will continue to be disciplined in our execution and grow with sustainable margin improvement. We are not looking to squeeze all the margins out overnight. We want to be disciplined and maximize growth while ensuring that there is steady improvements in margin. Some quarters it will be up, some quarters it will be down. But directionally, I think the India Consumer Services business will be a cash-generating business going forward. We hold the same view for Internal UAE and Singapore, which are wholly owned subsidiaries are profitable, and we think they will continue to remain profitable. We want to maximize growth there. Again, we don't want to maximize profits in the short term. We think the market runway is tremendous, and these are growing at a very, very healthy clip, as you can see. So we want to maximize the growth there while making sure that these businesses remain profitable. Our joint venture in the Kingdom of Saudi Arabia is also growing exceptionally well, and we now believe that we have line of sight of profitability in the coming quarters in that JV as well. Coming to native. I think [ native ] has done exceptionally well in terms of growth and margin. Again, something similar, I would say, for where we now have line of sight of profitability in native over the next few quarters and the incremental capital between now and when native starts to generate cash in our view, will not be very substantial. So the real area where we are investing today. I think in Health, fair to say over the next 2 years, if not longer, we'll continue to take investments. InstaHelp, we are evaluating quarter-on-quarter what is the right level of investment. And as our view of the market of the competitive intensity and the size of price is evolving, so is our view on capital allocation. I think you're right, when we get to that overall adjusted EBITDA breakeven stage hopefully in the next 18 months or so, then it will be an important point in time for us to step back and start to our capital allocation framework where to deploy the capital on our balance sheet to grow faster. I don't see us entering any new international markets. I think we are focused on India and focused on deepening our penetration in India. And I think that will be where most of the...

Our next question is from the line of Mr. Manish Adukia from Goldman Sachs.

Great set of results. My first question actually is Abhiraj, a follow-on to your last comment that you made to Gaurav's question where you mentioned that no plans to enter any new international markets. Now given just your track record in the three markets where you operate in particularly UAE and Singapore, which not only have continued to accelerate growth or continue to grow really fast, but have also now shown a proven model of profitability. Why should you not be able to export that same model to a few other markets and expand it, particularly when your India core services is generating cash, your native you say will become profitable in a few quarters. And InstaHelp, I'll come to in a bit as a second question, but just trying to understand that part a bit better as to why would you not enter new geographies when you already have a playbook of making them profitable while growing...

Thanks. part answer to your question. One, I think purely from a management bandwidth standpoint, we have our hands full with the India business opportunity as well as actually doing justice to the opportunity in UAE, Singapore and the JV in Saudi. We believe these markets are only getting started. As you can see, the growth rate is extremely healthy, 76% year-on-year growth in NT terms even if I remove the currency impact, it's a very healthy 58% year-on-year growth. And the opportunity size is large in these three geographies is extremely large in India. So we want to make sure that all our attention as management goes into doing justice to these opportunities. That's the first and probably the most important -- the second is, I think I also do want to trivialize what it actually takes to enter and win in the market. It takes much more than just great execution. Often, the playbooks have to be customized for that particular market. And you need, to be honest, a little bit of good luck and timing and fair winds on your side as well. We've had that with us in UAE and Singapore along with just exceptional execution by our teams there. But we've also seen the flip side of this in Australia and the U.S. back in the day when we had launched them pre-COVID and around COVID, and we didn't have the fairness of luck. So we've seen the story about internationalization play out over a few years. And I think what we've concluded is that the markets where we are present are very large, and we are better off as management, focusing all our attention and energy on these markets, particularly India. Maybe in a few years, we may change that thought process. But at least for the next few years, I think we have our hands full with the opportunity that's available in India and UAE, Singapore and the Kingdom of Saudi Arabia, and we will be sharply focused on this.

That makes a lot of sense -- my second question is on India core services and the margin profile of that business now given that in 1Q, you're already closer to 7% of NTV and you've guided for 9% to 10% of NTV, which now seems a lot more, let's say, near to medium term than where it was maybe earlier. Do you think -- and given that growth is still accelerating for the business, do you think now there is the probability that you may actually do better than what you've guided on that 9% to 10% margin profile and exceed that number? Or would you intend to cap that margin at 10% or thereabouts and beyond that, whatever the margins are, you will just look to reinvest in growth. So any color there would be helpful.

