Here Are The Key Takeaways From Delhivery’s Business Model

Logistics giant, Delhivery, will be launching its initial public offering (IPO) consisting of a fresh issue of Rs 5,000 crore worth of shares and an offer for sale by existing shareholder of Rs 2,460 crore.

Use of IPO Funds

According to the company’s draft prospectus, it is the largest and fastest growing logistics company in India in terms of revenue. Out of the Rs 5,000 crore that the company plans to raise, it will utilise Rs 2,500 crore towards funding organic expansion. The expansion would include growing the network infrastructure, scaling existing businesses, and upgrading the company’s technology platform.

Out of the remaining funds, it plans to use Rs 1,250 crore towards inorganic expansion. In the past, the company has grown its areas of service through various acquisitions such as Aramex, Spoton, Primaseller and others. The company has spent Rs 1,544 crore on these acquisitions.

The remaining funds would be used for General Corporate Purposes. Delhivery has stuck to the Securities and Exchange Board’s ICDR regulations of not allocating more than 25 per cent of the funds raised to general corporate purposes.

Business Model

Delhivery currently focuses on providing a full-range of logistics services ranging from express parcel and heavy goods delivery, truckload freights, warehousing solutions, supply chain, cross-border logistics, and e-commerce solutions.

The company operates on an asset-light business model, allowing it to scale up rapidly without incurring high fixed costs. It leases out vehicles, and the logistics infrastructure, while also collaborating with other network partners for these logistics services. The company has 15 million square feet of leased infrastructure.

Delhivery has five business verticals: Express Parcel, Part Truck Load Services, Truck Load Service, Supply Chain Services, and Cross-Border Services.

The express parcel service forms the company’s largest revenue source, though its share has decreased from 83 per cent in 2019 to 70 per cent in 2021. Delhivery serves as a logistics partner for major e-commerce companies. Assembling an entire logistical force can often be unviable, especially for smaller companies. Hence, they prefer to outsource operations to logistics partners like Delhivery.

Revenues from part truck loads and truck load services contributed to around 16 per cent of the company’s revenue in 2021. These businesses allow users to contract a part or the entirety of the truck loads.

These segments have additional revenue sources such as insurance, loading, unloading, cash-collection fees, pick-up etc. The company has created a platform called Orion, which connects truckload capacity to customers. The users can list their requirements for spot or long term freight, and fleet-owners or agents can bid on the platform for the contracts.

In addition, the company offers various supply chain services such as warehousing. The segment forms around 8 to 10 per cent of the company’s revenue from operations. The last segment is the cross border logistics business that offer logistics services outside India.

In terms of expenses, freight handling charges contributed to more than 75 per cent of the company’s expenses over the last three fiscals. These charges include fuel expenses, vehicle leasing expenses, driver expenses, maintenance costs, toll payments and other expenses. Employee expenses are another major item on the company’s income statement. These expenses represent 20 per cent of revenues.

Delhivery’s Financials

Despite the company’s revenue compounding at a rate of 48 per cent per annum over the last three fiscals, the company has made losses in the past three fiscals.

However, the quantum of the losses has decreased from 107 per cent of the revenue in fiscal 2020 to 10 per cent of the revenue in fiscal 2021. The high losses in 2019 were due to buyback obligations of cumulative compulsorily convertible preference shares.

The company has been unable to generate positive operating cash flows, and hence has relied on investors funding so far. It is backed by SoftBank, Federal Express, Fidelity, Chimera, and several other marquee investors. The company’s last funding round valued the start-up at around $3 billion.

But the IPO would value it around $5.5 billion, according to a Reuters’ report. The IPO would allow the company to raise money in an exuberant public market. Carlyle Group and Softbank would be offloading their stake through the IPO. The company also has borrowings of around Rs 340 crore, which translates into a debt-to-equity ratio of less than one and a debt to EBIDTA ratio of around five times.

In the future, the company expects the fragmentation and inefficiency in the sector to decrease as the government simplifies tax structures, and creates better roads. In addition, an underinvestment in technology, human capital, and automation has caused the sector to remain fragmented.

The larger top ten organised players contribute to only 1.5 per cent of the logistics sector in India. In contrast, in the United States the ten largest players contribute to 15 per cent of the logistics markets, and 7-10 per cent in China. 85 per cent of fleets in India are composed of less than 20 trucks.

In the warehousing space, small warehouses with areas less than 10,000 square feet dominate the Indian market. As the sector consolidates, Delhivery believes that large integrated technologically-aware players like it could dominate the logistics markets.

Key Risks

Logistical Disruptions

Any logistical disruptions, roadblocks, strikes, or natural calamities could inhibit the company’s ability to execute its operations.

Third-Party Network Partnerships

The company operates on an asset-light model and coordinates with several different third-party operators. The actions of third-party operators could jeopardise the operations and brand reputation of Delhivery.

Overhead Expenses

Oil prices have affected logistics companies in the past. The company leases vehicles from fleet operators, but has to pay for fuel, and employee expenses. Rising fuel prices could put pressure on the company’s margins.

Competition

The company faces intense competition in the space from various players, both organised and unorganised. In addition, several companies have begun developing their own supply chains to have greater control over the customer’s experience.

Dependence on E-Commerce

Like mentioned earlier, the company derives around 70 per cent of its revenues from e-commerce companies. The companies prefer to outsource logistics to third party companies in a bid to keep their costs low, and stick to the core business.

However, if these companies begin building their own logistics base, like some have, Delhivery could face trouble in replacing the revenue.