Take the latest earnings conference call, held on 21 May. At least two analysts quizzed Barua on Amazon and Flipkart—the two e-commerce giants run their own logistics operations but have recently started third-party logistics services. This means they can ship and deliver goods for companies and people who don’t necessarily use their marketplaces. That’s Delhivery’s playfield.
View Full Image
“We have seen Amazon increasing capacity and Blue Dart also inducting new planes …how does Amazon adding capacity impacts us (Delhivery)?,” one analyst at the call asked.
“I think Amazon adding or not adding capacity makes no difference to anybody other than Amazon. So, it’s quite irrelevant as far as Delhivery is concerned,” Barua responded. “The self-logistics arms, at various points, have flirted with the idea of externalizing their services. But unfortunately, strategy is easier to conceptualize than to execute. And I don’t think their expanding capacity is going to make any significant difference to the market,” he added.
The questions around growing competition surfaced on the backdrop of a difficult year for Delhivery. In its first year of operations, in 2011-12, the company generated revenue of a paltry ₹1 crore. It has speeded its way up ever since, growing significantly every year. Revenue, for instance, nearly doubled in 2021-22 compared to the year before to ₹7,241 crore, driven largely by the company’s express parcel and part truckload services.
Express parcel is largely about e-commerce shipments, speed post and document courier, with a turnaround time of less than three days. Part truckload is a road transportation service where shipments from multiple shippers are clubbed together to fill a full truck. Revenue from this service zoomed by over 250% in 2021-22 as Delhivery acquired Spoton, a part truckload services provider.
This ride hit a speed bump last year—Delhivery reported flat revenue for the year ending March 2023. In the fourth quarter, revenue from services slid 10% to ₹1,860 crore. The net loss widened to ₹159 crore from ₹120 crore in the year-ago quarter.
What went wrong?
One, the funding winter impacted e-commerce companies and the market slowed down. Growth in e-commerce shipments fell from 43% in 2021-22 to 38% in 2022-23, as per data from Redseer Strategy Consultants, an advisory firm. This year, e-commerce shipments are expected to grow 20-25% in an aggressive scenario, but will likely be lower. This slowdown in shipments impacted logistics companies with significant exposure to the sector.
Second, Delhivery faced operational issues in its part truckload business due to the integration of Spoton. Third, popular social commerce company Shopee exited India in early 2022, also hurting Delhivery’s growth.
Delhivery has seen its market share in e-commerce shipments slip to an estimated 21.5% in 2022-23 from 23% the year before, brokerage firm Bernstein stated in an April report. The share is expected to further fall to 19% by 2029-30, it added. As of last year, half of the e-commerce parcel volumes were handled by the captive or self-logistics companies of Flipkart and Amazon. The remaining pie is split between Delhivery, which holds a dominant share, and other logistics companies, such as Xpressbees, Ecom Express and Shadowfax.
The big question now is on the path ahead. Is the worst over for Delhivery? And can it accelerate on the revenue front this year?
In the works
Delhivery was founded by Barua, Mohit Tandon, Bhavesh Manglani, Suraj Saharan and Kapil Bharati. They initially wanted to be in the e-tailing game but realized they were a tad late. By 2011, Flipkart had already gained significant ground and Amazon was making noises about starting its India operations. Barua and his gang seized on the next best opportunity—e-commerce logistics.
While their idea was cool, logistics was also a minefield. An e-commerce logistics startup, Chhotu.in, shut down in 2014 and sceptics cautioned about the capital-intensive nature of the business. Logistics firms need to erect huge warehouses and run fleets of trucks and planes. Companies in the sector need a steady supply of capital.
Capital was not really a worry for Delhivery. As Barua’s team strategized and executed well, marquee investors lined up—Tiger Global Management, Softbank, Steadview Capital, Bay Capital and Singaporean wealth funds, among others.
Nonetheless, the company did brace up to several challenges. It had to slash its initial public offering (IPO) size to ₹5,235 crore from ₹7,460 crore it planned earlier, amid volatile equity market conditions.
And now, it faces a volatile e-commerce market, which impacts its express parcel service—the service generated 63% of its revenue in the March quarter of 2023.
“E-commerce logistics is a business of scale, and if Delhivery manages to get decent scale, there is enough and more operating leverage to improve profitability,” said Abhisek Banerjee, vice-president of ICICI Securities Ltd, a brokerage firm. “But revenue growth would depend on how e-commerce as a sector plays out. 2022-23 was slow, but things have started improving in e-commerce,” he added.
This anticipated recovery holds out hope for a better year for Delhivery.
Redseer has forecast a 20% annual growth in e-commerce gross merchandise value (GMV) in 2023-24 in an aggressive scenario.
“E-commerce shipments work slightly differently. In recent quarters, low average sales value categories have been doing well. Grocery is doing better than electronics, for instance,” said Mrigank Gutgutia, partner at Redseer. “If e-commerce GMV growth is close to 20% in 2023-24, then volume growth will be higher, which would benefit shipment volumes, too,” he added.
While Delhivery did not agree to Mint’s request for meetings with the company’s management for this story because it is in a silent period, a spokesperson downplayed external factors impacting the firm’s results.