I think our goal right now is to get to that number not be in a rush to get to make sure that do justice to the market opportunity and the TAM and prioritize growth above all. Thankfully, in this business, growth and margins are not each other. The faster you grow, the more margin you unlock and we've demonstrated that consistently in the past few quarters and years. So I think priority #1, very, very clearly in that business is to grow fast. And priority #2 is to continue to show margin expansion. I think once we get to that 10% -- we'll have the optionality to decide, do we want to take it up further? Do we want to start reinvesting back to grow faster and keep it at that level, et cetera. And we take the right call for the business at that point in time. I think we're still some distance away from that. So right now, the focus remains doing justice to the opportunity ahead of us in terms of growth and ensuring the improvement in margins year-on-year.

Very clear. My last question is on InstaHelp. And again, maybe just delving a little bit deeper to your response to Gaurav's question earlier. Firstly, from a market position and profit pool perspective, like you said, you think you should be able to capture a disportionate part of that profit pool at some point in time. But given that you have revisited your TAM assumptions this time around and are also calling out explicitly that margins here would be structurally lower than the core businesses. At least now, do we have enough comfort and confidence that this segment can be profitable at all? And without assuming material consolidation, let's assume that there are two players in the market. Even in that scenario, do you think that this segment could at all have any profit pool in the foreseeable future? And second, even if in a scenario where it does not have a profit pool and given what you articulated earlier about this segment being strategic and how it drives engagement for your core business, as long as the business continues to operate in a narrow loss range, would you still be okay to continue to operate it in the medium term, even if the profit pool is not large enough, like your thoughts...

Yes. So let me delve a little bit deeper into both the TAM and emerging from the TAM, our view on the profit pool and how we want to execute. So the TAM, as we've articulated in the letter in our view is between INR 7,000 crores to INR 12,000 crores. There is a base case assumption, which assumes 7 million to 8 million monthly transacting households doing 3 transactions a month at the full price of INR 300 or INR 200 per hour. And just to put things in perspective, that already assumes that the annual transacting users will probably be around 20 million households because that's usually the ratio in which the monthly transacting users interplay with the annual transacting users. We've seen that in our core business. We've seen that in other categories like food, et cetera. And there is a bull case where we are able to unlock a model that goes beyond the walking model that we have right now and do it profitably. The TAM in the top 15 cities can perhaps expand to 10 million to 12 million monthly transacting households. And that automatically translates into INR 10,000 crores to INR 12,000 crore NTV. Now I would also want to call out one specific thing around this TAM in the nature of it -- if you actually look at the -- and there's an old adage, right, that gauge someone by their actions, not by their words. So if you actually look at the actions of the three players in the market over the past 6 months, actually, all of us have limited ourselves to micro markets where the household coverage that we are covering today is only about 3.5 million to 4 million households. Most of the investment today is actually not going into expanding coverage and expanding lots of new users into the TAM, but it's actually going into artificially subsidizing orders largely of repeat users. And Urban company that beauty of doing this as everybody else because there's a certain competitive dynamic, and we are prioritizing leadership right now above -- so we believe it's a matter of time before the market -- the broader market is able to see what we already see in our most penetrated micro markets, our assumptions on the TAM that we've laid out because we have a full understanding of all the micro markets that can be served well in the top 15 cities coming from our core business, et cetera, et cetera. The bull case assumption that we've given here of INR 10,000 crores to INR 12,000 crores is actually that now. It is a bull. And we're not being conservative in this range of [ TA ]. Our base case assumption is 7,000 to 8,000 and aggressive assumption is 10,000 to 12,000. Our conservative assumption would be even lower. And that conservative assumption would assume that usership falls as the prices go all the way to $300. In this TAM assumption, we have assumed that usership does not -- it remains at that three orders per day level. So that's just the view on that. Now given this view, we believe that it is even more important for us over the next few quarters to be aggressive. We are opinionated about which micro markets within the overall addressable TAM matter and how do we win disproportionate share in those micro markets and how do we win disproportionate share in this early TAM. And we think this battle will largely play out in the next few quarters, which is why we want to be very aggressive right now so that, a, we capture disproportionate share of the TAM and b, capture disproportionate share of the profit. When will the pricing correct to its full potential, very difficult for us to say. But whenever it propionate share of the TAM and the more profitable segments within that TAM is likely to enjoy the maximum share of the profit. That will see the least correction as far as volumes are concerned when pricing goes up. That player has maximum likelihood of breaking even and eventually running this business slightly profitably at a very low margin. We've also articulated that we don't think the margin profile of this business, given everything we understand will reach anywhere close to India Consumer Services. It will be in all like low single digit. We certainly have no intention of making any money from this business over the next 5 years. And our assumptions this business has to breakeven by FY '21. We'd be happy...

