Elara Capital initiates coverage on Delhivery with ‘Reduce’, cautious against consensus optimism

The brokerage expects the company to be EBITDA positive by FY25

The chances of Delhivery missing consensus estimates on volume growth and operating leverage are more than not, according to analysts at Elara Capital and they have advised 'caution' to investors against 'consensus optimism'.

The analysts have initiated coverage on the logistics company with a ‘Reduce’ call and with a target price of Rs 413. The stock was trading at around Rs 409 at 9.20 am on the NSE on October 4.

Also read: Go First's settlement talks with Delhivery fail, legal battle to continue at NCLT

While stating that the company is on the way to becoming profitable, analysts added that the likelihood of missing the consensus estimates 'may weigh on the stock price, near-term'. They expect the company to be EBITDA positive by FY25 and PAT positive by FY27 (on high fixed costs on leased assets). The analysts also expect early investors through the private market to sell at incremental price points, adding to the supply of shares.

The brokerage’s analysts noted the investments done by the company to drive growth but do not expect these investments to deliver in the short-term.

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“In contemplation of high volume growth, Delhivery, in a deliberate dash, invested Rs 3 billion annually (on an average) through FY19-23. Thus, it did gestate a robust pan-India network and superior technology, while also setting itself to high growth expectations."

“But in our view, near-term volume/realization growth could be slower as: growth for B2C express industry pared to 15-20 percent from 25-30 percent average in the past five years, given large e-commerce platforms’ focus on captive logistics arms and tech disruption-led pricing strain; competition has intensified in B2B Express space given new entrants and expectations of high-quality service; supply chain contracts renegotiated at competitive rates,” said the brokerage.

One of the key risks highlighted is from excess capacity being added which has preceded demand, and which may trigger under-utilisation. The brokerage holds this view despite the 'huge addressable market' of $318 billion in logistics.

The company has an industry-first, integrated business model, with operations spanning many logistics sub-segments under a roof and managed via “state-of the-art tech with pan-India mesh distribution network”, wrote the analysts. But, they added, “the proof of concept is yet to be validated for scale-led operating leverage benefits. Recent acquisitions, macro challenges and investment in capacity expansions meant that freight and handling as also employee costs (leased/variable in nature) spiked in line with revenue in FY19-23 and unit economics are yet to turn favorable.”