Analysts bearish on Delhivery as volumes, integration costs weigh on Q1

Analysts, which expect improvement in the second half, are currently bearish on the stock

The share price of logistics unicorn Delhivery suffered a sharp fall of 6.4 per cent after the market absorbed the results of the first quarter of this financial year.

The company went from being earnings before interest, taxes, depreciation and ammortisation (Ebitda) positive to loss making, with fall in revenues and margins. It declared revenues of Rs 1,746 crore, a sequential drop of 16 per cent against Q4 revenues of Rs 2,072 crore.

Total expenses fell two per cent quarter-on-quarter (QoQ) to Rs 2,206 crore (Rs 2,254 crore in Q4). Year-on-year (YoY), revenues have grown 30 per cent on a low base, and total expenses have jumped 26 per cent.

In FY23, employee stock option (ESOP) costs will amount to Rs 261 crore. And, over a five-year period, the equity base will expand from 724.5 million shares (June 2022) to 803.86 million shares.

Given an adjusted Ebitda loss of Rs 217 crore, versus Ebitda profit of Rs 81 crore in the previous quarter, the Ebitda margin went to minus 12.5 per cent from 3.9 per cent in Q4 of FY22.

Adjusted cash losses were assessed at Rs 187 crore against profits of Rs 141 crore in Q4. These accounts are pro-forma. So, it is hard to make comparisons since the integration of Spoton took place during the last financial year and Q1, 2022-23 after the acquisition by Delhivery in August 2021. 

The integration is estimated to have impacted Ebitda negatively by Rs 196 crore, while the exit of Shopee from India may have impacted Rs 50 crore negatively.

Freight volumes into the newly-integrated network stood lower, with declines in the part-truck load (PTL) segment while express parcel services grew. Gross margin declined sharply (QoQ) from 28 per cent to 17 per cent. Higher-than-foreseen volumes created bottlenecks at key gateways and loads in some capacity-constrained locations, impacting operations.

Some customers reduced volumes in April-May 2022 and volumes started to pick only in June 2022. But Q2 is also likely to see somewhat reduced volumes. Some redundancies remain despite the operational integration of Spoton. The company has Rs 40-crore provisioning to cover possible breach of service-level agreements.

The Spoton acquisition will eventually yield operating scale in the integrated business and create larger network effects, improving transit times and reducing the total cost of operations. It may also enable Delhivery to enter a new market segment, economy PTL. 

Company expects to derive significant synergies from greater utilisation of people, fleet and infrastructure. It also expects to move to larger, more efficient fleet formats (tractor-trailer operations) and infrastructure (automated mega-facilities).

All of Spoton’s customers have now been on-boarded to Delhivery’s services, including express parcel, cross-border, truckload freight services and supply-chain & warehousing.

During the earnings call, the management stated that the integration of Spoton should be completed in Q2. This will allow for synergy with 7-8 per cent Ebitda margins by Q4, 2022-23. The business is skewed towards the second half, which will be stronger. But there was no guidance on Ebitda or revenue.

While issuing a “sell” recommendation, one analyst assumes Delhivery has a potential “profit pool” of Rs 6,300 crore by FY26.

If it captures 60 per cent of the profit pool, the valuation could reach Rs 1,416. And, 40 per cent share of the profit pool could be valued at Rs 944. If it captures 25 per cent of the profit pool, the target price would be Rs 484. Another analyst also has a sell recommendation with a target price of Rs 442.