On Delhivery not having to share cost benefits with customers - as the annual price resets happen in the month of Jan, Feb, March, next calendar year, could we expect that kind of benefit to start flowing through into our margins? Also on self-logistics part - Valmo has become 60% of Meesho's pie. Any benchmarking of cost structures? Is there a thought process emerging that it may be best for certain clients to focus on the mid-mile part?
Probably, Aditya. It's too early because right now we don't know what the shape of those negotiations will be exactly. Some of the negotiations that are ongoing with some of our bigger customers also involve a shift of heavier volumes into the Delhivery network. Heavy volumes have grown, and this year, the growth again has been pretty sharp. People are reevaluating doing this through their existing self-logistics networks. Broadly, given the absence of irrational pricing from other competitors in this market, at the bare minimum, it's unlikely that we will see very significant reductions in pricing. If at all, they will only be in response to extremely high gains in share of wallet with these customers, which still will be margin accretive for us. On self-logistics - we have done the benchmarking of our first mile, mid-mile, and last mile costs broken up, and then bundled versus the cost of the stitched network. We are more efficient both at an unbundled level as well as at a bundled level compared to the pricing that we have seen in the market. The growth of Valmo has come with a consequent increase in return rates. Logistics costs as a percentage of revenue have not reduced for Meesho. For an equivalent profile of goods, the costs of delivering via the Valmo network are not lower than delivering through Delhivery. In fact, they are higher than Delhivery, and when you adjust for loss and damages, our sense is that actually Delhivery is significantly more efficient. The stability of the network has been tested during the peak period. Our service levels have held up. We do believe that we have material cost advantages. Overall, what you will see is a consolidation towards Valmo plus a high-quality player like Delhivery, and partitioning of the total Meesho volume between these two.
On express parcel - what would Ecom Express volumes be in the base quarter, 2QFY25 last year? And trying to figure out the organic growth in this quarter - at 55-60 odd million parcels Ecom has done at 50% retention rate, the organic growth is only 4-5%. Is that math right?
I don't have the data offhand immediately, but broadly, Ecom Express must have been doing about 85 to 90 million orders a quarter in steady state. You have to correct for the fact that there's a reporting difference between Delhivery and Ecom Express in terms of the RTO rates. So, you have to adjust the volumes by about 14% or 16% or thereabouts. The forward volumes how Delhivery recognizes it would have been about 90 million orders for the quarter. Q2FY25 may have been a peak quarter, so it may have been slightly higher. On organic growth - if you look at our direct-to-consumer and SME volumes, they have grown 40% YoY. With the marketplaces, the growth rates are significantly different. Our volumes of the marketplaces have also grown pretty significantly. Our organic growth rate, it's very difficult to comment exactly what it would have been. It would have been north of 15% for sure. And that would mean that our overall volume retention from Ecom Express would have been north of 45-50%. We did 185 million odd consignments or 180 million on which if you add about 15%, you get to about 207. We've added close to about 36 million consignments after that on a base of about 85-90, which will be about 40%.
On express parcel margins - last quarter, before the acquisition of Ecom Express, your margins were 16%. Your shareholder letter does indicate that service EBITDA margins are expected to be in the range of 16 to 18% by the end of 2026. How should we think about it? Are there no benefits from the potential acquisition of Ecom Express? Also, the Rs. 300 crore envelope on integration costs - will it be more back-end loaded or spread? And on supply chain margin - what structural change caused margins to move from 7.2% to 12.8%?
In terms of margins, normative margins 16% to 18% in the express business, we've maintained this for a while, which has always been based on the idea that beyond 18%, if the company feels it is necessary, and basis our client conversations, we typically tend to pass a certain amount of pricing benefits back. As the competitive intensity in this sector has reduced, and as inflation has caught up with other players, the necessity for us to pass on these benefits has reduced year on year. With the acquisition of Ecom Express, the need for us to pass this on is obviously lower than before. So, there's no structural reason why margins cap out at the 18% mark. Incremental margins are significantly higher than 18% as we start gaining volume scale. Realistically, yes, in the express business over time, if we don't fully pass these benefits on, margins can inch up beyond the 18% range as well. Why you're not seeing the uptick in Q2 is because a reasonable portion of the volume has actually shifted into October - the announcement on the change in GST rates pushed out volumes by about seven days, which incurred an additional cost of approximately Rs. 7 crores. On integration costs, Rs. 90 crores have already been incurred. We will have approximately Rs. 100 to Rs. 110 crores of integration costs over the next two quarters. We believe that the total integration costs will be materially lower than the Rs. 300 crores originally forecasted. On SCS, the change indeed is structural - significant improvements in operational processes, warehouse management systems, technology and product advantages, and launch of transport management systems with tighter integration with express, PTL and FTL transportation.
