Should You Subscribe to Delhivery IPO Limited | Delhivery Limited IPO Analysis

Delhivery Limited which is one of the largest and fastest-growing logistic service players in India has come up with its Initial Public Offering (IPO) which is live between May 11^th to May 13^th, 2022. Let’s discuss this IPO in detail in this article as we move ahead.

IPO Details:

• The IPO Window of Delhivery Limited is open from 11^th May to 13^th May 2022.
• The Issue Size of the IPO is Rs. 5,235 Cr. which consists of a fresh issue and an Offer for Sale.
• The IPO consists of an Offer for Sale (OFS) worth Rs. 1,235 Cr. While the rest of the amount accounts for fresh issues i.e., Rs. 4,000 Cr.
• The IPO is getting listed on both the stock exchange- Bombay Stock Exchange (BSE) and National Stock Exchange (NSE).
• The price band of the IPO is Rs. 462 to Rs. 487 per equity share.
• The Face Value is Rs. 1 per equity share.
• The Investor Quota of the IPO is as follows Qualified Institutional Buyers (QIB)- 75%, Non-Institutional Investors (NIIs)-15%, and Retail Investors- 10%.
• The IPO Lot consists of 30 shares in 1 lot and multiples thereof up to 13 Lots.
• The Allotment Date for Delhivery Limited IPO is 19^th May 2022 and it will get listed on the Stock Exchange on 24^th May 2022.
• The objective of the Issue :

i) Funding Organic Growth: Rs. 2,000 Cr.

• Scaling up existing and developing new business- Rs. 160 Cr.
• Expanding network distribution- Rs. 1,360 Cr.
• Logistics operating system up-gradation & improvements- Rs. 480 Cr.

ii) Funding inorganic growth through acquisitions: Rs. 1,000 Cr.

iii) General Corporate Purpose: Rs. 1,000 Cr.

• The Selling Shareholders are:

i) Investors Selling Shareholders: Rs. 1,184 Cr.

• CA Swift Investments- Rs. 454 Cr.
• Deli CMG Pte Ltd.- Rs. 200 Cr.
• SVF Doorbell (Cayman) Limited- Rs. 365 Cr.
• Times Internet Limited- Rs. 165 Cr.

ii) Individual Selling Shareholders:

• Kapil Bharati (Co-Founder & CTO)- Rs. 5 Cr.
• Mohit Tandon (Co-Founder)- Rs. 40 Cr.
• Suraj Saharan (Co-Founder)- Rs. 6 Cr.

2) Company Overview:

• Delhivery Limited, which was incorporated in June 2011, is the largest and fastest-growing fully integrated Indian logistics and supply chain company. It provides a full range of logistics services including express parcel delivery, heavy goods delivery, PTL & TL freight, cross-border express, and supply chain solutions along with certain value-added services such as e-commerce return services, etc.
• It currently has 23,113 active customers in segments such as e-commerce, D2C, e-tailers, and enterprises across several verticals such as FMCG, consumer durables, electronics, retail, etc. Delhivery is the largest and fastest-growing 3PL services provider by volume and revenue in FY21 with a market share of 24-25% of overall e-commerce parcel volumes.
• Currently, delhivery operates on a pan-India network and provides services in 17,488 PIN codes (more than 90% PIN code coverage) and has more than 11,000 network partners. To date, the company has shipped more than 1.2 bn express parcels. The company follows a mesh network model (vs hub and spoke model) that brings agile response to changes due to volumes, shipment profiles, and environmental conditions.
• Delhivery follows an Asset Light Business Model. All of their logistics facilities were leased from third parties. It follows an approach of investing in critical service elements and IP-sensitive areas of the network. Currently, delhivery has 14.27 mn sq. ft logistics infrastructure and the company is in process of getting ownership of 9 facilities which add another 12,671 sq. ft.
• Delhivery currently has 82 gateways, and 3,836 delivery points and has a team size of 86,184. It has a rated automated sorting capacity of about 3.7 mn parcels per day.

