StockAxis

Delhivery Limited - IPO Note

Logistics

Delhivery Limited - IPO Note

Logistics

Price range
Rs. 462 – 487
Issue Period:
May 11, 2022
May 13, 2022
Rating
Avoid
May 11, 2022

Stock Info

Sensex
53941.35
CNX Nifty
16114.80
Face value (Rs.)
1
Market lot
30
Issue size
Rs. 5,235 cr.
Public Issue
10.75 cr. shares
Market cap post IPO
33,678 – 35,284 cr.
Equity Pre - IPO
64.24 cr.
Equity Post - IPO
72.45 cr.
Issue type
Fresh Issue and Offer for Sale

Shareholding (Pre IPO)

Promoters
-
Public
100%
Source: Ace equity, StockAxis Research

Shareholding (Post IPO)

Promoters
-
Public
100%
Source: Ace equity, StockAxis Research

Key Strengths and Strategies

Asset-light Business Model
An asset-light business model of Delhivery has enabled it to scale up volumes rapidly with lower fixed costs and greater flexibility. While it designs, operates, and controls fulfilment centres and gateways, partners play a significant role in other operations such as pickup, mid-mile, and last-mile delivery.

It leases the majority of the network's infrastructure and vehicles. It had 14.3 million square feet of leased infrastructure and 11,000+ vendors and partners as of December 2021, excluding Spoton. The digital solutions assist the partners in growing their businesses by allowing them to offer multiple Delhivery services in their catchment areas.

Its ability to form mutually beneficial collaborations and strategic alliances with significant international players like Aramex and FedEx has allowed it to expand its reach outside of India without incurring additional fixed costs by leveraging their worldwide networks.

Strong Realisations with Diverse Customer Base
It serves 23,113 active consumers spanning e-commerce, consumer durables, electronics, lifestyle, FMCG, industrial products, automotives, healthcare, and retail, excluding Spoton. Most of India's major e-commerce businesses, as well as 750+ D2C brands, are among the company's customers. Spoton also provides PTL freight services to 5,533 active customers in various of industries. Several clients use multiple service offerings, with customers who used at least two services accounting for 58.1% of revenue.

Customer loyalty has been attributed to the company's service quality, reach, and efficiency, as well as tight integration with customers' ERP systems and business processes. Customers who had been doing business with Delhivery for more than three years accounted for 65% of revenue in H1FY22. These customers' business volume has also consistently expanded over time.

Proprietary Technology System Enables Data Intelligence Capabilities
The technology team at Delhivery has developed proprietary technological platforms that allow it to provide comprehensive logistical services. Order management, warehouse management, transportation management, financial transactions, tracking, and supply chain analytics are all covered by the IT stack, which includes over 80 apps.

The company collects, saves, and processes a large amount of transaction data, such as location, product information, shipper and consignee information, operational facilities, activities, and devices, field team performance data, traffic, and weather. As Delhivery's operations grew, it gained access to additional data sources and, at the same time, improved its capacity to extract insights from the data, which is one of the most important assets.

Investments in Infrastructure and Network
Across all business lines, Delhivery will continue to increase operational capabilities, network infrastructure, and capacity. Mega-gateways at Tauru (Haryana), Bhiwandi (Maharashtra), and Bengaluru have been commissioned (Karnataka). It plans to construct new integrated facilities and mega-gateways in major cities, increase capacity at existing automated sort centres, commission new sorters at strategic locations, and invest in portable automation to boost capacity at collection and return centres and intermediate processing centres. It will also extend its network of fulfilment centres and in-city micro-fulfillment centres to provide "Fulfilled by Delhivery" and "Delhivery Flash" services to vertical e-commerce, D2C, and brand customers.

Create New Adjacent Growth Vectors
To harness operational scale, rapid expansion, network architecture, technology systems, and access to enormous amounts of data, Delhivery will continue to develop new growth adjacencies. For example, the company's capacity to collect, structure, and analyse transaction data offers it an advantage when evaluating the financial profile of various supply chain stakeholders.

The company hopes to offer financial services such as working capital financing, insurance, and personal loans in the future, either independently or in collaboration with partners, by exploiting data analytics capabilities. It also intends to provide value-added services to fleet owners and freight capacity suppliers, such as highway assistance and routing and tracking software.

Pursue Strategic Alliances and Select Acquisition and Investment Opportunities
Delhivery will look for strategic relationships with global and domestic leaders in many aspects of the logistics industry that can benefit the company. It will also look for high-quality acquisition and investment opportunities within and outside India that are complementary to the business or that enable the company to build new, valuable capabilities for customers, establish presence in target markets in India and globally, gain access to software and hardware technology, expand its customer base, or gain excess to a skilled team.

Risks

Losses and Negative Cash Flows: Delhivery has a history of losses and negative cash flows (from operations, investment, and finance), and it is likely to continue to do so in the future as it anticipates rising expenses. Its goal is to offer reasonably cost services to customers. Delhivery may pass on cost savings to customers in the form of cheaper prices, resulting in eroding profit margins.

High working capital: Typically, the company pays partners and manpower agencies within 60 days from the date of invoice, while it offers customers with payment terms of up to 90 days which may contribute to negative cash flows.

Lack of Specificity around the Objects of the Offer: There is a lack of clarity around the objects of the offer and currently, the management has not earmarked the amount that will be deployed from the net proceeds in respect of the categories specified under each object. Pending use will have the flexibility to deploy and deposit temporarily with scheduled commercial banks.

