The initial public offering (IPO) boom for New Age companies has faded much too quickly. Will investors make a bid for Delhivery?
The initial public offering (IPO) boom for New Age companies has faded much too quickly. Will investors make a bid for Delhivery?
When Delhivery, India’s most valued logistics startup and a favourite of private equity companies, released its draughts red herring prospectus (DRHP) in late 2017, it was an amazing year for the stock market. During this time, there was a lot of interest in New Age firms. The euphoria in the market has given way to caution as investors burn their fingers in the IPOs of loss-making digital companies like Paytm and Zomato.
According to industry estimates, Delhivery is to postpone its initial public offering (IPO) by a few weeks or maybe a quarter because of the present volatile market conditions. Industry watchers believe this is a sensible decision since it would give the Gurugram-based business more time to enhance its financials and refine its pitch to public-market investors in the future.
“As New Age businesses grew in popularity, it encouraged people to invest, speculate, and profit. The bubble, however, has broken. In addition, the worldwide business landscape is in turmoil. The LIC IPO, which is set to take place around the same time, is expected to bring a lot of liquidity into the market “Ventura Securities’ head of research, Vinit Bolinjkar, agrees. “This will have repercussions for Delhivery’s initial public offering, which is a major issue.”
Delhivery’s INR7,460 crore initial public offering (IPO) will contain a fresh issue of equity shares worth INR5,000 crore and an offer for sale (OFS) by existing shareholders for INR2,460 crore, according to its DRHP. Delhivery is reportedly seeking a valuation of USD6 billion to USD6.5 billion.
The primary question is if Delhivery can present a compelling storey in the face of rising investor scrutiny of loss-making companies trying to list on stock markets.
Limits on valuation are becoming more common.
According to industry experts, a slew of critical issues must be solved right once.
According to institutional investors, institutional investors are too wary about Delhivery on several fronts.
“First and foremost,” says Vikash Khatri, founder of logistics and supply-chain consulting business Aviral Consulting, “whether there is opportunity for growth in the company’s profitability and future development drivers.”
Starting with the USD6 billion-USD6.5 billion valuations that Delhivery is seeking based on the price-to-sales strategy, stock-market analysts have raised concern that the sum is too expensive in light of current market conditions. Despite its rapid growth, Delhivery has failed to achieve profitability.
“Delhivery’s market capitalization is equivalent to that of the Container Corporation of India (Concor), a company founded in the 1980s that possessed large assets.” Although expensive valuations are appropriate for all technological enterprises since they come with the promise of the future, “it is especially true for public companies,” according to Deepesh Kashyap, vice-president of Equirus Securities.
According to the publication, Delhivery is valued at at least USD4.5 billion, according to analysis by a local institutional equities trading firm, giving it a more attractive starting place for investors.
According to Equirus research, if the company continues to lose money after going public or slower growth than expected, its stock will suffer.
Logistics is a serious macro company that is heavily dependent on economic conditions. Delhivery’s most recent funding was roughly USD4 billion six months ago. Consequently, experts have trouble explaining why the company is asking for a 50% or more significant premium in its first public offering.
At a USD6.5 billion valuation, we don’t expect much more than a ten per cent to fifteen per cent gain in value. Given its size and scale, as well as its increasing profitability, the market may still be prepared to reward it with a bit of profit. Alok Deora, head analyst – institutional equities at Motilal Oswal Financial Services, believes the stock market will not see a “runaway increase.”
The most critical topics to emphasize in the IPO sales presentation
Delhivery’s growth rate has been very good since the company began. There was a 59% increase in sales from FY15 to FY21. The company’s sales went up from INR222.8 crore in the previous fiscal year to INR3,646.5 crore in the next year. In particular, the B2C sector, which made up 70% of Delhivery’s total sales in FY21, played a big role in the company’s growth. Investors won’t be able to find businesses like Concor that make so many sales.
Investing in Delhivery is also a great way to get in on the e-commerce growth storey. The entire e-commerce volume was expected to reach 1.5 billion shipments in FY20 and grow at a rate of 32% to 35% compound annual growth rate (CAGR) by FY26, reaching 8 billion to 9 billion shipments by FY26. They say that third-party logistics companies (3PL) handled 41% of all shipments for e-commerce in fiscal year 21. It looks like their share will rise to about 46% by the end of fiscal year 26.
Delhivery has a distinct edge over its publicly traded competitors. It is the biggest third-party e-commerce logistics provider, with a 40 per cent market share in terms of volume. Even though most of the industry is controlled by the captive logistics verticals of Flipkart and Amazon, the percentage of third-party logistics (3PL) providers is likely to grow.
The firm now has the most extensive network in India for heavy-parcel delivery (large appliances and white goods) has increased the number of such shipments to 5.2 million in FY21 from 0.85 million in FY19, according to the company. Most industry analysts believe that the firm will retain its market share.
Following the purchase of Spoton Logistics last year, Delhivery’s second significant sector is business-to-business express, where it has risen to become one of the top three part-truck loads (PTL) operators in India.
Delhivery has provided very optimistic growth estimates for several different sector verticals in its DRHP. However, maintaining such development rates from such a high starting point will be a difficult task. To continue to develop, Delhivery will need to scale its network infrastructure while also integrating its B2B and B2C verticals while retaining operational efficiency.
Because logistics is a macroeconomic industry, the development of logistics enterprises will be determined by the state of the market. According to Delhivery, the industry leader in express-parcel services, the company has forecast a 30 per cent compound annual growth rate (CAGR), which may be susceptible to market dynamics and competition from rivals Flipkart and Amazon.
