The e-commerce sector has been attracting a lot of attention in the last few years. While private investors have been spoilt for options, there haven’t been many players in the listed space. As a result, companies in allied sectors such as logistics witnessed a sharp rise in stock prices due to scarcity premium. One such stock is Blue Dart, a leader in express delivery of packages.

The company’s share price zoomed from about ₹2,000 in early 2013 to over ₹7,000 in late 2015. Revenue grew at 14 per cent annually in the last five years and profit increased 11 per cent in that period. Blue Dart owns a fleet of six aircraft and 8,685 vehicles and services over 34,000 locations in India. It is the leader in the air express delivery segment, with a market share of 46 per cent.

Also, the company’s e-commerce segment has been growing at a fast clip and currently accounts for a fourth of the total revenue. These factors have possibly aided the stock’s re-rating.

With sentiments turning somewhat downbeat in the e-commerce space, the stock has corrected. Still, the current price of ₹ 6,022 discounts Blue Dart’s 2015-16 earnings (of ₹81.23 per share) by about 75 times. While this is certainly not cheap, it is in the lower end of the band of 70-140 times, within which the stock has been trading in the last three years. The company’s leadership position in the air delivery space, improving foothold in the rapidly growing e-commerce space and potential benefits from GST rollout bode well for the stock. Also, its asset-light operation should aid faster expansions in the long term. However, given the pricey valuation, the positives appear to be priced in. So, investors can hold the stock as there may not be any near-term triggers and upside may be limited.

Growing revenue Blue Dart earns revenue from its air and ground express delivery segments. In 2015-16, revenues grew 13 per cent year-on-year to ₹ 2,565 crore. The air segment contributes 80 per cent of the revenue and the company services seven cities. The main advantage with Blue Dart is that, unlike others, it operates aircraft with services to seven cities through its subsidiaries, Blue Dart Aviation (74 per cent owned) and Concorde Air Logistics (100 per cent owned). Backward integration with control over aircraft availability has helped Blue Dart retain its dominant position.

The air cargo industry in India is the second-fastest-growing market in the world, according to the International Air Transport Association (IATA). The market is expected to grow at 7 per cent annually in the next five years.

In general, high value but low weight items such as jewellery and electronic items are transported by air. On the other hand, ground transport is used for heavier items such as furniture and home appliances. Blue Dart has about 13 per cent market share in the ground express delivery business.

The company’s delivery services cater to both businesses and retail customers. The B2B segment growth has been subdued but is expected to pick up as the economy recovers. The implementation of GST would also aid revenue as warehouse consolidation by businesses would increase distances over which cargo would have to be transported.

e-commerce strength Blue Dart’s B2C segment has been growing at a fast clip, aided by the e-commerce boom. The share of e-commerce revenue doubled in two years to about 25 per cent in 2015-16. The total size of e-commerce-related deliveries is estimated at about 500,000 per day and Blue Dart is estimated to have a 20 per cent share of this pie. The company has a vast network covering over 34,000 locations, over 575 retail stores and a sizeable presence in non-metro cities.

The company collected an estimated ₹4,000 crore in cash for cash on delivery (CoD) payments (which typically accounts for nearly 75 per cent of e-commerce payments), last year. By comparison, India Post collected ₹1,300 crore. With strong demand growth expected in tier-2/3 cities and overall higher penetration of online shopping, the segment should continue to sustain robust growth. The e-commerce industry is expected to grow at 52 per cent annually till 2020, according to data from KPMG.

Fulfilling services Blue Dart also has e-fulfillment centres to offer value-added logistics service such as warehousing, quality checks and inventory management to e-commerce companies. It has a centre in Gurgaon (1.4 lakh sq ft) and Bengaluru (80,000 sq ft). There are plans to set up over 20 facilities, mainly in smaller towns, over the next three years.

The e-fulfillment market is estimated to grow at 34 per cent annually in the next five years. As the e-commerce segment consolidates, it is likely that many players may turn to specialised logistics service providers such as Blue Dart for their backend need. This should aid volume and realisation.

Improving margin Blue Dart has been able to sustain its operating margin and improve it slightly — from 12 per cent five years ago to about 13 per cent currently. Margin stability has been helped by a few factors. One, it has benefited from the fall in fuel prices. Two, even if prices were to increase, the company has clauses with its customers to pass on fuel costs and currency movements to its customers.

Margin is also aided by the company’s asset light model of operation that minimises capital expenses. Its aircraft are on sale and lease-back arrangements and most of its retail outlets, and facilities such as warehouses are on land with long-term leases. Margin could also improve as volumes ramp up in its e-fulfillment centres that are just operational.

The company’s operating cash flow nearly doubled to ₹350 crore in 2015-16. It has ₹287 crore cash as of March 2016 and a total debt of ₹392 crore. Debt-to-equity ratio is at a comfortable level of about 0.9 times.

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