Analysts divided, but Delhivery's stock underperformance may reverse

There are conflicting views on Delhivery. The logistics player’s results for the July-September quarter (Q2FY24) are being interpreted as good by some analysts and disappointing by others.

As India’s largest listed logistics player, the company stands to benefit from the formalisation across the mostly unorganised logistics space.

Delhivery provides solutions to 23,113 customers, including e-commerce marketplaces, direct-to-consumer e-tailers, and enterprises across verticals.

The company’s in-house technology stack has 80 applications through which they provide various services.

Delhivery operates a pan-India network and services at over 96 per cent of PIN codes.

Delhivery’s diverse services include Express Parcel, Part Truckload (PTL) Freight, Truckload (TL) Freight, Cross-Border Services, and Supply Chain Services. 

Revenue grew 8 per cent year-on-year (Y-o-Y) to Rs 1,940 crore, in Q2FY24. Q2 is a seasonally weak quarter but growth was seen across all segments, except supply chain (SCS) and cross-border services. Adjusted Ebitda margin was stable at minus 0.8 per cent, 10 bps lower than Q1.

Net loss was lower at Rs 103 crore versus a loss of Rs 250 crore Y-o-Y. 

Momentum in the PTL business continued with volume growth (over 22 per cent Y-o-Y) as well as improved yields (over 5 per cent Y-o-Y). The other big gain is in TL, which is up 46 per cent Y-o-Y. 

The company has successfully renegotiated contracts in PTL and SCS businesses to improve profitability.

Working capital needs to be improved to 28 days versus 38 days in March 23 due to lower receivables days.

Net cash position as of September 2023 stands at Rs 5,360 crore, which gives headroom to continue looking for market share. 

The company has passed on efficiency gains in the B2C segment to gain market share and it has registered improved yields in B2B. 

The management did highlight that Q3 started well and reiterated that expenses are unlikely to rise in line with revenue growth in coming quarters, implying strong operating leverage. 

Management also says it is not looking to optimise yields in the Express Parcel segment and are unlikely to make pricing adjustments pushing for market share.

Any change in realisations can be attributed to a change in product/distance mix or volume growth. The company did highlight that Q3 has seen heavy products gaining in the mix.

In Q2, the company reported a de-growth of 9 per cent Y-o-Y and 20 per cent quarter-on-quarter (Q-o-Q) in the SCS segment, with revenue at Rs 164 crore. 

This decline is partly attributable to the deliberate reduction of unprofitable customers, commercial renegotiations with customers involving a shift from a capex model to an Opex model, and inherent seasonality. The management continues to remain confident about significant growth in SCS with the impact of new key customers from Q3FY24 so this is a key monitorable. 

The management expects better margins from H2FY24 onwards and it can point to the network expansion and the lower working capital needs as well as positive seasonality push. 

The management expects an increase in market share across e-commerce, D2C, and omni-channel segments. Its network gives it a strong position in tier 2 and 3 cities.

It’s also looking to diversify its customer base and expand into emerging markets. It is working to reduce dependency on its top five customers. It is attracting multiple SMEs in the Direct-to-Consumer (D2C) segment.

Adjusted Ebitda could break-even in FY24 given a strong H2, FY24.

The company could turn PAT/Free Cash Flow positive in FY26 given improving operating leverage and lower capex intensity as it completes network coverage. 

The stock of Delhivery has underperformed in 2023 and is down about 7 per cent in the past three months, versus a 7 per cent rise in Nifty.

According to Bloomberg, four of the six analysts polled in Bloomberg are bullish (two have sell ratings). Their average one-year target price is Rs 422.33 for the stock trading at Rs 387.30.