DELHIVERYNSEQ1 FY23August 16, 2022

Delhivery Limited

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15analyst exchanges

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Management on call

Sahil Barua

MD & CHIEF EXECUTIVE OFFICER

Sandeep Barasia

ED & CHIEF BUSINESS OFFICER

Amit Agarwal

CHIEF FINANCIAL OFFICER

Varun Bakshi

HEAD, INVESTOR RELATIONS

Gaurav Rateria

MORGAN STANLEY

Key numbers — 40 extracted

rs,

cting with businesses, businesses transacting with consumers or consumers transacting with consumers, both within the borders of India or from India to abroad or abroad to India. A quick snapshot of

Rs. 1,746 crore

FY23: We continue to be India's largest integrated logistics platform. In Q1 FY23, we registered Rs. 1,746 crores of revenue from services which represents a 30% growth over our revenues for the same quarter in

30%

platform. In Q1 FY23, we registered Rs. 1,746 crores of revenue from services which represents a 30% growth over our revenues for the same quarter in the previous financial year. Q1 FY23 adjusted EB

12.5%

Q1 FY23 adjusted EBITDA margin stands at Delhivery Limited August 09, 2022 negative 12.5%. We delivered 152 million parcels in our Express business in Q1 FY23 and have delivered close to

152 million

ITDA margin stands at Delhivery Limited August 09, 2022 negative 12.5%. We delivered 152 million parcels in our Express business in Q1 FY23 and have delivered close to about 1.6 billion packages

1.6 billion

elivered 152 million parcels in our Express business in Q1 FY23 and have delivered close to about 1.6 billion packages since our inspection in 2011. In Q1 FY23, in our part-truckload business, we delivered c

2.5 million

part-truckload business, we delivered close to 240,000 tons of freight and have shipped close to 2.5 million tons of freight since FY19. We run one of the largest networks in the country and operate close t

18.9 million

freight since FY19. We run one of the largest networks in the country and operate close to about 18.9 million square feet of logistics infrastructure across the country. This includes automated sortation cen

54%

pping, full-truckload shipping, supply chain services and warehousing and cross border logistics. 54% of our revenue comes from customers who used two to more of our services and we cover 18,435 pi

18.15 million

end of Q1 FY23. As discussed earlier, we have expanded our overall logistics infrastructure from 18.15 million square feet to 18.9 million square feet as of the end of Q1 FY23. We continue to have the largest

Rs. 1,344 crore

t-hand side, overall revenue between Q1 FY22 and Q1 FY23 has grown by about 30% year-on-year from Rs. 1,344 crores to about Rs. 1,746 crores. The composition of the business has changed slightly owing to the int

Rs. 1,746 crore

ue between Q1 FY22 and Q1 FY23 has grown by about 30% year-on-year from Rs. 1,344 crores to about Rs. 1,746 crores. The composition of the business has changed slightly owing to the integration effect or the PTL

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Guidance — 20 items

A quick snapshot of our key operating metrics

opening

“In addition, there are one-time transition costs of the integration which we expect will normalize over FY23 for instance due to commercial or contractual reasons, we have had to run a certain amount of redundant infrastructure and certain software licenses and there are certain administrative costs from the SpotOn entity that has continued in Quarter 1.”

A quick snapshot of our key operating metrics

opening

“171 crores and including one-time integration cost which we do not expect will continue into quarter 2 and beyond at negative Rs.”

Abhishek Parekh

“That is the first one and number two, there have been some questions around the viability of the social commerce model and the category we have significant dependence on social commerce platform's volume, is this something that the company sort of worried about over the short to medium term?”

Sahil Barua

“Penetration in India is less than 7% whereas comparable penetration for example in a place like China would be north of 20%, so we expect that there will continue to be a secular shift towards e-commerce going forward.”

Sahil Barua

“So, we don’t see a large risk going forward.”

Hitesh

“And my second question is on profitability, right, I understand this is a weak quarter because of integration issues and also your volumes, but how should we look at profitability over next 2 quarters when the integration benefit starts coming and volumes scaleup, so if you can give us some guidance on how margins could scaleup from here?”

Sahil Barua

“So first half obviously we do not expect the one-time integration costs to persist through the year.”

Sahil Barua

“One thing that I should point out is that this existing capacity itself will shrink a little bit going forward because we do continue to carry infrastructure, we do continue to carry certain contracts from SpotOn’s sort of previous days which we haven’t yet fully deprecated.”

