Blue Dart Express - Gross margins surprise - ICICI Securities

Blue Dart Express' (BDE) Q2FY21 performance has surprised on standalone gross margin. Gross margin expansion of 600bps YoY highlights the underlying tailwinds that air express has witnessed in a not-so-normal period: i) significant yield expansion -- domestic belly-cargo freight rates were up ~15% in Q2FY21; ii) mix improvement with more B2B air express cargo - partly aided by restrictions in road transport for a significant part of the quarter. Yield improvement for BDE largely shows in the gross margin improvement. We factor-in an 8% improvement in yield (prices) for BDE in FY21E, but normalise the same in FY22E as the underlying competitive dynamics of air express in a price-sensitive market remain unchanged. This explains the bulge in our earnings estimates and manifests in our DCF valuation methodology. Maintain SELL on the stock with a revised target price of Rs2,241/share (earlier Rs1,746/share).

- Gross margins surprised... While topline increased 8% YoY, the increase in gross margins is the key takeaway from the result. The same could not have been achieved without significant yield improvement. However, the sustainability of a 40% gross margin scenario remains unclear. We see road players becoming more active; we also see significant increase in belly cargo capacity of domestic carriers.

- ...presumably on yield improvement. We have earlier highlighted newsflow on yield improvement in the sector (link). Price increases for Q2FY21 also implies lower than expected volume trajectory. Also, with improvement of volumes (festive) in Q3FY21, higher yields observed in Q2FY21 may not repeat. There is a possibility of a mix change given higher ecommerce volumes. Since majority of the Q2FY21 beat is price-driven and may be reversible (as per our analysis), the sustainable cost improvement parameters stay untested in this margin beat.

- BDE can gain from the cold store supply chain opportunity of delivering Covid vaccines. BDE has successfully tailored its existing temperature-controlled logistics (TCL) solutions to transport vaccines, including complete supply chain solutions for the life sciences and clinical trial sector. This opportunity can extend the earnings bulge for the company.

- Maintain SELL. We have been working with 10% p.a. volume growth scenario for BDE's air freight, which also dictated our margin assumptions for the business. Our target price is the weighted average of: i) base case scenario (10% volume growth with a lower yield), and ii) low-volume scenario (3% volume growth with controlled increase in prices). Maintain SELL with a revised target price of Rs2,241/share.

Shares of BLUE DART EXPRESS LTD. was last trading in BSE at Rs.3700.55 as compared to the previous close of Rs. 3244.95. The total number of shares traded during the day was 24454 in over 5689 trades.

The stock hit an intraday high of Rs. 3784 and intraday low of 3356. The net turnover during the day was Rs. 89580392.

Source : Equity Bulls

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