Next question is from the line of Mr. Sachin Salgaonkar from Bank of America.

Congrats on a great set of numbers. I have three questions. First question, let me start on InstaHelp. Now both your competitors in this space are actually of the view that AOV of the segment is not going to increase and it might remain low. What gives you comfort that the steady-state AOV could be eventually at 300 if both your competitors actually believe that directionally AOV will be relatively low?

Sachin. We've articulated that the AOV has to get to around INR 300 for this business to let me explain why Today, on average, our view is that sustainably the service professional has to be paid about anywhere between INR 130 to INR 160 per hour. Let's take a rule of thumb of about INR 150. Why INR 150? Because at best, even if you achieve incredible utilization at full potential, you can utilize the service professionals in a month by about 140 to 150 hours. 150 hours assumes that they are working 2 days in a month and you're utilizing them for 6 hours of utilize on a base of maybe 8 to 9 hours of time that they give you, which is around 65%. At that point, then net earnings will clear the threshold of about INR 20,000 to INR 2,000, which we feel is minimum required for this category to be attractive to be able to get supply side from offline where they are making around INR 15,000 to INR 17,000. So that's why there is a range of 100 to 160 150 sort of the very minimum sweet spot in our view. Unlike quick commerce beyond the point, like this category, there is benefit of utilization and densification. But beyond that, that benefits out at a certain point in time. So it's not that you can keep utilizing this individual more and more and more. And if you squeeze the pay too much, then it shows up in other means, which is more churn, therefore, more onboarding costs, more training costs, et cetera, et cetera. So one way or the other, our view is that sustainable pricing and sustainable earnout is at that level. We have a view based on 11 years of operating across 50-plus categories, having seen this play out many, many, many times over. I would not like to comment on how prudent the view of our competitors is. If the category has to clear gross margin breakeven at INR 150 an hour, then for all the other costs that we incur, which is customer support, marketing, team costs, training costs, et cetera, et cetera, we believe that the pricing has to at least be at INR 200 per hour there at that point in time, how user behavior evolve. We've seen evidences of category getting there in micro markets that are not that competitive. Obviously, the rate of growth and the rate of penetration does take an impact, but enough users are willing to get there. So that gives us the confidence that eventually the category can get there. And we also believe that we need that INR 50 on top for this category to break to meet all our costs. How soon will it get there? Will it take a couple of years? Will it take 5 years? We don't know. We're taking the worst case, which is 5 years that this will be a very, very gradual buildup to that point just given the competitive intensity, which we think is likely to...

Second question is on the core business. As you [indiscernible] is there a rethink that this TAM might be larger than what you guys thought? And in the call, you earlier articulated there is perhaps a positive read-through from InstaHelp one can't notice that since you guys accelerated InstaHelp, if anything, your core business has also started to sort of move up in a meaningful manner. So when we think about the TAM, when we think about the opportunity out here and clearly, competition is hardly in this space, how big could this market be? And how should we think about a medium-term opportunity for this space?

Yes. I think we also believe the TAM is very large. And every year, we -- for instance, it's quite visible that our Tier 2 markets are performing even better than Tier 1. And honestly, I think we're only beginning to do justice to that potential in the Tier 2 markets. So I think the TAM is large. I think we are only getting started. If you look at the size of the TAM and even in our most penetrated oldest cities like Delhi NCR, for example, and some of our categories, we have a fair amount of headroom. And that's one of the reasons why our oldest micro markets in these cities continue to perform very well. Can it grow faster than 29%? Look, I again, would reiterate that I don't want to get ahead of ourselves. I don't want to set the wrong expectations. I think the 29% does have a little bit of margin there because of the low base last year. And it has been only a few quarters back that we were doing at 19% or 17%, et cetera. So yes, we've seen acceleration. '19 has gone to 21 has gone to 2 has gone to 29%. We at our end will continue to do whatever is in our control, focus on the basics, focus on great quality, focus on supply efficiency, focus on better fulfillment times, focus on customer excellence. I think the growth rates are an outcome of it. I would not get too caught up with a quarter here or a quarter there. I think secularly, we would like to grow at a very, very healthy pace and do justice to this opportunity while improving customer trust and customer quality. That's our focus. And I think if I take a 5-year view, there's no reason why this business cannot be significantly larger than it...