PRIVATE CLIENT RESEARCH INITIATING COVERAGE SEPTEMBER 12, 2013

Amit Agarwal Blue Dart Express (BDE) [email protected] +91 22 6621 6222 PRICE: RS.2340 RECOMMENDATION: ACCUMULATE TARGET PRICE: RS.2620 FY15E P/E: 24.0X

Stock details Blue Dart Express (BDE) is the leader in the Air express market (over 47% BSE code : 526612 market share) and is slowly gaining market share since it's entry in 2007 in NSE code : BLUEDART the surface express market (over 13% market share). It has the requisite Market cap (Rs bn) : 54.5 infrastructure, tie-ups, skilled manpower and an established brand name Free float (%) : 25 which is synonymous to reliability and faith. Parentage of DHL (75% hold- 52 wk Hi/Lo (Rs) : 2755/1531 ing) brings in best global practices in the company. We believe the com- Avg daily volume : 9000 pany is well placed to be part of the high growth E-commerce market (40- Shares (o/s) (mn) : 23.7 50% CAGR FY13-15E). We also expect the company to benefit from in- creased requirement of corporates for prompt and reliable and Summary table further gain market share in surface express. We estimate BDE to deliver (Rs mn) 15mFY13 FY14E FY15E 13% earnings CAGR over FY13 to FY15E despite a tough economic scenario on the back of jump in revenue share of relatively profitable E-commerce Sales 21,621 21,600 24,424 Growth (%) 44.9 -0.1 13.1 segment, sustained 12-15% growth in Air express and increasing market EBITDA 2,622 2,722 3,175 share in the surface express industry. The stock trades at 24x FY15E EPS, a EBITDA margin (%) 12.1 12.6 13.0 premium for its dominant market share, healthy growth rate, strong bal- PBT 2,694 2,970 3,391 Net profit 1,886 2,020 2,307 ance sheet and parentage of DHL. Its 5-yr average one year forward PE (x) EPS (Rs) 79.4 85.0 97.1 multiple stands at 27x. Initiate with an Accumulate with a target price of Growth (%) 52.2 7.1 14.2 CEPS (Rs) 94.0 95.6 109.1 Rs 2,620 at 27x FY15E EPS. Book value (Rs/share) 276 344 417 Dividend/share (Rs) 70.9 15.0 20.0 Key investment argument ROE (%) 28.4 24.4 22.9 ROCE (%) 41.1 36.4 34.2  Express package is one of the fast-growing verticals. As per Net cash (debt) 2,350 2,607 3,666 company estimates the domestic express package industry is valued at ~Rs Net WC (Days) 43 38 43 EV/EBITDA (x) 17.4 16.4 14.4 120 bn, of which the organized segment is only ~50%. The organized express P/E (x) 29.4 27.4 24.0 package market can be sub-divided into 1) air express (~Rs 26bn) and 2) P/Cash Earnings 24.8 24.4 21.4 P/BV (x) 8.4 6.8 5.6 ground express (~Rs 34bn). It is one of the fast-growing segments within the logistics industry and expected to post a CAGR of ~17% over FY13-16E. Imple- Source: Company, Kotak Securities - Private Client Research mentation of GST is likely to be a key positive for industry and accelerate the shift in market share from unorganized to organized players. Given company's Shareholding pattern favorable positioning within the industry, we expect it to grow at above indus- Corporate try growth rates and continue to incrementally gain market share. Industry is bodies Public evolving into a differentiated oligopoly market, with top four players enjoying 7% 4% ~75% market share. FIIs 6%  Unparalleled infrastructure in the entire south eastern region. BDE cur- Domestic rently has a fleet of 6 aircraft (5 Boeing 737 and 1 Boeing 757), 7457 vehicles, Institutions 413 facilities, 20 ground hubs and a dedicated skilled staff of 8258 blue darters 8% who work around the clock to yield results for the company. The above men- tioned infrastructure is unparalleled in the industry which helps BDE to Promoter 75% deliver safely, on time and differentiate itself from other players. Source: ACE Equity  Bluedart is the leader in express cargo business. Blue Dart Express (BDE) is having a lion share in the Air express market (over 47% market share) with One-year performance (Rel to Sensex) limited competition from players like Safex, Fedex and Firstflight. Also, it is slowly gaining market share since it's entry in 2007 in the surface express market (over 13% market share). BDE is also fast emerging as a key player in the e-commerce segment, which is clocking a CAGR of 30-40%, with a mar- ket share of 30-35% and revenues of Rs 1.8 bn (~8% of its overall revenues).

Source: ACE Equity

Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been pre- pared by the Private Client Group. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited. INITIATING COVERAGE September 12, 2013

 Aggressive push in the high growth E-commerce segment. Blue Dart plans to ride the wave of the high growth E-commerce market which has grown at 50% CAGR over 2007-2011. Management indicated that currently it has tie ups with more than 2000 E-commerce companies. Since 2007, BDE has gained 35% market share in this segment and is expected to sustain this growth mo- mentum over the next 5 years. Ecommerce logistics, which is the most crucial link of any successful E-commerce venture, is likely to record a growth of 30- 40% CAGR over the next few years owing to this.

 Strong Parentage. DHL, world's largest logistics player acquired 81% stake in Blue Dart in 2005, though it has been recently reduced to 75% in-line with SEBI regulations. DHL helps strengthen the brand identity and customer relations. It also brings in best international practices, transparency and good corporate gov- ernance in the company. Blue Dart and DHL () have entered into a sales alliance agreement for international services.

