Ladies and gentlemen, good day and welcome to the Meesho Q2 FY27 earning conference call. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the introduction. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Navin Killa from UBS. Thank you, and over to you, Navin.
Thank you. On behalf of UBS, I would like to welcome all the participants to the Q2 FY27 conference call for Meesho Limited. I would like to inform you that the call is being recorded, and the audio call and the transcript will be available on the company's website. Joining us today to discuss earnings for Q2 FY27 are Vidit Aatrey, Chairman, Managing Director, and Chief Executive Officer, Sanjeev Kumar, Full-time Director and Chief Technology Officer, Dhiresh Bansal, Chief Financial Officer, and Karthik Chandrashekar, Head, Corporate Development and Investor Relations. We encourage investors and analysts to review the shareholder letter, which is available on Meesho's investor relations website. During the call, therefore, management will focus on answering questions beyond the topics that are already covered in the letter.
Before we begin, do note that certain statements made on this call may be forward-looking in nature and should therefore be considered in conjunction with the risk factors disclosed in the company's filings. With that, I think we can open the floor for questions. Moderator, I'll pass it back to you.
Thank you so much, sir. Ladies and gentlemen, we will now begin with the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we'll wait for a moment while the question queue assembles. First question comes from the line of Vivek, I'm with Jefferies. Please go ahead.
Hi, good evening, Meesho team. First, on the contribution margins, this quarter, 6% is a great number. You have cautioned not to extrapolate this for the rest of the year. But from a second-half perspective, where do you think this number should settle at? Also, if you can comment on FY 2028 as well.
Sure. Thanks, Vivek. Dhiresh here. I think from a contribution margin perspective, the reason why we mentioned that this is not to be assumed as going forward into the next quarter as well, because typically we have certain lead lag between how we gain efficiencies on our cost front and when do we pass it back onto our sellers and hence consumers in the form of lower pricing as well. That's I think the key reason. This quarter also, as we have mentioned, we had incurred certain additional costs in relation to servers, especially GPUs, and hence we did not pass it along back. As that situation normalizes, we will reduce pricing to fund for the growth into our flywheel. From a full-year perspective, we don't give specific guidance.
Of course, I think we will continue to make progress on the longer-term contribution margin targets that we have during the course of this year. So it will be substantially better than FY 2026, both with the efficiencies that we're gaining on the logistics side and hence what we have there, and also moving into FY 2028, we will start seeing benefits coming in from ad monetization as percentage of NMV increasing.
Got it, Dhiresh. The second one is and in some ways related to CMs. Logistics efficiency, you have spoken about 15% faster deliveries. So two parts. One is on a YOY basis because festive season is in a different quarter. Is there also a network effect or underutilization, so to speak, in some ways this year versus last year, which is helping this 15% and again, this 15% should be seen for Q2 plus Q3 combined? The second part is, if you can just comment on Valmo, how things have been there on that front.
Sure. The first part of the question in respect to the speed improvement that we have seen in this quarter, that is a continuing trend. Even in Q2 and Q3 put together, we expect that to continue. The reason why that is happening, I think we have mentioned a few, but just to highlight, one, the fact that density increase and especially as we have more capacity creation that has happened across the course of the year, that also helps with faster delivery timelines. To give you an instance, let us say on the same route, earlier we were operating two shifts. Now we are able to operate three shifts of line haul, then the speed would improve. The growth itself and the density leads to better speed across the network.
We have also aided that with better network design that has happened across our network and some of the 3PL networks as well. Lastly, I think improvements on the software side which is GenAI and LLM, which is a more sustainable improvement that we keep doing in the form of improvement of address accuracy, hence making it easier to find the end users, has been the reason for improvement in speed. That we expect to sustain across the quarters.
Dhiresh, comments on Valmo?
