Q1FY24 Review: Delhivery: Gaining at the cost of margins?

7 Aug 2023 , 01:36 PM

Delhivery’s Q1FY24 sales growth of 11%/4% YoY/QoQ was in-line. Adj. Ebitda loss was down 88% YoY (SpotOn debacle YoY), but up QoQ (corporate o/h, network costs, etc.). Through Q2-Q4FY24, Delhivery will see QoQ Ebitda expansion, as costs will lag revenue growth. As such, analysts of IIFL Capital Services FY24/25 adj. Ebitda margin of 0.2%/2.5% has risk (competition).Valuations are ahead of fundamentals; SELL. 

In-line performance: 

Delhivery’s Q1FY24 performance was in-line, with sales growing 11%/4% YoY/QoQ. Adjusting for the non-cash ESOP charges + lease expenses, it has reported an adj. Ebitda loss. The B2C/B2B revenue growth of 14%/34% YoY has lagged growth in volumes, while supply chain/truck load/cross border (20% share in revenues) have shown mixed trends with -13%/7%/-46% YoY growth/(decline). Given SpotOn integration issues, Delhivery’s Q1FY23 was adversely affected, for which the YoY comparison is not fair. Further, given the seasonality in B2C/B2B segments, even QoQ comparison holds less relevance. Regardless, adj. Ebitda loss is down 88% YoY but up QoQ in Q1 — due to increase in corporate overheads, annual performance payout, etc. However, lumpiness in depreciation (-34% QoQ/-8% YoY) and higher treasury income (+108% YoY/+36% QoQ) have helped in narrowing losses for the quarter. 

Focus on market share and growth: 

In the post-earnings call, Sahil Barua, CEO of Delhivery stated: 1) B2C market growth should be 16-20% p.a., over the medium term. Growth is driven by D2C and long tail shippers, where reach matters. 2) B2B business is showing traction and SpotOn integration issues are behind. 3) Focus is on growth vs defending yields and continuing to churn out of low-yield consumers. 4) Flipkart, Maersk, etc., have forayed into B2B logistics but have no value proposition, and pose no great risk. 5) Delhivery will consolidate network/ cut costs, and invest wherever needed (new sites/trucks/automation etc.). 6) On a QoQ basis, margins will expand as expenses lag revenue growth. 

Valuations well ahead of fundamentals: 

Analysts of IIFL Capital Services like Delhivery’s volume growth, but are concerned about the falling yields. New entrants with deep pockets will risk Delhivery’s aspirations to profitability/ cashflows, for which there is a risk to their FY24/25 adj. Ebitda margin of 0.2%/2.5%. Valuations are clearly ahead of fundamentals. Retro DCF implies a 49% Cagr in FCFF through FY27-37 at a terminal growth of 5% and WACC of 13%. As such, positive FCFF is not seen before FY27 on most liberal assumptions.