Contingent Liabilities: The company has a contingent liability of Rs. 97 crores, which includes tax appeals, service tax, and other liabilities. The financial condition may be harmed if certain contingent liabilities become non-contingent.

E-commerce Revenue Concentration: E-commerce clients account for the majority of shipment volume; 70% in FY21 and 61.5% in 9MFY22.

Sales Concentration from Top Five Clients: Certain large customers account for a considerable amount of the business, with the top five customers providing Rs. 1,557 crores and Rs. 1,859 crores to revenue in FY21 and 9MFY22, respectively, or 42.66% and 43.98% of total revenue.

Related Party Transaction: The company has entered various related party transactions whose arithmetic aggregated absolute total amounts to ~Rs. 61 crores and Rs. 210.44 crores, representing 1.67% and 4.37% of revenues in FY21 and 9MFY22, respectively. The company states in RHP (Page 49) that it will continue to enter related party transactions which may potentially involve conflicts of interest.

Intense Competition: Delhivery operates in a highly fragmented industry and face intense competition, which could adversely impact operations and market share.

Company Description

Incorporated in June, 2011, Delhivery Limited is the largest and fastest growing fully-integrated logistics service player in India as per the FY21 revenue (Source: Company RHP). It caters to a diverse base of 23,113 active customers such as e-commerce, D2C e-tailers, enterprises, and SMEs across several verticals such as FMCG, consumer durables, consumer electronics, lifestyle, retail, automotive and manufacturing.

It has in-house logistics technology which is built to meet various needs of the supply chains. Delhivery has 80 apps through which it provides various services. It collects huge data and use to guide real-time operational decisions. Since inception, it has collected user, product, location, and network data for 100+ crore orders along with 3,000+ crores shipment lifecycle events points.

It has Pan India network with presence in every state, servicing 17,488 PIN codes or 90.6% in India as of December, 2021. Its infrastructure includes 122 gateways, 21 automated sort centres, 93 fulfilment centres, 35 collection points, 31 returns processing centres, 244 service centres, 132 intermediate processing centres and 2,521 direct delivery centres, including Spoton’s 40 gateways and 138 service centres.

Delhivery acquired Spoton in August 2021 to further scale PTL freight services business. Spoton delivered 758,730 tonnes of freight in FY21 and had a network presence across 13,087 PIN codes with 2.85 msf of infrastructure as of December, 2021. Together with Spoton, Delhivery had 7,900+ active customers in PTL freight during 9MFY22.

Valuation

Though Delhivery has outperformed the listed players in terms of revenue over the last five years (FY16-FY21), it has failed on the profitability front, posting losses while other listed firms have posted decent profits. The company has stated that increased expenses are expected, which is not encouraging in terms of profitability. The working capital cycle appears to favour partners, staffing agencies, and clients, which has an impact on cash flows.

Furthermore, the company has not said clearly where the funds from the new offering will be used. The management has only stated that 50% of the funds will be allocated to organic growth, 25% to inorganic growth, and the remaining 25% (or Rs. 1,000 crores) to general corporate purposes. Other factors, such as higher revenue concentration from the top five clints, contingent liabilities, and severe competition, do not inspire confidence.

We also believe that the issue valuation, when compared to its operating performance, is excessive, at 5.5x Price/Sales (post issue annualised FY22), compared to an average of ~2x for listed firms such as Blue Dart, Gati, Mahindra Logistics, and TCI. Given all the above, we recommend AVIOD the issue.

Peer Analysis

Particulars (Rs. in Crores) M. Cap Sales CAGR (FY16-FY21) FY21 EBITDA (%) FY21 PAT (%) RoE (%) P/Sales (x)
Delhivery 35,284 49.05% -2.75% -2.75% -14.66% 5.50
Blue Dart Express 16,000 5.11% 20.87% 3.10% 17.20% 3.60
Transport Corp. of India 5,320 10.17% 9.39% 5.25% 12.58% 1.65
Mahindra Logistics 3,400 9.60% 4.13% 0.92% 6.28% 0.83
GATI 1,800 -4.64% 2.11% -17.34% -43.40% 1.19

Financial Snapshot

Particulars (Rs. in Crores) FY19 FY20 FY21 9MFY22
Revenue 1,653.90 2,780.58 3,646.53 4,810.53
EBITDA -137.07 -172.05 -100.38 -231.79
Loss Before Tax -1,783.30 -268.80 -415.74 -898.75
Loss After Tax -1,783.30 -268.93 -415.74 -891.75
EPS -47.22 -5.22 -8.05 -15.36

Key Information

Use of Proceeds:
The total issue size is Rs. 5,235 crores, which is Fresh issue (76.41%) and Offer for Sale (23.59%). From the net proceeds of fresh issue, the company is expected to use 1) Rs. 2,000 crores to fund organic growth initiatives; 2) Rs. 1,000 crores to fund inorganic growth through acquisitions and other strategic initiatives; and 3) General Corporate Purposes.

Book running lead managers:
Kotak Mahindra Capital Company Limited, Morgan Stanley India Company Private Limited, BofA Securities India Limited, and Citigroup Global Markets India Private Limited.

Management:
Deepak Kapoor (Chairman and Non-Executive Independent Director), Sahil Barua (Managing Director and Chief Executive Officer), Sandeep Kumar Barasia (Executive Director and Chief Business Officer), Kapil Bharati (Executive Director and Chief Technology Officer), Suraj Saharan (Head of New Ventures), Abhik Mitra (Managing Director and Chief Executive Officer of the Material Subsidiary), Ajith Pai Mangalore (Chief Operating Officer), and Amit Agarwal (Chief Financial Officer).