What is the story behind the stock price rally in Delhivery

Amidst the carnage in the digital stocks and the sharp correction, one stock has stood out. Delhivery, the digital logistics player, which recently closed the IPO around the same time as LIC, has done exceedingly well on the bourses, notwithstanding the volatility in the price. From a low Rs456 on 20th June, the stock of Delhivery has rallied by a whopping 42.5% to Rs650 in exactly one month. The stock has gained on a robust business model and healthy business growth outlook. It has already crossed the previous peak made in May 2022.

The 42% rally in the Delhivery stock comes at a time when the index overall is up just about 6-7%, showing a very clear outperformance. Even if you take the issue price of Rs487 as the base, the stock of Delhivery is up 33.5% from the IPO prices, so the IPO investors should surely not be complaining in this case. It just goes to highlight that not all that is digital is bad and shunned by the markets. On the other hand, the market is a lot more discerning and willing to give a good valuation and price to a stock with a good story to tell.

Today, if you look at the spread and reach, Delhivery is the largest and the fastest growing fully-integrated logistics services player in India. Here we are purely talking on the basis of revenues as of FY22. Incidentally, Delhivery provides supply-chain solutions to a diverse base of 23,613 active. Some of its predominant customers include e-commerce marketplaces, direct-to-consumer (D2C) e-tailers and small & medium enterprises (SMEs). With its highly precise model of logistics management, it is able to cater to this segment.

Currently, Delhivery is expanding its infrastructure in Bhiwandi (Mumbai) and Bengaluru. It is also collaborating with Welspun on a 700,000 SFT mega-gateway in Greater Mumbai and with GMR for a 1,000,000 SFT facility in Bengaluru. These will be multi-channel order fulfilment centres for the customers of Delhivery. They are likely to be operational by 2023 and are likely to substantially processing capacity to meet customer demand from the lucrative South and West. That is showing up in the price as it would be value accretive.

There are also several reasons why brokerages find the stock attractive and what has driven the surge in valuations in the stock of Delhivery. The B2C-heavy business model of Delhivery has an estimated profit pool of Rs6,300 crore in India by FY26E, so there is a lot for the key players to fight over. Delhivery is estimated to capture about 25% of the market by 2026 and that is likely to lead to a significant upward re-rating of the stock in the next few months. It also gives Delhivery significant scope for operating leverage.

Just to look back, between FY19 and FY22, Delhivery actually captured 90% of the incremental 3PL ecommerce distribution market. The company is likely to be among the quickest to a positive bottom line with profits estimated at above Rs1,500 crore by FY26, something to really play for. For now, the management is focusing on operational efficiencies in the business which it can pass on to the customers. That is a good place to start with for the long term investors.