Ecom Express acquisition will improve scale, profitability; poses low integration risk, says Delhivery

The note come a week after Delhivery announced plans to acquire Ecom Express for Rs 1,407 crore or around $165 million at an 80 percent discount to its peak valuation of $850 million.

As reported by Moneycontrol, Ecom Express opted for a distress sale after months of operational challenges, failed listing attempts, loss of a founder, and allegations of misreporting financials.

Integration not a risk

There is almost "100 percent overlap" in the count of customers and more than 95 percent in terms of revenue between the listed market leader and Ecom Express.

The customers are familiar with Delhivery systems and the company will be able to seamlessly route Ecom Express’ volumes into its network without further technology integrations.

In contrast, SpotOn's acquisition required the firm to onboard a large number of new customers, most of who were unfamiliar with Delhivery’s systems and with whom it had to sign new contracts and commercial agreements.

Moreover, Ecom Express’ volumes are roughly 40 percent of Delhivery’s Express Parcel volumes. In terms of overall network tonnage, Ecom Express’ tonnage is less than 20 percent of Delhivery’s.

SpotOn’s PTL volumes were twice those of Delhivery’s PTL business at the time of acquisition.

Ecom Express employees to be retained

Delhivery also plans to retain a majority of Ecom Express employees who are sufficiently trained on basic industry processes of pickup, sorter operations, bagging, loading/unloading, delivery and cash management, and are familiar with standard scan-based operations.

"Delhivery’s headcount is substantially larger than that of Ecom Express. Our regular rate of attrition provides sufficient opportunity for us to absorb qualified operating staff from Ecom Express, which is the bulk of the company’s total employee base," the company said.

Profitability to improve

Delhivery also expects the acquisition to further reduce its capital expenditure (capex) intensity as a percentage of revenue.

As of the December quarter, Ecom Express had a net block of around Rs 450 crore, with roughly Rs 370 crore of plant and machinery, office equipment, and computers and IT equipment.

Delhivery estimates these assets to be less than 50 percent utilised at the retained revenue assumptions, resulting effectively in around Rs 200 crore of net block available for future growth.

"This will reduce our future capex, especially towards sorters, over the FY27-29 period," the company said.

The logistics major also expects incremental profits from the retained revenue to substantially offset the temporary costs of network and overheads rationalisation.

"Delhivery has a more efficient cost structure as compared to Ecom Express. Retained revenue post completion of the acquisition will therefore generate incremental EBITDA margins that are substantially higher than Ecom Express’ standalone service EBITDA margins," the firm said.

The acquisition, which has to be approved by the Competition Commission of India, is expected to be finalised in six months after signing of the definitive documents but could take longer.