Q4FY23 Review: Delhivery: Weak Q4; hoping for a better FY24

22 May 2023 , 12:20 PM

Delhivery’s Q4FY23 sales fell 10% YoY (in-line) while losses were 32% higher (better vs forecast on higher treasury). B2C business was down 4% YoY and B2B was down 32% YoY. Delhivery sees B2C growing at 15-20% in FY24, while B2B even higher. The task is to balance quality, margins and growth – which remains a daunting one, given the challenging macro. Regardless, we model ~500bps lower network cost-income ratio, leading to 2.5% adj. Ebitda in FY25 vs -5.6% in FY23. However, the stock is pricing in even sharper gains; Risk-reward is not favourable. Maintain SELL.

Weak Q4: 

In Q4FY23, Delhivery’s overall revenues fell 10% YoY with 32% higher losses, when treasury income was higher 35% YoY. B2C segment revenue fell by 4% YoY, despite 2% YoY higher shipments as yields compressed (change in mix). B2B segment reported even higher fall in revenues (32% YoY) with ~30% drop in shipments. These two account for ~81% of Delhivery’s revenues. However, Delhivery’s B2B business is up 18% QoQ, as it attempts to regain customer confidence subsequent to SpotOn integration debacle. Gross margin is down YoY/QoQ reflecting the challenging macro. Adj. Ebitda margin is 0.3% for Q4 vs 4% YoY,-4% QoQ.

Hoping for a comeback in FY24: 

Delhivery’s CEO stated: 1) B2C segment growth should be 15-20% for FY24/25. 2) B2B can outgrow B2C for protracted period (fragmented industry structure); focus is to balance quality, margins and growth; management is renegotiating contractual terms with select customers. 3) Thrust on inducing efficiency, lowering perunit costs; immense scope to cut costs even further (eg: network rationalisation, introduction of tractor trailers, etc.); pricing as a lever to improve profitability is not on the horizon. 4) The company would not like to offer any guidance on adj. Ebitda, though hopeful of a better FY24. 5) It will invest ~6% revenues towards capacity expansion plans.

A tall task: 

Delhivery’s approach to focus on margins vs aggressive growth is a shift from its earlier approach. It has to differentiate offerings, regain consumer confidence, cut costs, and grow margins in a challenging macro.

Analysts of IIFL Capital Services maintain sales growth forecast of 21% p.a., through FY25, and model adj. Ebitda of 2.5% (despite a miss in FY23). A 1% change in costs-income ratio swings Ebitda by ~Rs1bn. Hence, risks to earnings remain high. At 20x EV/Ebitda, the stock is pricing even higher adj. Ebitda margin (~10%) on consensus sales (FY25: Rs108bn). Risk-reward is not favorable; SELL.