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Despite seasonality, Delhivery’s performance in surface express continues to remain robust. Regaining lost wallet share during Spoton’s integration along with yield improvement in the PTL business underpins management’s focus on improving profitability together with gaining market share. With a bulk of the network expansion investment for FY24 completed and pickup in demand imminent in Q3 (B2C monthly volume run rate up over 15% vs. Q2 average), H2 should see decent operating leverage for the company to turn EBITDA positive. Strong cash position (net cash of ~USD650mn) lends support to future expansion plans while keeping any aggressive competition at bay. We forecast a 24% revenue CAGR over FY23-26E and PAT turnaround in FY26E. We retain our BUY rating, with a TP of Rs490, based on DCF methodology.

Delhivery: Financial Snapshot (Consolidated)

Momentum continues, despite a weak environment

Revenue grew 8% YoY to Rs19.4bn, driven by the express parcel segment, up 8% YoY, and part truck load business (PTL), which delivered 27% YoY growth in Q2FY24. Despite Q2 being a seasonally weak quarter, growth was seen across all segments, except supply chain (SCS) and cross-border services, which declined 9%/57% YoY. Adjusted EBITDA margin remained stable at (0.8%), 10bps lower than Q1, as network expansions continued in anticipation of a strong H2. Net loss was lower at Rs1.03bn vs. loss of Rs2.5bn YoY on the back of improved operating leverage and higher other income (over 16% YoY). Momentum in PTL business continued because of volume growth (over 22% YoY) as well as improved yields (over 5% YoY). The company has renegotiated contracts in PTL and SCS businesses to improve profitability from every account. Working capital position improved to 28 days vs. 38 days in Mar-23 due to a reduction in receivables days. Net cash position as of Sep-23 stands at Rs53.6bn.

Outlook and risks

Despite seasonality, where other express surface operators have reported muted growth, Delhivery’s tech-enabled network sustained its performance in both express and PTL businesses. The company’s strategy to pass on efficiency gains in the B2C segment (where customers are price-sensitive) bodes well for future market share gains, while yield improvements in the B2B segment, which focuses more on network speed and reliability, should aid the path towards profitability. Our estimates broadly remain unchanged, with adjusted EBITDA expected to witness breakeven in FY24E, and the company turning PAT/FCF positive in FY26E on the back of operating leverage and reducing capex intensity (6% from the current annualized run-rate of 7.5%). Our Sep24E TP of Rs490/share, based on DCF methodology (13% WACC, 5% terminal growth), implies FY26E EV/EBITDA of 28x. Key risks: Slowdown in the e-commerce industry/overall GDP, external calamities, operational risks due to dependence on contractual labor, third-party assets, and pricing pressures in a fragmented market.

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