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Volumes to improve with higher capacity utilization of the newly added aircraft

Result slightly below estimates; margins improve QoQ

* Blue Dart Express (BDE)’s revenue was flat YoY at INR13.2b in 2QFY24 (in line). BDE handled 0.3m tonnes of cargo volume (+4% YoY), while its realization dropped ~4% YoY to INR 43.1/kg due to a higher share of surface express during the quarter. BDE carried 92m shipments in 2QFY24.

* EBITDA margin came in at 9.9% in 2QFY24 (v/s our estimate of 10.5%). EBITDA declined ~20% YoY to INR1.3b. Margin was lower than estimated owing to lower realization and certain integration costs related to the addition of two new aircraft. In line with the operating performance, APAT declined 23% YoY to INR713m (13% below estimate).

* As utilization levels for the newly added aircraft ramp up, volumes are likely to rise. BDE’s revenue is expected to be driven by the higher share of the fast-growing Surface Express segment and the dominance of the company in the Air Express segment. However, in the near term, margins are projected to expand gradually until utilization levels improve for the two new aircraft. We cut our EBITDA by ~8%/4% for FY24/25E and reiterate our BUY rating with a revised TP of INR7,540 (premised on 20x FY25E EV/EBITDA). The longterm outlook for the company remains robust.

Surface Express continues to be the key growth driver, documents business to remain stable

* Surface Express serves as the key growth driver for BDE, with a significantly better growth percentage than Air Express. This is led by improved infrastructure, the introduction of GST, e-way bills, etc.

* Despite the surface express industry being highly competitive and undergoing consolidation, BDE has managed to increase its market share. Surface Express is poised to be the growth catalyst, with anticipated double-digit growth.

* BDE holds the highest market share in the document logistics segment. This segment has been a strong contributor for BDE for over 40 years.

Highlights from the management commentary

* The induction of two aircraft has been successfully completed, and they have been in operation throughout 2QFY24. There are plans to incorporate a new location, Guwahati, into the network, which is expected to contribute additional volumes to the company.

* The initial start-up costs related to the new aircraft additions have been incurred in P&L and now incremental costs are all related to operations. PBT margin is also expected to be similar to that of the pre-Covid level.

* There was a disconnect between the movement of ATF prices and Brent prices last year, which impacted margins adversely. The same has been negotiated with customers now and the impact of this disconnect is likely to be minimal.

Valuation and view

* BDE has encountered short-term difficulties, including expenses associated with adding aircraft, sluggish industry activity, and elevated ATF prices. Nevertheless, as aircraft are now in service and with the onset of festive demand, there is a potential for accelerated volume growth in 2HFY24.

* With improved volumes, a higher share of Surface Express in overall volumes, and increasing wallet and market share of BDE in the Surface Express segment, we expect the company to register a revenue/EBITDA/PAT CAGR of ~13%/16%/20% over FY23-25. We reiterate our BUY rating with a revised TP of INR7,540 (premised on 20x FY25E EV/EBITDA).

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