Decoding Delhivery's IPO

Delhivery boxes may have found their ways to our homes but will the company’s IPO find a way into investors’ hearts?

If necessity is the mother of invention, then curiosity is its father.

It is this curiosity about why parcels used to take so long to deliver, that led to the formation of a unicorn, Delhivery in 2011.

This curiosity is what has shipped over a?billion parcels?across India to?17,000 pincodes.

And now the company is ready for the bourses. But will Delhivery be able to deliver returns to investors after its IPO? Let’s take a look.

The first thing we need to know is the IPO details -

??Delhivery’s Business Model

The IPO and the shareholding details won’t really help us understand much unless we dive deeper into Delhivery’s business model. So, what does Delhivery do?

Well, it delivers.

All of us probably have at least one Delhivery box lying around in our house.

That’s because a lot of e-commerce platforms like Amazon and Ajio use Delhivery’s services.

But it doesn’t just partner with these big firms for deliveries.

Common people like you and I can also send our couriers through the company.

Currently, it is one of the largest companies in this space and has a 22% market share (behind only Blue Dart which has a?36%?market share).

Let’s take a look at its financials:

What’s behind this tremendous growth?

Delhivery’s tech-first mesh-network model.

You see, the company is no ordinary logistics company. It has tech solutions in place that help drivers identify the most optimum route that can help them carry the maximum load by spending the least amount of time and money.?

Plus, it does not use the regular hub-and-spoke model that everyone else seems to be using. What’s that?

In this model, there are designated hubs in each region where all your parcels will go before being sorted and shipped to your house.

So, even though the truck may be passing a shipping center close to your house, it will ignore it and move on to the main hub where goods are to be sorted.

But, Delhivery’s model is different. In this model, the truck can move to any center according to the demand, making the delivery process much faster.

This has helped the company cut down on costs and win customers by getting them their packages faster.

Not just that, it has also developed new software that can help conduct strict quality check assessments right at the customers’ door. This has helped increase Ajio’s resaleability of returned goods from?25-98%

So, both e-commerce firms and customers are happy with the company’s services.

Now you know why the company’s contracts have increased 32%?in the last 9 months.

Plus, the company has an asset-light model. It does not own any of its fleet of transport vehicles and much of its logistics infrastructure is also leased.?

This gives the company much better flexibility in terms of expansion.

So, things seem to be going great right?

But let’s look at the other side of the picture.

Lets take a close look at its financials

While the company’s revenue may be growing, it still has not been able to make a profit.

That’s because a major chunk of its money is spent on paying off freight (shipping), handling and delivery charges, and also in training new delivery personnel.

Right now, the company spends rupee1.18 for every 1 rupee it earns.

For this cost to go down, the company will have to expand faster and deliver even more parcels.

Because of the company’s lack of profits, it has a negative free cash flow of $2.5 billion?and a debt of $3.7 billion.

This negative free cash flow highlights that the company does not have enough cash to run its operations: something that could be harmful to its expansion plans in the future.

And it’s not that the logistics business is inherently loss-making. Some of Delhivery’s competitors like BlueDart have been profitable for years.

All of this has made many investors and brokerages wary of the company’s IPO.

Especially because the markets are currently falling.

Also, investors have been burnt before when they invested in non-profitable high-valued startups like Zomato and Paytm last year.

Both companies are right now trading way below their IPO prices.

Plus, Delhivery’s increasing dependence on e-commerce platforms, which are now launching their very own logistics arms, is not very reassuring either.

But Delhivery does have some redeeming factors.

Even if its logistics business takes a hit, its tech solutions, which have proven to be game-changers, will be in high demand.

But enough speculation, why not take a look at what the market actually feels about the IPO?

Currently, Delhivery’s shares are trading at a Rupee. 5 discount in the grey market. This highlights that the demand for Delhivery’s shares is low and that the company’s shares may open at a lower price than anticipated.

However, it is too early to predict the fate of the company’s IPO.

Only time will tell if investors are ready to trust a loss-making high valued startup again