Yeah. I think we continue to make progress on Valmo in terms of reducing our cost of doing business. I think even from a capacity perspective, we have had a good festive season. Some of the problems, let us say that the overall logistics ecosystem saw last year, I think they are largely kind of behind us, and this festive season has been good both in terms of capacity availability as well as efficiency of the operations. That is, I think, on the Valmo as well as overall logistics side.
Sure. If I can ask one more, which is on the outlook side, you have mentioned about you are watchful on the macro side, while you stand for value, but there is a fair amount of discretion, I am guessing, at the value level also for the kind of users you serve. How worried are you with the macro and does that worry you from a, let us say, 12-month perspective? I know world is very volatile. There are a lot of uncertainties. Can the household budgets, can that impact the point that you made? Basically, how worried are you about it?
Yeah. Hi, Vivek. This is Vidit here. On this particular point, actually, from whatever data we have seen on the user behavior, we do not see any concern yet. We see now a large part of our platform is about utility products, personal care, beauty, home, kitchen, baby care, a lot of this stuff that people need, and we help them, people save money. So we see healthy amount of traffic conversion on our platform. So we do not see any concern emerging anywhere. A large part of the thing that we have highlighted, is we continue to see supply chain disruptions on the seller side. A lot of our sellers, because the price have been volatile, it impacts supply chains.
We have been trying to help them out as much as we can, but last one month also, there were a lot of disruption that happened because of price changing of crude across the board, and a lot of petroleum products are used in supply chains from our sellers across categories and products. So we see a lot of pain point on the seller side. But on the demand side, actually, we have not seen, and we believe because we stand for value, and especially in times where the macro could be impacted, we as a platform will add a lot more value to consumers' lives. So on the demand side, we actually feel quite confident that things should be okay.
Got it, Vidit. Thank you. Wish you all the very best.
Thank you. Ladies and gentlemen, in order to ensure that the management will be able to address all the question from the participant, we request you to please limit your question to three question only per participant. If you have a follow-up question, please rejoin the queue. Our next question comes from the line of Sachin Salgaonkar with Bank of America. Please go ahead.
Hi. Thank you for the opportunity. I have three questions. First question, maybe just a follow to Vivek's question. Clearly a sharp improvement in CM, and when we think about CM, there are two parts, right? One is ad take rate improvement, and second, logistics efficiencies. Dhiresh you did talk about logistics efficiencies, but wanted to understand what is the primary reason for QOQ improvement. Is it the improvement in ad take rates or is it mainly logistics efficiencies?
Yeah. The primary cause for improvement has been on the logistics side and the efficiencies that we've gained there. For instance, our improvement in RTO, as a percentage of our orders, the density of orders increasing with kind of the volume gains that we've had, the network redesign that we kind of spoke about. All of those have led to and also the ongoing sort of efficiencies that we gain within Valmo. All of those have led to improvement in our cost structure, which is largely kind of reflected in our contribution margin improvement. Ad continues to kind of do well from input metrics perspective, which is how the demand for ads from sellers continues to kind of remain robust. But let's say this quarter QOQ movement has been largely led by logistics.
Got it. Is it fair to say ad as a percentage of NMV is largely flattish on a QOQ basis, or we saw some improvement?
Yeah. We don't comment on that in specific separately. But like I said, the large part of improvement has come from logistics.
Got it. When we speak on logistics, apart from efficiencies, there's also this volume-led attractive rates what 3PLs give you. Did this quarter see some attractive rates coming because your volumes have now started to increase with 3PLs?
Yeah. There's no specific movement on, let's say, a slab-linked pricing, which kind of leads to improvement in our cost structure. I think we continue to have those. Large part of it usually comes in the festive quarter, which is going to be Q3. So I wouldn't say that it's linked to volume slabs, et cetera.
Got it. My last question is on investments. Clearly you guys, Vidit, you talked about sorter investments. So wanted to understand where we are. This quarter you guys did mention about a token and a server cost increase. A clarification question was, in the medium term, you said we expect the server cost to normalize. Is this in absolute amount we should see normalization or more as a percentage of NMV?
