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Robust portfolio of Air and Ground cargo offerings; to benefit from likely reduction in ATF prices

* Blue Dart Express (BDE) commands greater than 50% market share in the organized Air Express segment and has been picking up market share in the Ground Express segment. The company has well-diversified service offerings of Air express (~65% revenue share) and Ground express (~35% revenue share).

* Despite the challenging last few years, BDE has managed to grow revenue through improved volumes and realizations. Through its dedicated aircraft fleet service, its operations were not as severely impacted as pure Road transporters during the pandemic.

* The Ground express segment is expected to grow at 2x the air express segment. BDE is looking to increase the share of Ground express in its overall mix to better capitalize on the growth opportunity.

* Aviation Turbine Fuel (ATF) accounts for ~40% of direct operating costs for an Express Logistics airline. The ATF prices have reduced in the recent months after a sharp rise in FY22. However, the reduction in ATF prices has been not in sync with the reduction in Brent crude price. Now, with the recent change in benchmarking of ATF pricing to MOPAC (Mean of Platt Arab Gulf oil price), the ATF prices are expected to reduce in December.

* We believe this reduction would support margins for BDE and would also support higher air freight volumes.

Price hike to sustain margins amidst rising inflation

* The company has announced a price hike of 9.6% effective Jan 01, 2023. This price hike is the annual price hike BDE undertakes to offset the rising costs.

* The implementation of such price hike takes a few months based on negotiations with customers and the net price hike turns out to be 5-6%.

* Also, ATF prices have fallen ~18% from its highs in Jul’22, which should offset some of the increases in other costs and support overall margins for the company.

BDE is looking to add two new aircraft to increase its operations in smaller towns

* On the back of a strong parentage and an enviable network, BDE caters to more than 35,000 locations, with a fleet of six aircraft and more than 12,000 vehicles.

* The company has more than 2,300 facilities and hubs across India, aiding in servicing 98% of the pin codes.

* It plans to further strengthen and consolidate its air and ground infrastructure to expand its reach.

* The company is looking to add two Boeing 737 aircraft with a capex of INR3- 3.5b in 2HFY23 to cater to the increasing demand for Air express.

* The two new aircraft would be of 18 tonnes capacity (existing aircraft are 30 tonnes capacity) to cover Tier II & Tier III cities.

* The robust network built over the years will help the company capitalize on the growth opportunity in the Express Logistics space.

Valuation and view

* BDE is looking to increase its contribution from the Ground Express segment from its current levels of ~35%. Owing to the cost differential between services, the growth in Ground Express is expected to be 2x the growth in Air Express.

* BDE is adding two aircraft to its fleet to cater to the strong growth in volumes. EBITDA margin is likely to stabilize at 15-16% levels, with higher fuel prices and rising competition.

* We expect BDE to clock a revenue/EBITDA/PAT CAGR of ~17%/14%/15%, respectively, over FY22-24, and we reiterate our Neutral rating, with a TP of INR8,110 (20x FY24E EV/EBITDA).

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