Can Ecom Express’s IPO succeed when Delhivery’s stock has failed to deliver?

Unable to find anyone suitable within the logistics world, the company’s headhunters turned to a different industry, telecom, seeing some parallels with the logistics landscape. Telecom had started out as a fragmented sector, with multiple operators jostling for the same customers. Many big names, including the Tatas and Anil Ambani’s Reliance Communications, would exit the field, while others would get acquired.

Ecom Express eventually picked Ajay Chitkara, the former head of Airtel’s enterprise arm, because he had steered the business through the turbulence in the telecom sector and turned it into a ₹22,000 crore behemoth. In a sign of the scale he had built at Airtel, when Chitkara resigned in June 2023 after a 23-year stint, the telecom giant appointed four CEOs to take over the various divisions he had been managing.

Chitkara took the helm of the business-to-consumer (B2C) logistics-focused Ecom Express in September 2023. A month later, Krishnan passed away. For Ecom Express, this was the second such blow after co-founder Sanjeev Saxena died in 2020. The new CEO thus found himself in the driving seat of a company with stunted revenue growth and a bottom line still deep in the red.

Ecom Express’ top line has barely moved, growing just 2.2% to ₹2,609.2 crore in FY24. Worse, it suffers from an overdependence on one customer, tier-II focused e-commerce platform Meesho, which accounted for more than 50% of its revenue in FY24. Amazon, Flipkart (Ekart), Nykaa, Purplle, and V Mart accounted for another 25% or so. This high level of revenue concentration is a huge risk weighing over the company.

Another concern is the lack of profitability. Ecom Express suffered a loss of ₹255.8 crore in FY24. While this was significantly lower than the ₹428.1 crore loss it reported in FY23, Chitkara will have to work overtime to get the company into the black. This will be a top priority as Ecom Express filed for a public listing in August—if it is to attract investors, the new CEO will have to show them it has a clear roadmap for sustained growth and profitability.

Drawing that roadmap will require considerable cartographical skill. While the Ecom Express headhunters may have seen parallels with telecom, the logistics industry is in many ways far more complex and navigating it is a fulltime job.

Much of the logistics action today is playing out in the world of e-commerce, an industry that Ecom Express’s founders chose to target with express delivery services, which presumably is the reason for its name. 

Within that universe, Ecom Express has to vie with fellow 3PL rivals such as Delhivery, which is more than three times its size by revenue, and Xpressbees, which was almost the same size in FY23. Both Delivery and Xpressbees have their own fleets and also offer other services, including B2B logistics. All three had bleeding bottomlines but Delhivery reported a profit in the first quarter of the current financial year.

Then, there are legacy outfits such as Blue Dart and DTDC (whose operations go well beyond e-commerce into courier services, etc) as well as aggregators such as Shiprocket and ShipKaro (which accumulate small orders and get them delivered by their logistics partners).

With all of these contenders jostling for space, a price war has broken out in the B2C e-commerce logistics arena, with each company offering the lowest possible delivery charge, sparking fears that a consolidation may lie ahead. With this headache on top of the revenue challenge and the lack of profitability, Chitakara has many balls to juggle while getting Ecom Express ready for its initial public offering (IPO). It didn’t help matters that one more ball entered the mix a few months ago.

The advent of Valmo

In February, Meesho’s Ecom Express’s biggest client by far, formally unveiled Valmo, its own logistics marketplace, which it had been running in stealth mode. Valmo aggregates informal and formal 3PL providers on its platform and picks the cheapest one for its shoppers. Meaning, if Ecom Express or Delhivery were to bid and offer the cheapest price, Valmo would pick them. At the time, Meesho said the logistics arm already handled 20% of its business and that it planned to double this over the year.

Valmo’s entry has set alarm bells ringing across the e-commerce logistics industry. The 3PL segment views it as an existential threat, with good reason: Valmo’s website indicates that it is close to handling a million orders a day, has over 3,000 logistics partners, and serves 6,000 pincodes.

The threat was serious enough for Delhivery, the largest operator in this space and a listed company, to sound the alarm. “The big structural change in the market over the last several quarters … has obviously been Meesho internalizing a certain percentage of logistics themselves. I think that’s led to a bigger rearrangement of the overall market," co-founder Sahil Barua said in the company’s earnings call on 5 August, after flagging the threat in previous quarterly calls as well.

Delhivery saw 16% of its revenue come from Meesho in FY24. But Barua chose to downplay the threat, saying the company’s revenue was well diversified. “If we were a parcel-only player … dependent on a single company … (that was) launching self-logistics and putting price pressure, … life would be pretty hard. But fortunately, for us, that’s not the case," Barua had said on 12 May, after the FY24 results, in an oblique reference to Ecom Express.

Meesho is very strong in tier-II India and beyond and Ecom Express touts itself as the e-commerce logistics delivery partner for tier-II India. Indeed, in FY24, 86% of its deliveries were in tier-II locations. Valmo is now threatening to make the same deliveries at a lower cost.

Ecom Express declined to comment for this story, citing Sebi (Securities and Exchange Board of India) regulations, which prohibit a company from talking to the media after IPO draft papers have been filed for approval. However, it has addressed Valmo’s entry in its DRHP, noting that it could prove to be a challenge for the company. “Unlike the top horizontal players by GMV (Flipkart or Amazon) who use their captive logistics arms for better control despite slightly higher cost per shipment (CPS), this player relies on its captive arm for lowering CPS at the cost-of-service levels," it states, without naming Meesho or Valmo. GMV is gross merchandise value, or the value of all goods sold on a platform.

