Shrinking business in the B2B segment, increasing competition and slowing business from the e-commerce segment has been impacting the performance of Blue Dart Express (BDE) since few quarters. We see this as a result of structural change in both the B2B (digitization and competition) and B2C (consolidation and captive network for e-commerce companies). We believe that a fresh strategy of Mckinsey, implementation of GST, a strong brand name which stands for reliability and a strong distribution network is expected to provide impetus for BDE in the medium term. Despite hiccups, we expect revenues for the company to grow at 6 % CAGR, EBIDTA margin to sustain at 11.5 % and earnings to grow at 16% CAGR over FY17 to FY19E. We believe that BDE continue to remain as one of the key stocks to invest in the courier space. The stocks’ premium valuation of 47.3x FY19E earnings is a concern which makes us believe that the stock would under perform the market, unless growth visibility improves. We revised our earnings downward and downgrade the stock to accumulate (from ‘BUY’) with a target price of Rs 4,375.
BDE had hired Mckinsey & Company and spent a total of `35 crore to prepare a strategy for BDE for developing new products, reduce operating cost, and improve utilisation level of assets, geographical expansion and to face competition. This payment had EPS impact of Rs 10/share during FY17 on the reported EPS of Rs 61.3. Due to demonetisation and implementation of GST, till date BDE has not implemented the Mckinsey strategy, which it would have started implementing under normal circumstance.
Management expects to start implementing the strategy from H2FY18, with full implementation spreading over FY19E to FY21E with the results of the implementation expected post FY21E. As per various agencies, air cargo traffic is estimated to grow at 10% CAGR and surface cargo traffic at 8% CAGR over the next 5 years which bodes well for courier companies. The above coupled with implementation of GST is further healthy for BDE. BDE already have a robust brand name, systems and infra in place to capture the above growth. BDE currently has a fleet of 6 aircraft (5 Boeing 757), 9,185 vehicles, 582 facilities, 20 ground hubs and a dedicated skilled staff of 10,000 employees.