The curious case of diverse brokerage views on Delhivery — explained

• While Credit Suisse gave Delhivery an ‘outperform’ rating, IIFL Securities advised investors to sell out the stock saying that it’s walking a tightrope.
• On June 2, Credit Suisse gave a bullish view on the stock and at the same time IIFL Securities highlighted the poor performance of Delhivery and recommended investors to sell the stock.
• Delhivery’s journey in the stock market shows it is clearly struggling to gain investor confidence.

At this point in time, logistics company Delhivery can go either ways — inch towards profitability or get mired in more losses or take too long to deliver its promise. Moreover, two major brokerages gave contrasting views on how its future will pan out.

While Credit Suisse gave it an ‘outperform’ rating, IIFL Securities advised investors to sell out the stock saying that it’s akin to walking a tightrope.

Strong presence in the e-commerce industry
Delhivery has a 25% strong market share within the e-commerce industry with top clients like Amazon, Meesho, Flipkart and similar others. Its asset-light model combined with technology and automation shows that it has attractive growth prospects ahead.

While this gives it an edge and first mover advantage in a growing express parcel service market – 44% of its business comes from five customers with heavy dependence and concentration.

“The company doubled parcel volumes in FY22; gaining strong market share of 24-25% in the third quarter FY22 in all e-commerce parcel volumes and almost 60-65% in ex-captive. Delhivery has a common mesh network and various services generate virtuous synergies for all others. Its evolving in-house technology platform supports its entire operations,” said Credit Suisse.

It also made a play for the B2B logistics space by acquising Spoton with express delivery, supply chain and cross-border offerings. This expansion was funded by various rounds of fund infusion.

On the other hand, IIFL believes that Delhivery’s focus on automation, scale and vigour for growth is good but could face execution challenges. It believes that the risk-reward ratio is unfavourable, and hence investors should wait for a better entry point.

“At current valuations, the stock seems to be pricing-in seamless execution of the strategy to integrate complex business, contain costs, pass on scale related benefits to consumers and yet turn profitable,” said analysts at IIFL Securities in their maiden report on the company.

Internet company or a logistics company?
Credit Suisse however backs its valuation and believes that the share price will zoom by 26% in a year. It believes that Delhivery is bound to achieve profitability as the sector is ripe to achieve profitability. The company strengthened its accessibility, infrastructure, execution process over the years especially after acquisition of Spoton.

“We prefer Delhivery to other internet peers, with no customer acquisition cost, diversified growth – e-commerce and broader logistics; and cheaper valuation for the same growth play,” said Credit Suisse.

IIFL however compares Delhivery with other logistics players instead. Other niche logistics sector-players, it says, compete on differentiated services but Delhivery competes on price alone — and its wafer thin margins could affect its profitability going ahead.

“With around 85% of overall costs being variable, it needs to be seen how Delhivery intends to improve its operating efficiency, gain leverage, pass on the chunk of such gains to consumers, and yet log a meaningful Ebitda margin in the absence of any significant price increase,” IIFL says.

Delhivery too pegs its valuation with other consumer tech companies instead of logistics players like Blue Dart.

“If you think of us as a consumer-tech company, then we are grossly undervalued. Because if you look at all those consumer-tech firms listed recently, their revenues are not growing as much as ours. Our revenues are 4x of those companies; we are growing at 65% pace along with operating profitability," said Sandeep Barasia, chief business officer at Delhivery in an interview to Mint.

However, even those who agree to treat it like a consumer tech company, too seem to have their reservations. It all comes down to the sector it belongs to how much leeway can be provided over the fact that it is still loss-making.

Delhivery’s losses have come down by 43% to ₹1,011 crore in FY22, as compared to where it was three years back but a few believe its losses don’t justify its valuations.

“From the fundamental point of view, Delhivery is still a loss making company with really no clear path to showing profitability. The PE ratio with FY22 numbers was very high at 100-130 range so being so overvalued, the numbers and fundamentals don’t really justify the price that we are looking at,” Neha Khanna, Director told Business Insider India.


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