Blue Dart Express - Expectations running ahead of fundamentals - ICICI Securities

Two recent events have generated significant interest for air express players: 1) Global belly cargo capacity has remarkably reduced and, on some routes, air freight rates have increased by 30-60%. Due diligence suggests that rates have gone up in India by 7-15% - a hope-inducing factor for Blue Dart Express (BDE) given its operating leverage. 2) Recent DHL commentary highlights the Covid vaccine distribution opportunity that may open up for the air express industry. Reseachers have also estimated that 15,000 flights would be needed to ensure global distribution of the vaccine over next two years. This presents an opportunity for the Indian express and 3PL players. These two events have resulted in salience for Indian air express, particularly BDE. Reiterate SELL on BDE as the structural headwinds of the model will sustain.

- While global belly cargo freight rates have increased by 30-60%, due diligence suggests the same in India have risen 7-15%. Globally, the rate increase has been driven by decline in belly cargo capacity - which is leading to an increase in freight load factor despite drop in freight ton-km. Under normal circumstances, about 60% of air cargo globally is flown in the belly-hold of passenger flights. With hundreds of those jets parked waiting out the pandemic, airfreight costs have spiraled: rates to North America from Hong Kong are up almost 60% this year. Due diligence suggests, Indian belly cargo freight rates are up 7-15% (mostly YTD). This can be extremely prospective for BDE since the business has meaningful operating leverage and margins can expand materially with price hikes of 7-15%.

- BDE has seen success in wresting more market share in domestic air freight traffic in FY20 - presumably by closing the pricing gap with belly cargo of commercial carriers. BDE did see a sharp market share gain (~3.5% YoY) in air freight cargo over FY20 (IBEF data) - presumably as the company tried to normalise/reduce pricing. This ensures average realisation of Rs41/kg, not far from the average costing of belly cargo of commercial carriers (Indigo and Spice). With increase in belly cargo freight rates of commercial carriers, BDE will also enjoy pricing/margin benefits. The key question remains whether such pricing power may sustain. Globally we have tracked certain commentaries, e.g. Qatar Airways, one of the world's heavyweights in freight, does not see cargo rates declining for at least 12 months.

- DHL commentary also raises hope for air express volumes till FY22. Insufficient last mile connectivity, cooling facilities in the final delivery stages and lack of storage at clinics would 'pose biggest challenge' to delivering vaccines on a high scale (this is particularly true for mRNA vaccines). Reseachers have also estimated that 15,000 flights would be needed to ensure global distribution over the next two years.

- Temporary pricing and margin benefits may last for some time. Continued competition by road, ultra price sensitive customers and a heightened belly cargo capacity will eventually help normalise margins barring an interim blip. BDE's sustainable success can be in using this opportunity to aggressively restructure costs and try to be successful in road express. Maintain SELL. The Covid vaccine distribution story in India cannot be >Rs2bn-3bn p.a. opportunity given the price sensitive nature of market and eventual penetration of vaccines.

Shares of BLUE DART EXPRESS LTD. was last trading in BSE at Rs.2833 as compared to the previous close of Rs. 2601.65. The total number of shares traded during the day was 11531 in over 2160 trades.

The stock hit an intraday high of Rs. 2939.95 and intraday low of 2626.2. The net turnover during the day was Rs. 32309487.

Source : Equity Bulls

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