Intense competition to keep Blue Dart Express profit under pressure

While investments will pay later, intense competition to keep profit under pressure

The stock of Blue Dart Express has increased about 8 per cent from its lows a month-and-a-half ago due to strong revenue growth in the December quarter. Sales in the quarter were up 21 per cent year-on-year and 7 per cent sequentially. However, despite the growth, brokerages are not too enthused by the company’s prospects in the near term. 

While sales were robust, operating and net profit dropped 25-31 per cent as the company continued to invest in the roll out its ground network. The investments have been impacting margins, which are now at the 5-7 per cent levels as against 11-12 per cent earlier. The company is looking at investments of Rs 150 crore annually for the next couple of years to tap into the growth avenues. 

Alok Deshpande of Edelweiss Research believes that while Blue Dart is making investments in ground express, a high growth category, it makes up only 20-22 per cent of its total sales and, therefore, is not large enough to meaningfully impact growth group-wide. 

 

The other worry is the intensifying competition in the business to commerce (e-commerce) category, especially given well-funded private equity (PE) backed rivals. Jay Kakkad of Ambit Capital cites the case of Delhivery and Ecom Express which have increased market share in e-com logistics (B2C) by incurring operating losses. 
 

Blue Dart has been expanding by more than double its reach as compared to its network two years ago. From levels of 7,000 pin codes it is now catering for 18,000 pin codes with the company indicating that it will reach 19,200 pin codes across the country over the next few months. However this expansion was premised on the assumption that PE-funded players will focus on profitability. However, given the expectation of further funding, e-commerce players could continue to put pressure on prices, keeping margins of players such as Blue Dart under pressure for a longer period.

Edelweiss has a reduce rating on the company given that its core business of air express is on a structurally low growth trajectory. Further, valuations at over 42 times its FY20 times in the absence of growth triggers, and competitive pressures are on the higher side. Investors will have to wait for an improvement in its margin profile before taking exposure to the stock.