Good Morning Toasters!

In today’s issue of the Morning Toast, we discuss

• Hero MotoCorp on road to recovery?
• Zomato’s unit economics fail to inspire
• News around the world
• An educational concept to keep you learning every day 🙂

Market Watch

Nifty: 17,322.20 | -30.25 (-0.17%)
FII Net Sold: INR 1,890.96 crore

Sensex: 57,996.68 | -145.37 (-0.25%)
DII Net Bought: INR 1,180.14 crore

Technical Setup

Hero MotoCorp on road to recovery?🚀

• Analysing Hero MotoCorp on a daily time frame, indicates that the stock has been consolidating between 2645-2785, thus making this an accumulation zone (see image below)
• Prices can also be said to be in an uptrend as they made a new high (Higher than the previous swing low). A closing above its nearest resistance (2780) might lead to a good up move

Okay great! Tell me more? Any new tools?

• On a daily frame (see image below), after setting up Bollinger bands, its making a squeeze pattern (upper and lower band coming close)
• This is followed by a decent move along the ongoing trend (uptrend), which is an indication of a positive chart structure
• Prices are currently trading above 20 SMA (simple moving average), indicative of strength in the counter (short term uptrend)

That’s Great! How do I enter / exit such a setup?🤩

• On a daily time frame, a breakout above 2780 might lead to a bigger up move. A trailing stop-loss can be set at 20-day SMA (swing trade) to limit your losses
• The next resistance can be the first target (2980). If prices manage to break the 2980 the uptrend might continue

Interesting! Final thoughts?🧐

• On a daily time frame, price was consolidating and are on the verge of breakout after making higher highs (closing above previous swing high) shows positive bias
• When it came to confirmation, prices were trading above the 20-day SMA and squeeze pattern was formed by the Bollinger bands which increases the probability of the stock continuing its uptrend

Keep a track?

Around the World 🌎

Living in the present seems to be a mantra of the past now with Zuckerberg betting majorly on the future; what’s happening and what’s next!

• Meta (ex-Facebook) has undergone a major rebranding exercise with new slogans and internal values being introduced and has officially made the pivot to a company ‘building the future of social connection’ rather than a social media company. With an emphasis on long term thinking, engineers at Instagram & Facebook are being encouraged to apply for jobs in the Metaverse and AR dept of the company with a total of $10bn invested in these projects already
• But that’s not all! JPMorgan has announced that it is the first bank to begin lending activities in the Metaverse with a lounge opened in Decentral and (where Samsung also opened an electronics store recently). They’ve also released a paper exploring how businesses can find opportunities in the metaverse after a lot of client interest to learn about the same
• Back home too, the Hiranandani Group has committed to investing Rs. 3500 Cr in the next 2-3 years in technology-led consumer services with its new venture called Tez Platforms which will focus on the areas such as social media, entertainment, gaming and e-sports.  It is in talks with international companies to create this kind of infrastructure in the metaverse

Deep-Dive🤿

A new segment, that aims to perform differentiated deep-dives into company unit economics, operations, TAMs et al. independent of quarterly nos. and updates. Like always, these are not meant to be recommendations, and are purely for analysis only. Enjoy!

Zomato’s unit economics fail to inspire🤷🏼

Penetration vs Frequency

• Zomato’s recent quarter update (shared via a blogpost :P) revealed that the OG Tech Player (to get listed) has expanded operations to ~170 more cities, taking its tally to ~700 cities; during the process, they have acquired 5 Mn new customers
• However, during Q3FY22, Monthly Transacting Users (MTU) for the company actually declined marginally to 15.3 Mn QoQ; let’s dig a little deeper here —
• If we assume that one person orders for a household (on average), the company has penetrated ~60 Mn households; in total, in the top 800 cities of the country, there are ~75 Mn households, which indicates an already high penetration level for the company
• For analysis perspective, let’s increase the ordering frequency to two persons per-household, the penetration is still a sizable 40%; in which case, isn’t the argument more about frequency of ordering vs penetration of services?

Frequency means…..affordability?

• Order frequency, and increased utilisation of the services is likely heavily linked to cost economics for an average consumer, and whether ordering from the likes of Zomato & Swiggy, is significantly cheaper to your home cooked meal or chef cooked home meal)
• We often compare Zomato to the likes of DoorDash et al. To justify long tailwind possibilities & penetration capabilities, but fail to consider differing local dynamics in play
• An at-home cook in India, can be hired for a princely sum (:P) of INR 8000 per month in Tier 1 cities of Mumbai & Delhi, and even lesser when you move away from the metros
• Assuming 3 meals per day, that translates to INR 90 / meal, add in vegetable & other miscellaneous cooking costs, and your price per meal is still significantly lower than ordering from Zomato, who mind you will need to justify delivery, preparation and other chargers to break-even on a single order basis
• This is without taking into consideration the monumental change in consumption habit the company will have to promote, possibly via extensive branding, and even then the results would take some time to show (much like building a market)

So….the unit economics are all fuzzy?

• Zomato in their most recent quarterly release mentioned that their top two cities, which account for ~15% of Gross Order Value have consistently made >5% in contribution margins
• Now, we’ve all been on the receiving end of this statement, every time we say greater than x, we’re pretty close to x in terms of value; so assuming Zomato is saying its >5%, we can safely assume its less than 6% (makes sense no?)
• So a contribution margin of >5% in its top cities, translates to just about breaking-even, which is a little concerning;
• In your best markets (Mumbai & Delhi), with ~5 years of operations in which you have, the most prosperous client base, the best operating dynamics, most optimised routing dynamics, not to mention highest Gross Order Value, you just about break-even?
• Isn’t that a little dis-concerting? Imagine the run-way (time & capital) to perform similar kind of unit economics in other cities, in order to actually, at an organisation level, turn profitable?

Okay…I guess?

• Let’s take a walk down memory lane… Zomato’s listing was heralded as a new dawn, with multiple Tech companies listing after, and many planning IPOs as well
• Honeymoon period (for lack of a better word) lasted a short period of time, with external market dynamic factors turning sooner than expected; Zomato recently went below its IPO Issue price, eroding shareholder wealth
• Unit economics, acquisitions, use of funds, and path to profitability, in a challenging market environment (limited liquidity, return to normalisation) are key to watch (we believe)

What else caught our eye?👀

India’s startups going through a tough phase

• Several of the country’s highest-profile startups tanked (and how!) soon after listing soon after it closed a record year of IPOs
• Paytm seems to be heading this list of stocks with both Zomato and Nykaa also receiving a significant battering
• This has caused many other prominent startups like Oyo Hotels and Delhivery to push back their public debuts

LIC seeks SEBI’s help

• LIC has sought an exemption on the deposit that it has to make with the SEBI before its IPO (1% of the issue size has to be deposited and is returned after the share sale)
• The primary purpose is to counter fraud but since LIC is govt owned there won’t be any chances of the promoter misappropriating funds prior to the share allotment
• In this case, the deposit amount will be around Rs. 500-800 Cr; SEBI is yet to give a decision on this

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Educational Topic of the day

Bollinger Bands

Bollinger Bands is one of the popular technical analysis tools, where three different lines are drawn, with one below and one above the security price line. Its specific period moving average is denoted as midline to form an ‘envelope’.

These lines show a band or a volatility range in which a particular security price is moving up or down.