Yeah. On the server cost side, the normalization that we expect is as percentage of NMV, which is going back to the baseline that we had in two quarters, which is by Q4 2027 quarter. On sorter, yeah.
Yeah, I think we are making all these investments around automation across the board. Some of them are long duration investments, some of them are short-term. I think now every quarter, the levels of automation across the network, especially in Valmo, will keep growing. When there are significant updates, we will come and tell you. I think we expect that the automation levels will keep growing across all kinds of nodes, small or big. That is a big focus area for us, especially as the platform gets larger with more and more volumes, it becomes a very important focus for us.
Vidit, is this expected to impact the FCF, or this will be spread over a period of time?
Right now, we do not see it impacting FCF. A lot of these investments in CapEx, we are seeing are being done by our partners also. All the Valmo entrepreneurs who are part of the network, small or big, depending on the size of their node, they think of this as a large opportunity to grow their business. We have always taken a point of view that building an ecosystem is a better thing to do to scale the ecosystem much faster. We are taking the same view even around these investments. We are seeing a lot of our partners make these investments right now, and we expect that to keep happening. When we feel that we will have to basically ourselves invest a lot more, we will come out and communicate. So far, it does not look like the majority of CapEx investments here will come from us.
We think a lot of this would come from the partners who are part of the Valmo network.
Got it. Super clear. Thank you.
Thank you.
Our next question comes from the line of Navin Killa with UBS. Please go ahead.
Hi, thank you for the opportunity. I had two questions, actually. You did mention on the logistics side about improvement in delivery timing and all. I suppose there is always a cost versus speed trade-off. How do you see these two kind of factors playing out over the course of the next two to three years? Secondly, the financial services and the BNPL and the fintech products, if there is any kind of information or data that you can share and ambitions on how big the business could be, given some very interesting precedents in other emerging markets. How do you see that opportunity?
Yeah. I think on the first question, maybe I can take that. On logistics cost versus speed improvement, the way we see it is not as a trade-off. Whenever we do speed improvements, we hold the cost and then kind of make those speed improvements. The reason why they happen, like I'd mentioned, for instance, if density of the network increases, that leads to faster speed. It also comes with better cost, actually. They both move in the same direction when it comes to things like density. Where it is about, let's say, using GenAI and LLM for improving accuracy of address, both cost improve because the number of attempts required to deliver a product comes down, and also the speed improves because it is now delivered faster to the end consumer.
The way we kind of hold it is while not deteriorating cost, how can we keep improving speed? As the volumes grow, there is natural benefit that we get, which we further aid by improving our network design as well as software improvements like GenAI and LLM now. We don't see these as two sides of the coin. They're kind of moving in the same direction. On financial services, the second part of your question. Like we've mentioned, we continue to see encouraging signs. We have essentially both seller and consumer side lending products there, and both are showing good signs while kind of maintaining risk rates within the pricing norms that we have set in those areas. We are also building on a larger supply base from various NBFCs, and increasingly, we're looking at getting bank partners as well.
That's overall from a progress perspective, doing well. It is still a part of our new initiatives, and as we get it across the line from new initiatives into, let's say, the core marketplace, we will start sharing more in terms of how the AUM and some of the other parameters are moving there, including what we expect as medium and long-term targets.
Thank you.
Thank you. Our next question comes from the line of Ankur Rudra from JP Morgan. Please go ahead.
The first question is on the CM side again. You would say that your improvement has come from logistics efficiency, but you also said you will be reinvesting. Could you add some color about how you will be reinvesting, and if there is a floor to how much you will reinvest in the festive quarter?
Yeah. Ankur, this is Dhiresh here. We will. Overall from FY 2027 versus FY 2026 perspective, like we have mentioned, I think there will continue to be significant improvement in contribution margin. The way we think about it is that we will restore some of the lost logistics-related spread that we had in FY 2026 back to where it was in past FY 2025 period during the course of this year. That sort of will be the outer guidance during the course of this year. Having said that, I think given a lot of things are changing around ecosystem, we would continue to maintain some flexibility around how much is passed back as logistics efficiency versus continue to retain on P&L as also some of the other line items like server cost, et cetera involved.
