IGI Logo

Lower ATF prices to support margins; aircraft addition to boost volumes in 2HFY24

* For an express logistics airline such as Blue Dart Express (BDE), the cost of aviation turbine fuel (ATF) accounts for ~40% of direct operating costs. ATF prices usually move in sync with Brent prices. In early FY23, ATF surged in line with Brent, but it did not come down when Brent prices declined in the last few quarters. As a result, BDE witnessed under-recovery of fuel surcharge, which affected its margins in FY23. However, ATF prices have significantly corrected recently, which should boost margins for BDE going forward.

* BDE has added two new aircraft to cater to tier-II and tier-III cities as it sees a healthy demand outlook in these cities for the long term. BDE would move some of the belly cargo capacity, for which it uses third-party aircraft, to new aircraft. We expect BDE to clock a 12% volume CAGR during FY23-25, supported by strong growth in the Road and Air segments.

* With lower ATF prices and its annual general price increase effective from Jan’23, we expect BDE’s margins to improve going forward. As the capacity utilization of new aircraft ramps up, we expect BDE’s EBITDA margin to rise to 13-14% from 2HFY24 onward from the current level of 10-11%. We expect BDE to clock a CAGR of 14%/21%/26% in revenue/EBITDA/PAT during FY23-25. With an improved outlook and a ~30% correction in the stock price from the highs seen in Oct’22, we believe the stock is now attractively valued. We upgrade our rating to BUY from Neutral, with a TP of INR8,040 (premised on 20x FY25E EV/EBITDA).

ATF prices decline sharply in 1QFY24; the disconnect between ATF prices and Brent prices reduces

* In FY23, ATF prices did not move in sync with global Brent prices, which led to a significant under-recovery for BDE, thereby impacting margins.

* However, in the last few months, ATF prices have corrected significantly (~22% lower than Mar’23 level; Brent prices corrected ~4%).

* BDE has also implemented a 10% annual general price hike in Jan’23.

* We believe these factors, along with improvement in volumes, would lead to margin improvement in coming quarters.

BDE adds two new aircraft to expand footprint in small towns

* The company has added two Boeing 737 aircraft in FY23 to cater to growing demand for Air express. The two aircraft with 18-tonne capacity (30-tonne capacity in existing aircraft) will cover Tier II and Tier III cities.

* BDE has a strong parentage and an enviable network catering to more than 55,000+ locations, with a fleet of six aircraft and more than 12,000 vehicles.

* The robust network will help it capitalize on the growth opportunity in the Express Logistics space

Market leadership in Air Express; focusing on increasing market share in ecommerce

* BDE enjoys a ~60% market share in the organized Air Express segment (as of FY22) and has been gaining market share in the Surface Express segment

* E-commerce plays a crucial role for BDE as it accounts for one-fourth of the company's total revenue. BDE's strong presence and focus on serving the ecommerce market allow it to leverage the growing online shopping trends.

Valuation and view

* With lower ATF prices and a price hike in Jan’23, BDE’s margin is likely to stabilize in the 13-14% range.

* BDE is also looking to increase the contribution from the Surface Express segment from current levels of 35%. Growth in Ground Express is expected to be 2x higher than growth in Air Express due to the cost differential between the two segments.

* BDE has added two aircraft to its fleet to cater to strong demand growth.

* With an improved outlook and a ~30% correction in the stock price from the high seen in Oct’22, we believe the stock is now attractively valued. We upgrade our rating to BUY from Neutral with a TP of INR8,040 (premised on 20x FY25E EV/EBITDA).

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer