Kotak Institutional Equities Upgrades Delhivery To ‘Add’ Despite Fading Growth Momentum

Brokerage Kotak Institutional Equities has lowered its fair value for Delhivery shares, which have been under significant pressure over the last couple of weeks and touched several new lows, to INR 415 from INR 540 earlier. However, this still signifies an upside of 12% from the stock’s last close on Thursday.

Despite the cut in fair value, the brokerage has upgraded its recommendation for the shares of the logistics unicorn to ‘add’ from ‘reduce’, maintaining its bullish stance on the stock. Its ‘add’ rating is one step below the ‘buy’ rating and signifies that it forecasts the stock to deliver 5%-15% returns over the next 12 months.

Delhivery shares were significantly hit last week, falling over 30% in two consecutive sessions after the startup issued a Q2 FY23 performance update on October 19. 

While the stocks regained slight momentum during the one-hour special Muhurat trading session on Diwali earlier this week, rising 3.2% on the BSE to INR 399, it fell again in the next two sessions. 

Delhivery shares touched their new record low of INR 351.55 after falling as much as 5% on the BSE by 1:00 PM IST on Friday.

In its Q2 update, the logistics startup said that the market sentiment was broadly unchanged in Q2 compared to Q1, while consumer discretionary spending was also muted due to the persisting inflationary pressure, flat or lower average user spending and total active shoppers during the festive season.

Delhivery witnessed a 208% increase in its consolidated net loss to INR 399.3 Cr in Q1 FY23, while its total income was up 31% in the quarter to INR 1,794.5 Cr. Its PTL (partial truckload) business took a hit in the quarter. The startup’s loss had widened by 143% to INR 1,011 Cr in FY22.

Delhivery said that while the PTL business was “on a path to recovery”, the volumes in its supply chain services (SCS) and truckload (TL) businesses declined in Q2.

Kotak Institutional Equities said in its latest note that the startup’s weak business update was a reflection of a moderation in the overall ecommerce industry growth, which was led by “cyclical factors” rather than “structural impediments” or market share loss.

In fact, the brokerage based its analysis on the overall industry-wide growth slump which has resulted in moderating quarter-on-quarter (QoQ) growth trend for Meesho, while Amazon’s growth has also moderated since FY22.

It is pertinent to note that ecommerce sales during this year’s festive season were hurt by lower consumer spending.

As per a RedSeer report, the total ecommerce GMV during the first week of the Indian festive season reached $5.7 Bn, which was a 4X surge compared to the non-peak season, but there was hardly any growth in the average user spending.

The analysts at the brokerage said that other business-specific factors such as Delhivery’s higher exposure to non-metro cities that were impacted by erratic monsoons, particularly in the Northeast, could have also contributed to its muted Q2 performance.

With a bullish stance on the stock, the analysts said, “We find it [Delhivery] well-placed operationally and strategically to weather near-term weakness in industry growth, and eventually drive the increasing relevance of 3PL (third-party logistics) in ecommerce logistics.”

While Delhivery’s performance update has largely shaken the positive market sentiment the startup had gathered since its IPO in May, it is also pertinent to note that its impending IPO lock-in expiry on November 24 could also be playing a significant role in the decline in the share price.

Kotak Institutional Equities did not make any comment on the IPO lock-in expiry in its report. 

Speaking about the slowing growth in the larger ecommerce space, the brokerage said that it reflects the withering away of the positive bias of the Covid-19 pandemic, and inflation-related effects on consumer discretionary spending that are slowing down consumer spending in the space.

“However, we do not see structural impediments to India’s ecommerce growth story at the current scale — India’s ecommerce volumes are lower than that of China a decade ago; China has increased its ecommerce volumes at a CAGR of >35%,” the brokerage added.

Recently, international brokerage Jefferies also maintained its bullish stance on Delhivery despite the lacklustre Q2 performance update. Maintaining a ‘buy’ rating, the brokerage said that it is likely a near-term headwind rather than a sustainable trend.

“Delivery is a market leader in e-commerce 3PL logistics and we believe it should continue to gain share in the next 3-5 years,” Jefferies said.

Shares of Delhivery were trading almost 5% lower at INR 352.1 on the BSE on Friday.

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