Why did Delhivery's stock drop 30% in two days?

It has probably been the 2 most stressful days for Delhivery every since the stock got listed 5 months back. In fact, Delhivery and LIC had listed almost at the same time in May 2022. However, their performance had been stark contrast. While the stock of LIC dipped into losses and never recovered, Delhivery had managed to stay above the issue price of Rs487. In fact, the stock had gradually appreciated to touch a high of Rs708 before tapering lower. However, in the last 2 days, the stock has lost more than 25% in one of the most violent corrections seen in the stock in its 5 months of trading. Here is the story in numbers.

The above data has been sourced from the NSE and the stock price for 21st October reflects the price as of 2.30 afternoon, but the numbers are sufficient to show you the extent of fall. The stock lost 15.75% on Thursday and another 18.07% on Friday. Overall, the stock fell 31% in a span of just 2 days. With this fall, the stock of Delhivery is now trading  about 20.74% below the IPO issue price of Rs487. The stock has great business model and has shown fantastic execution till date. So, what exactly explains this rabid sell-off in the stock and what were the triggers for the sharp fall? Does it offer a buying opportunity?

The trigger for the fall came after Delhivery admitted that it anticipated a moderate growth in shipment volumes through the rest of financial year FY23. Like many of the other digital players and digital enablers, Delhivery was also a loss making company since most of the costs get front-loaded in this business model. However, what really hits such companies is when the management raises over the top line. The top lines of most companies are likely to be hit by the slowdown in growth. Delhivery being in the logistics business works on derived demand and that is obviously likely to take a hit. That spooked the stock price.

Shorn of these data points shared by Delhivery, it still has a fairly robust and formidable business model. For instance, Delhivery is India's largest and fastest growing fully-integrated logistics services player. Delhivery, incidentally, provides supply-chain solutions to a diverse base of 23,613 active customers. Some of its major customers for supply chain solutions include such as e-commerce marketplaces, digital warehouses, direct-to-consumer or D2C  e-tailers and medium, small and micro enterprises (MSMEs). Delhivery enable leaner outfits to completely outsource the logistics game and focus on the core business only.

However, the company had given a slightly ambivalent business update for Q2FY23, at a time when markets are already preparing for a spate of downgrades in earnings. Delhivery said in its statement that, with fall in consumer discretionary spending due to high levels of inflation, the average user spends had fallen or remained flat. This was also true of the numbers of total active shoppers during the ongoing festive season. That probably explains why the current festive season has been relatively subdued as most people are avoiding spending and saving for a rainy day. That has hit the derived demand for their products.

The broad logic of the company was that with higher inflation, people are cautious and that reduces the volumes of online shopping. That would consequently reduce the number of logistics hops handled by the company and have a negative impact on the revenues. However, despite the inflationary pressures and its likely impact on their business model, Delhivery is confident of meeting its top line targets for the fiscal year. The extended monsoon had also hit business and with normalization of monsoons, demand for logistic should be the playground for investors to serious look at as it is a leading indicator.

The sharp fall and sell-off in Delhivery is reminiscent of the kid of pressures that other digital companies like Paytm, Zomato, CarTrade and Policybazaar showed in the last one year. In the last 1 year, there were 2 digital stocks consistently above the issue price viz. Nykaa and Delhivery. Now even Delhivery is well below its issue price and Nykaa is gradually inching towards its IPO price. One only  hopes that the digital magic would start working on the stock markets also.