Meesho's margins shine, but risks keep investors wary

Meesho Ltd's September quarter (Q2FY27) earnings showed operating leverage at work, even as competition and a potential demand slowdown kept investors cautious. The stock fell 0.5% on Thursday.

Operating revenue grew 34% year-on-year to ₹4,132 crore, while net loss narrowed to ₹132 crore from ₹411 crore. Net merchandise value (NMV) rose 23% year-on-year to ₹12,911 crore, and growth was even higher at 33% when measured over the 90 days before Dussehra this year and last year. Meesho’s mega blockbuster sale, which fell in Q2 last year, has shifted to Q3 this year.

Margin improvement

Contribution margin rose to 6% of NMV, from 4.6% in Q1 and 3.3% a year ago. Of Meesho’s two primary margin levers, logistics and advertising, logistics efficiencies drove the Q2 improvement. Deliveries were 15% faster year-on-year on higher network density, while AI helped reduce fraudulent orders, delivery re-attempts, cancellations and returns.

The challenge is that any savings in logistics costs are eventually passed on. Management has also cautioned against extrapolating Q2’s contribution margin over the near term, even as its medium-term target stands at 8-8.5%.

Meesho reaffirmed its guidance for 25% CAGR in NMV through FY31. Its expanding user base lends credence to this goal. Annual transacting users grew 21% to 284 million. First-time buyers rose 16% sequentially, but this was supported by higher marketing and promotional expenses, which increased to 2.9% of NMV from 2.1% in the previous quarter. Growth spending should normalize after the festive season.

Competition challenge

Competition could, however, keep costs elevated, particularly as AI potentially narrows the logistics moat Meesho enjoys. The company highlighted how AI data science agents have reduced the time required to take a model to live testing from 17 days to three days.

Meesho’s newer initiatives, including financial services, grocery and AI services, contributed just 0.3% of revenue, but their Ebitda loss widened to ₹41.6 crore in Q2FY27 from ₹13.5 crore in Q2FY26, against consolidated adjusted Ebitda (adjusted for ESOPs) of ₹172 crore.

Management also highlighted risks from the West Asia war, which could keep raw material and fuel prices elevated while putting household budgets under pressure. For Meesho’s value-conscious customer base, this could become material if the conflict persists longer.

JM Financial’s estimates value the stock at adjusted Ebitda multiples of about 60x for FY29 and 30x for FY30, among the highest in its internet coverage. That leaves little room for earnings or growth to disappoint.