Delhivery IPO review (May apply)

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Review By Dilip Davda on May 6, 2022

•    DL is an emerging leader in fully integrated logistics services.
•    With a diverse range, it has gained momentum and scaled up its operations. 
•    It is on the verge of turning corners.
•    Considering future organic/inorganic plans, it's a pure long-term story.
•    Well-informed Investors may park funds with a long-term horizon.

PREFACE:
Ever since unicorn loss-making companies' IPOs marked their entry into the primary market, it has become a point of debate on fancy valuations offered for such companies. While we are seeing the actual fates of two mega IPOs under this category i.e., Zomato and PayTM and their current price, it still leaves many pros and cons. We have yet one more digitally operating logistics and parcel servicing company Delhivery which has been reporting losses despite growth in its top lines. However, this company's management has attributed new accounting guidelines for adjustments of certain special provisioning and that has kept their bottom lines in red. Over the period, DL has reduced its adjusted EBITDA from -11.35% in FY19 to just around -0.72% for 9M FY22 and is soon likely to turn the corner. It has well-diversified activities in the segment with the most modern infrastructure and use of technology. Thus, Delhivery is quite different from Zomato and PayTM. 

ABOUT COMPANY:
Delhivery Ltd. (DL) is the largest and fastest-growing fully-integrated logistics services player in India by revenue as of Fiscal 2021. It has achieved significant scale and growth over the period. It puts a major thrust on the three basic principles i.e. - people centricity with in-place technology, infrastructure and network, growth through partnership for third party contracts and efficiency of operation of scales with prudent cost management. As of December 31, 2021, it has a diverse base of 23113 active customers and is growing fast. 

DL operated 21 fully and semi-automated sortation centres and 82 gateways across India (excluding Spoton) as of December 31, 2021. It had a Rated Automated Sort Capacity of 3.70 million shipments per day as of December 31, 2021. The company has automated material handling systems at gateways in Tauru (Haryana), Bhiwandi (Maharashtra) and Bengaluru (Karnataka). This automation, combined with system-directed floor operations, path expectation algorithms and machine-vision guided truck loading systems, together enable its facility staff to be more productive and reduce errors in operations. It operates a Pan-India network and provides services in 17,488 postal index number ("PIN") codes, with 86184 team size and 3836 delivery points as of December 31, 2021. Its major operations are on an asset-light model with third party leased facilities. 

As per the survey, this segment is expected to grow at a CAGR of 9% till 2026 as rising e-commerce with online deals augurs well. India being densely populated and a vast market bring bright prospects for logistics service providers. This growth will be driven by strong underlying economic growth, a favourable regulatory environment, growth of domestic manufacturing, rapid growth of the digital economy and improvements in India's transportation infrastructure.

The segments underlying DL's largest lines of business, namely express parcel delivery, express PTL and warehousing and supply chain services, are expected to grow faster than the logistics industry and to witness consolidation among organized players. As per the RedSeer Report, which has been exclusively commissioned and paid for by the company in connection with the Offer, all these segments are expected to grow at a CAGR of approximately 28-31%, 21% and 9% respectively. Based on its plans, it is poised for bright prospects with the digitalization of operations and latest technology and most modern infrastructures. It has a well-established reach on a PAN India basis. 

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its funding plans for organic growth (Rs. 2000.00 cr.), scaling up existing business lines and new developments (Rs. 160.00 cr.), expansion of network infrastructure (Rs. 1360.00 cr.), upgrading/improving proprietary logistics operating system (Rs. 480.00 cr.), inorganic growth (Rs. 1000.00 cr.), DL is coming out with a maiden combo IPO of fresh equity issue worth Rs. 4000 cr. and an offer for sale of Rs.1235 cr. making an overall issue size of Rs. 5235 cr. (approx. 107494860 shares).

