IGI Logo

Five reasons to buy this quality name

We believe Delhivery’s current valuations provide a great opportunity to BUY this high quality stock. The risk-reward skew at current market price is very attractive in our view (5.3:1). While we acknowledge growth has been slowing in e-commerce sales in FY23, we believe it is a transient issue and is unlikely to be symptomatic of structural weakness in the space. We have cut our revenue growth estimates meaningfully for FY23/FY24E/25E (16%/23%/24%). We have built in 32% EBITDA margin accrual from incremental sales over H2FY23 (company in Q2FY23 presentation mentioned it has ~50% gross margin over incremental transport revenues). We estimate Delhivery to reduce adjusted EBITDA losses significantly (almost breakeven in Q3FY23E) and return to adjusted EBITDA profitability in Q4FY23E (~2% adjusted EBITDA margin). We estimate adjusted EBITDA margin to improve steadily hereon (~10% EBITDA margin in FY26E) with a revenue CAGR of 33% YoY over FY23-FY26E. We cut our target price to Rs460 from Rs477 and upgrade the stock to BUY.

* Five reasons to BUY Delhivery: 1) Lowest cost structure compared to peers across first mile, mid mile and last mile logistics in express parcel business is a competitive edge in a cost-sensitive market, 2) technology and trust moat should strengthen its dominant share in niche segments such as secured delivery, 3) hands on management ensures agile decision making and timely intervention during exception handling, 4) strong balance sheet should help sustain investments through periods of tight liquidity and 5) uncharacteristically high (compared to peers) brand recall among end-users could make it a key beneficiary of open ended B2B e- commerce marketplaces (Link to our thematic note on B2B e-commerce) and ONDC roll out.

* Context on what went wrong: Delhivery’s share price has corrected by ~50% from peak levels of Jul’22, given the concerns around sustainability of revenue growth and path to profitability. Revenue growth concerns are centred around slowing of growth in the express parcel segment (e-commerce) and sharp decline in volumes in the PTL segment post the integration of ‘Spoton’ which was acquired in FY22. The path to profitability was also in question as the company reverted to negative adjusted EBITDA in Q1/Q2FY23 post two quarters of positive EBITDA in Q3/Q4FY22.

* Valuation: We value Delhivery using time discounted forward EV/EBITDA multiples. We discount EV calculated at 20xFY26E EV/EBITDA by 1.5 years (at 20% discount rate) to arrive at our price target of Rs460. We believe risk-reward skew for the stock is attractive at current market price (5.3:1). We envisage an upside scenario where the stock re-rates to Rs620 if revenue growth recovery in express parcel and PTL segments are higher than estimates. We assume a downside case where the stock could de-rate to Rs300 if EBITDA margin profitability is pushed beyond Q4FY23 and medium-term revenue growth visibility worsens further due to global headwinds (Refer Table 6).

To Read Complete Report & Disclaimer Click Here

For More ICICI Securities Disclaimer https://www.icicisecurities.com/AboutUs.aspx?About=7

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