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Weak operating print

BDE reported a muted quarter, as profitability faltered on both—sequential and YoY—basis, despite revenues improving 9% YoY, presumably on the back of higher utilization of new aircrafts. We believe operating a premium logistics network limits BDE’s ability to sustainably improve margins, in spite of commanding higher pricing in both, air and surface express. Also, maintaining growth momentum with a premium-pricing model in a highly competitive B2B express market may prove challenging. With the stock currently trading near its +1 SD 5-year EV/EBITDA average, current valuations limit upside. We marginally cut FY25/26E PAT by 6%/2%, respectively, as we factor-in the miss; we maintain our REDUCE rating. We roll forward our TP of Rs7,050/sh to Jun-25E (on DCF method), implying FY26E EV/EBITDA of 14x and P/E of 36x.

Weak show; margins contract despite growth in top-line Despite seasonality, Q1 consol. revenue grew 2%/9% on QoQ/YoY basis, respectively. Gross margins remained flat YoY, while EBITDA margins contracted by 35bps/202bps on YoY/QoQ basis, respectively. Benefits of insourcing volumes on new freighters vs. using commercial belly space seem limited. We suspect revenues grew on the back of higher utilization of new aircrafts and growth in surface express, but lower substitution of the high-yield express cargo for port-to-port load would have limited margin ramp-up. Employee costs grew 11% YoY, possibly owing to annual wage hikes. Other expenses grew in line with revenues, at 8% YoY. PAT declined 13% YoY due to higher depreciation charges (+20% YoY), lower other income (-11% YoY), and weak operating performance.

Outlook and risks

Though BDE has been able to maintain its market leadership position in the air express industry backed by its impeccable execution and network reliability, we remain concerned about the company maintaining its growth momentum with a premium pricing strategy, especially in current times of intense competition in the B2B express market. We expect margin expansion from current levels owing to higher utilization of new freighters, however sustaining the same over the long term owing to operating a premium logistics network remains challenging. Factoring-in the current quarterly miss, we cut our PAT estimates for FY25/26 by 6%/2%, respectively. Our sales estimates remain largely unchanged, as we expect volume CAGR of 9% over FY24-27E, and anticipate muted realizations (-1% CAGR), as growth in surface outpaces that in the air segment. We expect EBITDAM to expand by 160bps over FY24-27E on the back of ramp-up in utilizations of new freighters. With the stock currently trading near its +1 SD 5-year EV/EBITDA average, current valuations limit further upside, in our view. Key risks: Higher demand for air and lesser substitution with other modes, the premium pricing differential is likely to expand due to brand and superior execution, change in pricing strategy in surface express, and rationalization of overhead costs.

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