 Healthy Balance sheet. The company currently has zero debt on books and cash balance of Rs 2.5 bn which is almost 30% of the Balance sheet. Blue Dart is expected to generate FCF of Rs 2.3 bn over FY13 to FY15E as against a rela- tively modest capex plan of Rs1.5 bn. Healthy cash balance is of utmost impor- tance for the company while facing the downturn in the economy. Healthy cash balance could positively impact the other income component of the company with broader yields increasing.

Valuation and outlook BDE is an undisputed market leader in the air express segment, with a dominant market share of ~47%. It is fast emerging as a key player in the ground express cargo segment too, with a market share of ~13% currently. By virtue of its first- mover advantage and deep understanding of the domestic market, BDE has successfully created an advantageous positioning for itself within the industry. It is also well placed to leverage the growth opportunity in the E-commerce segment. We estimate BDE to report revenue and net profit CAGR of ~13.5% and ~14.5% respectively over FY13-15E. Express package industry has a very high fixed cost of 75-80%. Hence, operating leverage is very high. Going forward, we believe a combination of factors such as increasing share of value-added business and improving operating leverage is likely to expand BDE's EBITDA margins from ~12.1% in FY13 to 13% by FY15. The stock trades at 24x FY15E EPS, a premium for its dominant market share, healthy growth rate, strong balance sheet and parentage of DHL. Its 5-yr average one year forward PE (x) multiple stands at 27x. Initiate with an Accumulate with a target price of Rs 2,620 at 27x FY15E EPS.

Risks and concerns  Increase in competition intensity from large local and global MNC players  Lack of adequate infrastructure at airports tuned to requirements of express in- dustry and poor road infrastructure  High operating costs  Moderation in GDP growth rate is likely to lower industry growth rate and nega- tively impact BDE,  Volatile crude prices as it accounts for significant portion of its overall cost.

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ABOUT BLUEDART EXPRESS Blue Dart Express (BDE) is a 75% subsidiary of the global logistics leader DHL and present across both the air and ground express package distribution vertical. As part of the DHL Group, BDE accesses the largest and most comprehensive express and logistics network worldwide, covering over 220 countries and territories and offers an entire spectrum of distribution services, including air express, freight forwarding, supply chain solutions and customs clearance. BDE is fast emerging as a key player in the ground express cargo segment, with a market share of ~13% currently; it is an undisputed market leader in the air express segment and has a dominant market share of ~47%. BDE has a 49% associate company Ltd (BDA), which is the only domestic scheduled cargo airline in India. It operates on an exclusive basis for providing air express cargo services to BDE through its network of night operations to support customer demand. Currently, BDA is not consolidated with BDE. Going forward, management has indicated a possibility of BDE increasing its stake in BDA to make it a fully- owned subsidiary.

Business structure of Bluedart Express

DHL (75% stake) Blue Dart (13% market (47% market share) share) Surface Express Air Express

Ecommerce fast growing

(35% market share)

Source: Company

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EXPRESS DELIVERY INDUSTRY (EDI)

Structure of EDI

Express Delivery Indutry

Air Express Surface Express Blue Dart GATI DTDC Transport Corp Firstflight Bluedart Skypak Safex

Source: Company

The EDS industry provides services that include integrated door-to-door transport and quick delivery of time-definite shipments of documents, samples, parcels, etc. The figure below shows the different stages of the express delivery – from collection of consignment from customer in one country (for example, India) to delivery to customer in a different country (for example, the United Kingdom (UK)). One of the key features of this industry is that it handles custom clearances and reduces the requirements of multiple agents such as freight forwarders and customs house clearance agents

Various stages involved in express delivery service Pick-up Customer Collecting Branch Collection Hubs

Transport (Surface/Air)

Delivery Consignee Distribution Hubs

Local Distribution Ofice

Source: Kotak Securities - Private Client Research

Oligopoly competition in a market worth Rs 120 bn The size of India’s express service industry in 2006 was pegged at around Rs 70 bn and in 2013 it is estimated at Rs 120 bn. India’s express service industry is largely fragmented with more than an estimated 2,500 entities. In terms of strength, the organised segment, consisting of a few players control about two-third of the industry revenues. The organised segment includes key global integrators DHL, FedEx, TNT and UPS. While, FedEx, TNT and UPS operate their own international freighters, DHL has tie ups with commercial cargo airlines. In the domestic segment, the key players include Bluedart, First Flight, DTDC, Skypak, Overnight, Professional and many others.

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AIR EXPRESS INDUSTRY

Key features The main features of the Air Express industry include: Speed of Service, Door-to- door delivery including completion of all cross border regulatory requirements, Tracking Systems, Proof of Delivery, Security and Reliability and access to global connectivity for customers.

Key players Domestic International

Bluedart DHL Firstflight Fedex DTDC TNT Skypak UPS Overnight Aramex Professional

Source; Industry

Fast growing segment As per Director General of Civil Aviation (DGCA), domestic cargo handled at Indian airports has grown at 20% CAGR in the last 5 years to around 2.7 mn tonnes in CY12, while international cargo has grown at 12% CAGR to around 1.5 mn tonne. Air Express industry is one of the fast-growing segments within the logistics industry and is expected to post a CAGR of ~12% over CY12-15 (Source: DGCA). The growth would be driven by industries like Banking, Insurance, E-Commerce, Computer hardware, Pharmaceuticals, Consumer durables and Automotive. In addition, new segments like organized retail, e-commerce and others are expected to emerge as major customer segments in the medium term. Given BDE’s favorable positioning within the industry, we expect it to grow at above industry rates and continue to incrementally gain market share. Industry is evolving into a differentiated oligopoly market, with top four players enjoying ~75% market share.

