Delhivery IPO- will it reward investors after gains on listing day?

Delhivery is the largest and fastest-growing fully integrated logistics player in India by revenues. It provides a full range of logistics services, including express parcel, eCommerce delivery and heavy goods delivery. It was founded in 2011 by Mohit Tandon, Sahil Barua, Bhavesh Manglani, Kapil Bharati and Suraj Saharan.

It has a strong network infrastructure, which includes 122 gateways, 21 automated sort centres and 93 fulfilment centres.

The company had launched an IPO consisting of a fresh issue of shares worth Rs 4,000 crore, and an offer-for-sale of Rs 1,235 crore. The price band of the issue was set at Rs 462-487 a share. Proceeds of the fresh issue will be used towards funding organic growth initiatives, funding inorganic growth through acquisitions and other strategic initiatives and for general corporate purposes. 

The stock listed on the exchanges on 24th May 2022, at Rs 493, a gain of 1.23 per cent from the issue price on the BSE. During the day, it rallied 16.81% to Rs 568.90. It settled at Rs 537.25 apiece, a gain of 10.31%.

Competitive strengths

The company has been rapidly scaling its business along with investment in technology infrastructure, including its propriety logistic technology systems and data intelligence capabilities.

Over the years, it has grown its team size to cater to almost 90% of the pin codes in India. Number of active customers have been increasing over the years with more than four fold jump in the last three years.

Its technology stack consists of over 80 applications for all supply chain processes. The company has built a nationwide network, servicing 17,045 PIN codes or 88.3% of the 19,300 PIN codes in India.

Delhivery is able to reach most parts of India to service growing customer base with growing team

The 164-network infrastructure includes 124 gateways, 20 automated sort centres, 83 fulfilment centres, 35 collection points, 24 returns processing centres, 249 service centres, 120 intermediate processing centres, and 2,235 direct delivery centres.

Delhivery has a diverse base of 23,113 active customers (ex-Spoton) across e-commerce, consumer durables, electronics, lifestyle, FMCG, industrial goods, automotive, healthcare and retail products.

Delhivery’s investment in warehousing and warehousing technology gives competitive advantage

Integration with customers ERP systems and business processes have led to repeat business. In the first half of FY22, about 65% of its revenues were from customers who have been transacting with it for over three years India. Strong data processing & analysis and technological capabilities enable it to respond quickly to changes in the operating environment and capture higher market share.

Express Parcel (ecommerce delivery) is the maximum revenue contributor in 9MFY22

Delhivery provides a full range of logistics services, including delivery of express parcel and heavy goods, PTL freight, TL freight, warehousing, supply chain solutions, cross-border express, freight services, and supply chain software. The express parcel service is the major contributor accounting for nearly 70% of the revenues.

The company also offers value-added services such as e-commerce return services, payment collection and processing, installation & assembly services, and fraud detection. Delhivery is the largest and fastest-growing fully integrated logistics services player in India by revenue as of FY21.

Key risk and concerns

The company’s asset light business is highly reliant on asset partners and any inefficiency or disruption with asset partners can impact the operations and brand image of the company.

Major risks include its heavy reliance on e-commerce, despite diversifying into other industry verticals, dependency on network partners and other third parties for transportation vehicles and manpower.

The company has acquired assets (Aramex, Fedex, Primaseller etc.) and companies (Spot-on) as a part of its growth strategy. Failing to integrate newer acquisitions may impact profitability.

Lower entry barriers in many of the segments in which it operates, and dependency on certain large customers who contribute significantly to its business are a point of concern.

Delhivery continues to make losses despite reveanues doubling over last three years

Most of the company’s business is dependent on the health of e-commerce business. Online shoppers are expected to double to 330-350 million by FY26 from 160 million in FY21. In addition to e-commerce marketplaces, growth in new models such as direct-to-consumer, omni-channel and social commerce are expected to disrupt retail models.

Delhivery has doubled its revenues over the past three years but is yet not profitable. It widened its losses in 9MFY22.

Delhivery needs to catch up with competition on profitability

Delhivery also lags the competition in terms of profitability and profitability metrics. Though it is the fastest growing logistics company, it needs to come on par with competitors on many of the metrics.

Delhivery is in the process of deploying automatic guided vehicles, automatic storage and retrieval systems and unmanned aerial vehicles for parcel sortation, material conveyance or last mile delivery. Customized “soft robotics” or “exoskeleton” products have been planned to reduce fatigue for workers engaged in repetitive, labour-intensive tasks such as loading and unloading.

The company has also begun to transition more of the cargo and two-wheeler fleet to electric vehicles. In addition, the company is also testing UAV operations for specialized delivery use-cases and scaling up the capabilities in machine vision. Whether these initiatives would add to the customer base and the bottom line, needs to be watched out for.

Our View:

Even though the company has a good track record of execution built on its proprietary technology and has scaled up significantly, the logistics industry is extremely competitive, and the company is yet to turn profitable.

Investors need not rush to invest, based on the gains it made on the listing day, but rather should watch the strategy of the company over next few quarters and invest only once profitability is seen through the results.

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Research done by: Ketan Sonalkar, SEBI Rgn No INA000011255