Buy Delhivery Ltd For Target Rs.475 By Emkay Global Financial Services
Mixed bag; awaiting industry headwinds to recede
Delhivery’s performance in the PTL segment remains robust, although it continues to face headwinds in B2C owing to weak consumption trends and insourcing by Meesho. With the management alluding to a series of initiatives for sprucing up B2C volumes, we believe Delhivery’s cost and tech advantages should help further bolster its market share. While service EBITDA margin contracted sequentially on account of network expansion in anticipation of festive demand surge, an imminent pickup in volumes in Q3 (October run-rate is up by over 25% vs the Q2 monthly average) along with declining capex intensity should bode well for the margin trajectory in coming quarters. Factoring in the miss on margins and the subdued environment, we cut FY26E/27E sales by 3%/5% and EBITDA by 6%/9%, respectively. We retain BUY while trimming Sep-25E TP to Rs475, based on DCF methodology.
PTL outshines, while B2C and margins disappoint
Revenue grew 13% YoY to Rs21.9bn, driven by the PTL, SCS, and Cross-border Services segments (up 27%/20%/44% YoY, respectively) in Q2FY25. The Express business grew 7% YoY, while Parcel volumes grew only 3% YoY and realizations per parcel improved 5% YoY. PTL revenue was up 27% YoY, continuing its growth trajectory despite seasonality, as volumes grew 23% YoY along with realization per ton increasing 4% YoY. SCS was the only segment that recorded sequential decline in revenue (-24%), owing to seasonality from consumer durables clients. EBITDA margin came in at 2.6% (Consensus: 4%), as COGS increased 14% YoY. Depreciation decreased 23% YoY due to change in the depreciation policy undertaken in the previous quarter, from WDV to SLM without changing the useful life and residual value of assets. This, coupled with other income increasing 18% YoY, led to PAT of Rs102mn. Business remains cash-surplus for the period ended Sep-24, at Rs54bn, and capex for H1FY25 stood at Rs2.4bn.
Outlook and risks
Given its agile and integrated network offerings, Delhivery has been able to garner lost wallet share in the PTL segment. But industry headwinds have caused the volume trajectory in the B2C segment to be muted. We remain circumspect of management commentary around the limited impact on volumes owing to insourcing, but draw comfort from initiatives planned for bolstering volume growth focused around faster regional deliveries on both - surface and air, rapid intra-city logistics (2-4 hour), premium tech enabled service offerings (reduction in RTO, address disambiguation), and physical franchise network for SMEs. Improving PTL volumes without sacrificing realizations and benefits of operating an integrated network should aid the margin trajectory, in our view. Strong net cash position and reducing capex intensity (5% in FY26) is likely to help the company ward off industry headwinds better than competition. Sep-25E TP is Rs475, based on DCF methodology (13% WACC, 5% terminal growth). Key risks: Slowdown in e-commerce due to quick commerce; operational risks due to dependence on contractual labor; pricing pressures in a fragmented market.
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