Last quarter you said you were aiming to retain 30% of Ecom Express volumes. Do you have a sense of what has actually been retained? Also, has the self-sourcing strategy among horizontal players peaked? What is the category mix on your network? What will be recurring costs from Ecom Express from Q2 onwards?
Our assessment was based on a 30% volume retention. We have retained significantly more than the 30% planned originally - broadly somewhere in the 55% to 65% retained volume already and this continues to rise month on month. Partly because other players faced a tough quarter from profitability constraints and operational disruptions including rain, so we have seen a flight towards quality. We have gained share across all client types including marketplaces. Softline is probably about half our volumes, FMCG and BPC categories are maybe about a quarter. Integration costs envelope was about Rs. 300 crores - those will largely be people-related costs persisting through Q2 and Q3, and winding down leases. No further recurring costs beyond integration - as volumes go up, it's as if we were expanding the Delhivery network itself.
What are the changes we'd expect with Ecom consolidation in key KPIs? What is your market share within 3PL? On PTL - is there a broader theme of value over volume this quarter, and can margins expand toward 16-18% as volumes expand?
With Ecom Express acquisition, express delivery centres will go from 4,500 to probably 4,750-4,800 by year end. No major change to gateway infrastructure - the network has absorbed Ecom volumes fairly seamlessly. Pin code reach may expand to about 19,200 from 18,857. Market share has probably expanded by about 25% or so with Ecom acquisition. Market share should continue to consolidate towards more disciplined players. On PTL, it's not value over volume - Q4 is the peak quarter and Q1 is seasonally lower, with additional disruptions from rain and Operation Sindoor. Regarding margins, we've guided 16-18% not because that's the theoretical limit - we've operated above 18% in peak months - but as a conscious call to share efficiency with clients. Technically, margins as volumes expand could expand beyond 18% range as well.
On Rs. 14 crore investment in new businesses - how much could losses go up to and how do we see them turning profitable?
These businesses are very small. The on-demand intracity logistics market is estimated at about 10 billion dollars. Our entry into this market is approximately 100 days old. Ahmedabad is the first city we launched Delhivery Direct and we are at contribution margin break even in about four months. Delhi and Bengaluru are four times the size of Ahmedabad so some things are still to be discovered. Investment levels will vary - it's the first quarter.
How are you thinking of investing time and resources into newer ventures - acquisitions, air cargo? And does PTL margin guidance account for material yield changes?
New services being evaluated include Rapid Commerce - which we've launched as B2C but the B2B market is actually very large. We'll expand Cross Border Express Parcel business with an economy product beyond the current express product through FedEx and Aramex. We also continue to evaluate air freight and may make a more decisive move there. On PTL yields - customer mix is still less indexed to retail customers who are higher yielding. As we increase that share, profitability and yields will continue to go up. Teams set up geographically to tap this. Market is also less price sensitive than perceived.
Has there been any material change in insourcing strategy from Meesho? Has there been any stabilisation in their insourcing mix? And what about Amazon Transport Services and E-Kart?
Meesho's insourcing strategy is consistent with what they have said in the past. It is at a level they seem comfortable with. The important thing is that of the significant percentage they outsource, a larger percentage of that is now accruing to Delhivery. Volumes with all marketplaces have increased in Q1 and so far in Q2. It doesn't represent a fundamental shift in how they think about in-house logistics - that will take more time to materialise. The shift in their thinking appears to be that instead of merely trying to go to the lowest cost provider, they are going to a highly efficient provider with the highest quality.
Historically, incremental margin should be between 35-40%. Now that majority of Ecom Express revenue will flow through Delhivery network, should we think about incremental margins being materially better than 35-40%?
The incremental margins spoken about in the past are based on a target service EBITDA margin of 16% to 18%. As volumes go up, we will evaluate client by client for share of wallet gain, and there is a possibility that service EBITDA may expand beyond as well. In the absence of further adverse pricing, the network's utilisation will continue to go up. By end of year, we'll be at maybe 4,850-4,900 Delhivery centres - an expansion of maybe 6%. If volumes go up 30%-40% in this period, that obviously is going to present a massive increase in utilisation. Even if there are no linehaul benefits, the incremental margins could be higher as well.