Cost is a constraint for air express industry The demand for air freight is limited by cost, typically priced 4–5 times that of road transport and 12–16 times that of sea transport. These values differ from country to country, season to season and from product to product and for different volumes also. Cargo shipped by air thus has high values per unit or is very time-sensitive.

Blue dart is a key player in the segment Blue dart is a key player in Blue Dart Aviation is an important player in the Express Aviation sector in India. Air Air Express industry cargo industry has three primary types of carriers; combination carriers (passenger airlines that use a portion of their “belly-hold” capacity to carry cargo and may also operate separate air cargo fleets), conventional all-cargo carriers operating both scheduled and charter services, and integrated (express) carriers operating their own fleet of aircraft and delivery vehicles providing overnight, door-to-door service. BDE is a key player with 47% market share in domestic segment.

Growth of Air Express industry - Organised Air Express Industry in India Year Size (Rs bn) Growth rate (%)

2011 20.4 18.7 2012 23.4 14.6 2013E 26.5 13.4 2014E 29.9 12.8 2015E 33.6 12.3

Source: Industry

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ATF is the main cost involved in Air express industry Aviation Turbine fuel (ATF) price fluctuation is a key risk for air express players given that it accounts for 50% of air charter cost (20% of overall cost). Companies in this industry follow fuel surcharge-based pricing mechanism to counter this key risk. Fuel surcharge based pricing mechanism involves passing of any increase in fuel price to the customer which helps maintain margins for the company.

SURFACE EXPRESS INDUSTRY

Key features It involves timely delivery of goods using road/rail infrastructure. It usually involves slightly heavy parcels other than documents.

Growth drivers Growth in the ground express vertical is likely to be driven by industries such as motor vehicles, electrical appliances and health services.

Strong competition Competition within the industry is at high level due to the presence of large number of players, limited differentiation of services, high bargaining power of buyers and low entry barrier mitigated by low substitution risks and moderate bargaining powers of suppliers. Larger players due to their reach and network are in relatively better competitive position compared to the medium and smaller players. Overall, the competition in the express delivery services industry is high.

BDE is a new player in surface express Blue Dart is slowly gaining BDE has been a relatively new entrant in the ground express cargo industry and has market share in Surface successfully created a niche for itself even in this segment, with a market share of Express industry ~12%. BDE operates in the segment through dart Surfaceline (100% ownership). Dart Surfaceline is an economical, door-to-door, ground distribution service to over 33,751 locations in India for shipments weighing 10 kgs and above. Management expects outsourcing by large organized retail players to be a key opportunity. The ground vertical is likely to be a key beneficiary from implementation of GST, which not only is likely to boost outsourcing to 3PL players but also accelerate shift in market share from unorganized to organized players

Outsourcing of logistics operations to benefit third party logistics (3PL) Third Party Logistics is an effective way to reduce operational costs, and allow a company to focus on their core competencies. Outsourcing logistics operations to an asset backed 3PL provider like BDE adds to the bottom line for both the customer and the corporate through accurate, well-managed inventory and supply chain solutions.

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GST to benefit surface express industry Implementation of Goods and Service Tax (GST) is expected to make inter-state movement of goods hassle free and reduce lot of delays. With GST, multiple tax regimes with different rules and rates across states will merge into a single tax structure. This will reduce the need for check posts and improve efficiency of operations for the express service providers by reducing delays and paper-works. GST is expected to increase outsourcing to 3PL players and shift business from unorganized segment to organised segment. However, the contours of GST are still to be finalised and the overall impact can be assessed once the structure is known.

Growth of Surface Express industry - Organised Ground express industry in India Year Size (Rs bn) Growth rate (%)

2011 24 13.2 2012 28.7 19.6 2013E 34.2 18.9 2014E 40.6 18.9 2015E 48.3 18.9

Source: Industry

Brief comparison between Air express and Surface express Parameters Air express Surface Express

Cargo type Light weight Medium to Heavy weight Cargo weight Less then 15 kg More than 15 Kg Cost of transportation 6x of surface express 1x Distance More than 500 km Less than 500 km Speed Domestic delivery in 24 hrs Domestic delivery in 3 to 5 days Number of players Oligoploy market Large number of players Goods Documents, Merchandise etc Machinary, Equipments, furniture etc

Source: Company

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THE BDE ADVANTAGE

Volumes matter - BDE has demonstrated healhy volume growth even in bad market With 70% of the cost, fixed in nature for a courier company, volumes become Volumes for Blue Dart have important for profitability. With high proportion of the cost fixed in nature, higher grown even in a bad market volumes lead to higher margin and better profitability. Volumes for BDE have grown at a healthy 24% in the last 4 years with improvement in margin from 11.5% in FY09 to 12.1 in FY13. Volumes for the company have also grown at a multiple of ~5x of GDP in the last 3 years which underpins our view that the company is a market leader in express cargo.

