Business recovery enthuses Blue Dart’s investors

Automation and improvement in tech capabilities should help, but valuation is high

After a washed-out June 2020 quarter (Q1), business is recovering for logistics companies, such as Blue Dart Express, as the economy is getting unlocked. This has also boosted investor sentiment. The stock of Blue Dart, which had corrected over 10 per cent after the announcement of results on July 31, has gained 16 per cent in the last fortnight, much more than the 1 per cent rise in the BSE Sensex during this period.

Blue Dart’s consolidated revenue had declined 47.2 per cent year-on-year (YOY) to ~416.2 crore in Q1 because of the lockdown and its focus on the supply of essentials, which forms just 20-25 per cent of its business.

However, logistics operations were seen normalising in July and reached over 80 per cent of the year-ago level. The company has also started transporting non-essential products for various sectors after easing of lockdown restrictions. This should help improve overall volumes and operating leverage and thus, support operating margin going ahead.

Analysts at ICICI Securities also expect new client acquisitions and focus on reducing costs will help keep the company on a profitable growth trajectory. They believe in the current situation, many Blue Dart’s peers are witnessing cash flow pressure, which should help the company regain its market share. Further, continued automation and improvement in technological and service capabilities will likely help Blue Dart sail through the current crisis.

In Q1, weak operating leverage had resulted in a ~42.5-crore Ebitda (earnings before, interest, tax, depreciation, and amortisation) loss. Thus, the company reported a loss before tax of ~163.2 crore, against a pre-tax profit of ~9.1 crore in the year-ago quarter. The company also took a 25 per cent cut in courier charges across retail and small business customers in Q1. What restricted the overall impact on operating margin was faster growth of the air cargo segment, which earns double the realisation than surface cargo.

Overall, though near-term earnings may remain under pressure, Blue Dart has the moat to bounce-back to normalcy with improved market share. Investors should note that analysts expect FY21 to end with a loss, and Blue Dart’s earnings per share to turn positive from FY22 (~33); it is expected ~86 for FY23.

A low base in FY22, however, means the one-year forward valuation is high at over 65x, which is a key reason for ICICI Securities to downgrade the stock to “hold” from “buy”. In fact, half the eight analysts polled by Bloomberg have a “sell” rating for the stock, with the average target price of ~2,074.

Long-term investors, thus, should await correction for a better entry into the stock.