Clearly, Chitkara and his team will have to address the company’s over-reliance on Meesho for business. If Valmo is indeed able to double its throughput, as planned, Ecom Express, which hasn’t diversified like its rivals, could feel the heat.

“Post the IPO, if they are able to ramp up the network, build the tech, and figure out a way to replace the volumes provided by Meesho as their biggest client, they should be fine," said Sachin Dixit, internet lead research analyst at brokerage JM Financial Institutional Securities Ltd.

Gearing up for the IPO

Immediately, having a successful IPO could prove to be a challenge in itself for Ecom Express, given its bigger rival’s dismal performance on the bourses. Delhivery, which went public in 2022 at a price of ₹487 per share, is still trading below its IPO price. On Thursday, it closed at ₹367 per share on the NSE.

Explaining the reasons for the poor performance, an 18 September analyst report by ICICI Securities indicated that Delhivery’s stock was ‘subdued’ because of the entry of Valmo as well as the rapid growth of quick commerce over e-commerce and the rising market share of other 3PL logistics firms.

Those same factors weigh over Ecom Express as well. So, convincing primary market investors that the loss-making company will outperform the market leader will be a tough sell. A lot will depend on the valuation it eventually fetches. Ecom Express was last valued at $749 million (in July 2023), according to Traxcn.

“Delhivery certainly seems the more dominant player. It has invested more in tech, is larger in revenue, customer base, business and service. We don’t know where Ecom Express will fall in terms of valuation—the attractiveness (for investors) is going to be a function of valuation," said Dixit.

The runup to the IPO has seen the two 3PL companies get hyphenated amid comparisons of their performance. “Our findings suggest that Ecom Express certainly has grown faster over FY22-24 while also having a broader pin code coverage. However, Delhivery still remains the dominant player with Ecom Express only coming second best across key metrics," said a 25 September report by JM Financial. “It remains to be seen how the second largest 3PL player will shape up post a successful listing with a stable management and INR 12,845mn ( ₹1,284.5 crore) in fresh funds."

In its DRHP, Ecom Express said that its focus on profitability and improved efficiencies had lowered its cost per shipment to ₹39.65 (from ₹45.4 in FY23). In comparison, it said, Delhivery’s cost stood at around ₹55.99 for express parcels, down from ₹59.07 in FY23.

Delhivery contested these numbers at an investor forum in September (and in a filing with exchanges) and said Ecom Express was overcounting its shipments. Delhivery counts a return to origin (RTO) parcel (a customer return) as part of the same journey as the delivered parcel and implies that Ecom Express may be counting this twice. It is not a peer-to-peer comparison as the reporting standard is different, the company argued. If adjusted for RTO, Ecom Express’ cost per shipment would increase by around ₹7 or by 15%, it added. The reporting standards could also be different because Delhivery carries heavier parcels, which cost more to transport but also generate more revenue.

Ecom Express has not publicly responded to Delhivery’s claim that some of its numbers were incorrectly interpreted. The company has always counted RTO shipments separately, as it earns money on each return, and that is what it has clarified with Sebi, said a person familiar with the company’s operations, adding that counting it as one shipment would appear to inflate the yield. Further, changing the reporting so close to the IPO would be tantamount to misrepresenting the data, he added.

Improving the revenue mix

B2C e-commerce accounts for nearly 90% of Ecom Express’s revenue, with the company limiting itself to packages under 10 kg. While it now faces pressure to diversify its revenue mix, Ecom Express has hitherto steered clear of segments such as B2B, unlike rivals Delhivery, Xpressbees, Shadowfax, and Blue Dart. It has also avoided owning a fleet and thereby avoided providing partial truckload (PTL) or full truckload (FTL) services, which its peers use to transport large shipments.

Justifying this avoidance in its DRHP, the company said that while its rivals provide B2B, hyperlocal, and C2C logistics and thus have diversified revenue streams, “this extensive service portfolio necessitates significant investment in infrastructure, technology, and manpower to support these diverse segments, potentially resulting in operational complexities and a diluted strategic focus". Not having to sink in funds and resources has allowed it to enjoy positive Ebitda since FY19, it added.

Instead, Ecom Express wants to improve the revenue from its newer segments, where it has more expertise, and where it garners the other 10% of its revenue. These include services to quick commerce companies (it manages their dark stores or warehouses) and warehouse management (storing, managing and distributing inventory for e-commerce companies).

The company can also showcase some operational improvements to investors as it seeks to win them over. Its active customer count has shot up from over 2,400 in FY22 to 6,400 in FY24. On the human resources front, Ecom Express is reducing fixed expenses by leaning on gig workers, who handled over 70% of its deliveries in FY24. It has also been using technology to better predict demand and reduce network costs. Meanwhile, the company sold its entire 82% stake in lossmaking Bangladeshi 3PL startup Paperfly for ₹1.17 crore in July 2024. Amidst all this, Chitkara has been working to root out capital inefficiencies and wasteful expenditure.

While all of these steps count, the road ahead is still a long and winding one. The imperative to have a wider revenue base may even see Ecom Express bite the B2B bullet in future. If that happens, it appears to have the right man for the job in Chitkara—after all, his greatest hits at Airtel came as the head of its B2B business.