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Stock Recommendation | BLUEDART EXPRESS LTD (BLUEDART) – ACCUMULATE – Target Price : 2875
Publish date: NOVEMBER 2, 2018
Bluedart has reported mix set of numbers for Q2FY19, with strong topline growth, but weak EBIDTA margin. Revival in B2B segment, healthy B2C segment and strong growth in the E-com segment led to double digit YoY volume growth. While aggressive PAN India expansion and rising fuel cost dented the margins,
■ Sales was ahead of expectation at Rs 7.98 bn (+13.5% YoY) with double digit YoY volume growth achieved by the company with 1) Rapid expansion of operations PAN India (from 7000 pin codes to 18000 pin codes in one year) 2) Hint of recovery in the key B2B segment for BDE and 3) Strong growth in the E-COM segment.
■ However, operational performance of the company was under pressure on account of increase in Freight (including fuel). Freight and handling cost was high for the company during the quarter at Rs 5.39bn (+21.8% YoY) primarily due to increasing fuel prices, which we believe the company was not able to pass on to customers completely. The employee cost and other cost were also higher during the quarter at Rs 1.39 bn (+23% YoY) and Rs 801 mn (+12.8% YoY) respectively as the company is expanding PAN India which involves manpower and administrative cost. The company now have offices/agents/franchises in 18000 pin codes PAN India (vs.7000 pin codes YoY in Tier 1 and Tier 2 cities)
■ Other income/depreciation cost and interest cost were stable for the company. Lower tax provisioning net of tax adjustment of prior period supported the PAT. Consequently, company reported PAT of Rs 210 mn (-35.7% YoY) which was below our expectation of Rs 292 mn.
Bluedart is an undisputed market leader in the air express segment, with a dominant market share of ~50%. It is also a strong player in the ground express cargo segment with a market share of ~13%. A fresh strategy under the observation of Mckinsey, expansion of operations PAN India and strong growth in the ecommerce segment are expected to keep the growth momentum healthy for BLUEDART. However, competition has restrained the company’s ability to increase courier charges in a high fuel price environment which has been impacting the operational performance of the company.
We believe that, the company would find it difficult to pass on the increase in fuel prices and other cost and charge a significant premium for its services to other courier companies. We have also seen a slowing trend of business flow from e-commerce companies to private courier companies (expect stable growth). PAN India expansion should help the company report strong topline growth with correction in EBIDTA margins over FY18 to FY20E.
In lieu of this developments, we have increased our topline assumption, decreased earnings estimate and maintain our multiple accorded to Bluedart. Post correction of 26% since our last update, we upgrade the stock to “Accumulate” from Sell with a reduced target price of Rs 2875 (from Rs 3215) at 38 x FY20 earnings.
Strong growth in the e-commerce segment
Increasing internet penetration, rising disposable income and desire for convenience and discount on product is shifting more and more Indian customers towards online shopping leading to strong growth of the E-Com segment. E-Com now contributes approximately 18/19% of the revenues for BDE and is growing at 20 to 25% CAGR.
Improving prospects in the B2B segment
In the B2B segment, Bluedart caters to companies in sectors like BFSI, Pharma, electronics, Auto and E-Commerce. Management indicated that the segment contributes almost 90% to the revenues and has been stagnated for the last many quarters. However, the management indicated that this segment has shown signs of improvement, which is positive for the company.
Rising fuel prices impacting margins
For BDE. 35% of the operating cost is fuel cost and another 35% is ground handling cost which is fixed in nature. From this cost break-up we can interpret that, crude prices and volumes dictate the margins of the company. Volumes have started improving for the company, but crude (diesel and ATF) have increased in the last 2 quarters impacting the margins of the company negatively. Freight cost at 71.1% in Q2FY19 of the overall operating cost is the highest for the company in the last many quarters. Higher operating cost coupled with the company’s ability to increase tariffs due to competition is impacting the margins of the company.
BLUEDART had hired Mckinsey & Company and spent a total of Rs 350 mn in FY18 to prepare a strategy for BLUEDART for developing new products, reduce operating cost, and improve utilization level of assets, geographical expansion and to face competition.
As part of the strategy company has expanded from 7000 pin codes in Tier 1 and Tier 2 cities to 18000 pin codes PAN India. To implement the same, company has made a capex of Rs 500 mn in H1FY18. This has also increased the offices/agents/franchisee and employee cost of the company. This is one strong reason we believe has impacted the performance in Q2FY19.
We expect the company to spend similar amount as capex in FY20E and increase the reach of the company to 19000 Pincodes (maximum for India). The expansion is also estimated to increase the employee cost and administrative cost for the company in FY19 and FY20E without commensurate increase in revenues, impacting the PAT of the company. However, we estimate this to yield superior results in the Long term.
We believe that the company is in a transitory phase where the company is expanding its operations. We believe that the expansion may put near term pressure on the operational performance, but would do well for the company in the long run. Considering the expansion and competition, we have increased our topline assumption, decreased earnings estimate and maintain our multiple accorded to Bluedart. Post correction of 26% since our last update, we upgrade the stock to “Accumulate” from Sell with a reduced target price of Rs 2875 (from Rs 3215) at 38 x FY20 earnings.
Bluedart is South Asia's premier courier, and integrated express package Distribution Company. The company has the most extensive domestic network covering over 35,000 locations, and service more than 220 countries and territories worldwide through group company DHL, the premier global brand name in express distribution services. The company has the most advanced communications systems and is strongly positioned to offer a consistent, premium, standardized quality of service. The company also has a dedicated aviation system which is focused on carriage of packages as its prime business, rather than as a by-product of a passenger airline. The company also has its own bonded warehouses, ground handling and maintenance capability.
BUY - We expect the stock to deliver more than 12% returns over the next 12 months ACCUMULATE - We expect the stock to deliver 5% - 12% returns over the next 12 months REDUCE - We expect the stock to deliver 0% - 5% returns over the next 12 months SELL - We expect the stock to deliver negative returns over the next 12 months NR - Not Rated. Kotak Securities is not assigning any rating or price target to the stock. The report has been prepared for information purposes only. SUBSCRIBE - We advise investor to subscribe to the IPO. RS - Rating Suspended. Kotak Securities has suspended the investment rating and price target for this stock, either because there is not a Sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon. NA - Not Available or Not Applicable. The information is not available for display or is not applicable NM - Not Meaningful. The information is not meaningful and is therefore excluded. NOTE - Our target prices are with a 12-month perspective. Returns stated in the rating scale are our internal benchmark. Kotak Securities Limited established in 1994, is a subsidiary of Kotak Mahindra Bank Limited. Kotak Securities is one of India's largest brokerage and distribution house.
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