Blue Dart stock flying high on better business prospects, improving volumes

Improving volumes, lower ATF prices have boosted sentiment

Logistics company Blue Dart Express has seen big moves in the recent past, with its share price up 25 per cent in the last six weeks to Rs 7,231.10 (a five-month high). This is primarily because several securities analysts have changed their stance on the business. 

In early May, Motilal Oswal had a “neutral” recommendation with a target price of Rs 6,190 while the stock was trading at Rs 5,734. The report cited high ATF (aviation turbine fuel) prices and low business volumes as negatives.
 

ATF prices constitute close to 40 per cent of operating costs for a courier company which runs its own planes (and also for a commercial airline).
 

However, ATF prices have since corrected significantly, and Motilal Oswal upgraded its recommendation to “buy” with a new target of Rs 8,040.
 

The analyst cited a share price-correction from the 52-week high of Rs 9,640 (October 2022) and the correction in ATF prices which should lead to better margins. Moreover, volumes have improved for the express distribution sector. 
 

Higher capacity utilisation with new aircraft is likely to propel volumes further, according to the analyst. Blue Dart Express has added two new aircraft to cater to tier-II and tier-III cities as it sees a healthy demand outlook for the long term.
 

The company has added two Boeing 737 freighters of 22-tonne each at a cumulative cost of Rs 450 crore to its current fleet of six Boeing 757 freighters of 33-tonne capacity.
 

Guwahati will be the eighth base station for the company’s air cargo operations with daily flights catering to express cargo needs of the North-east with optimal utilisation targeted for less than a year. 
 

Analysts see this fleet expansion as likely to lead to 300-400 basis points (bps) Ebitda (earnings before interest, tax, depreciation and amortisation margin expansion in the second half of the 2023-24 financial year (H2FY24) from the current Ebitda margins of 10-11 per cent to around 13-14 per cent. 
 

Overall, the air express yield could decline in the near term as the new aircraft also will carry low yield, airport-to-airport cargo initially to fill capacity. In anticipation of higher demand, capacity expansion also continues on the surface with the addition of 55+ owned retail outlets.
 

Management has announced planned capex of Rs 70 crore for domestic and Rs 150 crore for air for FY24. The surface local segment has lower yields but the company has hiked rates by 9.6 per cent from January. Large clients do negotiate tariffs, leading to a blended price hike of lower rates. 
 

Management claims it has gained market share across segments and added new customers. The total addressable market is estimated to be Rs 27,000 crore with 33 per cent in surface packages, 13 per cent in documents and 53 per cent in air. The air express segment is set to grow in the high single digits and surface express in high double digits. While there is increased competition, new initiatives and high service quality have led to customer loyalty.
 

Another analyst has retained a ‘buy’ rating while downgrading the target price to Rs 7,700 from an earlier Rs 8,733 with estimates of revenue compound annual growth rate (CAGR) of 15 per cent and earnings per share CAGR of 19 per cent over FY23-25.
 

One point to note – the stock has low trading volumes on normal sessions, with 5,000-7,000 shares traded. Volumes have now exploded to over 1.8 lakh shares. If volumes normalise, liquidity for big positions could be a problem. leading to high impact costs.