Delhivery may hit a roadblock before delivering big success

In the December quarter (Q3FY24), Delhivery saw a significant growth in its core business, which is express parcel.
In the December quarter (Q3FY24), Delhivery saw a significant growth in its core business, which is express parcel.

Summary

As instances of self-logistics drop because of likely lower service standards and efficiency, third party logistics providers are expected to benefit in the long run. Delhivery could be among the beneficiaries then.

For logistics solutions providers, two problems loom in the near-term—the anticipated modest growth in e-commerce and a shift toward in-house logistics. This should have an adverse impact on Delhivery Ltd’s prospects.

Recently, Flipkart pointed out that logistics costs are a key challenge for the e-commerce sector in India. Moreover, a move towards self-logistics like online shopping platform Meesho launching its logistics vertical Valmo, could stand in the way of e-commerce industry’s growth.

But captives lack the cost advantages versus third-party logistics companies. Plus, there are indeed many logistics companies to tap into today versus a decade ago.

 

For logistics solutions providers, two problems loom in the near-term—the anticipated modest growth in e-commerce and a shift toward in-house logistics. This should have an adverse impact on Delhivery Ltd’s prospects. 

Recently, Flipkart pointed out that logistics costs are a key challenge for the e-commerce sector in India. Moreover, a move towards self-logistics like online shopping platform Meesho launching its logistics vertical Valmo, could stand in the way of e-commerce industry’s growth.

But captives lack the cost advantages versus third-party logistics companies. Plus, there are indeed many logistics companies to tap into today versus a decade ago. 

“Logistics is an intricate orchestration of events best done by third-party specialists. These would eventually benefit from reducing instances of self-logistics. The current shift away from logistics specialists could create a double whammy for them in the interim," said analysts at Kotak Institutional Equities.

As instances of self-logistics drop because of likely lower service standards and efficiency, third party logistics providers are expected to benefit in the long run. Delhivery could be among the beneficiaries then. 

With 5,000 crore cash on its books, Delhivery has already incurred most of the capital expenditure (capex) much in advance at its latest facilities.

“Even as near-term express parcel growth could be challenging due to the rise in in-house logistics by large platforms, outsourcing to third party logistics players would still continue," said Ankita Shah, vice president of institutional equities research, Elara Securities (India).

She explained that the integrated business model with presence across part truckload, supply chain and cross border segment helps mitigate impact of any potential slowdown in any business.

In the December quarter (Q3FY24), Delhivery saw a significant growth in its core business, which is express parcel. Express parcel business accounted for the largest chunk of the revenue pie, at 66%, in Q3, closely followed by the ‘part truckload’ segment at 17%. The ‘part truckload’ business saw satisfactory growth and continued market share gain. The ‘part truckload’ segment provides B2B express services.

Delhivery’s shares are around 4% away from its 52-week high of 488 apiece seen on 5 February reacting to robust Q3. Revenue grew 20% year-on-year to 2,194 crore. Profitability was strong with the company reporting its first ever quarterly net profit of 11.7 crore. Sustaining profitability is key ahead. 

Apart from monitoring the volume and pricing trend in the express parcel and part truck load business, investors should closely track unit economic cost and market share gains.

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