Weakness in operating metrics to persist
Blue Dart Express (BDE) has reported lower-than-expected earnings in Q1FY21. Standalone EBITDA loss came in at Rs1,182mn against expected EBITDA loss of Rs38mn. Consolidated EBITDA loss was Rs425mn against Rs365mn expected EBITDA. Standalone gross margin contracted to 16% from 28% QoQ and 34% YoY. To note, the compression in gross margin is post Ind-AS 116 relief on rentals. The cost of sustaining five aircraft bears on margin and profitability in periods of sharp revenue decline like Q1FY21 (topline declined by 47% YoY). Management highlighted: i) Majority of Q1 business has been conducted in June, ’20 ii) July, ’20 has seen a significant improvement vis-à-vis Q1, though more on B2C side than B2B side and iii) volumes in Q1FY21 were not completely comparable YoY, as many charter services ran given disruption of B2B services. We downgrade BDE to SELL from HOLD with a revised target price of Rs1,746/share (earlier Rs1,944/share).
* While BDE was trying to implement cost rationalisation, Q1FY21 highlighted further weaknesses. Gross margin (standalone) disappointment in Q1FY21, despite Ind-AS 116 adjustment of last year, highlights the heavy operating leverage of BDE. Our base case margin assumptions factor in a consistent 10% p.a. volume growth in air cargo. What if, volume growth disappoints, given i) increase belly cargo of commercial airlines and ii) steady loss of share to road express.
* Management hints at no improvement in prices over Q1/near term. BDE has mentioned that it has witnessed significant opportunity in international and domestic charter – palletised capacity for carriage of urgent and large volumes to multiple airports in India and cross border. However, there is little scope for increase in prices given the current demand–supply scenario.
* Drop in gross margin vis-à-vis road express player like TCI Express highlights the relative business moat. While an asset-light road express player like TCI Express could improve gross margin despite significant volume weakness, the same for BDE has dropped materially – more to do with acceptability of the product at the offered price points in our view. Even rail players (EXIM container) have fared better than BDE in the current quarter.
* We downgrade BDE to SELL from HOLD. We have been working with 10% p.a. volume growth scenario for BDE’s air freight, which also dictated our margin assumptions for the business. We introduce another scenario of 3% volume growth over the foreseeable future, given the current competitive dynamics and market scenario. The weighted average target price of those two scenarios comes to Rs1,746/share. Downgrade to SELL.
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