Delhivery IPO to raise up to Rs 5,235 crore opens on May 11th: Should You Subscribe?

Delhivery Limited IPO opens for subscription on the 11th May. The company is looking to raise up to Rs 5,235 crore through the public issue. 

Delhivery Limited IPO Details:

Delhivery IPO Date: 11 May - 13 May 2022

Delhivery IPO Price band: Rs 462 - Rs 487

Delhivery IPO Issue Size: Rs 5,235 crore (Fresh Issue of Equity Shares aggregating up to Rs 4,000 crore and Offer for sale of Equity Shares aggregating up to Rs 1,235 crore)

Reservation: QIB 75%, Retail 10%, NII 15%

Post Issue Implied Market Cap: Rs 33,678 crore - Rs 35,284 crore

Minimum Investment: Rs 14,610

Employee Discount: Rs 25 per share

Bid lot: 30 shares, and in multiples of 30 shares

Delhivery IPO: Objects of the Issue

The net proceeds from the IPO will be utilized for the following purposes:

• Funding organic growth.
• Funding inorganic growth through acquisition and strategic initiatives.
• General corporate purposes.

Delhivery IPO: About the company

• Delhivery was incorporated in 2011 and it is the largest and fastest-growing fully-integrated logistics services player in India by revenue as of FY21.
• The company provides supply chain solutions to a diverse base of 23,113 Active Customers such as e-commerce marketplaces, enterprises and SMEs, and direct-to-consumer e-tailers across several verticals.
• It collects, structures, stores, and processes vast amounts of transaction and environmental data to guide real-time operational decision-making.
• The company’s express parcel delivery network, which serviced 17,488 PIN codes in the 9 months ended December 31, 2021, covers 90.61% of the 19,300 PIN codes in India.
• In FY21, in PTL Freight Service, the company delivered 373,854 tonnes of freight, growing at a CAGR of 75% between FY19 and FY21. 
• It operated 21 fully and semi-automated sortation centers and 82 gateways across India (excluding Spoton) as of December 31, 2021.

Industry Overview

• The Indian logistics sector is one of the largest in the world and presents a large addressable opportunity, with a direct spend of US$216 billion in FY20. 
• Total logistics spending in India was ~14% of GDP in FY20, which is significantly higher than developed countries like Germany and the US, where logistics spending is ~8% of GDP.
• The Indian supply chain services market (including warehousing) was estimated to be US$65 billion in FY20 and is expected to reach US$109 billion by FY26. The share of organized players is expected to increase from US$1.6 billion in FY20 to US$13-15 billion in FY26 at a CAGR of 42-45%.

Delhivery's Services

Express Parcel: They were the largest and fastest-growing 3PL express parcel (and heavy parcel) delivery player in India by volume and revenue with a market share of approximately 24% to 25% of the overall e-commerce parcel volumes.

PTL Freight: PTL freight services were launched in 2016. They provide a full suite of freight services including door-to-door and hub-to-hub delivery, and much more.

TL Freight: The truckload freight brokerage platform, “Orion”, connects shippers with fleet-owners and suppliers of truckload capacity across the country via a centralized bidding and matching engine.

Supply Chain Services: They provide integrated supply chain solutions to e-commerce and corporate customers.

Cross-Border Services: They provide door-to-door and port-to-port express parcel services that include cross-border e-commerce. They expanded this offering to include cross-border air-cargo services in late 2019.

Delhivery's Financials

• The company has reported revenue of Rs 1653.90 crore, Rs 2780.58 crore, and Rs 3646.53 crore in FY19, FY20, and FY21, respectively. The revenue growth has been 68% and 31% in FY20 and FY21 over previous years.
• The company has reported a net loss of Rs 1783.30 crore, Rs 268.93 crore, and Rs 415.74 crore in FY19, FY20, and FY21, respectively. 
• In the same period, it has reported EBITDA of Rs (137.07) crore, Rs (172.05) crore, and Rs (100.38) crore.
• EBITDA margin improved from (8.29)% in FY19 to (6.19)% in FY20 and (2.75)% in FY21, while declining from (3.37)% in the nine months ended December 31, 2020, to (4.82)% in the nine months ended December 31, 2021.
• For the last three fiscal years, DL has posted an average negative EPS of Rs. - (13.64) and an average negative RoNW of - (18.93) %. 
• The fair value loss on financial liabilities at fair value through profit or loss as a percentage of revenue from a contract with customers was 89.53%, nil, and 0.25% in FY19, FY20, and FY21, respectively.
• The Customer Retention Rate for the top 100 customers (by revenue in the respective Fiscal) was 93.00%, 100.00%, and 92.00% for FY19, FY20, and FY21, respectively.

