Delhivery may hit a valuation hurdle amid near term concerns: Brokerages

However, Delhivery's growth opportunities, its business model and revenue trajectory are positive triggers, say brokerages

Logistics services provider Delhivery is raising Rs 5,235 crore in an initial public offer (IPO) to fund its organic and inorganic growth initiatives. The company, which is the largest integrated logistics player by revenue, is eyeing steady growth in the Indian logistics sector, as well as market-share gains in the organised space. 

While the logistics sector is expected to grow 9 per cent annually between 2019-20 (FY20) and 2025-26 (FY26) to hit $365 billion, the organised segment, which was just 3.5 per cent of the sector in FY20, is expected to grow nearly 4x the overall sector.

The share of the organised segment will be more than 12 per cent of the sector by FY26. Given its network, scale, large investments in technology, and focus on enhancing customer wallet share, it is expected to be a key beneficiary of the growth trends. 

Express parcel services is its largest segment, accounting for 62 per cent of consolidated services and is linked to growth in e-commerce services.

The e-commerce space has grown at 31 per cent annually from 2017-18 through to FY20 and should grow at similar levels over the next few years. E-commerce volumes are expected to jump 5x between FY20 and FY26.

The company had 25 per cent share of the overall e-commerce volumes (including captive players) and 42 per cent share of the e-commerce volumes handled by third-party logistics players for the third quarter of 2021-22 (FY22).

Given the underlying growth trends, the company has registered an impressive 57 per cent annual growth over 2018-19 through to FY22, aided by an asset-light, technology-driven business model.

The model has helped the company scale up its presence without the burden of fixed assets. In addition to organic growth, what has helped the company expand its customer base, enhance its network, and strengthen its technological base has been the Rs 2,000 crore worth of acquisitions over the past five years. A fifth of IPO (Rs 1,000 crore) will be used to fund its inorganic initiatives.

While its volume and revenue growth numbers have been impressive, the same has not percolated through to the operational level. Despite the benefits of scale and operating leverage, the company posted an operating loss of Rs 233 crore for the first nine months of FY22. While revenue growth at 82 per cent for this period is strong, whether the company will break even at the operating level in the near term will be key for investors. 

Given the lack of clarity on the path to profitability, brokerages have either not rated the issue or are neutral. At the upper band of Rs 487, the stock is priced at 9.7x 2020-21 and 5.5x FY22 annualised revenue.

IPO subscribed 21% on Day 1

Delhivery’s IPO was subscribed 21 per cent on Wednesday - the first day of the issue. The retail and institutional investor portion were subscribed 29 per cent each. A day earlier, Delhivery raised Rs 2,346 crore from 64 anchor investors. The Gurugram-based firm allotted nearly 48.2 million shares at Rs 487 apiece - the upper end of its IPO price band.