In the realm of logistics, a fascinating rumor has been making the rounds: Delhivery, the logistics powerhouse with a 12-year history (can we still call it a startup?), might just be eyeing the acquisition of Gati, a seasoned logistics firm that has been in the game for 34 years.
But hold your horses! On Wednesday, Delhivery flat out denied these reports, labeling them as "factually incorrect." Gati, too, dismissed the rumor. So, where does that leave us? Perhaps it was just a casual conversation between Delhivery and Gati executives at a logistics mixer that sparked the rumor mill. Or maybe there was a serious meeting with some numbers thrown around in a conference room somewhere. The truth remains elusive.
Interestingly enough, this isn't the first time such rumors have surfaced. Four years ago, Delhivery was already in the spotlight for supposedly holding talks with Gati. With history repeating itself after all these years, one cannot help but wonder: Should Delhivery really consider acquiring Gati?
Logistics: The Lifeline of our Economy
Logistics, the invisible force that keeps our economy running smoothly, plays a crucial role in our daily lives. Whether it's the fresh produce you find at the supermarket, the car you test-drove last weekend, or the clothes you're about to order online, logistics ensures they are readily available to us. In India alone, the logistics industry is valued at a whopping $160 billion and continues to grow.
Yet, not all logistics companies are created equal. They operate diverse businesses, each with its own profit margins and dynamics.
Delhivery: From "Delivery Boy" to E-commerce Trailblazer
Let's take a closer look at Delhivery. Its journey began in 2011 as a humble "delivery boy" for restaurants, but it soon recognized a much larger opportunity—the booming e-commerce industry in India.
At the time, e-commerce giants like Flipkart and Snapdeal relied on their modest in-house delivery operations or traditional courier companies ill-equipped to meet the high expectations of Indian consumers. These companies were slow, outdated, and failed to deliver a seamless experience. To address this gap, Delhivery embarked on a mission to build a network of warehouses, establish last-mile distribution channels, and develop a robust tech platform to integrate everything seamlessly. Additionally, they focused on streamlining backend processes, including payment handling, especially the popular cash on delivery option. Delhivery's vision of becoming the go-to "third-party, last-mile logistics delivery firm" (3PL) for e-commerce has been taking shape remarkably well ever since.
According to a RedSeer report, Delhivery fulfills around 20% of all e-commerce delivery volumes in India. Given the relatively low internet shopping penetration in the country, there is immense potential for further growth.
The E-commerce Delivery Dilemma: Margins and Revenue Streams
However, there's a catch—the margins on e-commerce deliveries have hardly been impressive. In FY19, Delhivery's service level EBIT margin stood at a modest 2.5%, even though nearly 90% of its revenues came from the e-commerce sector.
To counter this challenge, Delhivery began exploring alternative revenue streams and reduced its dependence on e-commerce, which now accounts for only 60% of its topline. According to a report by Investec, this shift has led to significant margin improvements, with the current EBIT margin reaching 11%.
Several factors contribute to this improvement. Delhivery's years of investment in infrastructure and optimization have begun yielding results. The company has better route utilization and reduced transport costs. Additionally, Delhivery strategically lowered its pricing to gain a larger market share. Thus, the changing revenue mix has positively impacted Delhivery's margins.
Enter the Partial Truck Load (PTL) Revolution
Now, let's dive into the fascinating realm of Partial Truck Load (PTL) services.
Imagine you're a business needing to transport a 20 kg pack of electric equipment and a 500 kg machine from one end of India to the other. Road transport using trucks is the most convenient option. However, renting an entire 50-foot truck would prove costly. In this scenario, logistics providers offer the option to share the truck with other customers, consolidating the items going in the same direction. This arrangement lowers transportation costs while maintaining flexibility.
PTL services predominantly cater to the business-to-business (B2B) segment and involve establishing direct relationships with manufacturing clients. This means higher order values, premium pricing, and consequently, superior profit margins for logistics companies.
Just consider the enviable EBIT margins achieved by industry players like Bluedart, TCI Express, and Safexpress, consistently hovering around 15%.
The PTL Evolution: From B2B to Express
Yet, even PTL is evolving. The days of waiting weeks for products to reach their destinations are long gone. Modern consumers expect fast deliveries for all their purchases, including B2B transactions. Brands operating in both the online and offline spheres strive to meet these expectations, necessitating an express approach to truckload businesses as well.
The Power of Mergers and Acquisitions
Here's where Delhivery's potential acquisition of Gati comes into play. If Delhivery can combine its express delivery expertise with Gati's PTL prowess, it could emerge as an unstoppable force in the logistics industry. After all, mergers and acquisitions are often pursued to strengthen existing capabilities or gain an edge in business segments poised for significant growth.
Gati: Legacy and Challenges
Gati, an established entity with over 30 years of experience, began its journey by specializing in heavy shipments like air conditioners and even ATMs. Over time, it established a formidable presence in surface logistics, particularly trucking. The majority of Gati's revenues are derived from this segment, making it one of the top five players in the organized PTL space.
However, Gati has faced its fair share of challenges in recent years. Poor business decisions, internal conflicts, and mounting debts have eroded its market share. Despite maintaining gross profit margins in line with its peers, Gati's EBITDA margins have been disappointingly low, hovering in the single-digit range.
If Delhivery were to acquire Gati, it would face an uphill battle in turning the company's fortunes around. Yet, the potential synergies between the two entities could prove transformative.
Two Roadblocks on the Journey
Before we get carried away with this theory, we must acknowledge two significant roadblocks.
Firstly, Delhivery has already invested resources in another startup called Spoton Logistics a couple of years ago, aiming to fortify its position in the B2B express delivery segment and reduce dependency on e-commerce. However, integrating Spoton's business with its own has proven challenging, making it unlikely for Delhivery to rush into another acquisition at this juncture.
Secondly, and perhaps more importantly, Gati may not even be up for sale! Allcargo Logistics acquired a 19% stake in Gati in 2019, which it increased to 47% in subsequent years. Allcargo sought to capitalize on Gati's PTL business and has taken steps to restructure and revitalize the company, including hiring a new CEO. It seems highly unlikely that Allcargo would abandon a business it is actively investing time and money into rebuilding.
Putting Rumors to Rest
Considering these factors, it appears that the rumor mill is indeed at work in this case. However, if our discussion has shed light on the critical role of B2B express logistics as Delhivery, the newly-listed 'startup,' charts a path towards profitability, then we have accomplished our goal.
We would love to hear your thoughts on this potential acquisition and whether we effectively conveyed the significance of the B2B express logistics industry in Delhivery's journey.
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