Express Parcel volumes have increased this quarter, but we did see the yield coming down. Is there a way to look at it that the incremental shipments which have come, have come largely at a lower yield? After Ecom Express consolidation, what impact should we see on volumes? Have all volumes moved in Q1 or are there incremental volumes to be moved in Q2? What could be the impact on yields and margins from current levels? Also, Quick Commerce has created a material opportunity for PTL division - can you quantify the upside?
Yield is a function of volume mix, which is a function of clients and the weights of packages and distances that they travel. There is a double digit decline in the average weight per parcel due to growth in the small parcel business. So yield has shrunk organically - nothing to do with pricing. Pricing remains consistent and irrational pricing-led compression of yield is a materially lower risk going forward. In Q1, there was a very minimal impact of volume transition from Ecom Express to Delhivery - mostly only towards the end of Q1 in the last parts of June. The real impact is in July and our view is that's a more representative level going forward. We anticipate that margins will actually expand as volumes go up and we'll easily be in the 16 to 18% range. On Quick Commerce impact on PTL - brands shipping to mother warehouses and dark stores of Quick Commerce companies creates a large B2B opportunity. This is a complex delivery requiring appointment coordination, on time delivery, electronic proof of delivery, and PO reconciliation - a service Delhivery already provides in similar contexts.
Since the acquisition of Ecom Express, are you seeing any change in terms of competitive intensity? There was poor pricing discipline amongst multiple 3PLs. Has anything changed?
The irrational pricing did exist. We've seen a reduction in the intensity of price competition. With the acquisition of Ecom Express, all contracts negotiated with clients are at Delhivery pricing. The irrational pricing has been cleaned out of the erstwhile Ecom Express network. But other 3PLs have also signed contracts below cost. Logistics costs inflate very predictably - wages 7% to 8% a year, rentals 5% to 8% a year, fleet costs at a fairly predictable rate. Balance sheet constraints will force independent 3PLs to be disciplined about pricing.
On supply chain services - what is giving you confidence that the business will see a sustained growth trajectory towards Rs. 1,800-2,000 crore in three years? And why was volume retention from Ecom Express higher than expected?
On volume retention being higher than expected - we took a conservative view when evaluating the deal. We've been pleasantly surprised. The reality is the operating environment became tougher and e-commerce principals realised that third-party logistics firms who price below cost cannot survive. There's a flight to quality. On Supply Chain services - we went through a process of fundamentally renegotiating contracts, getting out of unprofitable sectors including Quick Commerce fulfillment, and pricing contracts correctly. The pipeline is healthier than ever - close to Rs. 300 crores of supply chain mandates in various stages of conversion, and more than Rs. 1,000 crores in the broader pipeline. Over a three-year period we can convert Rs. 600-700 crores of that. Fairly confident we'll get to Rs. 1,800-2,000 crores in SCS.
Is there a broad tonnage target for PTL to achieve the 16-18% margin guidance?
Roughly at close to about 600,000 to 640,000 tonnes of quarterly load which translates to about 200,000 to 215,000 tonnes of monthly load - versus the current 150,000 tonnes monthly. Three things will kick in: fixed cost utilisation will go up, trucking utilisation will improve on reverse lanes, and pricing discipline with churning of low margin customers. These three things should comfortably give a 7 percent uptick on margin.
How much Ecom benefit has already come in Q1 financials? Are incremental Ecom volumes coming at Delhivery rates with pricing gains? What drives confidence in 20% PTL annual tonnage growth? Are FTL value-added services material TAM or margin opportunities?