Understood. Second question was on the. You mentioned, the growth in the A&P spend was up quite a lot this time, almost 50% sequentially. I noticed that the LTM ATU increased by just 10 million over the last quarter. I am just curious if there is any signs of CAC or churn rising in the platform.
Vidit here, I will maybe take this question. Actually, we keep rebalancing our marketing spends across the board. This ATU increase also happens quite a lot in the festive month. It is also to be taken into account with the same thing that we mentioned that last year, the festive sales happened in September, which has moved to October this year. When you look at YOY, that basically is part of that base effect. But in general, we continue to basically reallocate our spends in marketing. This is what we see in CAC, because the platform frequency has been getting much, much better. We have been basically investing a lot more in users that could be much higher LTV and so on. Sometimes CAC may not be the best ideal way of looking at it.
It is CAC and LTV both put together deciding where we should invest. Our internal guardrails of those investments are still the same. If we are not seeing a certain return rate on investments, we do not invest that money. I would say, we see good investment ROI on all these bases. We see our new user base growing in big cities almost as fast as in some of the smaller towns across the platform, and frequency going up. As our user base keeps expanding across the board, we will keep doing it. It is not there. I would say, the time when you see we are basically going back on our marketing investments, we are reducing that. That would be the time when it feels like, "Hey, we cannot add more users." But right now, we do not feel that.
We are seeing with sustained marketing investments at the level that we have been at a percentage of NMV, our ROI on that has been quite healthy. As long as that is there, we will keep investing there, maybe increase that, maybe reduce that around that number, but stay in that zone.
Appreciate the color. Just last question on the festive season sales. There was a press release earlier this month where you highlighted that day one was up very sharply. If you could add any more color in terms of how the rest of the festive season has been this quarter.
I think the festive season has been good. Festive season overall, we published the day one numbers, but even overall, the festive season has been good. As I mentioned, there have been certain supply-side challenges for our sellers considering last 20 days, there have been things happening in Middle East, and crude prices have been going up and down, which is a large part of sourcing for some of our sellers. But on demand-side traffic, we hit all-time high numbers across the board. Saw very good growth. A lot of consumers coming and buying across categories for the first time. So our festive sales this time have been better than expectations, and which gives us confidence that the demand side continues to be quite strong.
Appreciate it. Thank you, Aatrey .
Thank you. Our next question come from the line of Gaurav Rateria with Morgan Stanley. Please go ahead.
Hi, congrats on strong execution on CM. Couple of questions. My first question is on your growth rates. You yourself mentioned that adjusting for the shift of the festive season, growth was ahead of 30%, even while you did not pass on the pricing benefit. Just trying to understand the kind of decision that you're taking to intervene on the pricing and pass it on. Is it that you think the opportunity is to grow the platform at much higher than 30% in the near term, which is why you want to continue to play that card and keep driving the growth as and when you can?
I would say, if you see our pricing investments tend to basically pay off in the long run. If we pass on our CM back tomorrow, will we suddenly grow by 10%, 15%? The answer is no, because a lot of this is flywheel-related impact. Whenever we reduce our pricing, products and categories that were unviable last year or last month start to become viable. Sellers in that category get attracted to the platform, start selling, and the payoff happens over a long time period. A lot of these changes do not lead to a massive bump in the short term, but we have leading indicators to see how it will impact our two quarters, three quarters, four quarters down the line.
Because we could keep a high CM in the last quarter and the growth was still strong doesn't mean that we don't need to do it. We have
a strong plan of the products and categories that we want to scale up on our platform in the next 12 to 18 months. We are very sure that for that to happen, we have to continue reinvestment into our business, into our flywheel, and make a lot more consumers come to our platform, as well as make a lot more sellers and categories and products live on our platform.