Hitesh

“On the pricing front, we are seeing some stability on the e-commerce pricing where it is kind of not gone down much, right, so should we expect the pricing to remain now stable or you will still because you have the lowest price in the industry or you will continue to prioritize market share over pricing in the e-commerce segment?”

Sahil Barua

“We evaluate pricing at every customer level and depending on the customer's ambition for growth going forward and what our market projections for each individual customer are but suffice to say I don’t think we will be taking any significant pricing actions during the rest of the year.”

Risks & concerns — 15 flagged

Moving to the next slide, the impact of the integration which I will talk about in more detail as we go through the financials, first of all has risen from service stability.

— A quick snapshot of our key operating metrics

Compared to Q1 FY22, where we had an adjusted EBITDA margin of negative 4%, so a decline in the adjusted EBITDA by about negative 8.5% and compared to quarter 4 where we made an adjusted EBITDA of Rs.

— A quick snapshot of our key operating metrics

248 crores and a minor increase in corporate cost leading to a total impact of Rs.

— A quick snapshot of our key operating metrics

— Abhishek Parekh

— Sahil Barua

So, we don’t see a large risk going forward.

— Sahil Barua

And my second question is on profitability, right, I understand this is a weak quarter because of integration issues and also your volumes, but how should we look at profitability over next 2 quarters when the integration benefit starts coming and volumes scaleup, so if you can give us some guidance on how margins could scaleup from here?

— Hitesh

Between quarter 4 of last year and Quarter 1 of this year, it is a little difficult to say because of the outside impact that Shopee's exit had on the market overall.

— Sahil Barua

And my second question is, just a bit comment about the impact of Shopee in 1Q, I think you mentioned 22 million parcels and about Rs.

— Vijit Jain

So, our mid mile stability is for example, are our trucks are running at combination of express as well as PTL and so it decline in the PTL volumes that are flowing through the network will have a natural impact on overall transportation EBITDA and therefore if you would do an allocation would also affect express service EBITDA in that period.

— Sahil Barua

So, had our bigger volumes remained at the quarter 4 levels even with the decline in the express yield because of the change in mix, the margins would have remained constant or would have grown with time.

— Sahil Barua

21 crores capacity addition during Quarter 1, the inflation impact of Rs.

— Sahil Barua

In that sense, our business is not very difficult to model.

— Sahil Barua

No, there is no reason to assume that because Q1 actually tends to be fairly not consequential quarter in January, right because there is no sale, no festive reasons; April, May, June is actually quite drag in India in all sense, right because if you have your year end sales that happens in March, your next round of sales start with end of season sale for fashion which is in July followed by Republic Day.

— Sandeep Barasiad

So, we will see what the impact of that will be.

— Sahil Barua

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Q&A — 15 exchanges

I had a couple of questions, the first one was, we are seeing some sequential pressure in global e-commerce volumes, do you see something similar or at least a deceleration happening in the Indian e-com space over the short term and the next 2 to 3 years? That is the first one and number two, there have been some questions around the viability of the social commerce model and the category we have significant dependence on social commerce platform's volume, is this something that the company sort of worried about over the short to medium term? Delhivery Limited August 09, 2022

Sahil Barua

Good questions, let me begin with the first one which is are we seeing a slowdown in e- commerce generally in India, the short answer to that is not yet, if you look at our volumes, they have grown 50% a year between Quarter 1 of last year and Quarter 1 of this year from 100 million shipments to 150 million shipments, even adjusting for share gain that we have had in this period. I think that does represent growth in the market overall. If you remember in our previous earnings call, one of the things that we had pointed out is that while individual players were likely to see turbulence in e-co

My first question is on, due to the fact that you have gained some market share in the e-commerce space, can you talk about how much the industry has grown during this quarter? And my second question is on profitability, right, I understand this is a weak quarter because of integration issues and also your volumes, but how should we look at profitability over next 2 quarters when the integration benefit starts coming and volumes scaleup, so if you can give us some guidance on how margins could scaleup from here?