Volume for the company and opm

600,000 Volume (tonnes ‐ LHS) 44.0 Volume growth (% ‐ RHS) 450,000 OPM (% ‐ RHS) 33.0

300,000 22.0

150,000 11.0

0 0.0 CY08 CY09 CY10 CY11 15MFY13

Source: Company

Volume for BDE vs GDP growth of India Financial year GDP growth (%) Volume growth (%) Multiple (x)

FY11 6.1 26.6 4.4 FY12 6.3 25.1 4.0 FY13 (annualized) 5.0 32.5 6.5

Source; Company, Industry

Infrastructure is the key for express players - BDE has a mammoth infrastructure Blue Dart has built its Over the years, Blue Dart has developed an extensive reach of 274 retail stores, 365 infrastructure over years facilities and 7,300 vehicles servicing more the 32,000 locations across India. Further, its fleet of 6 aircraft and air cargo terminals provides connectivity across 7 major locations in India and operates the only scheduled domestic cargo airline. Blue Dart’s sustained investments in technology up gradation (constitute ~1% of revenue) helps maintaining its competitive edge. These investments provide greater visibility of the supply chain to the customers.

Current infrastructure of Bluedart Infrastructure Nos Remark

Boeing 737 5 375 tonnes per day Boeing 757 1 Air network station 7 Vehicles 7457 Warehouses 413 Blue darters 8258 Dedicated and trained Ground hubs 20 Hub and spoke model Network routes 166 Centipede model

Source: Company

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Scaling up is a huge task – tough for new entrants to scale up in a big way Express industry is characterized by low entry barriers given the limited requirements in terms of upfront capital requirement. Technical capability requirements and investments in IT infrastructure are also relatively moderate for starting of express service operations. However, scaling up from a small player to a medium-sized regional player or a national player is a challenge since this would require substantial investments, tie- ups, and a large network of owned or franchise-operated branches, investments in IT infrastructure and strong systems. Overall, the threat of new entrants is high for regional competition and low for national level competition. BDE is an established brand name in the national market and has minimum pricing pressure. Infact it is one of the preferred courier partners for most of the corporate houses. Costing of express delivery industry An express service player has to maintain a network for collection, transportation, and distribution of parcels. The investments in assets can be reduced by higher level of outsourcing. The cost structure of the players is such that a high proportion of operating costs is of fixed nature. Sizeable investments need to be made towards developing the branch and hub network for any operation spread across multiple cities. However, quantum of upfront investment required for a small operation is relatively low. As a result, the entry barrier for the industry is low but scaling up operations is a challenge as it involves significant investment as well as strong systems. Transport infrastructure and IT system infrastructure have to be developed in order to offer acceptable service quality. BDE has built this infrastructure over years. The operations of express delivery services are labour intensive and therefore involve high manpower costs. A large number of these costs are fixed in nature requiring high volumes for breaking even.

Cost variables of an express service player Capital cost Fixed cost Variable cost

Vehicles Employee (17%) Fuel Branches Insurance (10%) Contract Labour Hubs Aircraft (40%)

Source: Kotak Securities - Private Client Research

Advantage BDE over the industry Parameter Highlight for BDE

History Incorporated in 1991 Parentage DHL bringing in the best practices Infrastructure Unparalleled in the country Brand Name Well established Tie ups With the best in the industry Presence (incl. DHL) In 220 countries Technology Real times track and Trace, MIS, ERP, Customer Service, Space Control and Reservations. Aviation Dedicated capacity to support time-definite morning deliveries through night freighter flight operations. Perception Synonym to faith and reliability

Source: Industry, Kotak Securities - Private Client Research

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E commerce offering opportunities to express players like BDE India is among the fastest-growing online market and registered a 40% growth in FY13. Internet usage has reached ~10% penetration in India. With this trend, E- E commerce is a big commerce has shown an exciting growth trend among travel and retail sites. Retail opportunity for Blue Dart category penetration has increased to ~60% and has grown to ~45 mn visitors (August 2013). Payment models such as cash on delivery (COD) are emerging as a key option, which players like BDE have been able to capitalize by offering value- added differentiated service. Currently, e-commerce accounts for ~8% of BDE’s overall revenues and is growing at a CAGR ~30-40%. Company is the market leader in this emerging segment, with a market share of ~35%. Most of the leading online portals continue to rely on external parties like BDE to manage their distribution operations. This is due to their own express package distribution chain being limited to key metros and commercial districts. Management of BDE indicated, currently it has tie ups with more than 2000 e commerce companies. Some of the key categories within online retail are apparels, consumer goods, movies etc. which are scalable and are growing at a very fast pace. All these key trends portend positively for a player like BDE. Given the prevalent COD model of payment, BDE’s margins in this segment are significantly higher than its core business. With entry of Amazon in the area, BDE is expected to sustain this growth momentum over the next 5 years.

