Nearshoring Pressures And Rising Capex Will Erode Long-Term Results

Key Takeaways

• Shifts in global supply chains, regulatory pressures, and changing consumer behavior threaten Delhivery's volume growth, revenue potential, and network utilization over the long term.
  
• Sustained investment needs in sustainability, automation, and technology-amid stiff competition-jeopardize prospects for margin expansion and long-term earnings improvement.
  
• Strong execution in automation, technology, and integration is driving market share gains, margin expansion, and diversified, resilient revenue streams in a formalizing logistics sector.

Catalysts

Provides supply chain solutions to e-commerce marketplaces, direct-to-consumer e-tailers, enterprises, FMCG, consumer durables, consumer electronics, lifestyle, retail, automotive and manufacturing industries in India.

• The rise of nearshoring and diversification of global supply chains, particularly with manufacturers shifting production closer to consumer markets, is likely to diminish the long-term relevance of India as a trade logistics hub, constraining Delhivery's revenue growth potential and lowering the volume expansion trajectory that had been anticipated from e-commerce exports.
  
• Increasing environmental regulations and more stringent sustainability targets will force Delhivery to undertake significant capital expenditure on electric vehicles and green infrastructure, leading to higher operating costs and sustained capex requirements which are likely to threaten net margin expansion and potentially pressure free cash flow generation.
  
• Persistent pricing pressures from well-capitalized competitors, including large e-tailers with captive logistics arms as well as global integrators, mean Delhivery will continue to face difficulty increasing yields in its core Express business; this suppresses any potential for significant revenue and margin improvement, especially as e-commerce growth moderates.
  
• Delhivery's ambitious strategy relies heavily on continued investments in automation, technology, and process engineering. If scale and efficiency gains do not keep pace with industry wage inflation or technology obsolescence, the company could suffer from escalating R&D and automation expenditure without a commensurate impact on profitability, putting at risk long-term earnings growth.
  
• Consumer adoption of alternatives to physical goods, such as digital services or participation in the circular economy, poses a structural threat to e-commerce shipment growth, making Delhivery's significant network investments vulnerable to long-term volume stagnation and resulting in revenue and utilization levels that fall short of current bullish expectations.

Delhivery Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Delhivery compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Delhivery's revenue will grow by 13.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 1.8% today to 4.9% in 3 years time.
• The bearish analysts expect earnings to reach ₹6.4 billion (and earnings per share of ₹8.71) by about July 2028, up from ₹1.6 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 55.4x on those 2028 earnings, down from 204.6x today. This future PE is greater than the current PE for the IN Logistics industry at 22.5x.
• Analysts expect the number of shares outstanding to grow by 1.83% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.78%, as per the Simply Wall St company report.

Delhivery Future Earnings Per Share Growth

Risks

• Continued strong outperformance and profitability improvements in the Part Truckload (PTL) business, driven by investments in automation, operating leverage, and software optimization, suggest the company is effectively capturing market share from the largely unorganized sector, supporting higher future earnings and margin expansion.
  
• Successful integration and consolidation of Ecom Express, with conservative volume retention assumptions already being exceeded and significant cost and operating synergies expected, could lead to higher-than-expected revenue, cost savings, and long-term profitability.
  
• The company's engineered cost structure advantages and leading position in automated logistics technology provide resilience against industry pricing pressures and enable sustained service EBITDA margin improvements, which could positively impact net margins even in a competitive landscape.
  
• Increasing customer base, growth in high-yield SME and B2B segments, and ongoing investments in rapid commerce and local delivery services diversify revenue streams and reduce concentration risk, laying a foundation for stable and expanding topline growth.
  
• Industry consolidation, excess loss-making capacity exiting the market, and Delhivery's ability to offer reliable, scalable logistics solutions give it a durable competitive advantage, making it more likely to win increased share and secure stable revenues and profits as the sector formalizes and grows.

Valuation

• The assumed bearish price target for Delhivery is ₹303.68, which represents two standard deviations below the consensus price target of ₹419.71. This valuation is based on what can be assumed as the expectations of Delhivery's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹515.0, and the most bearish reporting a price target of just ₹277.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ₹129.9 billion, earnings will come to ₹6.4 billion, and it would be trading on a PE ratio of 55.4x, assuming you use a discount rate of 13.8%.
• Given the current share price of ₹444.2, the bearish analyst price target of ₹303.68 is 46.3% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.