Sahil Barua

Let me begin with market share and e-commerce, I think again, I will direct you first to the overall growth and volumes from Quarter 1 of last year to Quarter 1 of this year which is from a 100 million shipments that we did last year to 150 million shipment this year, so I think we certainly have gained market share in this period because the industry has not grown by 50% in a year. Between quarter 4 of last year and Quarter 1 of this year, it is a little difficult to say because of the outside impact that Shopee's exit had on the market overall. I think when you include Shopee, it is safe to

Let me start with the question on inflation, the overall inflation of Rs. 17 crores includes inflation due to wage hikes, inflation due to renegotiation of rental contracts and inflation due to fuel. In the part-truck load business, you are right, the hike in fuel is essentially passthrough to customers Delhivery Limited August 09, 2022 entirely and so to that effect, it doesn’t have any impact on profitability directly, so majority of this comes from wage hikes and rent escalation. Given that we run an integrated network, it affects all of our businesses sort of in a conjoint fashion because

Amit Agarwal

So, our Supply Chain Services business did Rs. 236 crores of revenue in Quarter 1 of FY23. Out of this, nearly 40% of revenue was attributable to the warehousing services and remaining was attributable to transportation, but I want to point out that nearly 90-95% of revenue in segment is combined on track of warehousing and transportation, it is not a separate service contract, they are integrated contracts. Sahil pointed out that we intent to add about 1.7 million square feet this fiscal year based on our pipeline. Out of this, we have added about 0.5 million square feet of space in Quarter 1

Just wanted to have your perspective on the competitive scenario that you have faced in the industry, obviously there are express parcel companies which are competing which you know, but there are traditional courier companies also which you said have not pivoted to the e- commerce business. Over a period of time, is it possible that they combined with shipment marketplaces type companies can actually for a combined together can pivot to provide e- commerce parcel services that you do and thus could ride up the ladder and be more competitive with you and is that already happening and your pers

Sahil Barua

Yes, our perspective on this is pretty simple which is that shipment marketplaces have a limited strategic value to the market as a whole. Any player who is the significant shipper is better served by having direct relationships with logistics companies, however, many they choose to have because the shipment volumes are large enough to ensure both appropriate price discovery as well as appropriate service discovery and they don’t really need the services of an intermediary. This has been something that is specific to India by the way. This is something that has been across the world, whether y

Sir, I have two questions on the e-commerce business, one, in the same day delivery offering, is there a significant pricing differential for parcels that exists between that in conventional offering? And the second question is related to the price hike that you took with the aggregators earlier this quarter, I am just wondering to address the aggregators, do you need to do more than that over the next year, does it include ramping up same presence to onboard the long tail or do you need to build or offer channel integrations, just your thoughts on how you are addressing aggregators?

Sahil Barua

On same day delivery pricing, yes, same day delivery is charged at a premium to regular delivery and especially same day delivery originating out of micro-fulfillment centers is charged at a premium to regular delivery. The premium varies depending on the volume and depending on the specific city in which we are operating because costs for this are different across for instance metros versus non-metro cities and we have 15 cities that we are currently operational. To your second question, I will go back to my earlier answer which is that we don’t particularly see anything that we have to do di

Ankit, just on the first question, when you are talking about possible loss of revenue, do you mean permanent loss of revenue or only in the quarter?

Management

For the quarter, if you can go to slide number 3, so if you look at the graph at the bottom right, what you will see is that part-truck load freight revenues have dropped from Rs. 482 crores in Q4 FY22 to Rs. 260 crores in Q1 FY23, so the net impact has been close to about Rs. 223 crores between quarter 4 and Quarter 1. A bulk of this was related to the integration related issues earlier in the quarter and we are seeing volume recovery and we are seeing revenue recovery and expect this to continue through this quarter and forward. The second question, in terms of yield per parcel, the yield pe

Management

Congratulations on integration of SpotOn, sir, my questions have been answered previously, just wanted to clarify on Q-on-Q and Y-o-Y basis, if we remove the SpotOn integration, what would be the EBITDA and margin? And the second question would be what would be the contribution of SpotOn on the overall FY23 revenues and FY24 revenues and margins?

Sahil Barua

So broadly to your question, if you remove the integration impact on this slide, the costs that disappear are the Rs. 150 crores cost which is underutilization of existing capacity. Obviously, the Rs. 46 crores which are the one-time integration costs and a portion of the revenue led reduction in service EBITDA which we expect will be likely in the range of about Rs. 20 to Rs. 25 crores, so 150 plus 46 is 196 plus about 25, so essentially we would have been at an adjusted EBITDA breakeven had we shown 0 growth between quarter 4 and Quarter 1, so if our Quarter 1 volumes in TPL had remained exa

My question was more on the breakdown of the margins between the different segments, I know you don’t provide an exact number, but given that a lot of the extra cost have been related to the part-truck load business, I wanted to understand if the margin trend in the other businesses is improving over time as your business is getting bigger and bigger?

