It is about two years since the IPO of Delhivery. Now, after some initial gains, the stock is trading below its IPO price, at ₹453. What’s the outlook for the stock?

Delhivery is one of India’s largest fully-integrated logistics provider with a reach of 18,675 Pin Codes out of 19,101 in India (nearly 98 per cent). It operates five primary revenue segments: 1) Express Parcel (EP), 2) Part Truck Load (PTL), 3) Truck Load (TL), 4) Supply Chain Services (SCS), and 5) Cross Border Services (CBS). Founded in 2011, Delhivery was largely a third-party B2C e-commerce logistics company for many years, with EP contributing over 80 per cent of revenue in FY20.

As e-commerce platforms reduced overdependence on third-party service partners/vendors, the exposure to a single service provider was typically restricted to 10-15 per cent of the regional volumes by then. With increased competition, there was limited pricing power for service providers such as Delhivery. However, after the acquisition of Bengaluru-based Spoton in August ‘22, Delhivery was able to strengthen its B2B capabilities. At the end of FY23, EP’s revenue share was at 63 per cent with Part Truck Load and Truck Load contributing 16 per cent and 6 per cent respectively.

What sets Delhivery apart is its prowess in technology and automation. It is one of the few logistics companies of scale to operate a mesh network. Typically, logistics companies operate a hub-and-spoke model, which is simpler to operate but has a few drawbacks. It can lead to slower response times, fragmented customer service and higher inventory costs. On the other hand, mesh networks are much more efficient and resilient. Also, they can be easily extended.

Investments have not translated into results

In order to build these capabilities, Delhivery has, on an average, spent 8 per cent of revenue on capital expenditure during FY19-23. That was expected to improve efficiency and thereby result in better profitability as volumes increased. Unfortunately, the investments have not translated into better financial performance. A significant portion of revenue continues to be spent on freight handling and employees. In FY23, freight & handling costs grew 13.8 per cent YoY even when revenue grew by just around 5 per cent.

As a result, despite a revenue CAGR of 45 per cent (FY19-23), margins at the EBITDA level continue to be negative, lagging other major players in the logistics industry. Blue Dart, for instance, has more than doubled its margin during this time.

When we break down the numbers at a more granular level, it is evident that both volumes and realisations have not grown in line with the investments of the past. During 3QFY22-24, realisations in EP and PTL have been flat. While EP volumes registered a CAGR of 8.7 per cent during this period, CAGR for PTL volumes was negative 10.6 per cent.

The number of active customers has increased at a CAGR of 53.8 per cent during FY19-23. While there have been indications that many non-profitable customers have been offloaded, the average revenue per customer has declined at a CAGR of negative 6 per cent.

Given the heightened competitiveness in the logistics space, realisations may continue to be under pressure. The stock is currently trading at 3x EV/sales, which is in line with its historical average. Bloomberg consensus estimates 18 per cent revenue CAGR during FY23-26, which appears too optimistic. We believe that there is more downside risk at the current valuations, especially if the financial performance continues to be underwhelming.