scorecardresearchKotak upgrades Delhivery to 'buy' from 'add'; here's why

Kotak upgrades Delhivery to 'buy' from 'add'; here's why

Updated: 17 Jan 2023, 03:07 PM IST
TL;DR.
Delhivery’s business model is superior to that of its peers on key counts. For instance, Ecom Express is facing a matching cost deflation with Delhivery in FY2022, and Xpressbees will face it incrementally given the lack of operating leverage in its business model.
The stock was also upgraded to buy by ICICI Securities earlier in November.

The stock was also upgraded to buy by ICICI Securities earlier in November.

Shares of logistics service provider Delhivery fell nearly 2.20% to 313.60 apiece during Tuesday's trading. The stock has been in a downward trend over the last three months, losing nearly 43.53% of its value, sliding from 555.60 apiece to the current position of 313. The stock came under selling pressure after the lock-in period for pre-IPO investors expired in November last year.

After the LIC, Delhivery IPO was the second biggest in 2022 and has been among the top five since 2021. The stock got listed on the exchanges on May 24, 2022, at Rs. 495.2, against the issue price of Rs. 487. Since its listing, the stock has tanked by 35.82% from its IPO price. Furthermore, since its all-time high of 708.45 reached in July of last year, the stock has fallen 55.73% to date.

Despite such weak performance, brokerage house Kotak Institutional Equities has upgraded the stock rating to "buy" from "add," with an unchanged fair value price of 395 per share, indicating an upside of 26.19% from the stock current market price. The target price set by Kotak is still below the company's IPO price of Rs. 487.

Kotak stated that it sees a low probability of disruption happening to Delhivery detriment. “We believe that upgrading Delhivery makes sense in this situation and given the stock's reasonable valuations,” said the brokerage. 

Delhivery’s business model is superior to that of its peers on key counts. For instance, Ecom Express is facing a matching cost deflation with Delhivery in FY2022, and Xpressbees will face it incrementally given the lack of operating leverage in its business model, as per brokerage.

Delhivery will further double up its efforts to deflate costs as it starts using long-length, fuel-efficient tractor-trailers on non-metro routes.

Peers lack a combination of Express Parcel and PTL volumes on non-metro routes. Having entered the PTL business more than five years ago and having acquired Spoton, Delhivery is well-placed, the brokerage highlighted.

Unlike peers, Delhivery has a lower concentration risk for the top 3 e-commerce accounts, it added.

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Stock price chart of Delhivery.

The stock was also upgraded to "buy" by ICICI Securities earlier in November; however, it reduced its target price to Rs. 460 from Rs. 477.

Delhivery's low-cost structure compared to its peers across first-mile, mid-mile, and last-mile logistics in the express parcel business is a competitive edge in a cost-sensitive market. 

In addition, the company has a strong balance sheet, which will help sustain investments through periods of tight liquidity. 

“We believe Delhivery’s current valuations provide a great opportunity to buy this high-quality stock. The risk-reward skew at the current levels is, in our view, very attractive,” ICICI said.

The brokerage has envisaged an upside scenario where the stock re-rates to Rs.620/share 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/share if EBITDA margin profitability is pushed beyond Q4FY23 and medium-term revenue growth visibility worsens further due to global headwinds.

For the September-ending quarter, the net losses of the company narrowed to 254.1 crore as against the 635 crore logged in the corresponding quarter of last year. The company posted a net loss of 399.3 crore in Q1 FY23. The revenue from operations during the quarter rose 23.24% to 1,883.4 crore compared to 1,528.2 crore in Q2FY22.

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

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First Published: 17 Jan 2023, 03:07 PM IST