Competition from e-commerce firms could threaten margins of logistics firms
1 min read 17 Jun 2015, 07:01 PM ISTWhile volume will more than double for logistics firms, Ebitda margin may not rise sharply due to competition from smaller firms that get PE funding
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Logistics companies are gearing up to cater to the e-commerce boom, but their profit margins may not grow as expected due to heightened competition from smaller companies that are receiving private equity (PE) funding.
This, despite the value added services that several logistics firms provide e-commerce companies. According to Sanjeev Jain, director of finance at Gati Ltd, profit margins in e-commerce logistics are actually higher than those in traditional distribution, and sustainable, given services such as packing, and warehouse and inventory management that logistics firms offer.
Still, competition in the logistics space is intensifying with start-ups such as Delhivery, Ecom Express Pvt. Ltd and Gojavas that have received millions of dollars in funding in the past few months. That means existing logistics companies such as Gati Ltd, Blue Dart Express Ltd and Transport Corp. of India Ltd may not have a sustained pricing power because of rising competition. “Going forward, while volumes may double, it may not lead to expansion of Ebitda margins as was experienced in the previous years. Smaller players are likely to grab market share through a growing delivery network and lower delivery costs," said Rajorshi Roy, vice-president at Centrum Capital Ltd. Ebitda, or earnings before interest, taxes, depreciation and amortization, is a measure of profitability.
While volume will more than double for logistics firms, Ebitda margin may not rise sharply. “Overall, Ebtida margins for Gati and Blue Dart are estimated to be around 8.5% and 9% in 2015-16, mostly unchanged from 2014-15 because of investments in last mile network optimization for e-commerce business and pricing pressure from new entrants as well," said Amit Anwani, an analyst from KC Securities Pvt. Ltd. There are other challenges which logistic companies are likely to face such as managing spikes in demand due to sporadic promotions run by e-commerce portals and inventory management, added Gati’s Jain.
Blue Dart is trading at around 79 times one-year forward estimated earnings, Gati at around 25 times and Transport Corp. of India at 16 times. The stocks are already discounting the expected expansion in volume. Further upside in these stocks hinges on improvement in margins led by economic recovery and, importantly, the implementation of goods and services tax (GST). GST will be a game changer as organized logistics companies will gain market share from unorganized firms.
The writer does not own shares in the above-mentioned companies.