In PTL, it has forecast a 30 per cent compound annual growth rate (CAGR). However, in retrospect, the sector has not grown more than 16 per cent -17 per cent. Spoton, on the other hand, has been one of the fastest-growing firms, with a compound annual growth rate of 20 per cent.
What Delhivery has to do to improve its situation
Analysts believe that for Delhivery to be successful in a significant way, it would need to concentrate on diversification. According to them, a primarily B2C-driven corporate structure would make it impossible to achieve margins in the region of 10 to 12 per cent. The reason for this is that B2C is a highly competitive and price-sensitive industry with substantial overhead expenses, such as technology and infrastructure expenditures, which must be considered.
With over 80 packaged apps and technology staff of 474 people, including data scientists and engineers, according to research company RedSeer, Delhivery has made the most significant investments in technological advancement and automation among India’s e-commerce-focused logistics firms.
In contrast, it will not be realistic to compare Delhivery’s technical skills with those of companies such as TCI Express, since the latter is primarily involved in B2B road express, where technology utilization is much more restricted than it is B2C transportation.
Delhivery’s revenue mix in FY21 is heavily dominated by B2C (70 per cent), with just 11 per cent coming from PTL or B2B express and the remainder coming from truckload services, supply chain, cross-border services, and other sectors.
Motilal Oswal Securities has published a study stating that the most critical risk is that a substantial amount of its revenues (about 42 per cent in FY21) is derived from contracts with its top five clients. This is because the e-commerce industry is heavily dominated by the top two players, namely Amazon and Flipkart. According to market sources, TCI Express and Blue Dart Express have a far more varied client base than their competitors, with no one customer accounting for more than 1 per cent -2 per cent of their total sales.
However, due to the purchase of Spoton Logistics and excellent success in Delhivery’s own independent B2B express business, the share of B2B sales in Delhivery’s revenues is expected to have increased this fiscal year considerably, as previously stated.
As predicted by industry insiders, Delhivery’s B2B sales, which include Spoton, are likely to account for 20 per cent to 25 per cent of the company’s overall revenues in the January-March quarter of the fiscal year 2020. The market research firm Market Intelligence estimates that Delhivery’s consolidated B2B sales were roughly INR150 crore last month, compared to around INR450 crore in B2C revenues.
Delhivery has said on several occasions that it intends to grow its B2B vertical to the point where it accounts for 50 per cent of total sales in the future. In reality, it may profit from the fact that organized firms continue to acquire market share at the expense of unorganized competitors. According to reports, the express-PTL market is predicted to quadruple from USD3 billion in the fiscal year 2020 to USD9 billion in the fiscal year 2026, with the percentage of organized players likely to increase significantly.
Expanding B2B, on the other hand, will be a very different ballgame than gaining market share by offering lower prices, which is a point that Delhivery’s rivals often emphasize. “Delhivery’s listing will bring more price sensitive to the market,” according to an industry source. ” The ability to engage with clients and build relationships is critical in the B2B industry. Simply lowering prices may not be enough to ensure better volumes shortly.”
While Delhivery’s Ebitda continues to be in the negative region, the company’s losses have not become any worse. This shows that the company has good operational leverage on its high fixed expenses (such as recruiting, pay, and technology), which suggests that its profitability profile is increasing.
However, the question is how long it will take for Delhivery to achieve positive Ebitda.
According to industry analysts, Delhivery may be on the verge of turning the turnaround and posting positive Ebitda margins by fiscal year 24. This potential, on the other hand, is subject to certain restrictions. The Ebitda of Ventura will remain negative as long as the company’s development slows and it remains in the investment phase, according to Bolinjkar of Ventura.
The present revenue mix is projected to fuel Delhivery’s development for the foreseeable future, with business-to-consumer (B2C) sales continuing the most significant component of the company’s revenue pie. As a result, the prognosis for profitability shortly may be tempered somewhat.
“Though we anticipate margins to rise over the next two years, we do not expect them to move above 5 per cent -6 per cent,” adds Kashyap of Equirus Securities. Delhivery’s competitors Blue Dart and TCI Express, on the other hand, generate margins in the region of 15 to 16 per cent.”
Although Delhivery has larger volumes than its competitors, Aviral Consulting’s Khatri believes that the company must manage the business with an optimized cost structure to become profitable. “The problem is that, given the high costs and extremely competitive nature of the B2C industry, there isn’t much room for cost reduction.” It would be impossible to predict definitively if Delhivery will be able to lower its costs by 5 per cent to 7 per cent.”
For the record, among all logistics operators in the nation as of FY20, Delhivery has the most extended receivables cycle with 96 days. This is about twice the time taken by competitors such as Ecom Express (38 days) and XpressBees (38 days) (56 days). In addition to having the largest workforce in the business, with 66,348 people, Delhivery is also said to have the highest labour costs. With a workforce of 19,763, VRL Logistics is the largest company, followed by Blue Dart (12,000) and TCI Express (3,000).
“With this level of human expenditure, it is almost difficult to achieve profitability. During their expansion period, businesses must make significant investments in human resources. Following that, they optimize their operations,” Khatri explains.
The bottom line is as follows:
Based on its DRHP, Delhivery is counting heavily on sales growth at a high pace while anticipating a much slower rise in fixed costs, such as technology and human spending. This will result in a significant improvement in Ebitda margins.
However, given the current state of affairs, it is impossible to predict if Delhivery’s gamble would pay off shortly without seeing far greater evidence of progress.
Edited and published by Ashlyn Joy