Shadowfax Technologies Limited (SHADOWFAX) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to Shadowfax Technologies Limited Q1 FY '21 Earnings Conference Call. [Operator Instructions]. Please note that this conference is being recorded. I now hand the conference over to Mr. Abhishek Bansal, Managing Director and Chief Executive Officer. Thank you, and over to you, sir.

Thank you, Yousuf for hosting this call. Good evening, everyone, and thank you for joining us today. With me today are Praveen, our CFO; and Sachin Dixit, who leads Corporate Development and Investor Relations. So the format we'll follow for this call, we'll have a quick opening remark from my side, followed by a quick presentation from Praveen, which we'll follow up with Q&A. As I start this call, I want to start with explaining how this quarter actually felt like from inside Shadowfax because if you only read the print, you will miss the entire story. This has been one of the most complex quarters for us. Early this quarter, diesel price went up along with the gas crisis and elections in a couple of large states. Now for a logistics company, diesel prices and manpower impact is everything we do. So the question we asked internally went well beyond what does this cost us. We asked something really big. Will India's consumption demand hold? Consumption held up better than many expected. In fact, we have now seen repeatedly that periods of economic pressure often strengthen digital commerce. Consumers become more value conscious, compare more, search more and increasingly shift online. This quarter reinforced that pattern once again. Moving on to the supply side. We did what strong operators do. We worked with our customers, collaborated closely with our delivery partners and vendors and used our network intelligence and data to dynamically rebalance incentives so that service levels remain intact despite the labor disruption. And here is the outcome that matters most. Through all of it, our performance effectively showed 0 volatility. We delivered one of the highest sequential growth while also improving our margins. Now that is by design. That is a company built to flourish in the toughest times. With all this uncertainty behind us now, we expect massive tailwinds into this year. Hence, we want to make a very important announcement, probably the most important one over this earnings call. We are now revising our financial year '27 revenue growth guidance from 27% to 30% that we had given earlier to 38% to 40% for this financial year. Having said that, our margin trajectory remains unchanged, suggesting faster growth with the same disciplined path into profitability. Moving forward, let me quickly now give a view of each of the strategies that have led us to display some of the financial numbers that we have seen for the last quarter. My conversation is going to be broken down now into Express Parcels, which is a large part of our revenue and quick commerce and hyperlocal. So we'll talk about both these factors. Talking first about Express Parcel. There are 3 large talking points for us, which have driven and shaped the business over the last quarter, the number one within that is the industry consolidation and the market share win that Shadowfax is seeing in the market today. Now what we have been seeing quarter-on-quarter volume is getting more and more consolidated between the 2 large 3PL networks that have held service levels at a national scale. Clients are choosing partners that they can sustainably depend on, and that choice is now settling in our favor as well. The second shift within this industry is what we are seeing is that the large marketplaces are expanding fast into low-value categories, where a INR 250 order calls for a different kind of network altogether. We believe that outsourcing will grow as these marketplaces need access to proven and low-cost supply chains. Now within this ambit of market share gain, one important factor has been the area around our geographical coverage and where you can see in our earnings presentation as well that there has been a lot of execution. We ended the quarter at about 16,372 pin codes, where we opened about 716 pin codes over the last 90 days, almost 8 pin codes every single day. And the way it works is beautifully simple. The moment we go live in a pin code, our existing client orders into that area gets switched on. Every new pin code helps us gain further market share. Now this industry phenomenon and this market share is around some of the core services, core businesses that we have created year-on-year. Moving within this Express Parcel business into some of the experiments and some of the new lines of business that we started creating a couple of years back. Number one being the Prime and D2C business. Now Prime is a business where we offer same-day delivery, next-day delivery services to the D2C brands that we work today. We are the only 3 per of national scale offering same-day delivery across the country. And because we are the only one, every client wants a speed, who wants speed has to come to us. That is showing up directly in our wallet share. When a client moves their fast delivery volumes to us, the rest of the volumes also tend to follow. This story isn't about just growth. It is about acceleration as well. Prime grew almost 2.5x last year. It has accelerated to 2.7x year-on-year this quarter, even at a much larger pace. Along the way, we have crossed more than 400 D2C customers who are using our Prime services across our platform. Now within this D2C ambit, we had launched a pretty ambitious product just about 90 days back called