5 reasons why ICICI Securities upgraded Delhivery to ‘buy’ from ‘sell’

Despite a 40 percent decline in October and 32 percent fall since listing, brokerages have turned upbeat on Delhivery's stock.

In a recent note, domestic brokerage house ICICI Securities upgraded Delhivery to 'buy' from 'sell' with a target price of ₹460, indicating a 39 percent upside in the stock. It is important to note that ICICI's target price remains below the firm's IPO price of ₹487.

"We believe Delhivery’s current valuations provide a great opportunity to BUY this high-quality stock. The risk-reward skew at the current market price is very attractive in our view (5.3:1). While we acknowledge growth has been slowing in e-commerce sales in FY23, we believe it is a transient issue and is unlikely to be symptomatic of structural weakness in the space," explained the brokerage.

The stock fell 4 percent in intra-day deals on Tuesday to hit its all-time low of ₹331.60. Over the past five trading sessions, the stock has lost 11.5 percent of its value.

Delhivery was listed on the exchanges on May 24, 2022, at ₹495.2, against the issue price of ₹487. Since hitting its record high of ₹708.45 on July 21, the stock has been constantly declining. The scrip has tanked 53 percent from its all-time high, hit in July and 32 percent from its listing price.

Five reasons to BUY Delhivery according to ICICI Securities:

1) Lowest cost structure compared to peers across first-mile, mid-mile and last-mile logistics in express parcel business is a competitive edge in a cost-sensitive market.

2) Technology and trust moat should strengthen its dominant share in niche segments such as secured delivery.

3) Hands-on management ensures agile decision-making and timely intervention during exception handling.

4) Strong balance sheet should help sustain investments through periods of tight liquidity.

5) Uncharacteristically high (compared to peers) brand recall among end-users could make it a key beneficiary of open-ended B2B e-commerce marketplaces.

What went wrong?

"Delhivery’s share price has corrected by over 50 percent from peak levels of Jul’22, given the concerns around the sustainability of revenue growth and path to profitability. Revenue growth concerns are centered around slowing of growth in the express parcel segment (e-commerce) and sharp decline in volumes in the partial truckload (PTL) segment post the integration of ‘Spoton’ which was acquired in FY22," said the brokerage.

The path to profitability was in question as the company reverted to negative adjusted EBITDA in Q1/Q2FY23 after two-quarters of positive EBITDA in Q3/Q4FY22, it said.

Bull and bear case

The brokerage has envisaged an upside scenario where the stock re-rates to ₹620, indicating an upside potential of 87 percent if revenue growth recovery in the express parcel and PTL segments are higher than estimates.

It has assumed a downside case where the stock could de-rate to ₹300, implying a downside of 9 percent if EBITDA margin profitability is pushed beyond Q4FY23 and medium-term revenue growth visibility worsens further due to global headwinds.

Estimates

ICICI has cut its revenue growth estimates for FY23/FY24E/25E to 16 percent/23 percent/24 percent.

Other brokerages

Brokerage house Kotak Institutional Equities had also upgraded the stock to 'add' from 'reduce' earlier and believes that it is well-placed to weather the slowdown. It has given a fair value of ₹415 for the stock, indicating an upside of 25 percent.

The brokerage believes Delhivery's weak business commentary reflects more of a moderation in the industry growth, led more by cyclical factors than structural impediments of market share loss.

"We find it well-placed operationally and strategically to weather near-term weakness in the industry growth and eventually drive the increasing relevance of third-party logistics (3PL) in e-commerce logistics," said Kotak.

Foreign brokerage CLSA has a "buy" rating on the stock with a target price of ₹532 apiece, which indicates a 53 percent upside on the stock. The long-term growth outlook remains intact, said CLSA. "A pickup in PTL (partial-truckload) and express parcel volume is likely to help improve adjusted EBITDA," it added.

Business update

In the business update released on October 19, Delhivery said, "Market sentiment in Q2 continued to remain broadly unchanged from Q1. Consumer discretionary spending remained muted due to continuing high levels of inflation, with average user spending and total active shoppers remaining flat or lower during the ongoing festive season, as per the industry reports. Industrial output also remained weak in the first 2 months of the quarter. In spite of the challenging market conditions, our market position remains strong owing to our structural cost advantages, network size and investments in capacity."

It noted that it was likely to see an adverse impact from high inflation and would clock moderate growth in shipments for the rest of the financial year.

In the second quarter, the company narrowed losses to ₹254 crore against a loss of ₹635 crore in the year-ago period. Revenue during Q2FY23 came in at ₹1,796 crore, which is 22 percent higher than ₹1,497.7 crore in the year-ago quarter.

According to a Mintgenie poll, 11 analysts on average have a 'buy' call on the stock.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.