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The bulge continues

Blue Dart Express’ (BDE) consolidated on the yield gains achieved in Q3FY21 (driven by limited belly cargo capacity) and enjoyed better mix with more B2C air express cargo. The same resulted in ~ 33%YoY revenue growth in Q4FY21 and nearly helped maintain margin performance of last quarter (Q3FY21). What impressed is continued cost focus, coupled with revenue tailwinds currently being enjoyed out of network capacity expansion of the past couple of years.

Continued B2B air express resilience (IT, pharma, medical equipments) also helped. Normalisation of pent-up consumer spending (ecommerce) and impending increasing competition from increased belly cargo of domestic freighters, rail (new competition) as well as road makes us less confident on the volume or yield thesis. The underlying competitive dynamics of air express in a price-sensitive market remain unchanged. Earnings bulge helps discounting of the best-case scenario. Maintain SELL.

* 33% YoY revenue growth as (apparently) more ecommerce shipments move to air.

Improved mix (higher percentage of air express) rather than only volume growth was the key to achieve an impressive topline performance. Price hike announced (9.6% from Jan, ’21) also increases expectation of further profitability improvement in FY22E. However, sustainability of a 40% gross margin scenario remains unclear. We see road players becoming more active; we also see significant increase in belly cargo capacity of domestic carriers and rail emerging as a new competitor – at substantially lower price points. Also, the nature of yield and volume improvement is peculiar to FY21E and should not be extrapolated going forward.

* To capture sustainable market share through entry into road express would require much more focus on costs.

While employee costs have been moderated to 17% of revenues over FY21 (14% in Q4FY21), the same can be sustainably controlled through increased market share in road express – BDE’s premium pricing in the segment will be increasingly challenged by rail if not road. Higher yield from Jan, ’21 and conversion of two leased aircrafts to owned ones have help maintain/improve the margin trajectory in Q4FY21, thereby extending the earnings bulge for some more time.

* Maintain SELL.

We have assumed a long term volume growth assumption of 6-7% p.a. for BDE’s air freight, which also dictated our margin assumptions for the business. We have factored in the bulge for H1FY22, and assumed pricing pressure post the same. Upside risks to our earnings may arise from continued strength in pricing for H2FY22 as well. Maintain SELL with a revised target price of Rs3,430/share.

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