ShadowFax360. It was a self-serve platform meant for smaller SMEs, smaller brands where any individual brand can self-onboard themselves and have a democratic access to our platform. Within 1 quarter of the launch, we already have more than 1,200 transacting sellers, and this number is compounding every single week. Moving over to the other experiment that we incubated last year was the business around Prime large, which was our foray into heavier deliveries via light commercial vehicles. We have already expanded to 10,000 pin codes, which was our full year target for FY '27. We hit that number within the first quarter. We are now raising our FY '27 target for Prime large to 12,000 pin codes. Revenue has grown close to 170% year-on-year to roughly about INR 75 crores ARR in this business line. 25% is the growth at a quarterly level that we have seen between Q4 and Q1 this year. So that's largely about the Express Parcel business where some of the core businesses are firing, some of the newer experiments that we had created and the newer product lines are continuing to show very, very good signs of success. Switching gears and moving into one of the most interesting bits about the commerce of this country, which is around quick commerce. Well, for quick commerce, the pie is just getting bigger, not just more crowded now. Hyperlocal has grown about 53% year-on-year, 17% over the last quarter itself. And this growth is not coming from one platform doing well. It is coming from the category itself getting bigger. As you will all know, quick commerce now has 5 to 6 large players and each one of them is growing with us. This demonstrates the deep potential of quick commerce in the country, and we are the ones who are powering that growth. Strong ambitions communicated by Amazon now are great for us as our wallet share with them is higher than that with others. Further, there are also hundreds of vertical quick commerce companies, which continue to grow rampantly by solving for category-focused assortment. Even in food delivery, which is a fairly mature segment of hyperlocal, we are seeing emergence of low order value models. This will make the pie larger as seen in China as well. More orders, more frequency, more density on the ground and every one of those orders will require somebody to physically deliver, and that's where Shadowfax gains. Now within quick commerce, there's this exciting element around dark stores. If you remember, last quarter, we had made an announcement that this year, we are going to open 100 dark stores for the full year. We are super proud to communicate that out of those 100 Dark stores, 47 are already live as on 30th June and another 20 are on the way to go live. This is nearly half our full year commitment delivered in the first quarter itself. Today, we are live across 6 metro cities and some of the best-known fashion beauty platforms in the country are anchoring that network. Today, we are seeing every category is having its own vertical quick commerce business, be it grocery, fashion, beauty, child care, pet care, even building materials. The reason is simple, and it is very good for us. These specialist brands want to spend their time, their capital on what they do best. For logistics, they prefer to depend on a specialist like us. This is exactly the role we played in vertical e-commerce about a decade back, and it is exactly the role we are playing in vertical quick commerce today. We believe vertical quick commerce can grow to 20%, 25% of the overall quick commerce market, following exactly the same path that e-commerce took. This is about a brand-new market being created, and we are helping build the roads it will run on. This is a great place to be for us. Now while we have spoken about various segments of how they have performed over the last quarter, I want to draw your attention and zoom out a bit to talk about the company and the culture, which is driving some of these things in action. Every single thing became -- began as an experiment. Prime was an experiment a couple of years back. Prime Large was an experiment we started last year. SF360 was an experiment we just launched 90 days back. Dark stores was an experiment we patiently ran for more than a year before we committed capital to it. As an organization, driving success in our core business while also getting some of these experiments to work and scale is something we attribute to the strong organizational DNA where we cultivate this innovation. We are extremely proud of the success and remain excited about the newer areas that we continue to bet on. Now before I close and hand it over to Praveen, a few closing remarks from my side. This quarter asked a great deal of this company, and frankly, the company answered. But here is what I want to leave you with because it tells you are far more about our future than about our past. While the environment was at its most demanding, we chose to build. This was the quarter in which we added more physical capacity than any quarter. We added more pin codes than we ever have. That is who this company is. When the environment gets tougher, we lean in aggressively rally our troops to come out stronger. This is what we did back in 2017. This is what we did back in 2022. This is what we are doing now. We call it the build mode. As we are stepping into the rest of this year with more capacity, higher coverage, more customers, stronger conviction than any point in our history, I have never been more excited about where this company is headed into. With this as a backdrop, let me pass on the mic to Praveen to discuss our quarterly performance. Thank you.