Key categories with online retail in August 2013 (mn users)

16.0 15.0 13.4

12.0 10.0

8.0

4.0 2.9 2.8 1.5 2.1 0.0

Source: Industry

Visitor growth for online retail (mn users)

48.0 43.0 45.0 40.5 37.4 36.0 33.3 29.0 26.1 27.6 24.0

12.0

0.0 Jul_11 Oct_11 Jan_12 Apr_12 Jul_12 Dec_12 Apr_13 Aug_13

Source: Industry

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Leading online retails companies (Traffic in mn users)

20.0 15.4 16.0 11.5 11.1 12.0 8.6 8.5 8.0 6.5

4.0

0.0

Source: Industry

Cash on Delivery (COD) model within e commerce is lucrative for BDE Cash on delivery is a further subset of E-commerce retail model and constitutes Example of COD ~25% of overall sales for most of the online retailers. It has led to increasing Normal courier charges 100 acceptance of the E-commerce model given the customer comfort in making the COD charges 25 payment only on receipt of the product. This segment is lucrative for BDE as it Total charges 125 involves collection of COD charges over and above the collection of cost of the Source: Kotak Securities - Private Cli- product. The COD charge is over and above the regular courier charge paid by the ent Research online retailer and is an added commission for BDE. BDE has to manage the cash receipt for the online retailer in a COD transaction. The COD charge could be as high as 25% of the regular courier charges and we expect this fast growing COD segment within ecommerce segment to help improve the margins of the company in near future.

Strong parentage develops trust towards BDE DHL, world’s largest logistics player acquired 81% stake in Blue Dart in 2005, Parentage of DHL adds lot of though it has been recently reduced to 75% in-line with SEBI regulations. DHL helps value to Blue Dart strengthen the brand identity and customer relations. It also brings in best international practices, transparency and good corporate governance in the company. Blue Dart and DHL (India) have entered into a sales alliance agreement for international services. BDE benefits a lot from DHL’s worldwide infrastructure and multiple alliances and seamless DHL also has its independent presence in few Indian cities running parallel to the Blue Dart’s facilities and generates revenue for Blue Dart in terms of commission. The cargo booking and various other services offered by DHL and BDE are clearly demarcated with no overlaps or competition.

Top 5 companies in express cargo globally Company FY13 revenue in $mn Home country Presence

Deutsche Post 76,545 Germany Global United Parcel Service 55,694 USA Global FED EX 46,023 USA Global TNT Express 9,293 Netherland Global Aramex 932 UAE Global

Source: Kotak Securities - Private Client Research, Industry

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No overlapping of service between DHL and BDE – WIN-WIN relation- ship On 12th September 2002, Blue Dart and DHL signed a Sales Alliance Agreement which came into effect from 1st October 2002 on a principal to principal basis. This alliance was further strengthened in 2005 when DHL Express (Singapore) Pte. LTD. acquired 81.03% stake in Blue Dart and currently holds 75% stake since 23rd November, 2012.While Blue Dart is the leader of the air express industry in India, DHL Express is the No.1 international air express services provider in India offering its customers the entire spectrum of express services from international air express to high-end logistics solutions including repair and return, strategic inventory management and direct express inventory distribution. Merger of the world’s No. 1 international air express service provider and India’s No. 1 domestic express services provider is a logical step in a win-win relationship to benefit all the parties involved, the customer and the stakeholders of both organisations. BDE is able to provide timely and secured delivery in the domestic market with support from DHL for innovative solutions and best practices in express, air and ocean freight and overland transport. Also DHL and BDE have entered into sales agreement for international and domestic business.

Sales agreement between DHL and BDE Cargo booking done by Segment Network owner Commission earned by

DHL Domestic Bluedart Bluedart Bluedart International DHL DHL

Source: Company, Kotak Securities - Private Client Research

Relationship between DHL and BDE

Network sharing

75% DHL BDE

Misc support

Source: Company

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BDE strategy - Achieve and maintain pole positions across both air and ground verticals  BDE’s key long term strategy is to achieve and maintain leadership status and pole position in both air and ground express segments.  Increase coverage and footprint in tier II and III towns.  Enhance and strengthen presence in sectors like e-commerce, pharmaceuticals, auto, consumer, BFSI and IT.  Stay ahead of the curve by continuously investing in and adopting next genera- tion technologies.  Maintain debt-free status and deliver profitable growth. We expect BDE to form its strategy based on the following customer expectations

Customer expectations and strategy of BDE Expectation Bluedart strategy

Door to door delivery Integrated infrastructure Real time tracking Online tracking, GPS , handheld devices Multiple pick-up in a day Dedicated staff and vehicle Nonstandard shipments Customized solutions On time delivery Seamless infrastructure Service to multiple location Expansion to Tier 2 and tier 3 cities Low cost service for non-critical items Classify as non express cargo Security of goods Proper handling Dedicated customer care Call centre, Online tracking

Source: Kotak Securities - Private Client Research

Criterion for selecting service provider – BDE has an edge for impor- tant cargo Most corporate customers use more than one express service provider for their shipments. This usage is typically categorized into critical and non-critical shipments. The service provider is selected based on the criticality of shipments since critical shipments require speedy delivery & security. This is where BDE scores over other players and is able to command premium. BDE has a credible history for 1) timely delivery; 2) Prompt and timely pick up and 3) Secured delivery of the goods. For the above BDE ensures complete and accurate information sharing from the customer. The company also has the entire infrastructure in place with adequately trained/well informed staff and real time tracking of goods plus call centre to promptly resolve any issue. The second criterion for selection of an express service provider is price of services.

