Bernstein has downgraded his rating Delhi very (NS:) to a Market-Perform rating and removed it from its India SMID portfolio. According to Bernstein’s analysis, the downgrade is driven by several ongoing challenges that have hampered the company’s ability to stabilize its business model.
Main reasons for downgrade:
1. Shrinking E-commerce Logistics Market: Delhivery’s core business, e-commerce logistics, faces a significant challenge as major customer Meesho moves its logistics operations in-house. Meesho, which accounts for 50% of the third-party logistics (3PL) market volumes, plans to increase its internal logistics handling from 20% to 40%. This trend, seen globally across platforms such as Amazon (NASDAQ:) and Coupang, poses a crucial risk for Delhivery, whose revenues are heavily dependent on e-commerce logistics.
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2. Volatility and management challenges: Delhivery has seen significant volatility, with issues including integration issues after the Spoton acquisition and the fallout from external factors such as Shopee’s exit. The constant shifts and departures of senior management indicate that the company is struggling to maintain stability.
3. Valuation Issues: Bernstein points out that current valuations assume high growth and strong execution, limiting further upside potential. To achieve the target valuation, Delhivery would need to achieve a revenue CAGR of 18% with margins of 12.5% till FY30, which seems challenging given the current instability.
Implications of investments:
Earnings estimate revisions: Bernstein has revised its earnings estimates for Delhivery, reflecting slower-than-expected scale-up in the e-commerce segment. EBITDA estimates for FY25-26 have been reduced by 10-16% and the target price has been adjusted from INR 520 to INR 450. The projection for achieving a positive PAT has been pushed to FY27.
But investors don’t have to wait for such institutional reports to come out to decide whether to buy or sell a stock. This can be easily measured by looking at the fair value of a share in InvestingPro. This fair value is calculated based on various financial models and then an average is taken to eliminate extreme valuations.
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As per the latest earnings figures, the fair value of the stock is INR 327, which is 16.1% lower than the CMP of INR 390.1. While there is quite a gap between what Bernstein thinks and InvestingPro’s valuation, both believe: a decline in the company’s coming performance.
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The financial health check is another good criterion to see whether the stock is fundamentally eligible to be included in the portfolio or not. Here, a score of 2 out of 5 simply rejects this counter for the holding goal.
Market trends: The shift towards internal logistics through e-commerce platforms is a major global trend. In India, this shift is being driven by platforms like Flipkart, Amazon and now Meesho, which see logistics as a competitive advantage. This transition reduces the addressable market for 3PL providers such as Delhivery.
Impact of Meesho’s strategy: Meesho’s move to handle logistics in-house through Valmo is expected to impact Delhivery’s volumes. Valmo aims to reduce costs and increase efficiency, which could further undermine Delhivery’s market share.
Long-term prospects:
While the short-term outlook remains challenging, Bernstein notes that the long-term margin forecast of 12.5% Adjusted EBITDA is unchanged in their DCF model. However, dependence on traditional logistics and continued competition could result in inventory derating if these challenges persist.
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