Thanks, Abhishek. Good evening, everyone. I think all of you would have already reviewed the financials. I will try and give a little flavor of how we went about meeting our numbers in this quarter. Firstly, very happy to say that we have delivered another record quarter across every key metric. Our revenues grew 65% year-on-year to INR 1,358 crores. It's a fifth consecutive quarter of 65% plus growth. And more importantly, we also continue to grow sequentially. Quarter 4 to quarter 1 revenue up 10% through what is typically a seasonally softer quarter. Order volumes reached nearly INR 25 crores, growing 83% year-on-year. That's INR 100 crores now on an annualized basis. To put that in perspective, we delivered as many shipments this quarter as we did in the entire FY '23. Now growth once again has translated into stronger profitability. Adjusted EBITDA rose to INR 67 crores, with margins expanding to 4.9%, which was 4.7% last quarter. And profit after tax reached a record INR 65 crores. This was the most profitable quarter in our history and again, the third consecutive quarter in which we have been able to say that. To comment on our business lines, Abhishek already touched upon, Express vertical continued to rapidly outgrow the industry. Hyperlocal delivered substantial sequential growth and other logistics services returned to sequential growth as critical log integration and more importantly, dark store revenues continue to scale the vertical. Now I want to spend a few minutes on the part of this quarter we are the proudest of because it's the part that does not show up in a growth number. Abhishek told you at the start about the macros, the fuel shock and labor squeeze. Let me tell you exactly how we absorbed them. On diesel price, many of our contracts allows us to pass increases straight through to our customers, and we had every right to take that hike on day 1, but we chose to lag it by 5 days and carry it on ourselves. See, in a quarter when our customers were absorbing pressure from every direction, we decided that this relationship was worth more than the 5 days of pass-through. That's the kind of decision that we cannot express on a slide, but it is why these relationships also last. We were not going to let the external environment decide our margins. So to compensate for headwinds, we really worked hard to improve efficiencies across our cost base. I want to just name a few. So our lost shipment debit cost, that's come down to 5.5% of revenue, which was 7.9% a year ago and 6.1% last quarter, Q4. We did a lot of work on transportation and linehaul costs. Transportation costs held flat sequentially in a quarter where we opened 76 new pin codes and all of them will be running below capacity initially. The largest cost line item, delivery partner expense went up just by 10 bps quarter-on-quarter despite significant supply squeeze and growth in hyperlocal verticals. And running underneath all of this now is technology deployed at scale, not pilots, not proofs of concept, but production systems carrying millions of transactions. Just 2 examples I would like you to hold on to. on what we have done on this front. The first is Delivery Partner Buddy, which is an AI copilot for our riders. It's a multilingual AI agent that resolves our rider partner queries and issues. It now handles around 16,000 rider conversations in a single day and roughly 97% of queries are all resolved without a human agent ever touching them. This buddy also learns -- continuously learns itself, resulting in even higher auto resolutions in due course. That's one example. The second one is what we call as Vision AI at pickup. This is a feature that we have deployed in our reverse process where riders are picking up reverse shipments. It is catching roughly 40% of bad pickups before they become losses. And all this at about just 35x lower inference cost than a frontier model to charge us. So what this does is it helps us reduce our QC losses, which is a part of our lost shipment debit cost line item. So those are examples. These are the places where our margin expansion is actually coming from, not from pricing it, not from cutting corners on service, from doing the same work with fewer errors and less waste at a scale that compounds every quarter. And let me say what Abhishek always quotes, AI is making the engine behind the scenes smarter, but the front line stays human. The delivery partner, the conversation at the door, the problem solved on the spot, all these remains a person, a human always. With that, we will open it up for questions. Youssef, over to you.

