Del(h)ivery failed? Why IIFL Securities see 22% downside in the newly listed startup

The bearish view of the latter is because IIFL Securities sees valuations to be building in the seamless strategy execution of rapidly scaling-up revenues, containing costs, cutting yields and yet turning profitable in a sustainable manner.

“We like the company’s focus on automation, scale and vigour for growth, but believe it is walking a tightrope, given the execution challenges. The risk-reward is unfavourable, and we would await a better entry point,” the Harshvardhan Dole of IIFL Securities said in a note on Friday.

IIFL Securities has set a target price of Rs 442, meaning a potential downside of over 22 per cent for the stock. In comparison, Credit Suisse, which sees a strong moat in terms of scale, has a target price of Rs 675.

Dole said niche logistics sector players have similar asset-light models but compete on differentiated services vs on price alone and, hence, record 10-15 per cent Ebitda margin.

“With 85 per cent of overall costs being variable, it needs to be seen how Delhivery intends to improve its operating efficiency, gain leverage, pass on the chunk of such gains to consumers, and yet log a meaningful Ebitda margin in the absence of any significant price increase,” Dole said.

Though, he acknowledges that Delhivery is scaling up fast. It has set up a Pan-India B2C express logistics network in only 11 years. It boasts of an asset-light model with one of the lowest cost structures and a USP of attractive pricing via leveraging scale, technology and automation — reflected in its above-industry growth and 25 per cent market share.

The company plans to replicate this model in other segments of the logistics industry, i.e. B2B express, supply chain and cross-border offering.

The opportunity landscape is significant, given the fragmented industry structure. Its recent acquisition of SpotOn has placed it among the top three. Such exponential scale-up has been supported by an Rs 82 billion fund infusion through various rounds. Thus, Dole assumes a revenue CAGR of 27 per cent over FY22-25 for Delhivery, with a 410 bps reduction in cost-to-income.

Nonetheless, he sees risk-reward as unfavourable given the price of the stock.

“We value Delhivery based on a 2-stage DCF; at the 1st stage, we assume rapid scale-up in revenue, with less focus on profit (until FY30) and thereafter, with moderate sales growth (14 per cent PA), focus moves to capturing the profit pool of the industry (Ebitda margin: 15-17 per cent),” he said.

“On 13 per cent weighted average cost of capital (WACC) assumption and 5 per cent terminal growth, fair value is assessed at Rs 442/share. A 1 per cent change in WACC/Tg moves DCF by 20 per cent/10 per cent. Valuations are building-in seamless execution, which seems challenging.”

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