Delhivery: A pricey bet on growth

19 Jan 2024 , 11:53 AM

Recommendation: Sell; Target price: Rs 325

 

Delhivery is one of IIFL’s top sell ideas for CY24 as analysts of IIFL Securities do not see risk-reward being favourable, despite a ~45% correction in stock price from the peak. Management, backed by investments in technology, vast network, etc., plans to scale up the B2B business while moderating aggression in B2C, where it has less pricing freedom. Through FY24-26, it should grow sales at best in sync with the industry, with an inferior operating matrix and capex > OCF. Meanwhile, valuations price in 60-65% p.a. growth in FCF (reverse DCF, terminal growth of 5%) through FY28-37. Massive execution surprises are key to the stock’s OPF hereon. 

Growing in sync with others: 

Through FY24-26, Delhivery’s sales growth is seen at 16% p.a., driven by the B2B segment vs core B2C (63% of sales), as other smaller segments such as SC and FTL scale up. Analysts of IIFL Securities note that while B2B has a long runway for growth, Delhivery has to offer a fine balance between costs, quality, and pricing to establish itself as a reliable logistics partner. Moreover, sales growth should mirror established players in the sector with impeccable operating matrix and return ratios, and to that extent, whether such a pivot in strategy works, needs to be seen. 

Assume improved operating matrix: 

Through FY24-26, analysts of IIFL Securities assume Delhivery to cut down cost-to-income ratio by ~500bps, when incumbents struggle. Its asset light model has less scope to offer any material operating leverage, for which the improvement in Ebitda (adjusted) margins from 0.1% to 2.2% in FY26, is backed by pricing gains. This remains a daunting task; however, analysts of IIFL Securities give benefit to Delhivery given its vast network, investments in technology, and management’s commitment towards profitable growth. Periodic entry of new entrants, given a long runway for growth, will likely be an overhang for incumbents; particularly in B2B and supply chain segments that are growing faster than FTL. 

Yet, payoffs are not favourable: 

Delhivery has guided to invest 5-6% of sales to grow its network, lower costs, and gain market share. Capex through FY26 > OCF during the same period (~Rs3bn p.a.). Analysts of IIFL Securities see the stock to re-rate, provided there are execution surprises. On a reverse DCF, the stock is pricing in 60-65% p.a. growth in FCF through FY28-37; they do not see risk-reward as favourable; maintain SELL.