Credit Suisse initiates coverage on Delhivery with Buy

The stock market has not been very kind to start-ups, especially to digital start-ups where the visibility of profits is not too clear. We have seen that in the case of stocks like Zomato, Paytm and PB Fintech.

Two exceptions have been Nykaa, which is still above the issue price and the other is the recently listed Delhivery Ltd. A digitally driven logistics company, Delhivery, has actually gained about 12-15% in the last couple of week of listing.

What was so unique about Delhivery. For starters, like most start-ups it is also a loss making company, although it has managed to maintain static losses despite doubling of revenues in the latest quarter.

The advantage that Delhivery brings to the table is a scalable model that is more of ROI accretive as it goes ahead. The focus is not on the traditional logistics but on giving a more digital twist to the entire end-to-end logistics business model.

Now the business model of Delhivery gets its latest ratification from Credit Suisse, which has initiated coverage on Delhivery with a buy recommendation. The IPO of the stock had been issued at Rs.487 per share but had later touched a high of Rs.617 before settling around the Rs.540 levels.
 

The stock is still well above the issue price. It is in this light that the coverage initiation by Credit Suisse with a buy call assumes significance.

Some of the reasons mentioned by Credit Suisse for the call are quite compelling. It has started with an “Outperform” rating and has assigned a target price of Rs.675 per share.

That is much higher than the recent highs the stock had scaled and surely leaves about 25% upside on the table for the investors at the current level. Credit Suisse has cited favourable industry structure, secular growth in e-commerce volumes and strong moat as key factors.

An interesting point made by the Credit Suisse report on Delhivery is that the company almost has zero customer acquisition cost, which puts it in a unique pedestal compared to the other internet plays in the market.

Also, in terms of valuation and the future outlook for profits and top line growth, Delhivery offers a much  better option to investors. The theme is that this is a service wherein the demand is secularly linked to the GDP growth.

Why does Credit Suisse talk about a moat. As Buffett used to explain, a moat is some unique advantage or entry barrier that cannot be easily replicated by competition. For Delhivery, the moat is in the form of scale, network complexity and a versatile technology platform.

More importantly, the biggest IP of the Delhivery business is that the back-end logistics management is based on a proprietary software, which enhances its IP value.

According to the Credit Suisse report, Delhivery doubled parcel volumes in FY22 at a time when the overall market grew at just about 40%. This has resulted in Delhivery capturing a market share of 25%. Its partnership model allows it to scale at short notice with minimal incremental cost.

Its logistics management edge is most visible in the supply chain management for the ecommerce players, managing their complex requirements.

According to estimates put out by Credit Suisse, between FY22 and FY25, they are pencilling in 29% revenue CAGR with stable to growing EBITDA margins. Delhivery is also best poised to gain  the most from the consolidation in the express parcel industry.

The opportunity is humongous if you compare with China. For example, China has e-commerce parcel volumes that are around 40 times that of India. Clearly, the future trajectory is humongous. It has almost broken even in FY22.