[Operator Instructions]. First question is from the line of Gaurav from Morgan Stanley.

Congratulations on stellar results. My first question is on your improved growth outlook compared to the previous quarter. Obviously, this is supported by a very strong performance in 1Q, but there's also assumption that you are building in from 2Q to 4 quarter. So just trying to understand the confidence behind those assumptions, especially the metrics around in-sourcing, outsourcing that you alluded to in your comments also, which allows you to kind of improve the outlook from an overall revenue perspective.

Thank you, Gaurav, for the question. I'll take this one. See, growth in our -- typically, Shadowfax is an organization where we work with enterprise customers. And enterprise customers, we typically get a fair degree of visibility, especially when we get into the sales season around the kind of volumes one should expect because necessary capacity actions have to be created in that. I think be it working with the large marketplaces where they do also have some sort of in-house delivery ecosystems. Today, we can probably say that we have a fair degree of visibility and high degree of confidence on the numbers that we are projecting. And hence, we are revising our estimates from a growth standpoint. Typically, all of our large customers in the enterprise give us forward projections so that, again, those capacities get created in due time. Now for the customers who do not have alternate ecosystems for delivery who 100% depend on 3PL, it's largely a function of the investments and the growth outlook that we see from our existing tail of growth and the new customers that we are going to acquire. What we see is that our rapid investments and hiring of sales teams, investing into D2C brands and the tailwinds that we are carrying for the last few quarters, the new customer growth looks to be quite aggressive and positive. And just to cut the answer to a short one, I think we are fairly confident on the numbers that we are looking at.

Got it. My second question is on the -- probably front-loading of the investments and CapEx. You gave a number of INR 60 crores, which is pretty strong, like high number for a quarter. Just trying to understand how much of this is because you have seen the upgrades to your current growth? Because my assumption is all these current growth numbers is already backed up by the investment that you made last year. So this upfronting of the investment probably has to do beyond FY '27 outlook that you have in mind, which is why you are kind of upfronting some of these investments like across the board, not just like this in terms of square footage of space, but also the dark store that you talked about, the pin code coverage that you talked about, the large parcel pin code reach that you talked about, everything looks like you have upfronted the investment here. So obviously, that has to do with the confidence beyond just FY '27. So I'm just trying to reconcile the outlook with the investment that you have made.

So yes, Gaurav, I'll try to answer this question in multiple parts. But you're absolutely correct. I think our view on long-term growth outlook continues to stay quite aggressive and strong. And every quarter that passes by, I think the confidence on the growth outlook is only going up right now. Now having said about investments, so there are 2 kinds of investments that we have to do as an organization. One is around CapEx. The other one is around OpEx, which largely comprises about people, trucks and rentals. Speaking first about CapEx, you're absolutely right. a lot of our investments typically have to be front-loaded before the sales season because sales season, you typically see a huge peak and that sort of peak stabilizes post that. While last year was something interesting where post peak also, we saw sequential growth. But typically, we plan for CapEx for the peak season. And hence, in the first 2 quarters of the -- of any financial year, you tend to see a higher CapEx outlay getting executed on the ground. Now within that, if you see the slide in our presentation, see, we have not changed the nature of the CapEx. Everything we are investing in is the same set of products that we were even doing in the previous year. 77% of the CapEx that we are talking about has gone into network and automation. To make it simple, network and automation typically means everything which is part of our sortation centers. So be it the sorting machines, be it the infrastructure, be it the IT and any sort of electrical expenses from an infrastructure side, 77% of these expenses continue to be focused on the middle mile capacity enhancements that we are doing. And you are right, these are very, very long-term investments. Typically, these facilities, once you create last for 5-plus years as well. So we continue to make these kind of investments. Secondly, again, you're right, we are expanding our pin codes. We are going -- we are expanding our coverage into the deeper rural areas of the country, and that has an OpEx impact. But yes, all of that is a continuous investment we are doing as we are seeing some of these growth projections from our customers.

