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Start of normalisation as the bulge fades

Blue Dart Express’ (BDE) reported a miss, with standalone EBITDA and PAT declining 52% and 67% QoQ. 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.

We have seen a glimpse of normalisation in Q1FY22; gross margin/shipment and EBITDA /shipment is well below its FY21E peak. Q1FY22 volumes witnessed ~ 3.3x YoY growths and yet EBITDA margins (standalone) corrected back to single digits from the bulge witnessed in FY21. FY21 witnessed ~53%/160% YoY increase in Gross margin/EBITDA margin (per shipment) despite a 23% YoY volume decline. Maintain SELL.

* Better disclosure aids Q1 analysis. BDE has shared the operational details for the first time in a quarterly filing. Volumes are up ~ 3.3x YoY (low Q1FY21 base). FY21shipment volumes declined 23%YoY. If BDE can replicate the performance for the next 9 months, one can expect 19% YoY shipment growth in FY22E. Realisation/shipment bulge is normalising as higher ATF prices start to impact EBITDA. Gross margin/shipment increased 53.3%YoY to ~Rs64 in FY21 despite a 23%YoY volume decline. (Q1FY21 was Rs43/shipment). The trajectory has clearly peaked and has started to come off (as expected) to Rs56.7/shipment in Q1FY22.

* 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 (similar in Q1FY22), 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. Despite conversion of 2 leased aircraft into owned ones, the compression in margins in Q1FY22 as pricing bulge faded (competition from belly cargo resumes) and higher ATF prices start to impact margins, the costs restructuring needs to go an extra mile. Else, we are looking at meaningful consensus earnings downgrades over the course of FY22E. This is despite a possible 19% YoY volume growth in FY22E.

* Maintain SELL. We have assumed a long-term volume growth assumption of 6-7% p.a. for BDE’s airfreight, 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 target price of Rs3,430/share.

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