The company has fixed the price band of Rs. 462.00 to Rs. 487.00 per share of Re. 1 for its combo offer. At the upper cap of the price band, DL will issue 82135530 fresh equity shares and 25359330 shares by the offer for sale. The issue opens for subscription on May 11, 2022, and will close on May 13, 2022. Minimum application is to be made for 30 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 14.84% of the post issue paid-up capital of the company. 

The company has reserved equity shares worth Rs. 20 cr. for its eligible employees and offering them a discount of Rs. 25 per share. From the residual portion, it has allocated 75% for QIBs, 15% for HNIs and 10% for Retail investors. 

The issue is jointly lead managed by Kotak Mahindra Capital Co. Ltd., Morgan Stanley India Co. Pvt. Ltd., BofA Securities India Ltd. and Citigroup Global Markets India Pvt. Ltd. while Link Intime India Pvt. Ltd. is the registrar to the issue. 

Having issued initial equity at par, the company further issued/converted equity shares in the price range of Rs. 1.80 to Rs. 1896.50 (based on Re. 1 FV) between January 2012 and April 2022. It has also issued bonus shares in the ratio of 9 for 1 in September 2021. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. 0.10, Rs. 3.50, Rs. 35.18, Rs. 139.88, Rs. 142.91 and Rs. 196.19 per share. 

Post-IPO, DL's current paid-up equity capital of Rs. 64.24 cr. will stand enhanced to Rs. 72.45 cr. Based on the upper cap of the issue price, the company is looking for a market cap of Rs. 35283.22 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, DL has (on a consolidated basis) posted a turnover/net profit (loss) of Rs. 1694.87 cr. / Rs. - (1783.30) cr. (FY19), Rs. 2988.63 cr. / Rs. - (268.93) cr. (FY20) and Rs. 3838.29 cr. / Rs. - (415.74) cr. (FY21). For the nine months of FY22 ended on December 31, 2021, it has posted a loss of Rs. - (891.14) cr. on a turnover of Rs. 4911.41 cr. 

For the last three fiscals, DL has posted an average negative EPS of Rs. - (13.64) and an average negative RoNW of - (18.93) %. The issue is priced at a P/BV of 5.23 based on its NAV of Rs. 93.19 as of December 31, 2021, and at a P/BV of 3.53 based on its post-IPO NAV of Rs. 137.87 per share. 

Due to negative earnings so far, its P/E cannot be measured, i.e., the issue is priced with a negative P/E. 

According to management, due to the new accounting system, it kept providing certain costs that kept its bottom lines in red. However, it is now on the verge of turning the corner in the near term. 

DIVIDEND POLICY:
The company has not declared any dividends for the reported periods of the offer document. It will adopt a prudent dividend policy based on its financial performance and future prospects. 

COMPARISON WITH LISTED PEERS:
As per the offer document, DL has shown Blue Dart, TCI Express and Mahindra Logistics as its listed peers. They are currently trading at a P/E of 40.22, 49.28 and 139.90 (as of May 06, 2022). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORDS:
The track records of the 4 merchant bankers associated with this issue are as under:

Kotak Mahindra Capital Co. Ltd.: This is the 26th mandate from Kotak Mahindra in the last three fiscals (including the ongoing one). Out of the last 10 listings, 4 opened at discount and the rest with premiums ranging from 0.04% to 79.38% on the day of listings.

Morgan Stanley India Co. Pvt. Ltd.: This is the 5th mandate from Morgan Stanley in the last three fiscals (including the ongoing one). Out of the last 4 listings, 1 opened at discount and the rest with premiums ranging from 17.35% to 79.38% on the day of listings.

BofA Securities India Ltd.: This is the 9th mandate from BofA Securities in the last three fiscals (including the ongoing one). Out of the last 8 listings, 3 opened at discount and the rest with premiums ranging from 0.04% to 79.38% on the day of listings.

Citigroup Global Markets India Pvt. Ltd.: This is the 13th mandate from Citigroup in the last three fiscals (including the ongoing one). Out of the last 10 listings, 4 opened at discount and the rest with premiums ranging from 0.04% to 79.38% on the day of listings.

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