Weak volume estimates a speedbreaker for Blue Dart; trend may not improve

The stock of Blue Dart Express has shed 5.7 per cent in the past one month, sharply underperforming the Sensex, which fell 1 per cent during the same period.

The weak earnings outlook, on the back of margin headwinds, has been weighing on the stock. The trend is unlikely to improve in the near term, which could keep the stock under pressure.

Among factors keeping the margin outlook gloomy for the company are high investments to expand geographical reach, market share loss mainly in the B2C or e-commerce segments, and the overall economic slowdown.

Analysts at ICICI Securities, who expect margin expansion for Blue Dart to start from FY21 onwards, have given a ‘hold’ rating on the stock after the June 2019 quarter results, amid higher competition in the B2C segment and continued capex. 

In fact, the broking firm has revised its FY20 and FY21 earnings downward for Blue Dart by a sharp 41 per cent and 28 per cent, respectively.

After reaching 18,000 pin codes, the company plans to add 1,200 pin codes across India over next few months. Besides, Blue Dart will also invest in automation and in the creation of a strong IT network. 

Though this will help the company in the long run, it will cause the company to take a hit on profitability in the near term. This is because in the initial period of investments, employee and administrative costs will rise without material improvement in the top line.

The company indicated that it will take close to two years for capital investments as well as expansion to contribute to the top line and earnings, materially.

Further pressure on margin also stems from the slowdown in the economy, thus impacting volumes and operating leverage, says an analyst with a domestic broking firm. 

For instance, the BFSI (banking, financial services and insurance) segment that contributes around 10 per cent to the company’s top line has been sluggish, according to Kotak Securities.

Therefore, investors are recommended to stay away from the stock, despite its attractive valuations, until clear signs of margin expansion emerge. 

The stock is currently trading at 31 times its FY21 estimated earnings, at a close to 40 per cent discount to its long-term average 1-year forward valuations.

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