BDE is the undisputed leader in the air express industry  Company is the undisputed market leader in the air express segment, with a dominant market share of ~47%.  It is fast emerging as a key player in the ground express cargo segment too with a market share of ~13% currently.  BDE is also fast emerging as a key player in the e-com segment, which is clock- ing a CAGR of 30-40%, with a market share of 30-35% and revenues of ~Rs 1 bn (~8% of its overall revenues).  Improvement in road infrastructure, setting up of logistic parks, and implementa- tion of GST is expected to cut down transit times, reduce in-transit inventory, in- crease other efficiencies, and thus encourage demand for Road Express, which coupled with continuing shift from unorganized to organized players, bodes very positively for BDE.

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CONCERNS

Increasing competitive intensity The industry is witnessing an increase in competitive intensity from large local and global MNC players. Given the tremendous potential of the industry, many global MNCs have drawn up aggressive expansion plans for India, which is likely to increase the competition intensity for BDE. Nonetheless, given BDE’s first-mover advantage and established infrastructure strengths, competitors are likely to find it difficult to gain advantage over it.

High operating cost The issue of high operating costs is another area of concern for the industry. The inflation in major cost elements like manpower, transportation, fuel and airport infrastructure costs have been high in recent times leading to pressure on the operating margins for the industry.

Poor transport infrastructure The lack of adequate infrastructure at airports tuned to requirements of express industry and poor road infrastructure is another area of concern for the industry.

High correlation with GDP growth rate Express cargo package industry has very high correlation with GDP growth rate. Typically, the industry growth rate has been ~1.8-2.2x GDP growth rate. Hence, any moderation in GDP growth rate is likely to lower industry growth rate and negatively impact BDE, given the high operating leverage in the industry.

Volatility in crude oil prices Crude oil price fluctuations are a key risk for BDE given that it accounts for significant portion of its overall cost. Company follows fuel surcharge-based pricing mechanism to counter this key risk.

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FINANCIAL ANALYSIS

Revenue CAGR of 13% over FY13 to FY16E Blue Dart’s revenue growth, being largely linked with the GDP growth, has historically clocked a multiplier in the range of 2-2.5x. However in CY10, CY11 and FY13 (annualized), the growth rate has surpassed this multiple standing at 4.4x, 4x and 6.5x respectively, largely on account of increased penetration in the surface logistics and e-commerce segment. This, we believe, is going to sustain in medium term with the incremental growth again primarily coming from the surface express and the -commerce segment. The e-commerce segment share is likely to increase further compared to ~8% of revenue currently.

Segmental growth in revenues (Rs mn) CY10 CY11 15MFY13* FY14E FY15E FY16E

Air express 9,179 11,917 16,899 15,141 17,110 19,505 Surface express 2,295 2,979 4,766 4,156 4,561 5,040 E commerce 402 1,341 1,877 2,252 2,703 3,243 Total 11,876 16,237 23,542 21,550 24,374 27,789 Share of ecommerce (%) 3.4 8.3 8.0 10.5 11.1 11.7

Source: Company, Kotak Securities - Private Client Research; * 15M ending March 2013

Boosted by increase in shipments and weight per shipment No of shipments CAGR Tonnes CAGR Kg/ (000) (%) handled (%) shipment

CY08 79,700 232,000 2.9 CY09 77,983 -2.2 267,000 15.1 3.4 CY10 87,700 12.5 338,000 26.6 3.9 CY11 99,650 13.6 423,000 25.1 4.2 15MFY13* 114,203 14.6 475,920 12.5 4.2

Source: Company, Kotak Securities - Private Client Research; * Annualized

High operating leverage – improvement in margins Operating margin in a courier business is a function of two elements: 1) rate charged by the company and 2) Utility of the assets as almost 70% of the costs are fixed in nature (40% aircraft, 16% employee and 10% miscellaneous). EBIDTA margin for BDE was under pressure over the last couple of years mainly on account of higher air charter expense. Blue Dart Aviation is the only cargo operator in the country with 6 scheduled aircrafts taken on lease for providing air express service and loading more than 375 tonnes of cargo per night. The leasing cost of these aircrafts is fixed in nature and forms ~40% of the overall cost. Going ahead the margins are likely to stabilize with higher utilization of aircraft which currently stands at ~80-83% and increased contribution from the ecommerce segment. BDE is already charging premium over other courier companies.

Comparison of rates charges by BDE over few competitors (Route - Delhi for express cargo) Company Rs/kg

Bluedart 465 Aramex 310 DTDC 280 First flight 210

Source: Industry; Kotak Securities - Private Client Research

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Sales and margins (bar and line chart)

28,000 14.0 Sales (Rs mn ‐ LHS) Margins (% ‐ RHS)

21,000 13.0 14,000 12.0 7,000

0 11.0 CY10 CY11 15MFY13 FY14E FY15E

Source: Company, Kotak Securities - Private Client Research

The expenses are mainly divided into three main heads freight handling and servicing cost (~75% of total cost), employee cost (~15%) and others (9-10%). The freight handling cost can be further divided into air charter cost, domestic network operating cost, International servicing charges and others. Air charter cost, which consequently becomes revenue for Blue Dart Aviation subsidiary constitutes ~40% of overall cost (~51% of handling/servicing cost). As a percentage of revenue it is largely stable in the last 3 years. Domestic network operating cost constitutes ~23% of overall cost (~30% of handling/servicing cost ) has been gradually increasing as a result of increase in the surface logistics share.

