Logistics - Technology to drive efficiency, network benefits and eventually profitability - ICICI Securities

We hosted Mr Ajith Pai, COO of Delhivery for a Fireside chat. Delhivery's journey has been characterised by constant drive to improve supply-chain efficiencies through better aggregation of data, refined choices of network, drive viability of service offerings while making yields competitive and trying to stay asset-light. One of the significant takeaways was the possible flexibility of network choices, driven by technology investments. Fixed networks, without recognising the demand pattern increases the scope of disruption. Express/Less than Truckload (LTL) industry is yet to experience any meaningful investments from incumbents towards the same. Has technology really allowed to overcome the issue of low country transaction density and self-logistics of large ecommerce players and paved way for a profitable mix of B2B and B2C across first mile, line haul and last mile - Delhivery believes so.

- The market and the market participant. Delhivery started as an ecommerce fulfillment operator in CY11 and extended the stack to non-ecommerce as well. Two self-logistics arms of e-commerce majors and Delhivery contributes to ~70% of the market with almost equal share. Ecommerce express is 60-65% of Delhivery's revenue. Rest is large parcel, traditional B2B and warehousing. No individual customer accounts for more than 15% of overall revenues.

- Continuous yield compression, while effecting margin improvement. Service EBITDA for e-commerce parcel logistics is in healthy double digits. As the company has graduated into that margin structure they have relentlessly gone on to reduce prices. Management briefly highlighted that in the last five years, yields would have halved while margins would have still increased. Also, the average distance travelled is coming down as fulfillment centres are going closer to customers, which is also reducing yields. Yield for a 1 kg parcel is already lower than US$1 in India and has a scope of falling further by 20-25%.

- Jury is still out on the stickiness of online spending bump witnessed in India at present. Growth rates in ecommerce have been 25-35% in the last 3-4 years. Delhivery believes, given the current scale of the market, 30% growth is sustainable. Covid-19 pandemic has made online shopping more convenient for customers. Though thesis on this is still not clear. The stickiness of the current online spending bump may add another 5-10% to the growth rate.

- Self-logistics - is it an impediment for profitability? Delhivery was of the view that with proper network infra, the weight of the parcels can still drive profitability, and not category of shipments. Self-logistics for ecommerce players started out and was initially prevalent given inadequate supply chain options, and has since become a permanent feature of the market. Delhivery reiterated that the market is dense enough for everyone to coexist profitably (including last mile e-commerce delivery), heterogeneous and can be cracked open through proper aggregation of data, and self-logistics is not skimming off the cream.

- Why has ecommerce shipments evaded the scope of listed Indian express players as a profitable business option? Following reasons could be gathered from the interaction: i) Incumbents' Inability to devise a suitable CoD product, ii) Air Express effectively being a small part of what is still quite a cost-sensitive market, iii) large part of the US$5bn opportunity initially captured by the unorganised space and later by the unlisted new-age start-ups. Delhivery reiterated that while the opportunity has evaded the listed space, it shouldn't lead anyone to conclude on the lack of profitability of ecommerce transportation market.

- What has Delhivery done better to make a profitable business opportunity out of Indian e-commerce transportation? Delhivery believes apart from pursuing operational efficiencies, investment in technology allows choice of network which can course correct based on evolving demand pattern in the network. With proper data systems in place, scale can be built up, which incumbents have largely ignored, thus restricting express delivery to its current niche. Delhivery has opted for an automated first mile, while making simpler architecture for line haul and last mile. The technology stack also allows Delhivery to handle hyperlocal last mile shipments albeit with an eye on costs. Management believes each of the first, middle and last mile needs to be individually efficient. Is it possible in Indian context of low density, cost consciousness and self-logistics prevalent? Management believes so.

- Move to omni-channel, suits Delhivery's inbuilt capabilities. While offering a suit of services, which include warehousing, express, LTL, FTL and cross border, Delhivery has its sight set on 3PL (our inference). The inherent omni-channel nature of optionalities with a customer which typically had restricted options 10 years back will help expand Delhivery's 3PL ambitions. Further, management of variability in demand across regions rather than density of transactions largely determine the 'warehousing + transportation' outsourcing requirements from ecommerce majors to players like Delhivery. However, the jury is still out on whether express and 3PL can coexist as separate service heads - Delhivery believes it can.

- Consolidation in near term. The rationale for either adding capability or additional revenue stream or customers - all highlights and tilts towards BUILD rather than BUY. Players can become larger as scale advantages and efficiencies play out; inorganic consolidation need not play out.

Source : Equity Bulls

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