A partner in need

News Clip : The Economic Times, Mumbai,

Sunday, 29th September 2002

- There is no doubt that Blue Dart's image was boosted by its association with FedEx, one of the strongest brands in the world

- Value For Money (Arun Jethmalani)

Just as human life itself is highly unpredictable, so too the path for companies is prone to unknown hazards and obstacles. For investors, it is especialIy when things appear rosy, that bad news hurts the most.

Blue Dart Express is a company that has a lot going for it. It is a dominant player in the domestic courier and logistics business, with an estimated share of more than 30 percent among the organised players. The sector it operates in is poised for strong growth, as supply chain management and logistics become crucial profitability drivers for all manufacturing companies. Plus, e-commerce and home delivery services need reliable providers for fulfillment of orders

This strength is visible in the performance of the company in recent years. Despite an industrial and investment slump, the company has managed a 10.7 per cent top line CAGR growth over the last six years. Through this period, it has invested heavily in infrastructure, systems and technology to ensure that it grabs an increasing share of the promising non-document business, which now accounts for the bulk of profits.

But the recent news that Fedex, their partner for international services, will not renew their contract severely hit sentiments in the scrip. In the last five months, the stock has tumbled from a high of Rs 103, to below Rs 60, a fall of 42 per cent. However, the scrip recovered smartly to current levels of around Rs 73, on the news that it has struck an alliance with DHL Worldwide Express for international sales./p>

The question is, how much business can Blue Dart hope to get from DHL, considering that DHL Worldwide Express plans to raise its stake in its Indian partner, DHL Air Freight to over 51 per cent? To the extent that DHL has domestic locations that cannot be serviced by its own subsidiary, Blue Dart might get business. Otherwise, logic would presume that DHL's subsidiary is favoured.

Many analysts believe that the loss of business from Fedex will not affect them too badly, as international courier sales constitute less than 20 per cent of their overall revenues. However, there will be a spillover in domestic business as well, since they enjoyed revenues from the domestic movement and consolidation of Fedex cargo.

The management too, believes that the long-term impact will be marginal, since the domestic market is growing much faster. Also, this is where the company has significant competitive advantages. However, the one thing that we cannot measure is the loss in brand value. There is no doubt that Blue Dart's image was boosted by the association with Fedex, one of the worlds strongest brands.

This applies not only to customers, but even to investors. Every research report I've seen on the company prominently touts the benefits that the Fedex association provided to Blue Dart. In fact, at the time of writing this, with a week to go before the alliance ends (at the end of September), the company web-site still sports a page where it tom-toms the Fedex relationship!

The question for investors is: has the bad news already been reflected in the stock? And, is the company strong enough to withstand the blow and continue on the growth path? If the answer to the above questions is "yes", the current slump in share prices might present a good opportunity for long term investors.

In the domestic market, their network of 12,000 plus collection points is a huge advantage, and creates significant competitive barriers. Their size, and investments in warehouse infrastructure, aircraft and technology make them well positioned to be a serious player in the third party logistics (3PL) arena, where small players will find it difficult to get an entry. This should compensate for the threats to the traditional document business from the unorganised sector and advances in technology (electronic document delivery).

Having said that, there are still some problems. Their margins are highly dependent on oil prices, as transport costs are a large proportion of their variable costs. Hence their profitability and return ratios vary widely from year to year. Also, their model requires them to continuously invest in aircraft, as demand grows. Hence there are large spikes in depreciation costs. A major concern here is that any free cash generated will get eaten up by large investments in the airline subsidiary.

Their bottom-line growth in the first quarter of the year (June 2002) was 20 per cent. Assuming that they can achieve a 15 per cent growth for the full year (FY2003), the projected EPS will be Rs 8.72 per share. At current prices, the forward P/E is just 8.3. A topline growth this year of 10 per cent will put their market cap to sales (FY03) ratio at 0.66.

Considering the reasonable growth prospects these valuations appear quite cheap. This investment, however, is definitely not for the faint-hearted, as year-on-year performance is far too dependent on external factors (oil prices). But if you can stick it out for the long term, and wait for the damaged perceptions (post-Fedex) to be rectified, then this could be a worthwhile stock.