Got it. Second question on the network design change that you were talking about. Looks like some structural changes you may have made across various parts of the logistics ecosystem, be it the first mile, be it the mid-mile and the last mile, which kind of helped you to achieve these kind of savings. It will be helpful to get some color on what other network design change that you talked about. Even the RTO that you mentioned, the NMV to GMV ratio doesn't look like it has changed much between last quarter and this quarter. Would it still mean that the RTO as a percentage has further improved versus last quarter?
Yeah. Maybe on the network change side, the primary changes have been on the middle mile side. I think last mile continues to be in a similar model. As we kind of mentioned that volume shifts, increasing volumes allow us to design our network more efficiently, use our line hauls more efficiently, use, let's say, bigger trucks in some places, et cetera. I think those have been the primary source of improvement when it comes to network design. Also some of the nodes that we design in terms of gateways and sorters, how do we kind of utilize them. That has been an equation that we keep solving for and keep improving across different quarters.
On the RTO side, while I think overall from a value of NMV to GMV, the ratio might not have looked to change significantly, but on the RTO as a percentage, it has improved versus the previous quarter. Again, any improvement in RTO actually straight flows into the bottom line. So, that linkage is quite strong. That's why you see this, a significant part of logistics efficiency is also coming from there.
Got it. Last question on some of these costs, like server and all. From a medium-term perspective, should one consider that to be kind of a variable cost? Should one consider that to be kind of a fixed cost? Just trying to understand the medium-term operating leverage on that particular line item. Thank you.
Yeah. I think there are components of both fixed and variable costs within server cost. It is a semi-variable cost, technically. There are, for instance, when our conversion, which is, let us say when a consumer comes to the app and browses and ends up shopping a product, that kind of improves. We see benefit obviously coming in server cost side because a significant portion of the cost is fixed. There are also variable components. If someone browses more, if we start using more compute-intensive algorithms to make sure that the relevance of the feed remains high, then those kind of lead to larger usage of server costs. It is a semi-variable cost in that sense.
I think even from a disclosure perspective, if you look at companies across in our sort of space, it is reported below contribution margin line, but that is also an area that we are also kind of contemplating on how to break this into variable and fixed and what portions to kind of bring up above contribution margin versus deep below contribution margin.
Thank you. All the best.
Thank you. Our next question comes from the line of Gaurav Malhotra with Axis Capital. Please go ahead.
Yeah, hi. Congrats on a good set of numbers. Just a couple of questions. First of all, if you look at the, there's been a big increase in the sellers on the platform, and we have seen that over the past few quarters. But then when we look at the NMV per seller, we see that that number has sort of become flattish to declining. So in that context, how do we sort of keep the sellers sort of encouraged to keep advertising on the platform, even though maybe they are not making as much money or how much they're making is not sort of growing in some sort of a growth fashion?
Yeah. So I think all sellers on our platform are not of the same scale and size. Over the last two years, a lot of work that we have done on the platform is to make our platform work for all kinds of sellers, really small sellers, big sellers. When that has happened, I think especially the non-GST seller base, which was not allowed to come online until two years ago, but now can sell on a platform like ours. That has led to a large part of seller base especially in the smaller base, which is why you see this. But when we look at a cohort data, which is sellers who are big manufacturers, they continue to expand on their business year-on-year, and they're seeing very healthy growth because the platform continues to scale across categories.
So just looking at the average sales per seller may not be the right thing to do because the type of seller base on the platform is quite diverse. But when we look at cohort numbers, we see very healthy growth across them.
Got it. My second question is on the logistics cost, that on a per order basis has sort of gone down in an inflationary environment. Now I understand that Dhiresh has given some couple of sort of thought processes around it. But will there be some sort of timing issue that there's a possibility that these costs sort of move up in, say, the December quarter, or maybe the full cost of 3PL has not been fully reflected in these costs? Any sense on that?