Sahil Barua

Shashank, broadly the answer is yes, as you can see and as I pointed out earlier, we run an integrated network where the substantially the biggest cost that I have shared between the two networks are the mid mile costs which are the trucking terminals and the hub and outside of that line haul or the trucking network itself, we don’t break that down between express and part-truck load and so obviously when there is a decline in the part-truck load volumes, we decided to continue running the trucking network with the same capacities to ensure fast service recovery and to ensure express was not a

Couple of questions from my side, first, I know that you have quantified the Shopee impact, but generally speaking over the last 2 or 3 years, what is the typical trend of shipment volumes from quarter 4 to Quarter 1, so like you mentioned it is just for the Shopee volumes could have been the similar number of 150 million shipments, but historically, how does this trend move from quarter 4 to Quarter 1? That is question number one.

Sahil Barua

Broadly flat, Alok in line with the schemes where the 150 million odd that we did excluding Shopee for quarter 4 has remained flat and Quarter 1, what is different this time I should point out though is that the industry has de-grown between quarter 4 and Quarter 1 because of the Shopee impact. And even historically would these flat volumes be more because of Delhivery getting more market share because from an industry perspective, I would think that Q1 would be lower than Q4, is that a fair assumption? No, there is no reason to assume that because Q1 actually tends to be fairly not consequent

Sir, I had just one question, just referring to the bridge that you all have given and for the PTL segment what revenues we have seen almost about Rs. 223 crores decline on a sequential basis, corresponding impact of that of almost Rs. 150 crores except provision it include Rs. 140 crores of provision, it is almost about Rs. 190 crores is that a high number because just for a corresponding revenue decline Rs. 223 crores sequentially, seeing an EBITDA impact of almost about Rs. 150 crores expect provision and with provision 190, is that a high number or is there something else that we have to l

Sahil Barua

I think the way you have to look at our business and we had pointed this out last time as well is that we are an extremely high incremental margin business and therefore when volumes drop sharply, it is not unusual to actually see that the drop in the PTL revenues is causing that extent of capacity underutilization. The other thing to point out is that the capacity underutilization cost that you are seeing Rs. 150 crores also as I had pointed out include certain facilities that are redundant and some contracts on the SpotOn side which will sunset through this year. So, to some extent, that Rs.

Sahil, just go back to that bridge between Rs. 21 crores and negative Rs. 217 crores just to sort of check my understanding, so the negative Rs. 150 crores of underutilization of the existing capacity essentially has four components, right, so you have capacity creation in such a future demand in the typical of Q1 looking into Q2, Q3, Q4, so that would be probably recurring every Q1; second is your redundant capacities of SpotOn, what you will sort of gradually taper down Delhivery Limited August 09, 2022 inclusive of employees, I guess, I think employees also I can see a flow in trend, third

Sahil Barua

That is correct. The incremental capacity additions that you are referred to as the first of the four is the Rs. 21 crores that we have pointed out here, that is the typical sort of normal capacity addition that will happen in Quarter 1, so underutilization of existing capacity which is the Rs. 150 crores is as you had pointed out the excess capacity that was created for two reasons, one is continuing to have redundant infrastructure between Delhivery and SpotOn and the second is that as volumes dropped sharply, we decided to continue to keep that capacity to stabilize service levels faster an

Let me answer the first question and then Sahil may come back with the further detailed portion. On express parcel, we are the largest player in the market, we have been the largest market share and we have been gaining share in the market, I think it is hard to say about the logical end point of market share is for us because while customers need a redundant partner, it is not clear whether there is any three partners and four partners and whether at some point we thought customers will have 20% shares or 25% shares each partner, but we are breaking that and we have customers who actually giv

Sahil Barua

Yes it is a good question on utilizing the PTL infrastructure capacity, I think I would just point out one thing which is there is not the PTL infrastructure capacity, it is the combined capacity that we have created in mid mile operations which is the hubs as well as the trucking network and the way to think about how we will grow the Economy PTL business is the way we think about it is that it is not I will repeat, double bold and underline that it is not a standalone capability that we intent to build, so the objective is not to go out and compete with the traditional Economy PTL players wh

Sir, my first question is, if you just take a step back and look at on the PTL side in Q1 FY22 we did 2,79,000 tons that number after SpotOn is now 2,39,000 tons, so while I understand there is an integration issue, but how come the volumes are even below what we used to do pre-SpotOn, sir if you could just help understand that better because and without SpotOn we could have done similar number if not more, that would be my first question?