Got it. My last question is on some margin bridge, if possible to give because there are multiple elements that have played out during the quarter, which is fuel price hikes, the labor cost escalations, some operating leverage that has come through your business and there could be other factors as well. So a broad bridge would be very, very helpful.

Yes. Gaurav, I'll take that. So see, essentially, as we said, right, because of the fuel hike, for the last few days in the quarter, we took that additional cost. So as you see, our transportation cost has gone up from last quarter, 18.7% to 18.8%. That's one cost increase that has happened. Partner expense from last quarter has again slightly increased because, of course, there was a supply squeeze. Our hyperlocal also grew at a faster pace sequentially. So that's another area. The -- if you see the consumable cost also has gone up by 0.1 percentage points, which is, again, some of the inputs are linked to crude prices and some prices actually took off by middle of the quarter. So that's responsible for the 0.1% increase. And all other expenses put together was 0.1%, but significant benefits have come from, say, lost shipment where we did a huge amount of work in this quarter. So that's come down from 6.1% to 5.5%, in fact, what you see is not so straightforward because, for example, had we not worked on improving our efficiencies, our -- for example, transportation costs may have been higher than what it is today. Our partner expenses could have been higher than what it is today. And even our employee benefit expenses could have been higher than what it is today. So we saw that there is a higher cost incidence. And we said, okay, let's work harder to keep it within our limits. So that's -- I don't know if that helps like a bridge, but that should give you a flavor.

No, this is helpful, Praveen. Just a follow-up. Is the full impact of the cost already reflected in the financials in 1Q or they are likely to come over the next 2 quarters?

Yes. More or less, it's reflected in quarter 1. The cost may be higher, but we'll also have a little upside from the revenue come in to neutralize that.

Next question is from the line of Mukesh Saraf from Avendus Spark.

My first question is on the Express segment itself. And our network currently is largely set up for the large horizontal platforms. But obviously, your focus now is on the D2C as well as the prime large. So just trying to understand how much of the existing network can kind of accommodate growth in these 2 subsegments? Or will entirely or will majority of the growth here will have to come through, say, newer infrastructure and newer network that you're going to set up?

Thank you, Mukesh, for the question. I'll take this up. So while we are setting up prime and prime large sort of service lines, one thing we want to tell everyone over here is that there is no dedicated infrastructure for any particular service line or a particular line of customers. How we have solved as a supply chain company is that for different line of services within the same infrastructure, within the same last mile hub, sortation centers, all trucks, we have created prioritization based on what the customer needs. Not all customers are on the same SLA, as you would understand. So different customers have different SLAs we call this segmented supply chain, okay? So within the same supply chain, within the same sort center, multiple SLA kind of configurations run and that orchestration is done by the in-house technology that we have created, how to ensure that the brand which needs a same-day delivery can go within the same roof versus, let's say, a low-value shipment, which again has to be shipped in a different configuration maybe altogether. But as I said, there is no dedicated infrastructure that we have set up for any particular service lines. If you end up setting dedicated infrastructure, it has a huge implication on operating leverage and the costing which our customers expect, the business has become completely unviable.

Maybe we can go to the next.

As there is no response, we'll move to the next question from the line of Sachin Salgaonkar from Bofa.

Congrats management on great set of numbers. I have 3 questions. Let me go through them one by one. First question would be great if you guys could dissect the 38% growth, what you guided. Is this primarily getting driven by Express? Is it QC? Is it hyperlocal? Any rough guide in terms of how the individual businesses could grow?

So I think it's a combination of both the businesses. We are seeing upside in hyperlocal as well as e-commerce. E-commerce, given the tailwinds which we are coming with, with the new customers that we have acquired over the last 2, 3 quarters, we believe that growth is going to sustain. And hence, there is a readjustment on these target numbers. Similar sort of a view even for quick commerce, where we have seen upsides in newer customers like Amazon now, where we believe that some of the benefits that we are seeing now, we had not anticipated that 2 quarters back. And given the kind of business we are doing and the visibility we have with those customers, we have basically been building it into our projections now.