I think on this overall logistics cost thing, I think even when we did the IPO, at that time we communicated, as a company, you should expect us to keep reducing the cost of logistics every quarter forever, irrespective of any time, right? Which is basically our core goal. Our core goal is to basically make more and more stuff affordable. Inflationary time, non-inflationary time, we will continue to do it. A lot of that was not visible three quarters ago because of all the supply chain disruption we had because of supply issues and logistics. But now since they are behind us, you should expect us to keep making progress here. I think levers will keep emerging. Sometimes it will be automation, sometimes it will be improving the quality of manpower we have, improving software across the board. I think we have multiple levers.
I do not want to list all of them down, but you should expect us to keep improving this every quarter, which is our long-term aspiration. That is when we will enable our consumers to come and buy all kinds of products and categories on our platform.
Got it. Cool. Thank you.
Thank you. Our next question comes from the line of Vijit Jain from Citi. Please go ahead.
Yeah. Hi, thanks for the opportunity. My question, just going back to Valmo here. Last time, Dhiresh, I think you mentioned Valmo share was about early 50s in 1Q, I believe. Is it going up now from 2Q onwards? A related question to that, good to see that delivered orders trends has been significantly higher than placed order trends for a few quarters now. You guys did mention that RTOs have declined, and that has benefited. I want to understand if RTOs will continue to decline significantly further here on as well.
Sure. Maybe I'll start with the second part of the question. On RTOs, I think there are two trends which we see playing out. One is obviously our prepaid share of transactions keep going up every quarter and year. As we've mentioned before, on prepaid transactions, we see much lower proportion of RTOs versus cash on delivery transactions. As a result of that, the RTO on a blended basis should keep coming down secularly across time period. Also, we take efforts to reduce even the cash on deliveries related RTOs that we see by, again, doing innovations both on the software side as well as improving the way we deliver some of these cash on delivery orders. Some of it is offset by the fact that we also keep going deeper into the country as we make progress.
These are the two big drivers of improvement in RTOs, and that gets reflected in the ratio of delivered to placed orders as well. On the first part of your question, Valmo share, I think as a principle, we don't specifically want to comment on how much is Valmo share versus how much is 3PL share, given its sensitivity to a lot of other players, too. But I think we continue to make progress on the Valmo side in terms of capacity creation as well as cost efficiency, and that continues to show up in our results this quarter.
Got it. Thanks. Just real quick on that, Vidit. Essentially most of the RTO gains here are coming from lower COD RTOs and higher prepaid mix. That's the understanding, right? Understood.
Yeah. That's right.
Got it. My next question is you have this existing guidance, right, of mid-20s, if I remember this right, FY 2026, FY 2030, CAGR somewhere thereabout, and you are obviously tracking much ahead of that. You have said that you are going to reinvest back some of these near-term CM margins for higher growth. Any thoughts on revising that guidance given FY 2027 you already know and staying at that mid-20s level would imply some form of deceleration in FY 2028. I just wanted to get a sense on that part. Then I have just one last question on AI use in your Discovery Feed.
Sure. On the guidance that we have out is for the longer term towards FY 2031. I think this was a five-year guidance for, let us say, 25% growth CAGR on the NMV side, which we continue to maintain for now. I think as we see this year progress and are able to crystal ball gaze a little more into FY 2028, we will come back and sort of say if it has to be changed or revised in any form. But given it is a long enough time horizon, I think, and with the visibility that we have, we feel comfortable at maintaining it right at now.
Got it. My last question is you guys have obviously invested a lot in all kinds of AI initiatives throughout the org. My question is since the user platform is Discovery Feed led, are there any metrics you can share on what trends you are seeing as you deploy more AI in Discovery Feed? Are you seeing decently improved conversions, more click-throughs? Whatever metrics are most relevant or useful to understand how that AI use impacts the Discovery Feed would be super helpful to me. Thank you.
Yeah. So one of the metrics that we have continued to share is the percentage of orders that come from Discovery Feed.
Right.