Peer comparison

• The listed peers of the company include Blue Dart Express Ltd, TCI Express Ltd, and Mahindra Logistics Ltd.
• In terms of revenue, Delhivery is the largest player with a total income of Rs 3838 crore (FY) followed by Blue Dart and Mahindra Logistics.
• All the other listed peers are profit-making companies. Blue Dart has an EPS of 42.91, TCI of 26.15, Mahindra Logistics has an EPS of 4.16 while Delhivery has an EPS of (8.05).
• TCI Express has the highest RoNW of 23.12% followed by Blue Dart Express at 17.08%. Delhivery has a RONW of (14.66)%.

USPs

Rapid growth and extensive scale: Delhivery's network structure, quality of engineering and technology, and data intelligence capabilities have helped them establish scale in all of their business lines and ensure synergies across them. This has driven higher network utilization, resulting in cost efficiencies, while maintaining service speed and reliability.

Proprietary logistics operating system: They have a team of 505 engineering, data sciences, and product professionals (excluding Spoton), as of December 31, 2021. They have built proprietary technology systems that enable them to offer integrated logistics services to a wide variety of customers.

Vast data intelligence capabilities: They collect, store, process, structure and analyze vast quantities of transaction data such as location data, product information, shipper and consignee information, etc. They use ML, AI, and operations research to build institutional intelligence, automation, and dynamic optimization capabilities that enable them to solve several complex operational problems.

Strong network design and engineering: Their network operates as a dense, dynamic mesh, making it efficient, fast, and agile in responding to changes in volumes, shipment profiles, and environmental conditions. The mesh structure allows them to reduce overall touchpoints in the journey of shipments through the network, reducing handling and improving precision.

Growth potential

Expand investments in infrastructure and network: The company will continue to expand its operational capabilities and expand network infrastructure and capacity across business lines. They continue to expand their network of fulfillment centers and in-city micro-fulfillment centers to expand “Fulfilled by Delhivery” and “Delhivery Flash” offerings.

Build scale in existing business lines: The company will continue to invest to gain scale and increase market share across business lines. They also expect to continue to improve operational productivity through automation and technology systems.

Deepen customer relationships: They will continue to expand wallet share with existing customers by designing customized and integrated supply chain solutions for their specific needs and industries and introducing practices from experiences with other customers.

Enhance technology (software and hardware) capabilities: It will continue to reinforce innovation capabilities by building innovative technology and data systems and investing in the best engineering talent. The company will also continue to develop and deploy future-ready hardware solutions in its operations.

Risks

Losses may continue: The company has a history of losses and negative cash flows from operating, investing, and financing activities and it may continue to experience losses and negative cash flows in the future. They have and may continue to experience limited profit margins on service offerings.

Dependency on a scale, automated, and unified network infrastructure: The company relies on a scaled, automated, and unified network infrastructure, largely comprising logistics and

transportation facilities, for business operations. If they are not able to maintain or expand network infrastructure, they may not be able to manage its growth.

Risk of disruption to logistics and transportation facilities: Company's daily operations rely heavily on the orderly performance of logistics facilities and transportation facilities, which are largely driven by technology. Any service disruption like failure or disruption of the automated facilities or equipment, technological issues, prolonged power outage, etc could have a material adverse effect on business and financial condition.

Delhivery IPO: Review

• Robust rise in revenues: Revenue increased at 49% per year between FY19 and FY21, on the back of higher demand for logistics services.
• On track to become EBITDA positive: At the EBITDA level, the company turned is a loss of Rs 35 crore in Apr- Dec 21 period. Delhivery expects to turn EBITDA positive by the end of FY22. 
• Improving margins: While the company is still making losses, the EBITDA margins have improved from -11.35% in FY19 to -0.72% for 9MFY22.   
• Reasonable valuations: Since it is loss-making, valuing on the basis of PE ratio is not possible. At the higher end of the price band, Delhivery IPO is priced at Mcap/ Sales of 5.5 times FY22 annualized revenues. This is cheaper compared to TCI Express (6.16 times) but costlier than Blue Dart Express (3.63 times), VRL Logistics (2.05 times) and Mahindra Logistics (0.83 times). Notably, the other companies are profitable and also have higher return ratio as compared to Delhivery. 
• Final recommendation: Given factors such as healthy growth in topline, improving EBITDA margins (EBITDA profitability by 2022 end), strong runway for growth but aggressive valuations, investors with a higher risk appetite who wish to take exposure to a new-age tech logistics player could consider investing in this issue. However, investors looking to invest should bear in mind that it is a loss-making company, and could be under pressure in this high interest rate environment.