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Improved utilization of new aircraft to boost margins;

capex underway in surface express

* After slow growth in FY24 and 1QFY25, demand is expected to pick up for the express logistics segment. Long-term growth is expected to be primarily driven by increasing urbanization, rising consumer demand, and changing consumer preferences toward faster delivery. BDE is making strategic investments in infrastructure and network expansion. The surface logistics segment is expected to grow faster than the air express business and BDE is positioning itself for capitalizing on the opportunity.

* In air express, BDE has added two new aircraft to cater to tier-II and tier-III cities as it sees a healthy demand outlook in these cities for the long term. The two new aircraft have replaced third-party volume with in-house operations. The share of third-party cargo has declined from 20-25% to 10-11% currently. The Guwahati route is still ramping up and the new aircraft are expected to break even in the next few quarters.

* BDE’s investment in surface express is backed by ~2x higher growth witnessed in surface express volumes in 1QFY25 than air volumes. With an increasing market share of BDE in the surface express segment, along with network expansion, we expect BDE to register a CAGR of ~17%/32%/36% in revenue/EBITDA/PAT over FY24-26. We maintain our BUY with a TP of INR9,500 (based on 24x FY26E EV/EBITDA).

Infrastructure and network expansion to drive growth in surface express

* The company is in an investment phase, resulting in elevated costs in the near term. The management expects to prioritize capex for the surface segment and building infrastructure for competitive advantages.

* Surface volumes grew at a faster rate than air volumes. E-commerce has been the main driver of growth. The air parcel and documents business is also doing well for the company.

* Due to high competition in the surface express segment, margins could remain under pressure. As BDE is undertaking network expansion and infrastructure development in surface express, margins are expected to be affected in the near term.

New routes ramping up; segments like surface/ecommerce witnessing strong growth

* As the festival season kicks in, capacity utilization of new aircraft is expected to pick up. As they reach optimal utilization levels, efficiency will improve, leading to higher margins. New routes, like Guwahati, are starting to ramp up and should pick up pace in the coming quarters.

* BDE continues to expand in the surface express segment, which forms 30% of its total revenues. The surface express segment is expected to be a key growth driver for BDE as it is expected to grow faster than the air segment.

Market leadership in Air Express; focusing on increasing market share in ecommerce

* 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.

* E-commerce plays a crucial role for BDE as it accounts for one-fourth of the company's total revenue. BDE's strong presence and focus on serving the ecommerce market allow it to leverage the growing online shopping trends.

Valuation and view

* Enhanced utilization of newly added aircraft, increased volumes on newly introduced routes, and network expansion should lead to higher volumes for BDE.

* With an increasing market share of BDE in the surface express segment, along with network expansion, we expect BDE to register a CAGR of ~17%/32%/36% in revenue/EBITDA/PAT over FY24-26. We maintain our BUY with a TP of INR9,500 (based on 24x FY26E EV/EBITDA).

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