“We are growing into a large addressable market that is shifting rapidly from unorganized to organized players and have no significant concerns about external factors that affect us or the industry,” the spokesperson said and added that the headroom for growth in e-commerce, with rising disposable incomes and underlying activity in manufacturing, are positive indicators for the industry at large.
“Our investments in infrastructure and capacity building are key to taking advantage of this growth opportunity from all segments—be it express e-commerce delivery, part or full truckload freight or warehousing and supply chain services,” the spokesperson said.
Delhivery, today, has 18 million sq ft of logistics infrastructure, comprising 94 gateways, 24 automated sort centres, 2,880 delivery centres and 140 freight service centres. It is slowly expanding the network in cities it operates in to address higher volumes.
Barua, in the March quarter analyst call, said that as e-commerce grows beyond the two big marketplaces (Amazon and Flipkart), dominant third-party logistics providers like Delhivery will gain. “A slowing market is worse for our competitors by far because we are the most efficient player in this space. And we will defend market share as we need to,” Barua said.
While e-commerce marketplaces like Meesho and Flipkart may be focussing on profitability at the cost of growth, newer players have emerged. Barua, in the same analyst call, hinted that after Ajio (a subsidiary company of Reliance Retail), Shein (the Singapore-headquartered fast fashion giant will enter India, again with Reliance Retail) would drive growth.
“What you’re seeing is a shift, rather a shakeup, at the top, which will drive growth. I expect e-commerce to continue to grow between 15% and 20% year on year,” he said.
Fight for share
Let’s circle back to the question of competition.
In July, Ekart Logistics, a subsidiary of Flipkart, launched its business-to-business (B2B) delivery and first-mile pick-up services, pressing a fleet of 7,000 trucks into the operations.
Ekart, which operates fulfilment and sortation centres, apart from delivery hubs, stated that it would cater to micro, small and medium businesses, including manufacturers and retailers across industries.
Ekart is the third e-commerce logistics player to enter the express part truckload segment, after Delhivery and Xpressbees. Delhivery has been strengthening its B2B services. Its part truckload business, which is the mainstay of the B2B vertical, was launched in 2016-17.
Calling Ekart’s B2B launch an experiment, a Kotak Institutional Securities report stated that it’s another attempt by peers to enter Delhivery’s turf.
Nonetheless, analysts at Kotak downgraded Delhivery saying that Flipkart’s logistics endeavours can affect the former’s medium-term growth if it is successful. It also deferred the cash flow break-even projections for Delhivery by another year to 2026-27.
While new-age logistics companies are diversifying into B2B delivery and courier service to garner a larger share of the spend pie, traditional companies are venturing into e-commerce fulfilment solutions.
Recently, Danish logistics firm A.P. Moller–Maersk announced its new e-commerce fulfilment solutions for India.
“The logistics market, split between legacy and new-age players, has become competitive. There are exits, fund-raises and clearly the M&A fund pool seems reasonably bullish,” said Nikhil Sethi, partner at KPMG in India. “The focus is to give better customer experience and efficiency. The logistics sector is poised to grow further, though a bit slower,” he added.
Meanwhile, Delhivery’s rivals have also stepped-up acquisitions. Mahindra Logistics Ltd, in 2022, acquired the B2B Express delivery business of Rivigo for ₹225 crore, to bolster its third-party logistics services. Xpressbees is in early-stage talks to acquire logistics and supply chain firm Trackon, which would add a new parcel delivery business, Entrackr reported in July, citing sources.
But Delhivery does have a competitive advantage—analysts watching the company think so. The company’s ‘mesh network’ routes load dynamically to achieve efficiency. It uses an algorithm that captures the most cost-effective route, and factors in external factors such as roadblocks and weather conditions in real time. This allows the company to act quickly. The mesh network has fewer touch points, thereby increasing speed. The inventory turnover at gateways has risen to 10X for Delhivery, as compared with 2X for competitors using the traditional hub-and-spoke model with fixed routes, a Kotak report stated.
The hub-and-spoke model uses predetermined hubs to ship packages and isn’t dynamic. For instance, companies operating such a model may not be able to react quickly to sudden flooding because of heavy rains in a location.
Growth tap
Apart from the mesh, Delhivery appears to have done a commendable job of checking its freight and handling costs—an important step in its path to profitability. In the March quarter of 2023, the cost was down by nearly 9% to ₹1,372 crore. One reason for this is the use of tractor-trailers, a larger vehicle compared to the traditional trucks the industry uses. The company believes they are also more efficient.
Delhivery has also built a full truckload freight exchange, a freight brokerage platform. It offers a bidding and matching mechanism to connect shippers with fleet owners. Shippers can post their freight requirements and fleet owners can bid for these jobs.
Loads are matched with capacity based on price. Since it’s a competitive bidding process, it has led to pricing efficiency for the company.
The cost optimization measures, along with higher utilization, may shore up the company’s margins, going ahead.
At the beginning of 2022-23, when questions first surfaced about Delhivery’s growth, the company had said that its primary focus was not getting the growth tap on, but ensuring margins were intact. “Because there’s no point driving fast if you don’t know where you’re going,” Barua told analysts during the March quarter call.
Now, he appears to be knowing where his truck is headed.
“We have four sequential quarters of margin improvement. It’s quite clear as to how the margin improvement will continue. And now, turning on the growth tap for us is not going to be very hard,” he said.
Investors will hope Barua is right.
For all the latest world News Click Here