On GST cuts - are we seeing any increase in demand or pent-up demand, where consumers are buying a bit more due to these GST cuts, particularly on the e-commerce side?
There has been some positive impact of the GST cut on the consumer side. We're seeing it not just in e-commerce alone, but we are even seeing this in certain parts of our freight business. Overall, there has been some uptick in overall volumes. But it is a festive period in general so there's sort of high volumes in the September-October period anyway. Some of these were because when the GST rates were changed, people consciously postponed consumption for a period of time. So, that middle 10 days in September, there was a dip in consumption. In some categories, we saw very strong growth during the festive period - consumer durables grew very fast. So, there has been an overall net uptick. We see this even in our part truck business to some extent.
On express parcel - beyond this year of integration and market share gain, how should one think about the normalized growth in this industry? Is this going to be 10%, 15%? And on PTL, we were very confident about hitting 20% on volume growth. The first half is around 15%. Do you still expect it to be around 20% in the second half?
On market growth and express growth - this year, there is the outsized impact of the Ecom Express acquisition. Our anticipation is that the market grows at sort of 15% to 18%, 20% kind of growth rates. Earlier, our point was that Delhivery would grow at the bare minimum in line with market growth. With the growth in express and PTL business, our cost structure has improved, and our ability to drive efficiency and differentially gain share of wallet has improved. With the acquisition of Ecom Express, pricing below cost is not a viable logistics strategy - so other competitors have become more disciplined. Also, weaker balance sheets for some competitors affect their ability to invest in capacity building. Players with largely variable cost models have no operating leverage. There's already one fewer player than there was last year. So market growth 15% to 20%, Delhivery's competitive positioning stronger than last year, we should be able to grow beyond market growth. On PTL, 15% is where we are for H1. There's a significant impact of GST. We have seen a reasonably strong October. The January-February-March quarter is usually the high watermark for PTL. We'll probably get to a 20% growth rate overall. Our yields are up 3% quarter on quarter, and we've gained nearly 1 rupee in yield over the last year. The focus is to get to 16% to 18% Service EBITDA margins. So, no structural change from a PTL growth standpoint.
On peak volume metric on a daily basis - looking at express parcel volumes up over 30%, the daily run rate is 2.6 million parcels. So could you help square that in terms of how I should think about what you report as a peak volume versus what you report on a quarterly basis? Does this imply a lot of slack in your existing system?
No, not really, Aditya. For two reasons - there's a big gap between Mondays and Sundays. You deliver a lot more consignments on Monday than you do by the time you're getting down to a Sunday. So, the average of approximately 91 million or 100 million, divided by 30 days, is not exactly correct. Because Saturdays and Sundays will be very low, Mondays will be very high. Also, more sellers will ship out in a fashion that goods are reaching zone D, zone E, zone C kind of locations on Saturdays and Sundays. So the available volumes for dispatch on Mondays are significantly higher. It's not a question of slack, it's the ability of the network to capacitate correctly for different dispatches across different days. Without a significant increase in our costs, we are actually able to deliver 7.2 million shipments on a Monday and call it 1.2 million shipments on a Sunday. Because if we had as much slack as the average would suggest, the reality is that the express business would be nowhere near at 16% kind of margins overall.
From a market perspective on express parcel - if you had to frame what the market looks like today and your market share, could you help us with what your current understanding is?
Market share, very hard to put exact numbers to it. If you look outside of, in terms of the overall market, including all of the marketplaces and excluding groceries, I think prior to the Ecom Express acquisition, we were close to about 20%. Post the Ecom Express acquisition, we're probably closer to somewhere between 27% and 30% or so. In terms of whatever is not outsourced, if I exclude Amazon self-logistics and Flipkart self-logistics, and depending on how you take Valmo - if you exclude Valmo, our market share will be well over half of the market.
On the PTL business - you saw better volumes year-over-year and sequentially. You saw better yield, but the margin was down. Why was that the case?
Two reasons. One is that Rs. 6-7 crores additional cost that we had to take during the month of September, because volumes got pushed out. We built capacity a little earlier. The second thing is by virtue of being an integrated network, when you're building up capacity for Express and Heavies, a certain amount of that cost gets allocated to the PTL business as well. But structurally, there's no change to the PTL margins. So, these will just rebound once all of this washes out.
How should we read the Rs. 13 crore incremental revenue from Ecom Express? You have obviously stopped manifesting volume there. How are you coming up with this number?