That in a way sort of reflects that relevance of those feeds and relevance of those feeds to the users. But in addition to that, as we continue to improve our models, we continue to make them larger and so on, we do see time spent in-app continues to improve. But beyond that also sort of adds up to your conversion improvements in new user, and everything else. With a better feed, we are able to sort of get a new user to convert faster, get existing users to transact more and so on. So all the transaction frequency, growth, et cetera, sort of ties back directly, almost regularly, to the ranking and relevance model improvements.
Got it. Thank you. Super useful. Thank you so much and appreciate your time.
Thank you. Our next question comes from the line of Aditya Soman with CLSA. Please go ahead.
Hi. Good evening. Thanks firstly for disclosing the quarterly FCF. I think that's a very useful number to have. So heartening to see that improvement in the current quarter on quarterly FCF. A large chunk of this is, as you indicated, led by working capital, I think INR 523 crores or so. But would that reverse? Because, if we look at Q2 FY26, even in that quarter, we had a big jump in working capital benefit, and then we did not see that for the rest of the year. Again, would that be a similar trend this time around? Just wanted to understand, given that there's been this shift in seasonality.
Sure. Aditya, I think a few things happened like Q2 FY26, the festive season was earlier, and so a lot of the jump in orders that we see was actually reflected in cash flows within Q2 FY26 itself. This time around as well, we had not the full festive season sale, but some more sales periods in September, and hence that also kind of led to negative working capital release during the quarter.
If I zoom out and look at the full year kind of picture that we have, if you look at the current adjusted EBITDA margin of about -1%, and you look at the growth at which, let's say the baseline growth that we have at about 30% area, and the 20 days negative working capital cycle, which kind of roughly translates to, if I leave out all of these ups and downs of quarters and festive season and whatnot, that contributes to about almost +1.5% of NMV as we grow year-on-year at that pace. So if our adjusted EBITDA margin is kind of in line with, let's say, where the quarter is or say keeps improving, then we should start seeing positive FCF coming in on a sort of LTM basis in a few quarters as well.
Understood. Very clear. So we should see this now on a sort of more regular basis, this working capital release that we saw in the current quarter. Maybe not to the same extent, but it should be a more sort of steady and continuous improvement. That's what you mean, right?
Yes. I think just to kind of note because while we have started disclosing quarterly FCF, we will always have this volatility due to last 15 days, let's say, of NMV in any given quarter. For example, if I look at December quarter, in December, typically towards the end of the year, we would have a lean period. Every year it is the same case. There might be trends up or down, but on a zoomed-out basis, if you look at it normalized for what every day's NMV is, you will start seeing improvements both in quarterly and LTM numbers.
No, thanks, Dhiresh. Very clear. Second question, just on the improvement in contribution per order, if I were to look at it is about INR 3, a little over that. Now, as you indicated, most of it has come, in fact, about INR 4 has come from logistics cost. But the revenue per order also reduced a little bit. Now, this would be you giving back some of that benefit of logistics to the customer or seller. Would that be the right understanding on this?
Yes. Some of that is carryover from the previous quarter because, let's say when we passed on some efficiencies in the previous quarter, that wasn't accounted for the full quarter itself, and hence you would see that. But we keep doing that. We keep, like Vidit also mentioned, keep becoming more efficient and pass a significant proportion of that benefit back to consumers to improve our pricing on the platform.
Got it. So the way we should think of the take rate is basically the absolute logistics revenue may be reducing a little bit, but absolute revenue from advertising or whatever other forms of monetization increasing. That would be the right way to interpret this over a longer term, right?
Yes, that is right.
Perfect. All right. Thanks, Dhiresh.
Thank you. Our next question comes from the line of Swapnil with JM Financial. Please go ahead.
