GST kicker for express logistics leader Blue Dart

Its stock surged 7% on Friday on expectations of higher revenues from the GST implementation

The Blue Dart Express stock surged seven per cent in trade on Friday after brokerages upgraded the stock, on expectations of higher revenues from the implementation of goods and services tax (GST), muted fuel costs and roll-out of new strategy from the current financial year. 

The latest upgrade comes from Kotak Securities with a price target of Rs 5,150 against Rs 4,420 previously. Post-GST, many manufacturers are expected to completely outsource their supply chain logistics to large third-party logistics players, such as Blue Dart Express, who would manage large scale operations for them along with proper paper work for input tax credit. Cumbersome tax structure and reluctance to share confidential information has constrained the growth of service providers.

The implementation of GST, according to Amit Agarwal of Kotak Securities, will shift manufacturer’s focus from tax efficiencies-based supply chain to logistics efficiencies, translating to significant amount of business for players such as Blue Dart. Spark Capital analysts, who have a ‘buy’ rating on the company with a target price of Rs 4,450, in a report earlier this week said the ground express segment (20 per cent of revenues, the other being air express, 80 per cent) will be driven by GST. The move by corporates to improve logistics efficiencies will result in warehouse consolidation and inventory on wheels, which will drive just in time deliveries, rather than warehousing of goods. 

Spark Capital’s Mukesh Saraf and Krupashankar N J expect Blue Dart to benefit from parent DHL’s aggressive foray in the third-party logistics space. DHL is expected to use Blue Dart’s strong network, reach and ground fleet for expansion. This should propel the ground express segment to grow at an annual rate of 18 per cent over FY17-19. 

Expectations of volume growth is another trigger. From 7.7 per cent growth in tonnage in FY17, analysts expect the company to post 9 per cent growth annually over the next two years, driven by strong outlook in sectors such as banking and financial services, e-commerce, pharmaceuticals and automobiles. Within this the fastest growing segment is e-commerce. The company primarily caters to Tier-II, III, IV markets as metros and Tier-I markets are serviced by captive arms of the larger e-commerce players. What stands out is Blue Dart's capabilities in handling cash on deliveries, reverse logistics (getting products back from customers) with presence across the value chain including fulfilment centres.

On margins, there are twin triggers for improvement, including benign aviation turbine fuel costs (35 per cent of the operating cost is fuel cost), which coupled with cost reduction measure suggested by Mckinsey can, according to analysts, boost margins from 10.1 per cent in FY17 to 12.5 per cent in FY18. 

While 60 per cent of the analysts who track the stock have a ‘buy’ with a target price of Rs 4,800, the stock, according to Spark Capital trades at stiff valuation of about 43 times the FY19 earnings estimates. Investors can buy on dips.