The impact on Q1 is not that high - only towards the end of June. July has been significantly higher and we expect that to continue. The real impact will be visible in Q2. The network has the unique property that more volume makes it more stable. On pricing, most relationships are based on pricing volume charts - broadly very stable with Ecom acquisition. On PTL 20% confidence - growth is not going to be linear, there will be quarters with slightly lesser or more growth. Q1 was slightly impacted by IndAS adjustments; adjusted for that, 17% would be slightly higher. Operation Sindoor and rains had material impact too. July numbers in Q2 are good so fairly confident. On FTL VAS - fuel procurement support and on-road assistance services are theoretically large TAMs but Delhivery's ambition is specifically to bring down trucking procurement costs, be efficient for Supply Chain services division, and be a capital light mechanism for clients to discover spot trucking.
How is network utilisation? Why would margins be between 16-18% rather than more? And other income has gone up to Rs. 1.3 billion - is it sustainable?
Utilisation differs at various points. For 1% increase in delivery centres, we had 14% increase in volumes - so distribution centre utilisation went up mathematically 14%. Sortation centre utilisation also went up 14% as their count hasn't changed. Trucking utilisation broadly in 60-65% range. On margins, we've guided 16-18% as a conscious call to share efficiency with clients. Technically margins as volumes expand could expand beyond 18% range as well. As PTL business gets to 200,000-250,000 tonnes monthly, Express Parcel margins have scope to expand further. On other income - increase is primarily due to mark to market securities due to interest rates going down in Q1. We expect this to normalise in subsequent quarters. Also, we paid Rs. 1,400 crores to acquire Ecom Express on 18th of July, so no further interest income will accrue on it.
What volumes did Ecom Express do in Q1? With 50-55% retention, wallet shares with marketplaces would have gone higher - is this temporary until marketplaces redistribute these volumes?
In Q1, Ecom Express would have done something like 30 million packages. On volume stickiness - there's no marketplace or direct-to-consumer brand or SME who's going to say they don't care whether the package gets delivered as long as they get a discount on shipping. This is a movement of volume towards higher quality players. As marketplaces get larger, they will look for a reliable partner. Unless we commit operational harakiri, there is any reason for our volumes to not be sticky.
What structural factors are driving the flight to quality beyond transitory factors? Is PTL essential for high-quality service delivery, and will competitors attack the PTL market aggressively?
Structural factors are more visible at marketplaces than direct-to-consumer or SME. Meesho has started doing logistics on their own and discovered logistics is hard to do. There is greater appreciation for what it means to create quality in a transportation network. As volatility in marketplace volumes increases, they find other networks don't have the ability to take that on. On PTL - it helps to have PTL for volatile volumes but high quality service is delivered by 14 years of investments in automation, software, teams, training - not just running a PTL network. Can other players attack PTL? Integrating PTL with a parcel network is very hard. One competitor has been trying for a couple of years with hardly any success. Investments in software, automation, technology required are highly non-trivial.
Out of 208 million volumes, what volume came from Ecom Express with customer shifting? And will Ecom Express have eventually zero revenue as a subsidiary?
The full impact will become a lot clearer in Q2. Our original assumption was that 30% of the volumes would accrue to Delhivery and we are already beyond that and it continues to grow. Ecom Express and Delhivery don't count shipments the same way - Delhivery counts forward and return consignments and RTO effectively as the same as a forward consignment, whereas Ecom Express counted them as two separate consignments. So the 500 million number was inflated to the extent of the RTO rate. Ecom Express as of Q2 itself will have more or less zero revenue as a subsidiary.
What are the asset turns and margins we should expect 2-3 years out? Is this fundamentally a 12-14% return on capital business? Is incremental Ecom volume directly margin-accretive?
Currently doing asset turns of about 2x net of cash basis with close to Rs. 4,500 crore deployed. Target is to get to roughly about 3x of asset turns for Express Parcel and PTL business which form close to 85% of revenues. Service EBITDA margin in range of 16-18%, corporate overheads guided towards 6-6.5%, bringing adjusted EBITDA to about 11%. Aspirational return on capital for Express Parcel and PTL business is well above 24%. With Ecom Express acquisition, front-loaded Capex by roughly Rs. 300 crores which will be warehoused and used as long-term capacities need to be built. On incremental volume being margin-accretive - no overheads required to service additional volume because it is coming from the same customers. Infrastructure is fine to absorb volume increases. Revenue less variable costs will flow through the margin.