Blue Dart Express: The business is in the bag - Buy

Logistics players who deliver e-commerce products enjoyed lofty valuations in the past and investors paid high-scarcity premiums to get a share of the red-hot sector.

With the current distress among e-commerce players, logistics players are seeing a fortune reversal. This can provide a buying opportunity for investors with a long-term perspective. And branded delivery companies will benefit as increasing internet penetration boosts online purchases.

One good bet in the space is Blue Dart Express, a leader in express delivery of packages. It operates a fleet of six aircraft and 8,685 vehicles and services over 35,000 locations in India. It is the leader in the air express delivery segment, with a domestic market share of 46 per cent. Blue Dart has about 13 per cent market share in the ground express delivery business.

E-commerce sales account for a fourth of the company’s revenue. Overall revenue growth in the last five years has been 14 per cent annually and profit grew 11 per cent per year on average in that period. Investor concerns over e-commerce growth, combined with its high valuation, have led to the stock taking a hit in the last six months. Still, the stock’s valuation is pricey — its current price of ₹4,256 discounts Blue Dart’s trailing twelve-month earnings by about 65 times.

That said, the company’s price to earnings ratio in the last three years has averaged 90 times, and hence the current valuation is in the lower end of its P/E range. Investors with a long-term view can buy the stock in dips. The company’s established leadership position in the delivery space, operational experience and technology investments in the e-commerce space and potential benefits from GST roll-out bode well. Its superior return on capital employed (about 36 per cent in 2015-16), aided by asset-light operations, also makes the stock attractive.

Blue Dart has managed to sustain sales growth, thanks to its operational strength and diversified revenue mix. The air freight segment contributes 80 per cent of revenue and the company has better control over aircraft availability through its subsidiaries that operate the fleet.

The company’s delivery services cater to both businesses and retail customers - e-commerce and other business. In the December 2016 quarter, despite concerns in the e-commerce segment post demonetisation (which impacted online purchases as 50-70 per cent of sale is Cash on Delivery), overall revenue increased 10 per cent year-on-year. This was thanks to higher shipments of other businesses (Point of Sale machines and cards) and good festive season sale before demonetisation. In 2015-16, revenues grew 13 per cent year-on-year to ₹2,565 crore. The share of the e-commerce segment has been robust, doubling in the last two years to about 25 per cent share in 2015-16. The company has a vast network with over 575 retail stores, e-fulfilment centres (offering value-added logistics services) and sizeable presence in non-metro cities.

Even as near-term concerns remain, expected demand growth in tier-2/3 cities and overall higher penetration of online shopping should help sustain robust growth over the long term. Also, as the economy picks up steam, improvements in manufacturing and other sectors should help business delivery segment growth.

Blue Dart’s operating margin has remained at about 12 per cent helped by a few factors.

One, it has benefited from the fall in fuel prices. Two, thanks to its leadership position, the company has been able to pass on cost and currency movement hikes to its customers. Three, its operations are asset light — aircraft are on sale-and-lease-back arrangements and most of its retail outlets and facilities such as warehouses are on land with long-term leases.

However, in the December 2016 quarter, the margin dipped due to higher employee expense and one-time consulting expense. The company may face some near-term margin pressure as its new facilities ramp up operations. In the long-term, margin should stabilise as utilisation improves.

The company’s revenue and net profit in the nine months of 2016-17 was ₹2,000 crore (4 per cent growth) and ₹115 crore (22 per cent fall) respectively. Operating cash flow was ₹270 crore in 2015-16. Its total debt to equity ratio of about 0.9 times and cash reserves of ₹287 crore (as of March 2016) also provide comfort.

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