Delhivery IPO opens today. Should you invest? What brokerages say

Major risks to the operating model of the logistics player include its heavy reliance on e-commerce, despite diversifying into other industry verticals, analysts say

The Rs 5,235 crore initial public offer of India’s largest logistics service provider Delhivery will open for subscription today and close on Friday, May 13. The IPO is the second biggest for Dalal Street in calendar year 2022 (CY22) after LIC.

The IPO consists of a fresh issue of shares worth Rs 4,000 crore, and an offer-for-sale of Rs 1,235 crore. The price band of the issue is set at Rs 462-487 a share.

Delhivery, which is the leading fully-integrated logistics services player in India by fiscal 2020-21 (FY21) revenue as per reports, has a diverse consumer base with 23,113 active customers. These are majorly e-commerce marketplaces, and direct-to consumer e-tailers and enterprises.

Delhivery operates a pan-India network. Through its express parcel delivery network, it serviced 17,488 pin codes during nine-months ended December 31, 2021. This covered 90.61 per cent of the total pin codes in India.

Express parcel delivery business derives the maximum business for the company (62 per cent of total revenue during nine-months ending December 2021), followed by part truck load services (18 per cent of total revenue during 9MFY22).

Key Risks

As per a pre-IPO note by Motilal Oswal, major risks to the operating model of the logistics player include its heavy reliance on e-commerce, despite diversifying into other industry verticals, dependency on network partners and other third parties for transportation vehicles and manpower, lower barriers to entry in many of the segments in which it operates, and dependency on certain large customers who contribute significantly to its business. 

Meanwhile, here’s a breakdown of what analysts recommend:

Yes Securities | SUBSCRIBE

The brokerage has given a subscribe rating to the issue as it believes the company’s asset light business model, cutting‐edge engineering and automation capabilities will help it leverage operating efficiencies and improve profitability in coming years. The brokerage has listed a unified infrastructure network, proprietary technology stack and capabilities, vast amount of data intelligence and R&D, and strong relationship with a diversified customer base as key positives of the company.

Angel One | NEUTRAL

The brokerage has given a neutral rating to the issue citing its expensive valuation. Based on annualised FY22 numbers, at the upper price band, the IPO is priced at an enterprise value to sales ratio of 5.1x and price to book value of 5.2x.

For 9MFY22, the company has reported an EBITDA loss of Rs 232 crores and a net loss of Rs 891 crores.

In terms of revenue, Delhivery posted robust growth of 82 per cent during this period and it is expected to turn EBITDA positive by the FY22-end. A slowdown in e-commerce services in India will impact the company due to its huge dependence on express parcel services, and concentration of select customers. Its top-five customers contribute to 41 per cent of the total revenue.

Samco Securities | AVOID

The brokerage expects the company to continue to experience increasing cost pressures, at least in the short term, due to rising fuel costs. In addition, it said, the issue looks sharply valued at a price-to-sales ratio of 5.5x on annualised FY22 revenue, when compared to its listed peers.

Considering the current increasing interest rate environment, where valuations of high growth companies across the globe are taking a beating, Delhivery’s expensive valuation is concerning, it said.

BP Equities | AVOID

The brokerage said the issue is aggressively priced. Moreover, despite improvement in the topline, the company continues to make losses.

"As we are witnessing the negative market sentiment towards similar category stocks (Zomato, PayTM), we suggest investors to 'Avoid' this issue," it said. 

Axis Capital | UNRATED

According to the brokerage, the company has significantly scaled its operations and financial metrics. Its revenue from contracts with customers has grown from Rs 1,653.90 crore in FY19 to Rs 3,646.53 crore in FY21 (CAGR of 48.49 per cent).

Company’s network structure, quality of engineering and technology, and data intelligence capabilities has enabled it to establish scale in all of its business lines and ensure synergies across them, resulting in cost efficiencies.

Moreover, Delhivery leases its network infrastructure and a majority of the vehicles operating in its network. The company operates leased infrastructure by partnering with vendors and network partners who provide pickup, delivery services and truckload capacity.

Hence, it has built an asset light model using an extensive ecosystem of partners that has enabled the company to scale up volumes rapidly, with lower fixed costs and greater flexibility.