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Focus on increasing share of Ground Express

* We recently released our Logistics thematic report, wherein we stressed upon the superlative growth potential of the Indian Logistics sector and the opportunities for the organized players like Blue Dart Express (BDE). We had assigned a Neutral stance on the stock owing to its rich valuation.

* The unparalleled network presence of BDE and strong growth in Express cargo would drive consistent growth in volumes across its offerings over the next few years. With the easing of fuel prices (on account of tax cuts), margin is expected to remain at elevated levels in the near term.

* BDE is looking to increase its contribution from Ground Express segment from current levels of ~30%. We expect BDE to clock a revenue/EBITDA/PAT CAGR of ~17%/18%/36% over FY21-24E and retain our Neutral rating, with a revised TP of INR7,390/share (27x FY24E EV/EBITDA).

Strong festive demand drives volumes in 2QFY22

* BDE registered a 30% YoY revenue growth in 2QFY22, driven by strong festive season demand and some impact of pent-up demand, with e-commerce being the highest contributor to growth, followed by Electronics and Pharma.

* The Ground Express segment grew faster than Air Express, taking the revenue share from Ground/Air to ~30/70, with the e-commerce segment contributing 20% of the pie.

* The Document Delivery business was badly impacted during the COVID-led lockdown. With the Education and BFSI sectors opening up, volumes are improving and have almost reached pre-COVID levels.

Reduction in fuel price and cost control measures to keep margin elevated

* A price hike of ~10% was undertaken in Jan’21 based on the number of customers and volumes handled. The average realization growth stood at 5%.

* Ground Express would benefit from the plunge in diesel prices by ~10% from the tax cuts announced in early Nov’21, which would support margin.

* Cost efficiency measures, such as the reduction of some low-profit pin codes from its network, are helping the company generate strong margin.

* The company has bought an aircraft in 2QFY22, taking its total tally of owned aircrafts to three, even as it continues to operate three aircraft on lease. The aircrafts are held through its subsidiary Blue Dart Aviation (BDA).

Valuation and view

* Ground Express is expected to grow faster than Air Express over the next few years with improved Road connectivity.

* BDE is looking to increase its revenue contribution from Ground Express. We expect BDE to clock ~17% revenue CAGR over FY21-24E. We expect margin to stabilize at 12%, leading to 18% EBITDA CAGR over FY21-24E.

* With no major capex and negligible debt, we expect 36% PAT CAGR over FY21- 24E. The stock trades at 23x FY24 EV/EBITDA. We maintain our Neutral rating, with a revised TP of INR7,390/share (27x FY24E EV/EBITDA).

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