It's just that Rs. 13 crore is just standalone revenue for some contracts, which need to be exited. So Ecom was in certain businesses that Delhivery doesn't want to service. That will also just wash out and go to zero. This is not express parcel revenue. This Rs. 13 crore is another contract that they had. There's a lock-in in that contract. We're servicing it, and it'll wash out.
On margins - you mentioned the 15.3% service EBITDA in Express will be more or less normalized as we proceed to October. But the press release indicates only 3 million extra shipments in October versus September. How sharp a jump can the 3 million drive through?
It's very significant. We do have our October provisional financials, but they're not public. What I can tell you is that September plus October, when looked at together, we are well within the margin range that we would have forecasted internally. The reason why September is slightly lower is that October volumes are similar to September volumes. The point is two things. One is that a lot of the costs in September are in the early part of the month, and the 101 million and 107 million that we picked up in September and October, respectively, are pickup volumes. A lot of the delivery has happened in the first week of October as well. So the closures in October will be higher. By the time we're entering the tail end of October, some of the additional capacities that were built into September are also going to start tailing off. So, the October margins will be better than the September margins. Net-net, when you look at September-October, the margins will be higher than 15.3%.
On the jump up in employee expenses - is that going to stay, or will it normalize? Also, on facilities where you have to continue paying rent because there is a lock-in, by when will that get sorted? And is it reasonable to think of material improvement in adjusted EBITDA margin in H2 vis-a-vis H1?
The jump in employee expenses is directly linked to the growth in volumes during the peak period. We did nearly some 35 million more consignments in the express business and 20,000 more tons of freight. So, we have more delivery riders. We also opened a few more centers across the country. October volumes have remained very strong. Manpower levels, staffing levels are modulated to whatever the overall volume that we expect to have. At a unit economics level, there's actually an improvement. On the Rs. 40 crore P&L difference between 426 and 386 - that corresponds to the integration cost. That cost will go down. It's not a permanent cost. Different facilities will exit at different points in time. There are about three facilities which have a longer lock-in, which will continue beyond FY26 as well. The rest of the facilities should largely exit by the end of this financial year. The Rs. 110 crores of additional impact already factors all of these points - cost of facilities, people, discontinuing businesses, overheads. On H2 vs H1 improvement - all the fixed capacity additions in the network do happen during the first part of the year and then they get sweated better during the second half. The volume momentum so far in October has continued to remain strong, and the fourth quarter is a peak quarter for PTL. The combination should ideally lead to better sweating of the fixed assets, and it should lead to improvement in margins. On parcel yield - it's entirely a function of parcel mix. Any movement in yields for the coming quarters will be a function of parcel mix.
On the Rs. 20 crore line item in other services' EBITDA - what does it pertain to and how sustainable it is? Also, clarification on the Rs. 90 crore integration cost breakup - is Rs. 48 crores part of employee cost and Rs. 42 crores part of other expenses? And on corporate overhead jumping from Rs. 209 to Rs. 235 crores quarter on quarter - is that a new normal? Any update on new business investments?
Of the Rs. 90 crores overall Ecom integration cost, about Rs. 31 crores come from exiting facilities, exiting offices, dismantling of infrastructure. About Rs. 17 crores are also from facilities, but in the exit of fulfillment center businesses Ecom Express was running. About Rs. 21 crores are essentially the separation of employees, and the remaining is shut down like AWS costs. The additional Rs. 40 crores will wash out over the next two quarters - factored into the Rs. 100 crore integration costs over the next two quarters. The Rs. 20 crore is related to our cross-border business - a commercial arrangement between us and FedEx. There is a change to the commercial structure of our arrangement with FedEx. Our five-year contract is due for renegotiation in the early part of next year. There are certain zones that Delhivery intends to service non-exclusively with FedEx going forward. We also intend to launch our own product for economy cross-border shipping. This is a one-time charge, this Rs. 20 crore charge. On corporate overhead increase of Rs. 26 crores - Rs. 2 crores are due to higher gratuity provisioning. About Rs. 2 crores are due to provisioning for end-of-year bonuses. About Rs. 15 crores is an increase due to tech costs - AWS and GCP. AWS costs are because we provision servers in advance of the peak season. Some of this is related to AI initiatives. AWS cost levels will certainly come down as we decommission excess capacity. Overall, from a wage standpoint, the overall increment in wages through this period is only close to about Rs. 4.5 crores. On new businesses - Rapid Commerce is currently live with about 20 dark stores in three cities - Bangalore, Hyderabad, and Chennai. We have just launched our first dark store in Delhi NCR. Will launch Mumbai by quarter four - so five cities total. This is an Rs. 80 to 100 crore kind of niche capability. On Delhivery Direct - currently live in three cities - Ahmedabad, Delhi NCR, and Bangalore. We will be expanding to another five cities by year-end. Currently at a run rate of about Rs. 25-30 crores annually. This is easily a Rs. 1,000-1,500 crore business in the next couple of years.