Sahil Barua

Just to be clear that 2,79,000 tons for FY22 will be proforma, so that will also include SpotOn, the Delhivery standalone volumes are now 279,000 tons, so in that sense when you compare the Delhivery job business to Q1 FY23, the business has grown in the same period. The reason for the decline is essentially us cutting out volumes in specific locations, the few highest volume locations from which we cut out volumes for where we have the largest automated gateways to allow the network to stabilize which were out of our gateway in Tauru and out of our gateway in Bhiwandi and therefore also cutti

May be I can just chip in one question here, on the PTL volumes, where are we now versus the normalized volumes, by when we expect to get back to the 4Q levels and the related question is Delhivery Limited August 09, 2022 that for fiscal 23, would PTL volume would remain constant or it has still potential to grow because we have lost out some time now?

Sahil Barua

I think Gaurav, it is still early to say, we have as I mentioned since progress levels have been completely stable since the end of Q1 FY23 and the operational issues at Tauru and Bhiwandi have been sort of conclusively resolved, so that remains stable into quarter 2 so far. We don’t anticipate any disruption coming from this. The reason I am not yet going to provide a forecast on what our volumes will be for the year or what our recovery will be is that one of the hypothesis we had is that as the Delhivery and SpotOn network combined and as we discovered efficiency by combining the two networ

Speaking time

Sahil Barua

Moderator

Abhishek

Amit Agarwal

Gaurav Rateria

Shashank Savla

Alok Deshpande

Abhijit Mitra

Lokesh Garg

Sandeep Barasia

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Opening remarks

Gaurav Rateria

Thank you Neerav. Hello, everyone. This is Gaurav Retaria from Morgan Stanley. Thank you all for joining us for Delhivery's Earnings Call to discuss Fiscal 23 First Quarter Results. To discuss the results, I am pleased to welcome, Mr. Sahil Barua – the MD & CEO; Mr. Sandeep Barasia – ED & Chief Business Officer; Mr. Amit Agarwal - CFO and Mr. Varun Bakshi - the Head of Investor Relations. I thank the management team for providing us the opportunity to host this call. I now invite Mr. Sahil Barua to take us through key financial highlights for the quarter post which we will open the floor for Q&A. With that, over to you, Sahil.

Sahil Barua

Thank you, Gaurav and thank you all for joining. A very good evening to you and welcome to our Second Earnings Call. So, the agenda for this call is to walk through our earnings presentation in about 20 minutes and then we will open up to questions. For those of you who are joining for the first time, a brief background on Delhivery. The objective behind Delhivery is to build the operating system for commerce in India which means we essentially provide the infrastructure, the services and the technology that allow buyers and sellers to transact with each other in the real world. These buyers and sellers maybe businesses transacting with businesses, businesses transacting with consumers or consumers transacting with consumers, both within the borders of India or from India to abroad or abroad to India. A quick snapshot of our performance in Q1 FY23: We continue to be India's largest integrated logistics platform. In Q1 FY23, we registered Rs. 1,746 crores of revenue from services which

A quick snapshot of our key operating metrics

For Q1 FY23, which is the column on the extreme right, between the end of FY22, since our last Earnings Call and the end of Q1 FY23, we have expanded our pin code reach from 18,074 pin codes to 18,435 pin codes. Our overall customer base has expanded from 23,600 customers to over 29,000 customers as of the end of Q1 FY23. As discussed earlier, we have expanded our overall logistics infrastructure from 18.15 million square feet to 18.9 million square feet as of the end of Q1 FY23. We continue to have the largest number of gateways, automated sort centers and processing centers among logistics companies in India. We operate 96 gateways across the country, 21 automated sortation centers, 189 processing centers, nearly 3,000 express delivery centers, about 240 freight services centers and we have an overall team size of close to about 60,000 people across the country. Moving to the next slide, key milestone for Q1 FY23: The first is one that we had referred to in our communication with sha

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