Freight Handling and Servicing cost (Rs Mn) CY08 CY09 CY10 CY11 15MFY13

Air charter cost 3,694 3,111 3,843 5,224 7,123 Domestic network operating cost 1,415 1,536 2,119 2,950 4,297 International servicing charges 604 601 684 822 1,072 Other expenses 646 608 838 1,086 1,607 Total 6,359 5,856 7,484 10,082 14,099 Percentages (%) Air charter cost 58.1 53.1 51.3 51.8 50.5 Domestic network operating cost 22.3 26.2 28.3 29.3 30.5 International servicing charges 9.5 10.3 9.1 8.2 7.6 Other expenses 10.2 10.4 11.2 10.7 11.4

Source: Company

Healthy return ratios Return ratios are attractive with RoE/RoCE at 20%/25% given the asset light nature of the business. Improvement in EBIDTA margins and asset turnover should help improve return ratios, with no major capital infusion.

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DuPont Parameter Ratio CY10 CY11 15MFY13 FY14E FY15E

EBIT margin (%) EBIT/ Revenue 0.12 0.12 0.12 0.14 0.14 Asset Turn over (x) Revenue /Capital employed 2.11 2.25 3.30 2.65 2.46 Financial Leverage (x) Capital Employed/ Equity 1.00 1.00 1.00 1.00 1.00 Interest Burden (x) PBT/EBIT 1.00 1.00 1.00 1.00 1.00 Tax burden (x) PAT/PBT 0.67 0.68 0.69 0.67 0.67 ROE (%) PAT/Equity 17.4 18.5 28.4 24.4 22.9

EBIT Margin (%) EBIT/ Revenue 0.12 0.12 0.12 0.14 0.14 Capital Turnover (x) Revenue/ Capital Employed 2.11 2.25 3.30 2.65 2.46 ROCE (%) EBIT/Capital Employed 25.8 27.1 41.1 36.4 34.2

Source: Company, Kotak Securities - Private Client Research

Small capex of Rs 1.5 bn over FY13 to FY15E We estimate BDE to spend around Rs 1.5 bn over FY13 to FY15E for expansion of its network and on technology which would help the company in effective and timely delivery. Timely and effective delivery is very critical for BDE as most of the items carried by it involve 1) Important documents for corporate clients 2) Time bound delivery of merchandise for ecommerce industry.3) Fragile goods and so on. It also develops trust and credibility for the company from clients. This also enables BDE to charge premium over other players in the industry. The current utilisation of the assets owned by the company is around 80% (revenue of Rs 21.6 bn) with room for expansion upto 90%. We estimate that the current assets should be sufficient for a growth of 15% CAGR for the next 2 to 3 years. (revenue of ~Rs 25 bn). The company can also take assets on lease to facilitate the growth.

Debt and Free cash flow analysis (Rs mn) CY11 15MFY13 FY14E FY15E FY16E

Gross Debt 0 0000 Networth 6,635 6,558 8,163 9,916 12,005 Cash 286 2,350 2,607 3,666 5,020 Net Debt/equity (x) 0 0000 Gross Debt /EBITDA (x) 0 0000 Operating cash flow 390 3,730 1,320 2,238 2,534 Net Capex 712 222 626 626 626

Source: Company, Kotak Securities - Private Client Research

The company currently has zero debt on books and cash balance of Rs 2.4 bn. Blue Dart is expected to generate operational cash flow of Rs 3.5 bn in next two years as against a relatively modest capex plan of Rs 1.5 bn.

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VALUATION AND OUTLOOK BDE is an undisputed market leader in the air express segment, with a dominant market share of ~47%. It is fast emerging as a key player in the ground express cargo segment too, with a market share of ~13% currently. By virtue of its first- mover advantage and deep understanding of the domestic market, BDE has successfully created an advantageous positioning for itself within the industry. It is also well placed to leverage the growth opportunity in the ecommerce segment. We estimate BDE to report revenue and net profit CAGR of ~13.5% and ~14.5% respectively over FY13-15E. Express package industry has a very high fixed cost of 75-80%. Hence, operating leverage is very high. Going forward, we believe a combination of factors such as increasing share of value-added business and improving operating leverage is likely to expand BDE’s EBITDA margins from ~12.1% in FY13 to 13% by FY15. The stock trades at 24x FY15E EPS, a premium for its dominant market share, healthy growth rate, strong balance sheet and parentage of DHL. Its 5-yr average one year forward PE (x) multiple stands at 27x. Initiate with an Accumulate with a target price of Rs 2,620 at 27x FY15E EPS.

Peer Analysis Market Cap ROE (%) PE (x) P/B (x) Company $ Mn CY13 CY14 CY13 CY14 CY13 CY14

Deutsche Post AG 26,500 15.0 16.0 12.4 11.5 2.0 1.8 FedEx Corp 29,700 14.0 13.5 12.5 10.5 1.7 1.5 United Parcel Service Inc 76,000 109 118 16.6 14.7 12.6 10.9 TNT Express NV 4,200 6.5 7.1 23.1 19.5 1.2 1.1 Aramex PJSC 915 13.0 13.6 12.4 11.1 1.6 1.4 Bluedart 815 24.4 22.9 27.4 24.0 6.8 5.6

Source: Kotak Securities - Private Client Research; Note: Numbers for Bluedart are for FY14 & FY15

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FINANCIALS: BLUEDART

Profit and Loss Statement (Rs mn) Balance sheet (Rs mn) Year end March CY11 15MFY13 FY14E FY15E Year end March CY11 15MFY13 FY14E FY15E

