Can Loss-Making Delhivery Convince Investors To Buy Into Its Growth Story?

After a hiatus of a few months, a tech company’s IPO has hit the Dalal street. Logistics startup Delhivery's share sale via initial public offering (IPO) opened for subscription on Wednesday. During the three-day share sale, which will end on May 13, Delhivery plans to raise Rs 5,235 crore. The IPO comprises fresh issue of Rs 4,000 crore and an offer for sale worth Rs 1,235 crore. Under the OFS category, CA Swift Investments, Deli CMF Pte. Ltd, SVF Doorbell (Cayman) Ltd and Times Internet are selling shares.

Delhivery IPO Details

Delhivery has priced the issue in a band of Rs 462-487 per share and a retail investor can bid for minimum one lot of 30 shares up to maximum of 13 lots. One lot of Delhivery shares in the IPO will cost Rs 14,160 at the upper end of the price band

Delhivery's IPO comes at a time when the domestic equity markets are going through a bout of volatility with the Sensex and Nifty falling close to 14 per cent each from record highs hit in October last year. The sharp fall in the markets has come on the back of tightened liquidity conditions, high inflation and fears of pressure on profit margins, analysts said.

This means that Delhivery IPO is testing the risk appetite of retail investors who incurred huge losses by investing in IPOs of new age companies like Zomato, Paytm, Policy Bazaar and Nykaa. The shares of all these companies are now trading below their IPO prices.

Delhivery’s Business

Delhivery provides a full range of Logistics services, heavy goods, PTL freight, TL freight, warehousing, supply chain solutions, cross-border Express, freight services, and supply chain software.

It has a 164-network infrastructure including 124 gateways, 20 automated sort centres, 83 fulfilment centres, 35 collection points, 24 returns processing centres, 249 service centres, 120 intermediate processing centres, and 2,235 direct delhivery centres.

Delhivery’s Financials

Delhivery has been posting losses for the last three years. In the financial year 2019, Delhivery posted a loss of Rs 1,783 crore, in the financial year 2020, it posted a loss of Rs 268.80 crore and in the financial year 2021, it reported a loss of Rs 415.74 crore, according to its draft red herring prospectus.

Once Bitten Twice Shy Investors

The biggest challenge for Delhivery would be to convince investors to invest in a loss-making company after the disastrous listing of Paytm, which was the poster boy of the startup world. Paytm, despite high losses on its balance sheet raised Rs 18,300 crore by listing on the stock exchange in November 2021. The IPO consisted of an offer for sale of Rs 10,000 crore and fresh issue of Rs 8,300 crore. The company sold shares at Rs 2,150 in the IPO and is currently down 76 per cent from the IPO price at Rs 520.

Foodtech startup Zomato, which raised Rs 9,000 crore by selling shares at Rs 76 per share in July, 2021, is also trading below its IPO price. The stock is down 34 per cent from the IPO price at Rs 50.

Falguni Nayar promoted direct-to-customer brand Nykaa which witnessed strong response from investors in its November 2021 listing is trading above the IPO price but the company’s stock price has fallen by a whopping 53 per cent from its record high touched on November 23, 2021. 

Analysts point out that Paytm and Nykaa IPOs which came last year had a higher portion of offer for sale which provided an exit route to investors and promoters while the market was flush with liquidity and trading close to record highs.

Apart from gaining investors’ confidence as a loss-making, but growth oriented tech startup, Delhivery IPO will also face the challenge of tight liquidity conditions in the market. Investors from across the world are worried about rising interest rates and high inflation that will wipe out easy money from the market. Over the last two years, it was the hot money- thanks to Central Banks’ Covid packages across the world-  in the market that pushed stock markets to new heights in India and elsewhere. But with the American Federal Reserve and the RBI changing their policy stance in recent months, liquidity will dry up in the market, forcing investors to avoid loss-making companies.

"New-age technology-based companies like Zomato, Nykaa, Paisa bazaar, and Paytm are trading below the listing price. Even though these companies are presenting growth in revenues but profitability is a little far-flung hence Investors are not willing to take long term bets.  The Delhivery valuation appears to be higher at 9 times FY 2021 revenues as compared to its peers like BlueDart which is trading at an EV/ Sales multiple of 4.80 times and, AllCargo at 0.76 times & GATI at 1.36 times," said Amit Pamnani, chief investment officer at Swastika Investmart.

What Analysts Say About Delhivery IPO

Ravi Singh of Share India advises investors to avoid putting money in the Delhivery IPO, saying the company will take time to turn the corner.

"Delhivery has posted continuous losses and its IPO is priced with a negative P/E. Even if we consider its improving adjusted EBITDA margins, Delhivery will take time to turn the corner. The IPO is also priced very aggressively. We recommend investors to stay away from this IPO," said Singh.

Yesha Shah, head of equity research at Samco Securities also has an avoid rating on Delhivery IPO. He is concerned about the increasing  cost pressures on the company due to rising fuel prices. 

 "We expect that the company will continue to experience increasing cost pressures, at least in the short term, due to rising fuel costs. In addition, the issue looks to be sharply valued at a price-to-sales ratio of 5.5x of annualised FY22 revenue, when compared to its listed peers. Considering the current increasing interest rate environment, where valuations of high growth companies across the globe are taking a beating, Delhivery’s expensive valuation is concerning. So we have an ‘Avoid’ rating for this IPO," Shah explained.

 Manoj Dalmia, founder and director of Proficient Equities advises investors to apply in the IPO based on their risk appetite.

 “The company has been suffering losses for the past three years. Although revenues have been increasing, it has a negative price-to-earnings ratio and it may be a risky bet considering the PAT. Investors are advised to apply based on their risk appetite, keeping oversubscription, GMP and other factors in mind,” said Manoj Dalmia, founder and director at Proficient Equities.

Meanwhile, Delhivery IPO witnessed a tepid response from investors as the issue was subscribed only 21 per cent on the first day, according to data from stock exchanges.