Last week, Delhivery was set to raise $450MM from Softbank, propelling it into unicorn-dom.
Delhivery, and the logistics industry in general, has been very unassuming and rarely covers any headlines (view Google Trends of fellow unicorn Swiggy v/s Delhivery). All this is because Delhivery is a business to business (B2B) company whose customers are companies like Amazon and Swiggy, and retail consumers rarely show interest.
This does not imply that the industry is small.
The overall logistics industry is pegged at an enormous $160Bn, and is expected to grow by 20% in just the next two years. After retail, it is one of the largest industries in the country, and it is only expected to gallop.
The industry is highly disorganized, with transport being done by small to mid-size organizations, that struggle to scale or keep track of what is happening. As long-time readers of these pieces would know, what is a large and disorganized industry good for?
It’s good for disruption, of course.
Logistics is beginning to see inroads from startups that are scaling rapidly to help organize India’s supply chains. There are two themes that have recently propelled logistics to significant importance in India.
The first market force is that at-home delivery is becoming incredibly important, pushed by the e-commerce, food delivery and grocery companies. Previously, nobody really cared about when anything was delivered to consumers. One day delivery or same day delivery were alien concepts. Why this is important is because delivering fast, and accurately, is now an important core to delighting and retaining customers. This is positively pushing the industry to innovate, because it affects revenue of so many players.
The second regulatory force is the nationwide rollout of the Goods and Service Tax. The key effect of this is that it has converted India into a single market, v/s many state markets. Initially, warehouses and logistics would be engineered for tax purposes and avoiding authorities. With no more checkpoints and a unified market, improving delivery is now a logistics problem, v/s a tax problem.
Both these forces are setting up the market for its natural course, which is why logisitics has now become so attractive. The larger your network, the more likely you are to be used, which makes your network more attractive. This is nothing but the definition of network effects. With these two market forces, network effects can bloom in full force. It is no wonder that the Chinese market has consolidated to the top players owning 75% of the market.
Delhivery thus finds itself well positioned to take advantage of these headwinds.
The company was founded by Sahil Barua and Sandeep Barasia in 2011, as a hyperlocal commerce company, which soon pivoted to logistics. Most B2B companies do not need to do much marketing, and hence the company talks very little about itself, although its company website is unusually rich with its own data.
The business model, in its essence, is clever and simple. Commerce is moving online, and Delhivery will enable it. When countries fight wars, arms dealers make a lot of money. Similarly, as e-commerce companies continue to slug it out, Delhivery could make a lot of money.
The company’s solution is business focused. It charges any business that wants to deliver goods to its consumers and charges consumers nothing. Delhivery wants to be a “plug-and-play” platform for business wanting to physically reach their consumers. The solutions are broken down into three verticals, transportation, warehousing and commerce. The bulk of the business is in transport, where the company has built a network of 12,000+ pin codes.
Pricing of the company’s solutions is similar to any delivery company, with weight and distance being key parameters for delivery. Delhivery makes a profit on every unit it delivers, and has likely always been unit economic profitable.
The real constraint that these logistics businesses face is the infrastructure and people costs they have to incur before they can set up a network. Delhivery had to build its supply chain and network for demand than it is handling today, and those costs piled up as losses before the company began to generate revenue. These are, in accounting parlance, fixed costs – which do not change with volume.
But if the company was able to generate demand for the supply chain it had built, it would rapidly start making money. The expectation is that profits generated from increasing volume would offset the fixed costs.
It is this money making machine that investors want to back. Delhivery has raised a fresh round of funding every year since its inception, bring the total fundraise to$270MM till date (excluding its likely 450MM raise). The company has grown from 15 K shipments a month in 2011 to 12 MM shipments a month, at a rapid growth rate of 157% annually.
Having already invested in infrastructure and fixed costs that wouldn’t change with volume, one would expect the growth in revenue to make up for these costs.
That is exactly what happened.
In 2017, the company grew from a revenue of INR 523 Cr ($74MM) to INR INR 751 Cr ($107MM), a 25% growth. As we have derived above, losses reduced from INR 371 Cr ($53MM) to INR 249 Cr ($35MM). If you notice the expenses (i.e. adding losses to revenue), you will notice it increased from $127MM to $142MM, an 11% increase.
Hadn’t we expected this?
We know the company is now doing 12MM monthly shipments, up from 10MM in 2017. That implies that revenue has grown 20%, and one would expect costs to grow at 9% (at the same scale as previous years). Doing some snoopy math, the company is tracking an annualized revenue of $129MM (107*1.2) while expenses are at $154MM (142*1.09). The expected annual loss (at November’s rate) is $25MM, and it will continue to narrow.
It is little wonder that Delhivery was planning an IPO, as it has a path to profitability.
A $1Bn valuation puts the company at a $1000MM/$130MM = 7.6 revenue multiple. FedEx, the US logistics giant, is valued at $58Bn for a $65Bn revenue, a ~1x revenue multiple, while UPS has a 1.5 revenue multiple. Assuming 2x revenue is a fair multiple, given UPS and FedEx stocks are struggling with the pressure from Amazon, Delhivery’s valuation would be justified at a $500MM revenue ($1000/2 = $500MM, which is 4x today’s revenue)
This implies that SoftBank and other investors are expecting Delhivery to deliver on some serious growth. If it had to get to $500MM of revenue in the next 3 years, it needs to grow 58% year on year (4^0.33 = 1.58). This is not entirely impossible, because the logistics market is expected to be worth $200Bn ($500MM is a drop in the ocean). Additionally, even though it started at a small base, Delhivery has demonstrated 150%+ growth.
With a larger war chest of $450MM, Delhivery could very likely do better than 58%. It has also seen the writing in the wall on India, with Amazon and Flipkart building in-house logistics arms (note: when companies start building competencies in-house, it is indicative that the competency is lucrative). Delhivery has diversified into othersegments, and looks set to reap the benefits of consumer demand across categories.
Delhivery has delivered its way to a $1Bn, and looks well poised for more.