Prime Stock Recommendation – Bottom-fishing this premier logistics player

1. 

   Viren acharya

   March 21, 2024 at 5:23 am

   Will the entry of Maersk Logistics India , which is global giant in this field pose a tough challenge to Blue Dart India, and keep the stock price capped .?
   1. 

      N V Chandrachoodamani

      March 21, 2024 at 9:48 am

      Can’t rule out that competition.

      But players like Blue dart have an edge in areas like Air Express. Surface is open to anyone and better Surface Infrastructure has been slowing down growth of Air.

      Truly speaking, the legacy players lost out to ones like Delhivery & E-comm express in the e-commerce boom. Profitability was a concern and so they turned cautious. But they lost a big share of that biz and that’s why listed logistics players didn’t perform that much despite such a huge e-commm boom.

      But now, the industry is also entering a phase of consolidation.

      In express logistics, delivery speed & tracking holds the key and Blue dart is not second to anyone in this space. It is one of the few players in the “valuables” space.

      The market expansion (with e-commerce) and market share stabilization has already happened. No more funded start-ups to compete and everyone is talking about profitability.

      We think there is a straight-line growth opportunity available for players in express logistics space, especially Blue dart, in line with the nominal GDP growth.

      Market share gains could be difficult as mentioned in our report itself.

      Hope this clarifies,

      Thank you
2. 

   Rk Mani

   February 21, 2024 at 3:13 pm

   thankyou as always very detailed. Do you have any comparison with other logistics player, this sector has multiple players as you said traditional and new age , road vs rail vs shipping vs air. Then you have warehouse players too TVS , Mahindra etc . Thus would be good to have a follow up with sector study and why this is still a best play
   1. 

      N V Chandrachoodamani

      February 21, 2024 at 3:46 pm

      Welcome your query sir,

      Your are right, this sector has many players catering to many segments.

      Btw, Blue Dart has high share of air express and low share of surface express (30%). Closely comparable peers would be TCI Express and Gati in the listed space (predominantly surface express) and a part of Delhivery (e-commerce biz).

      TVS is more skewed towards supply chain and it has a huge share of international freight forwarding business, which is more comparable to All Cargo.

      Mahindra is also more of Supply Chain solutions and they have recently ventured into express logistics with the acquisition of a division of Rivigo (a logistics start-up).

      Then we have TCI, VRL, Gateway Distriparks (rail), Concor, etc operating in the “transportation” segment which is more of an asset heavy business model

      With different Companies having different segments as their dominant business, there is no strictly comparable peer. Even if we take TCI Express and Gati, Blue Dart is much larger in revenue compared to them.

      For us, the choice of Blue Dart is due to its simple and steady business that is skewed towards domestic consumption growth and logistics demand Vs complex players like TVS Supply Chain or Mahindra.

      Express logistics players are also more asset light Vs transportation or supply chain players and scores mainly on brand equity and quality of service to customers.

      In this, the alternate option based on financial performance was only TCI Express. But we find Blue Dart attractive both on all counts and hence the preference.

      Hope this clarifies.

      Thank you
3. 

   contactks

   February 21, 2024 at 8:37 am

   Hi Chandrachoodamani, Thank you for the detailed write up. However, is the value not too pricey ? The PE is at 51.4 . The average EV/EBIT in Air air transport sector (US) as per Aswath Damodaran’s sheet is 13.02, whereas the company is trading at an EV/EBIT of 35. Is not the assumed revenue growth of CAGR 22-25% for next 3 years on higher side whereas the the current rate has been 10 -13 %. Can you please give some more colour to these assumptions?

   Thanks,
   Saravanan
   1. 

      N V Chandrachoodamani

      February 21, 2024 at 9:17 am

      Welcome your queries sir, very valid observations

      Let me try to address one by one;

      1. PE Ratio: This PE of 51 is on a depressed earnings base due to flat revenue growth and compressed margins. So, revenue growth + margin expansion in FY is likely to push earnings upwards by ~35-40% or so in FY25 (Pl calculate from FY23 base). As mentioned in the article, there was also additional deployment of 2 more aircrafts that also added a bit to margin compression

      2. Blue dart is a logistics player that provides end-to-end services provider and not an air transportation player. This sector is less capital intensive, can earn steady margins and can sustain secular growth for long period of time. Btw, the sector also operates on high single digit volume combined with price inflation, which makes it a 14-15% steady growth sector. Going by this assumption, PE is a better metric for logistics stocks.

      On an EV/EBIDTA basis (standalone), it trades at 20-25 times. Consolidated will have lease accounting adjustments as per INDAS116.It’s better to avoid such confusions as its balance sheet reflects services business than an air transport business.

      3. On earnings CAGR, it’s a continuity of what I mentioned in Point 1. A sharp jump in FY25 followed by ~14-15% for the following 2 years makes it a 24-25% CAGR on 3 year basis. As we mentioned in the report, lot of volatilities have played out in FY24 that flattened revenue growth while compressed margins as well.

      Going to FY25, the assumption is 8-9% volume growth, 5-6% pricing growth and 1-2% EBIDTA margin expansion (standalone). If you do numbers based on these assumptions (also pl try to listen to/read Q3 concall transcript) you will get the PAT number.

      Hope this clarifies

      Thank you

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