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 delivery 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 logistics 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 courier 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 (India) 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. Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 2 INITIATING COVERAGE September 12, 2013 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 Blue Dart Aviation 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.