Got it. Pretty clear, Abhishek. Second question is more a follow-up on these comments on new customer growth, what you mentioned. would love to understand how there is a mix change happening in your Express business between an e-commerce D2C vertical, let's say, as compared to a year back. And I did look at your market share at Express for this quarter versus last quarter. You did mention about a 28% to 30% market share versus a 27% to 29% last quarter. So the question out here is, is this gain more at the expense of smaller players or larger player?

Well, I think I'll answer the market share question first. What we are seeing in the market today is that the consolidation continues to strengthen between the 2 large players. And every quarter, the 2 large companies in the Express Parcels segment are continuing to gain market share. And that's something we have been observing as a trend over the last probably 4 to 6 quarters now. So I think that's a trend that we have been seeing. Around Again, D2C brands was a relatively smaller business for us 4 quarters back. 8 quarters back, it was virtually nonexistent. 4 quarters back, I mean, it became some smaller numbers. Today, I mean, that has grown to almost 2.7x. So you can imagine that the D2C brands and the associated smaller businesses are growing significantly faster than the rest of the business.

Got it. Super clear. And third question is on the quick commerce side. And while we understand, let's say, how an e-commerce entity thinks about in-sourcing and outsourcing because one of them is public, I would love to actually understand from you a framework which you guys could help analysts and investors understand how these quick commerce platforms are thinking between in-sourcing and outsourcing. There was a comment in the presentation where you talked about e-commerce platforms focusing more on outsourcing. But how do the incumbent quick commerce and food delivery guys think? Is there a rough proportion of their orders which they outsource? And is there something where they especially go to specialists like you for delivery?

Yes. No, that's a very, very good question. I'll tell you a larger point around outsourcing or having multiple supply chains in any given line of business. And what I'm going to say stands true for any sort of online business today, be it e-commerce, food delivery or quick commerce. In this country, it is impossible for any supply chain to come up and say that we are the best supply chain every single minute of the day, every single pin code, every single route of this country. Our country is extremely complex. So having just a single supply chain to depend all your fortunes on is never a great idea. To manage for the end customer and to optimize your experience for the last customer, every supply chain tends to diversify and have multiple solutions. Same goes for quick commerce. While in quick commerce industry, we are the single largest player operating today, where now we have a meaningful market share. And we believe our market share will be more than 50% today in the quick commerce outsourcing segment. Typically, all companies think about us having as an alternate supply partner rather than a capability-driven supply chain because not every day, their own in-house supply chains will always offer them the best SLA. Now if for a marginal price increase, you are having access to a supply chain, which meaningfully improve your customer experience and you do not lose that customer in an extremely competitive environment to your competitor, it makes sense to outsource. What we are seeing is that like customers can outsource even maybe 20%, 25% of the volumes if there are enough players available, given we are the single largest player of the national scale right now, we have seen the outsourcing levels in the industry to be trending anywhere between 12% to 15% today. I hope it answers your question.

Abhishek, super clear. One quick follow-up for Praveen, more a bookkeeping question. Praveen, what is the impact of the minimum wage hike in the 4 states on your margins?

Yes. We have roughly taken about between INR 2 crores to INR 2.5 crores a month impact because of minimum wage impact coming from various states.

See, one thing also to understand about our business is that, see, we necessarily don't always pay minimum wages to our contractual employees. A lot of people actually get incentives and markups on top of that because minimum wage level hiring is not the easiest at times. So typically, when the minimum wage correction sort of happens, not like whatever is the delta, it does not necessarily transfer to your P&L.

Again, yes, that's one. As I said, every cost line item would have looked different had we not embarked on a very strong efficiency drive at the beginning of the quarter. So we tend to improve utilizations and create stuff that will bring us benefits on the P&L.

Next question is from the line of Dhruv Jain from AMBIT Capital.