Hi. Thanks for the opportunity. My first question is more of a basic question, actually. Have you ever tried maybe charging a platform fee or a handling fee to the customers? The reason I am asking this question is because when I see at your unit economics on a per order basis, which is basically EBITDA divided by delivered orders, I am coming to a loss of around INR 2.4 per order, which means it is a matter of time that you should be able to recover this INR 2 loss at any EBITDA level. If you can just charge INR 1 or INR 2, you should be there. Just trying to understand any particular reason, if you have tried and you do not want to continue either ways, fiddling with that kind of a fee.
Yeah. Hi, Vidit here. I think we have historically made our POV on this public. We generally don't believe in charging any platform fee. I think the simple reason is we serve a mass market consumer, and sometimes that customer can miss new fees that you add at the cart level, and putting anything at the cart level that is not exposed earlier sometimes also lead to loss of trust with that customer. Where a customer could think that, hey, you're just trying to charge them at the end, why could you not just add that price to the product price? So we have always taken a customer-first view here that we will never add any hidden fees at the cart level, convenience fee, platform fee, many other fees that a lot of platforms add. We do not add that on our platform.
And we have taken that POV for the longest time. If we have to charge higher, we would increase our take rate on logistics or ads or something else, but we would not add a platform fee. We may let go of some short-term revenue around it, but increased customer trust would lead to much higher LTV in the long run, which would be the best thing for the business. And we continue to hold to this POV even now.
Got it. Very well. Understood, Vidit. The second question is with respect to your indirect costs. So heartening to see your contribution margin improving materially. But for some reason, I'm not able to grapple as to why the fixed cost leverage is not playing out. Typically, a platform business growing at a fast rate would see some of the fixed cost leverage also. Because I'm looking at your last year number, it was at 6.3% of NMV. This year, H1, it is somewhere around 6.4%, 6.5%. Any particular reason as to why that is not playing out? And if going forward we should expect material improvement from that side.
Yeah. So if you look at the cost below contribution margin and between EBITDA, there are three primary cost line items. There is marketing expenses, then there is server infrastructure cost, and third is people cost and some of the other G&A line items. As we've mentioned in the letter, the server cost in this quarter was elevated due to certain GPU capacity constraints. And hence we had to procure capacity for the festive season much in advance within the Q2 quarter itself to ensure that the scale of sale is continued to be supportive. This is sort of a global phenomenon right now, where GPU pricing has suddenly overshot significantly.
We are mitigating this with partnering with multiple providers as well as going into multiple regions within our existing hyperscaler relationships to mitigate and procure capacity only in the time periods when we need them, rather than building it in advance. This is expected to come back during the course of, let's say, the next quarter, Q4 FY27 as a percentage of NMV. That is, I think, one of the reasons. Second reason was on the marketing front, some of the investments that we made ahead of festive season, which I think we have also mentioned in the previous quarter letter, that we would be making certain investments in the upcoming festive season prior to the festive season. So investment goes in for things like TV advertisement production or other means of getting reach into customers that predates the actual NMV benefit that we start seeing.
On an overall annual basis, when we look at FY27 numbers, you would see operating leverage play out still in the business.
Okay. Just an extension on that, what would be the steady state number that you would be aspiring for fixed cost as a percentage of NMV?
We expect in the longer run, the fixed cost base to come to about 3% of NMV.
Got it. This would be somewhere around FY 2029 to 2030. Would that be the right?
31.
31. Okay. Just one last one on Kirana Club. Has that business been integrated? Any color on the nature of investments that will be required given that it's mainly a B2B business? Any thoughts on that?
Yes. I think the closing of the transaction has happened recently, as recent as today. I think we will start the integration process. Although it will continue to run fairly independently, the founders there continue to remain in the business and will continue to run that business. From an investment perspective, this will be as a part of our new initiatives and the cap that we mentioned in terms of capital allocation will hold on the new initiatives that we have, which is about INR 200 crores annual cap, including all of the initiatives that we have.
So INR 200 crores is including Kirana Club, is that understanding correct?
Yes.
Okay. Thank you very much for that and all the best.
Thank you so much. Ladies and gentlemen, we will take that as the last question for today, and we thank everyone for their participation. On behalf of UBS, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.