Blue Dart's losing speed

While it dominates logistics space; demonetisation, sluggish non-retail sales could impact revenues

The Blue Dart Express stock is down about 10 per cent since the start of the month, making new 52-week lows in the past few days. The Street is worried over falling e-commerce volumes due to demonetisation and cuts in earnings estimates by brokerages on the back of slower expected recovery. The impact for the company, a market leader in the express logistics segment, has been higher on the e-commerce side (B2C or business to consumer or retail) about 25 per cent of revenue. Analysts estimate a 60-70 per cent fall in sector volumes for the e-retailing business, as cash on delivery accounts for nearly 70 per cent of sales. the fall in spending after festive sales has been compounded by the demonetisation impact.
 
The company management, according to Motilal Oswal analysts, has indicated revenues in the B2C segment have been impacted by almost 50 per cent in November, compared with in the September quarter. The impact on the business to business (B2B, 75 per cent of revenue) is however moderate, down five-six per cent as against the September quarter average. The real impact could be seen with a lag of two-three months as demand from end-consumers slows. Analysts at IIFL Institutional Equities say the B2B segment could be impacted as companies adjust to new working capital cycles. IIFL has cut its FY17 and FY18 estimates for Blue Dart by 28 per cent each, to account for a delayed recovery in the e-commerce industry and sluggish B2B sales till the first half of FY18. The company risks further downgrades to earnings if the subdued sentiment continues, they add.
 
While B2B segment sales are down (electronics, automobiles), what gives comfort is that the largest sub-segment (within B2B) — financial services — accounting for 10 per cent of revenue, has done well. The outperformance is due to the sharp increase in credit card issuance after demonetisation. Further, the market for critical documents such as passports and certificates and pharmaceuticals, remain unaffected.
 
On market share, even before demonetisation, company’s e-commerce sales were down 20 per cent year-on-year in the first half of FY17 as compared to the year-ago period (while the overall sector did better), implying Blue Dart has lost ground to peers. After the September quarter results, analysts at Goldman Sachs say its revenues were up only two per cent year-on-year, whereas domestic air freight volumes grew by an average of eight per cent in July-August, implying potential pricing pressure or loss of market share or both for Blue Dart.
 
Margins, too, could come under pressure, given a higher cost base amid lower revenue growth, as was the case in the September quarter, when margins came in at 11.3 per cent as against 14.3 per cent in the year-ago quarter. The management, however, expects the margin number to improve to 12-13 per cent over the next couple of years.
 
At the current price, the stock — despite being down nearly 40 per cent since the start of the year — is trading at an expensive 53 times its FY18 earnings estimate. Unless there is a recovery in consumer spending and thus business growth for companies, the stock is expected to underperform. While the near term is expected to be difficult, its track record on operational performance and return ratios, as well as shareholder returns, have been top notch. Given the near-term weakness, await further correction to accumulate the stock.