On the announcement about the incorporation of a subsidiary in India related to Delhivery Financial Services Private Limited - how are we thinking about this subsidiary over the next few years? Is it going to be something big competing against one of the leading listed players in this particular space?
Our desire is for this to be large. There are three distinct pieces that we intend to power through this. First, we already have a large network of truckers who work with us as part of our express network, our PTL network in Line haul, our supply chain services business, and our FTL network. The objective will be to provide services to these truckers via the financial services arm - things like Fastag and Fuel. Second, we have a large number of partners who work with us and wish to grow their fleets with Delhivery. We will look for partners who can enable our partners to expand their fleet through lending for commercial vehicles - both small commercial vehicles for intracity distribution and short haul vehicles, but also long-haul vehicles as part of Delhivery's FTL and SCS network. Third, we already offer to our customers a form of assurance or protection against loss and damage, delays and so on within the Delhivery network. The business plan is being put together by Mukul Sachan, who joined us recently. Mukul was the CEO of LendingKart. We'll have more details to share in quarter four and towards the end of the financial year.
On PTL side - while underlying industry growth has been about 10 to 12 percent, we have been consistently outperforming the industry and become the second largest player. At what stage do you believe our growth will be similar to the underlying sector? Do you see logical consolidation in this sector over the next few years? Also, two other subsidiaries that have come up in the UK and UAE - is it related to the FedEx point?
Varun Bakshi: On PTL, we have extremely low market share at this point in time versus the organized market as a whole. And then there is a big unorganized market where there is a lot of share with the local players, which is basically getting more and more formalized with every passing month. So that stage is far. Our presence versus competitors relatively is geographically constrained still, although we have worked on that a lot. As we go to deeper parts of the country, we generate more loads. On consolidation - we do get to see various assets at various points in time. But to be very honest, we are yet to see something which we think will really benefit us in the longer run. Sahil Barua: On consolidation, choosing what to buy in this space is very important. There is one which is currently sort of being looked at by various players. We are not part of that. As an example, it's easy to build, let's call it a Rs. 300-400 crore PTL business, which is doing volumetric cargo and losing money. Delhivery is not particularly interested in buying those kinds of assets. There's no price at which that asset makes sense for us. Buying a forward moving PTL network with volumetric assets is the easy part. Making money is very hard. More likely over a period of time, these other players who are not investing in building capacity will remain flat. On UK and UAE - these will be outposts for Delhivery in both of these markets. With the UK, India FTA, this is an interesting market from a cross-border express standpoint. We're very excited about the economy product that we're going to launch now. We were not able to launch this while we had an exclusive partnership with FedEx, but now we can. The one in Dubai is because we intend to use multiple carriers for our mid-mile. We use Air India today. We also intend to use Emirates. The advantage is that we have the ability to consolidate and deconsolidate cargo in Dubai.
On the financial arm which is incorporated - is it going to be something very similar to what BlackBuck does, where you become an aggregator? Or are you also going to have some skin in that game, take some lending on your books?
Too early to say. BlackBuck has built a great business when it comes to doing fast tag and fuel. That is something that we intend to provide as a value-added service to trucking partners in the Delhivery freight exchange and within the Delhivery network. Commercial vehicle lending - they also have a pretty small book at this stage. Our approach is actually more geared towards small and mid-sized commercial vehicle lending, because that is where we feel that our ability to underwrite demand is significantly better. These vehicles, vendors plying with us give us a very significant competitive advantage, both in terms of capacity and in terms of cost. The intention will be to bring in partners who are interested in funding fleet owners. It's still early, too early to comment on exact details, but our approach will be somewhat dissimilar from BlackBuck overall. More likely than not, we will not take the risk of financial risk on our books - we'll just be an arranger collecting service fees.
On the 16 to 18% service EBITDA margin for the PTL business in the next 24 months - is that predicated on the 20% growth assumption? Or, even if the growth is slightly lower, do you believe that you'll be able to hit that number?
We will be able to hit those numbers even if the growth is slightly lower. We have a number of other margin improvement measures that are underway in any case. We've been consistently improving yield in this business as well. So, we expect that those yield improvements will continue. Overall, the second is capacity utilization across the network is anyway going up. And the third is that a lot of our BD is also focused on improving the directionality, which is another way of saying increasing utilization of the overall network. So, irrespective, we are not predicating reaching the 16 to 18% margins in the PTL business only on the 20% growth.