Business prospects and track record augur well, but comes at a stiff valuation
The IPO of India’s leading logistics services company Delhivery opens on May 11. The issue size is around ₹5,235 crore, consisting predominantly of a fresh issue of ₹4,000 crore, and OFS of ₹1,235 crore. The fresh issue proceeds are intended to be utilised for purposes of funding organic/inorganic growth initiatives, and general corporate 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 cap of ₹35,284 crore. Including the cash that the company will raise from the IPO, its enterprise value (market cap – net cash on books) will be around ₹29,000 crore. Thus the issue values the company at an EV/Revenue (annualised nine month FY22 revenue) of 4.5 times. On post-issue Price/Book metric, it is valued at around 3.5 times.
From investing perspective, what works and does not work are as follows. What works – the company has a good track record of execution built on its proprietary technology stack and has scaled up significantly since its incorporation in 2011 to emerge as the largest fully-integrated logistics player in the country. The runway of opportunity also appears good given India’s long-term growth prospects and the crucial role logistics plays when it comes to commerce – B2B and B2C.
What does not work are as follows – while the issue priced at 4.5 times EV/Revenue does not appear very expensive unlike many of the irrationally-priced IPOs for unprofitable companies that have hit the markets over the last year, it does not appear cheap either. The company does not have a past track-record of profitability given focus on growth. While it has reached near break-even on an adjusted EBITDA basis for nine month FY22 (adjusted EBITDA margin of negative 0.72%), how profitable it can get at the net profit level in future, is still unclear and depends on how multiple variables play out, going forward
The current market environment is not conducive for aggressive risk taking when it comes to unprofitable companies, given uncertainties on inflation trajectory 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 deals with 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 can wait for now and look to enter the stock at lower levels when the opportunity presents.
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 returns services, payment collection and processing, installation and assembly services and fraud detection. Its network functions pan India and currently services 17,488 PIN codes, covering 90.61 per cent of the 19,300 PIN codes in India.
The company currently derives 59 per cent of revenue from express parcel delivery, 25 per cent from PTL, 4 per cent from TL, 7 per cent from supply chain solutions and 5 per cent from cross border.
According to the company, one of its differentiators versus peers is its proprietary technology stack and capabilities. Besides, its business being based on its in-house software which the company believes is curated to optimise operations, its technology has also enabled the company to capture and capitalise on data gathered from years of operations. The company claims to possess vast amounts of data intelligence with regard to multiple aspects of logistics (such as vehicle tracing, fleet data, locations and products data, transactions, vision data from cameras across facilities etc). These are used to enhance efficiency and utility to customers via analytics. The company operates on an asset-light business model and leases most of its network infrastructure.
The long-term business prospects for the company appear good given the opportunity in the logistics sector in India. While the direct logistics spend as percentage of GDP in India is generally on par with that in large economies like the US and China, the share of organised players is much lower. As per the company presentation, while the top 10 organised players hold a market share of 7-10 per cent in China and 15 per cent in the US, in India it is only at 1.5 per cent. This augurs well for the company as increasing use of technology and building scale to optimise operations favour organised players.
According to research by Red Seer included in the RHP, Indian logistics sector is expected to grow to $365 billion by FY26 from $216 in FY20, at a CAGR of 9 per cent. The company can grow much higher than that, as it can benefit from both industry growth and market share gains, as organised players push for gaining a larger hold in the sector. The company has been a share gainer within organised sector as well in recent years.
The company has witnessed strong growth and outperformed many of its peers in growth in the recent years. It reported revenue from operations of ₹4,811 crore for the nine months ended December 21. Annualising this implies very strong FY19-22 revenue CAGR of around 57 per cent. This includes benefits of acquisitions and would be a little lower on an organic basis, but still strong. For the nine months ended December 21, it reported adjusted EBITDA loss (after removing one-off items, stock-based compensation etc) of ₹35 crore.
While margins are still negative, it has improved year on year. Net loss was at ₹891 crore. Adjusted for one-off items net loss would have been around ₹300 crore. While there is scope for margins to improve as company gains from operating leverage, investors need to note that logistics business is a low-margin business and this needs to be factored while determining valuation multiples.