scorecardresearchKotak Securities initiates coverage on Delhivery with a 'reduce' call; here's what the brokerage says

Kotak Securities initiates coverage on Delhivery with a 'reduce' call; here's what the brokerage says

Updated: 09 Sep 2022, 10:39 AM IST
TL;DR.
Kotak underscored that Delhivery is well-positioned operationally to drive a 26% decadal EBITDA CAGR.
Kotak said that the stock's current market price does not factor in a growth moderation in the e-commerce sector volumes.

Kotak said that the stock's current market price does not factor in a growth moderation in the e-commerce sector volumes.

Brokerage firm Kotak Securities has initiated coverage on the stock of Delhivery with a 'reduce' rating and a DCF-based fair value (target price) of 540.

Kotak underscored that Delhivery is well-positioned operationally to drive a 26% decadal EBITDA CAGR. Its diversified customer and the business mix should protect it strategically from changes in the industry structure.

However, the brokerage firm added that the stock's current market price does not factor in a growth moderation in the e-commerce sector volumes.

Key points highlighted by Kotak

1. Well-placed to grow market share, margin and TAM

Kotak expects Delhivery to record an EBITDA CAGR of 26% over FY2025-35E, much ahead of the sectoral growth prospects in its current segments. It also expects such outperformance to be driven by a combination of Delhivery gaining market share in its existing lines of work, growing profitability and entering the large-sized slow part truck load (PTL) segment.

"The key hypotheses are: (1) Delhivery’s ability to continue scaling up its presence; and (2) Delhivery retaining a part of the incremental cost deflation benefits. On scalability, we rely on Delhivery benefitting from and sustaining a past track record of investments in network infrastructure and technology. On retaining cost deflation benefits, we rely on factors unique to Delhivery – (1) the ability to mix different loads on the same network infrastructure and transportation leg; and (2) scale benefits (automation, direct lanes and last mile productivity)," said Kotak Securities.

2. Financials

"Adjusted for SpotOn, we see a 26% revenue CAGR over FY2022-25E. We are nearly 6% below consensus, as we factor in a moderation in sectoral e-com activity and limitations to how fast Delhivery can grow the PTL business from the current scale," said Kotak.

The brokerage firm expects Delhivery's adjusted EBITDA margin to improve to 7.6% from 1% over FY2022-25E, based on (1) Delhivery retaining part of cost deflation benefits and (2) operating leverage. At a 9.8% margin in FY2026E, it will generate FCF (free cash flow), said Kotak.

3. DCF-based fair value of 540

"In our DCF-based fair value, we factor in (1) a healthy about 24%/26% CAGR in revenues/service EBITDA over FY2025-35E, 10%/11% over FY2035-45E and 5% terminal growth; (2) corporate overheads growing at a slower 16%/8% CAGR over FY2025-35E/35-45E; and (3) modest improvements in capex intensity and working capital on incremental sales," said Kotak Securities.

The brokerage firm accounts for an 11% dilution linked to ESOPs on the existing pool of granted + ungranted stock options.

4. Risks

(1) A reduction in the impetus from the top three e-commerce players to burn cash and drive penetration; (2) an increase in insourcing by e-commerce captives; and (3) a recurrence of business transition/integration issues as seen in recent performance are the key risks, said the brokerage firm.

Disclaimer: The views and recommendations given in this article are those of the broking firm. These do not represent the views of MintGenie.

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Commodity prices and stock market
First Published: 09 Sep 2022, 10:39 AM IST