3) Industry Overview:

• The Indian logistics sector is one of the largest in the world with a size of $216 bn in Fiscal 2020 and is expected to reach $365 bn clocking growth of CAGR of 9% primarily driven by:

• Strong economic growth
• The rapid growth of the digital economy through e-commerce & D2C businesses.
• Improvement in India’s transportation infrastructure like highways.
• Growth in the domestic manufacturing sector
• The favorable regulatory environment in logistics

• Organized players accounted for only ~ 3.5% of the logistics market in Fiscal 2020 which is expected to reach 12.5%-15% by Fiscal 2026. This shift is expected to be driven by:

• The ability of organized players to offer integrated services
• Network and scale-driven efficiencies
• Larger investments in technology and engineering, resulting in a higher share of wallet with customers.
• Consequently, organized players are expected to grow at a CAGR of 35% between Fiscal 2020 to 2026.

i) Growth drivers in organized logistics:

Source: Delhivery Limited RHP

• Evolving B2C demand and consumption trends: People earning $7,500 - $15,000 are ~27% of the Working-age population and are expected to reach 40% in the next 5 years. Also, with low-cost smartphones and internet, online shoppers are expected to double from 160 mn in fiscal 2021 to 330-350 mn in fiscal 2026. Consequently, all such structural changes in the economy may boost demand for organized logistics.
• Evolving B2B demand and consumption patterns: Evolving business models, changing production trends, demand for integrated services, and the emergence of new markets require fast and reliable logistics.
• Enabling regulatory and policy reforms: GST in particular has been a key factor in catalyzing the growth of organized logistics in India. By eliminating state border checkpoints and compliance scrutiny, GST has facilitated a smoother and faster flow of goods across the country and significantly reduced overall transportation costs.
• Road transportation (being the quickest and cheapest alternative) is estimated at $124 bn in fiscal 2020 and is expected to reach $200 bn in fiscal 2026 clocking a CAGR of ~8%.
• Out of the road transportation segment, express parcel (delivery of parcels < 40 kg) is the fastest-growing segment. This express parcel segment is estimated at $2.3 bn in fiscal 2020 and is expected to reach $10-12 bn by fiscal 2026 clocking a CAGR of 28-32%.
• The growth will be driven by growth in e-commerce and rising customer expectations for speedy delivery. The e-commerce industry in India is expected to grow by 30-33% from fiscal 2020 to 2026 primarily driven by large e-commerce volumes and shipments which are expected to grow at a CAGR of 32-35%.

• In Hub and Spoke Model, the goods are bought at the hub or center where these goods are packed in one place and then delivered from the hub to the customer.
• For example, if the hub is Delhi then goods are packed and ready for delivery from Delhi to other cities and towns.
• But on other hand in the mesh model, many hubs are interconnected through nodes which helps in delivering goods faster and from the nearest place.
• For example, if there is a hub in Delhi, MP, Gujrat, and goods are required in Maharashtra then they would be available from Gujrat or MP.

4) Financial Performance:

i) Revenue & Revenue Mix:

• Overall revenue has increased at a CAGR of 48% from FY19 to FY21.
• Out of total revenue from operations, 70%-80% of the revenue comes from ‘Express parcel services’ which has primarily driven the overall revenue growth of 48%. The Express parcel services segment has increased at a CAGR of 36% from FY19 to FY21.
• Other major revenue streams consist of ‘Part truckload services’ (PTLS) and ‘Supply chain services’ (SCS). PTLS (CAGR – 66%) and SCS (CAGR - 72%) both comprise approx. 8%-11% of total revenue.
• The express parcel services growth is driven by an increase in the number of shipments from ~15 Crores in FY19 to ~29 Crores in FY21. In YTD22, the company delivered ~40 crores of shipments. Also, the company has increased its network capacity as they have scaled its business (indicated by increased peak daily pick-up volume from 0.8 mn parcels in FY19 to 3.29 mn parcels in FY21. It is also driven by increased PIN code coverage (from 13,845 in FY19 to 17,488 in FY21) and the corresponding increase in employees/team size.

