Delhivery IPO — All You Need to Know

Last week, SEBI approved the proposed IPO of Delhivery.

The company is one of the largest and fastest-growing fully-integrated logistics services players in India.

As the IPO tide continues to run into 2022, we sail along by bringing you our first exclusive on an IPO this year.

IPO Facts

• Issue Size: ₹7,460cr ($1bn) (Fresh Issue: ₹5,000cr ($673.6m) + OFS: ₹2,460cr ($331.4m)).
• Issue Type: Book Built.
• Issue Break-up: QIBs (75%), NIIs (15%), Retail (10%).

Under the Offer for Sale (OFS) category, the company’s Co-founders — Kapil Bharati, Mohit Tandon and Suraj Saharan — will sell shares worth ₹14cr ($1.8m), ₹40cr ($5.3m) and ₹6cr ($808,429) respectively. Existing investors SoftBank, Carlyle Group, Deli CMF and Times Internet will sell shares worth ₹759cr ($102.2m), ₹920cr ($123.9m), ₹500cr ($67.3m) and ₹330cr (44.4m) respectively as well.

Delhivery also passed a special resolution to allot equity shares worth ₹46.3cr ($6.2m) to 66 of its employees via stock options.

Apart from offering an exit to the investors and employees who wish to cash out, the IPO also aims to raise capital for other business initiatives (₹2,500cr ($336.8m) for organic and ₹1,250cr ($168.4m) for inorganic growth in line with a fairly robust M&A playbook). An expected $5–5.5bn valuation would imply a c.10x on FY21 sales which endorses a strong growth runway and perhaps an imminent inflection point when the business turns EBITDA positive largely through scale benefits.

Company Profile

In 2011, Delhivery was first established as SSN Logistics Pvt. Its name was later changed to that of its present day’s in 2015.

Based out of Gurugram, the company offers a full range of logistics services, including the delivery of Express parcel and heavy goods, PTL (partial truck load) freight, TL (truck load) freight, warehousing, supply chain solutions, cross-border Express, freight services as well as supply chain software.

Essentially, what started out as an e-commerce focused logistics company, gradually diversified to become a full-stack logistics and supply chain solutions provider. Delhivery boasts of a nationwide network that touches over 17,500 pin codes (88.3% of the total) spanning across 2,300 cities. It also claims to have 20 fully- and semi-automated sortation centres and 86 gateways across India which have helped to to fulfil over 850 million transactions since its inception (as of March 2021).

Company Financials

The company is the largest and fastest-growing fully-integrated logistics services player in India by revenue (as of FY21).

Delhivery has grown revenues at a 48.5% CAGR over FY19–21. Its continued diversification into associated logistics business verticals (e-commerce return services, payment collection and processing, installation and assembly services, fraud detection etc.) has also aided extensively to its growth. It has also reportedly acquired the milestone of delivering 1 billion shipments since it began operations.

In the run up to the IPO, the company raised close to half a billion dollars from quite a few investors last year, including crucial ones like — Fidelity, FedEx and GIC. Global investors like SoftBank, Carlyle Group, Tiger Global and Steadview have also joined the roster of marquee investors who have backed the startup for a long time.

One of the key instruments of its growth has been the range of acquisitions and mergers it achieved with some of its prominent industry rivals. Delhivery has spent nearly ₹1,544.5cr ($208.1m) in these “strategic initiatives” so far (pg 124, DRHP) through a number of asset purchase (Aramex, Primaseller, FedEx Express), share purchase (Spoton) and business transfer (Roadpiper) arrangements.

The acquisition of Spoton is perceived as an important one due to its complementary union effect between the two leaders in the logistics industry that would consolidate their B2B and B2C businesses. Expansion drives like these are expected to build on and augment Delhivery’s technological leadership in the supply chain domain and polish its tech and data science capabilities.

Owing to the ongoing global supply chain issues and pandemic hits, the company expects to increase business costs over time which could result in continuing negative cash flows. It is worth mentioning here that in FY20, Delhivery reduced its expenses by c. 6.4%, which was a significant break from the trend of almost 2x rise in annual expenses until then. However, these gains were somewhat quelled by a rise in the company’s employee benefits expense (41.5% YoY in FY20).

Seeing as the logistics business in the country is ever-proliferating with many thriving players in the field, offering competitive prices to customers remains crucial to sustaining business. But that could also mean taking a hit on profit margins and service offerings given the current operating finances.

Broad Industry Indicators

The Indian logistics sector is one of the world’s largest and presents an addressable market opportunity of $216bn in direct spends as of FY20 (pg 143, DRHP). Organised players account for a miniscule 3.5% of this market. However, growth in the organised segment alone is projected at 35% CAGR between FY20 and FY26 which indicates their increasing ability to steer the market share in their favour.

Considering the high inventory costs, efficiency concerns, pilferage and damages that continue to bog this industry, expansion in logistics infrastructure remains key to driving scale-driven efficiencies and consolidation as well as minimising redundancies in the sector.

As opposed to the logistics industries in other countries like China (where operators employ large franchise partner networks) and US (where operators usually own entire warehousing, pick-up and delivery infrastructure), the new age Indian players have led the country on a path of tech-enabled asset-light model.

This is generally achieved by gaining full control over network partners, leasing fleet assets and the use of proprietary technology systems. Delhivery, especially, operates through a mesh network (as opposed to a hub-spoke network in other countries) that is paired with a high degree of automation and full control over the value chain. It is this model of business that has historically augmented logistics growth in India and shows considerable promise going ahead as well.

Having said that, impediments like a complex taxation structure, poor road infrastructure, gaps in capacity-building and lack of sufficient investment in technology still plague growth in logistics, a sector which remains central to the growth of domestic infrastructure. With an increasingly consumption-driven economy, high consumer discretionary spending, low-cost smartphones and internet availability as well as explosive digital growth, India is firmly poised to script its own growth story in tech-enabled D2C businesses, particularly e-commerce.

Logistics will remain a key enabler to drive these changes and so will companies like Delhivery, by extension. Delhivery is one among a handful of startups which are trying to digitise the demand and supply system of the logistics market by connecting interested parties and reducing the role of brokers. By virtue of that alone, it presents a promising business opportunity, one that the capital markets would be wise to avail upon through this IPO.

(Originally published January 23rd 2022 in transfin.in)