Are you going to subscribe to Delhivery IPO?

The listing of India’s leading logistics services company Delhivery opens on 11 May. The issue is around 5,235 crore INR, which mainly consists of a new issue of 4,000 crore INR and 1,235 crore INR. The new emissions proceeds are intended to be used to finance organic / inorganic growth initiatives and general business purposes. Delhivery is professionally managed and has no identifiable promoter.

At the upper end of the price band, the company will be valued at a market value of 35,284 crore. Including the cash that the company will raise from the listing, its company value (market value – net money on books) will be around 29,000 crore INR. Thus, the issue values ​​the company at an EV / Revenue (annualized 9-month FY22 revenue) of 4.5 times. At post-publication price / book metric, it is rated at about 3.5 times.

From an investment perspective, what works and does not work is as follows. What works – the company has a good track record for execution built on its proprietary technology stack and has been scaled up significantly since its incorporation in 2011 to emerge as the largest fully integrated logistics player in the country. The path of opportunity also appears good given India’s long – term growth prospects and the crucial role that logistics plays when it comes to trade – B2B and B2C.

What does not work is as follows – while the issue, which is priced at 4.5 times EV / Revenue, does not appear very expensive in contrast to many of the irrationally priced IPOs for unprofitable companies that have hit the markets in the last year, nor does it appear cheap. . The company has not had previous results in terms of profitability given focus on growth. Although it has reached almost break-even on an adjusted EBITDA basis for nine months FY22 (adjusted EBITDA margin of negative 0.72%), it is still unclear how profitable it can be at the net profit level in the future and depends on how more variables play out, going forward

The current market environment is not conducive to aggressive risk-taking when it comes to unprofitable companies, given the uncertainty about inflation and interest rates – both in developed markets and in India. Markets may continue to remain volatile and under pressure over the next few months. Further, how the company handles inflationary pressures and any impact due to lower-than-expected GDP growth needs to be tracked over the next few quarters.

Given these factors, long-term investors may wait until now and look to enter the stock at lower levels when the opportunity arises.

Business operations

Delhivery provides a full range of logistics services, including express parcel delivery (parcels weighing less than 40 kg), PTL freight (10-2,000 kg), TL freight (point-to-point freight), warehousing, supply chain solutions, cross-border express and supply chain software. It also offers value-added services such as e-commerce return services, billing and processing, installation and assembly services and fraud detection. Its network features cover India and currently serve 17,488 PINs, covering 90.61 percent of the 19,300 PINs in India.

The company currently receives 59 percent of revenue from express parcel delivery, 25 percent from PTL, 4 percent from TL, 7 percent from supply chain solutions and 5 percent from cross-border.

According to the company, one of its differentiators in relation to peers is its proprietary technology stack and capabilities. In addition to being based on its internal software, which the company believes is curated to optimize operations, its technology has also enabled the company to capture and utilize data collected from many years of operation. The company claims to possess huge amounts of data intelligence with respect to several aspects of logistics (such as vehicle tracking, fleet data, location and product data, transactions, sight data from cameras across facilities, etc.). These are used to increase the efficiency and usability of customers through analytics. The company operates on an asset-light business model and leases most of its network infrastructure.

Long-term prospects

The long-term business prospects for the company seem to be good given the opportunity in the logistics sector in India. While direct logistics consumption as a percentage of GDP in India is generally on a par with large economies such as the US and China, the share of organized actors is much lower. According to the company presentation, the 10 best organized players have a market share of 7-10 percent in China and 15 percent in the US, while in India it is only 1.5 percent. This bodes well for the company, as increasing use of technology and building scale to optimize operations favors organized actors.

According to research from Red Seer included in RHP, the Indian logistics sector is expected to grow to $ 365 billion before FY26 from $ 216 in FY20, at a CAGR of 9 percent. The company can grow much higher than that as it can benefit from both industry growth and market share as organized players push for a bigger roof in the sector. The company has been a share winner in the organized sector in recent years.

Financial performance

The company has witnessed strong growth and has surpassed many of its peers in growth in recent years. It reported revenue from operations of DKK 4,811 million. INR for the nine months ending December 21st. Analyzing this implies a very strong FY19-22 revenue CAGR of around 57 percent. This includes benefits of acquisition and would be slightly lower on an organic basis but still strong. For the nine months ended December 21, the adjusted EBITDA loss (after removal of non-recurring items, stock-based compensation, etc.) was reported at DKK 35 million.

Although margins are still negative, they have improved year by year. The net loss was DKK 891 million. Adjusted for non-recurring items, the net loss would have been around DKK 300 million. INR. While there is potential for advances to improve as the company gains by leveraging, investors should note that logistics business is a low-profit business and this should be taken into account while determining valuation multiples.

Published on

May 7, 2022