Net sales 14,922 21,621 21,600 24,424 Equity 238 238 238 238 Freight and Service 10,082 14,099 13,997 15,753 Reserves 6,397 6,320 7,925 9,678 Employee expense 1,857 2,983 2,959 3,322 Networth 6,635 6,558 8,163 9,916 Other expense 1,217 1,917 1,922 2,174 Debt - - - - - Operating expenses 13,156 18,999 18,878 21,249 Minority interests - - - - Operating profit 1,766 2,622 2,722 3,175 Capital employed 6,635 6,558 8,163 9,916 + Other income 248 419 500 500 Fixed Assets 2,331 2,206 2,581 2,922 - Depreciation 218 347 251 284 Investments 747 228 250 250 - Interest - - - - Working capital 3,271 1,774 2,725 3,078 - Tax 571 834 980 1,119 Cash 286 2,350 2,607 3,666 PAT 1,225 1,860 1,990 2,272 Capital deployed 6,635 6,558 8,163 9,916 + (Associates-Minorities) 14 26 30 35 Source: Company, Kotak Securities - Private Client Research Consolidated PAT 1,239 1,886 2,020 2,307

Source: Company, Kotak Securities - Private Client Research Ratio Analysis Year end March CY11 15MFY13 FY14E FY15E Cash Flow Statement (Rs mn) Topline growth (%) 29.8 44.9 (0.1) 13.1 Year end March CY11 15MFY13 FY14E FY15E Bottomline growth (%) 30.8 52.2 7.1 14.2 Consolidated PAT 1,239 1,886 2,020 2,307 Operating margins (%) 11.8 12.1 12.6 13.0 Non-cash items 218 347 251 284 FDEPS (Rs/share) 52.1 79.4 85.0 97.1 Cash profit 1,457 2,233 2,271 2,591 CEPS (Rs/share) 61.3 94.0 95.6 109.1 Changes working capital (1,067) 1,497 (951) (353) DPS (Rs/share) 2.0 70.9 15.0 20.0 Cash flow from operations 390 3,730 1,320 2,238 BV (Rs/share) 279.2 276.0 343.5 417.3 Capex (712) (222) (626) (626) PER (x) 44.7 29.4 27.4 24.0 Investments 222 519 (22) - P/C (x) 38.0 24.8 24.4 21.4 Cashlfow from Investments (490) 297 (648) (626) Dividend yield (%) 0.1 3.0 0.6 0.9 Dividends (55) (1,963) (415) (554) P/B (x) 8.3 8.4 6.8 5.6 Equity raised - - - - EV/Sales (x) 3.5 2.4 2.4 2.2 Debt raised - - - - EV/ EBITDA (x) 26.2 17.4 16.4 14.4 Inc. in minority interests - - - - Debt/Equity (x) - - - - Miscellaneous - - - - Working capital turn (days) 67.0 42.6 38.0 43.4 Cash flow from finance (55) (1,963) (415) (554) Dividend payout (%) 4.5 104.1 20.6 24.0 + Opening cash 441 286 2,350 2,607 ROE (%) 18.5 28.4 24.4 22.9 Closing cash balance 286 2,350 2,607 3,666 ROCE (%) 27.1 41.1 36.4 34.2

Source: Company, Kotak Securities - Private Client Research Source: Company, Kotak Securities - Private Client Research

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Disclaimer This document is not for public distribution and has been furnished to you solely for your information and must not be reproduced or redistributed to any other person. Persons into whose possession this document may come are required to observe these restrictions. This material is for the personal information of the authorized recipient, and we are not soliciting any action based upon it. This report is not to be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It is for the gen- eral information of clients of Kotak Securities Ltd. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. We have reviewed the report, and in so far as it includes current or historical information, it is believed to be reliable though its accuracy or completeness cannot be guaranteed. Neither Kotak Securities Limited, nor any person connected with it, accepts any liability arising from the use of this document. The recipients of this material should rely on their own investigations and take their own professional advice. Price and value of the investments referred to in this material may go up or down. Past performance is not a guide for future performance. Certain transactions -including those involving futures, options and other derivatives as well as non-investment grade securities - involve substantial risk and are not suitable for all investors. Reports based on technical analy- sis centers on studying charts of a stock's price movement and trading volume, as opposed to focusing on a company's fundamentals and as such, may not match with a report on a company's fundamentals. Opinions expressed are our current opinions as of the date appearing on this material only. While we endeavor to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. Prospective investors and others are cautioned that any forward-looking statements are not predictions and may be subject to change without notice. Our proprietary trading and investment businesses may make investment decisions that are inconsistent with the recommendations expressed herein. Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group . The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited. We and our affiliates, officers, directors, and employees world wide may: (a) from time to time, have long or short positions in, and buy or sell the securities thereof, of company (ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company (ies) discussed herein or act as advisor or lender / borrower to such company (ies) or have other potential conflict of interest with respect to any recommendation and related information and opinions. As on September 10, 2013, Kotak Securities Limited does not hold Blue Dart Express shares in its proprietary account. Kotak Securities Limited is also a Portfolio Manager. Portfolio Management Team (PMS) takes its investment decisions independent of the PCG research and accordingly PMS may have positions contrary to the PCG research recommen- dation. The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. No part of this material may be duplicated in any form and/or redistributed without Kotak Securities' prior written consent. Analyst holding in stock: Nil

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