IGI Logo

Margins to improve with better capacity utilization, reducing disparity between Brent and ATF prices

* The recently acquired two 737-800 aircraft have been integrated into the existing aircraft network (BDE realized revenue from these new aircraft only during the last 10 days of 1QFY24). Starting from 2QFY24, we expect capacity utilization to improve significantly. As a result, we anticipate improved margin performance from the second quarter onwards.

* EBITDA margins faced challenges as ATF prices did not correct in line with Brent prices. However, over the last several months, the disparity between Brent and ATF prices has reduced, which should support margins.

* BDE enjoys a ~60% market share in the organized Air Express segment (as of FY22) and has been gaining market share in the Surface Express segment (~30% of total revenue), which is expected to grow at twice the rate of air express industry. The company continues to focus aggressively on the Surface express segment, which should support volume growth in the near to medium term.

* With the upcoming festive season, improved utilization of new aircraft and expansion of branch network, volumes are expected to register a CAGR of 13% over FY23-25. We expect EBITDA margins to gradually improve to 13% in FY25 with better capacity utilization and reducing disparity between Brent and ATF prices. We reiterate our BUY rating with a TP of INR7,840 (premised on 20x FY25E EV/EBITDA).  

Utilization set to improve in BDE’s newly added aircraft

* BDE added two new 737-800 aircraft of 18 tons each in the last quarter of FY23. This addition is expected to increase BDE's existing capacity by ~20%. After some regulatory clearances, these new aircraft have now been seamlessly integrated into the existing air network, and utilization is expected to improve from 2QFY24 onwards.

* BDE has been using the belly cargo capacity of passenger planes to transport shipments. With these new aircraft coming in, some parts of those belly cargo volumes would be transferred to the new aircraft. These would save costs as belly cargo costs are significantly higher especially during peak hours.

* Additionally, BDE would add new routes to the current network of seven to eight major metropolitan areas, which would support volumes further.

Margins seem to have bottomed out and could gradually improve

* Recently, BDE experienced margin pressure resulting from an unfavorable gap between Brent and ATF prices, along with the induction of two new aircraft. These new aircraft incurred startup costs and BDE only realized revenue from them during the final 10 days of 1QFY24. Consequently, these factors have had an adverse impact on margins.

* Margins are expected to improve in the coming period as a) aircraft utilization improve for new aircraft b) volumes in existing aircraft improve due to heightened demand during festive periods and c) recent reduction in the disparity between ATF prices and Brent prices. 

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html

SEBI Registration number is INH000000412