ii) EBITDA & EBITDA Margin

• Express parcel services are priced based on the weight and dimension of the parcel, travel distance, and payment method by the end recipient, with additional charges, levied for returns. Though the company has undertaken approx. 2x shipments in FY21 vs FY19, but the revenue per shipment has declined to indicate higher shipments of lower weight & dimensions parcels in large volumes.
• Consequently, due to the decline in the above revenue per shipment, the marginal impact of the same is visible in the gross profit margins.
• EBITDA margins for FY19 are (97.6%) on account of a large fair value loss on financial liabilities. Ignoring the said loss, adjusted EBITDA Margins stand at (8.3%) for FY19. The adjusted EBITDA margins have improved from (8.3%) in FY19 to (3.4%) in FY21.

iii) Financial Snapshots:

iv) Active Customers:

Source: Delhivery Limited RHP

• As per the company, the active customer definition is “Active Customers for a quarter are those customers on whom an invoice was raised at least once during such quarter. Active Customers for a Fiscal are calculated as the average number of Active Customers for each of the four quarters in the Fiscal”.

5) Valuations:

i) Peer Comparison:

• Blue Dart, TCI Express, and Mahindra Logistics are the listed players in this industry.
• From a valuation perspective, the company Delhivery Limited is demanding a premium valuation as per its Price/Sales and EV/Sales ratio which also justifies its growth.

6) Key Strength & Opportunities:

• In Q1FY22, 65% of the revenue is repeat business from customers transacting with the company for more than 3 years.
• Have a team of 505 engineering, data, and product professionals who have built proprietary technology systems Company has 80+ applications that encompass all supply chain processes from order management to supply chain analytics.
• Have built a nationwide network with a presence in every state, servicing 17,488 PIN codes covering more than 90% of total PIN codes in India.
• Have an asset-light business model wherein the company extends the logistics ecosystem by enabling network partners to onboard their physical assets and resources and participate in our platform.
• Entered into a strategic alliance with Aramex and FedEx enabling the company to expand coverage outside India in
• Middle East, North Africa & North America, Europe, Australia, and Asian markets. The company has partnered with over 11,000 contractors and network partners who provide pickup and delivery services, etc.
• Delhivery has launched 'Delhivery Direct' (C2C shipping service) which enables individual consumers to ship parcels from their homes. D2C and social commerce segments' annual shipments are expected to witness 6-10x growth from fiscal 2021 to 2026, which will further drive demand for the company's services. India's E-commerce industry grew at a CAGR of 31% from fiscal 2018 to 2020 and is expected to grow at 30-30% from fiscal 2020 to 2026.

7) Key Risks & Threats:

• TL freight service business generally has high working capital requirements.
• The majority of contracts for service offerings other than express parcels include a fuel price hike clause, which is linked to the price of diesel. A major chunk of revenue comes from express parcel only, which has no such fuel price hike clause, consequently, it may affect the margins of the company in long term.
• The company experience seasonality in its business wherein they observe peaks in shipment volumes in Q3 of each fiscal.
• Large dependence on the growth of the e-commerce industry.
• Failure to improve or effectively utilize its technology infrastructure or prevent disruptions to it.
• Any disruptions to its logistics and transportation facilities.
• Increase in debt to equity ratio from 0.12x to 0.21x as of Dec-21. History of losses and negative cash flows from operating, investing, and financing activities and may continue to experience the same in the future.
• Very price-sensitive market
• Companies operate in a highly fragmented industry and face intense competition, which could adversely impact the market share and profitability.
• High customer concentration as 40%+ of the revenue comes from the top 5 customers.
• Being an asset-light model, it makes the company exposed to a high degree of operating leverage due to high rentals.

What Should Investors Do?

Delhivery Limited is a loss-making entity and has come up with an IPO with a premium or high valuation. Also, the company is a PE-driven company and does not have any promoter which is a negative factor. The industry is having high growth potential and it will be an interesting thing to watch how this company will perform from here on. Currently, the Grey Market Premium of the IPO is in a somewhat negative zone and hence can list at discount. Hence, an only investors with a high risk-taking capacity should take a call on this IPO.

Disclaimer: The information here is provided for reference purposes only and should not be misconstrued as investment advice. Under no circumstances does this information represent are commendation to buy or sell stocks or MF.

Originally Published On:https://blog.investyadnya.in/should-you-subscribe-to-delhivery-ipo-limited-delhivery-limited-ipo-analysis%ef%bf%bc/