Russian Internet - Diving Deeper into E-Groceries, The Hottest E-Commerce Segment

In this report, we take a deep dive into the e-grocery segment, which is one of the fastest growing segments of e-commerce globally. Among public names, Yandex and Mail.ru Group provide an opportunity to make a bet on fast growth of this segment in Russia. Though the e-grocery segment currently generates a small piece of the pie for both names, the market should grow substantially in the next few years. We have a BUY rating on both stocks. > The segment has certainly caught investors' attention. The amount of capital being raised - both venture and public - in the food and grocery delivery segment is massive. We see this as a good reason to revisit the e-grocery exposure of Yandex and Mail.ru Group (MRG).> No single dominant business model. We analyze the business models of the current players in Russia and conclude there is not one that can be identified as clearly superior. In fact, a number of models can generate positive EBITDA at reasonable efficiency levels. The competition between dark stores, marketplaces and traditional retailers going online therefore depends on the investment they are ready to make into capturing market share and on how consumer behavior changes (e.g. consumers are showing a growing preference for super-fast delivery). Though the increase in e-grocery penetration will not challenge the existence of offline retail in the upcoming years, a reluctance to go online could certainly limit the growth rates for offline players.> Both stocks still a BUY. We have updated our models for Yandex and MRG to incorporate recent developments and the latest information regarding new businesses, as well as to update our figures for e-grocery unit economics. Having made several adjustments to our model, we continue to see both stocks as a BUY, with 24% upside for Yandex and 55% upside for MRG. For Yandex, we see the main drivers as a steady increase in Yandex.Plus subscribers, a recovery in ad spending, the fast development of new verticals (e.g. logistics, grocery delivery and the self-driving rover segment, which just got its first commercial contract) and a potential deal to buy out Uber from the taxi JV. For MRG, the same recovery of ad spending and the crystallization of value for gaming and edtech are the main drivers.> Risks. We see search market share loss, Russian macro, regulatory issues and new Covid-related restrictions as the main risks for Yandex. As for MRG, the same macro and Covid risks are valid, plus we see increased competition in social networks and the slow development of the subscription base as the main risks.