Wind beneath its wings

Express logistics major Blue Dart has delivered the goods so far. Can the show go on?

Circa 1983. Two wannabe entrepreneurs, Clyde Cooper and Khushroo Dubash, meet at a cafeteria in Mumbai and consider possible businesses. They settle on setting up an express courier service, for which they rope in Tushar Jani, an established entrepreneur. With a combined kitty of ₹30,000, sourced from personal savings and capital, the trio fill the need for a quality private courier operator by forging ties with the UK-based courier operator, Gelco Express International. By November 1983, India’s first domestic and international on-board courier service, Blue Dart Courier Services, better known as Blue Dart Express, was open for business.

Cut to today. Blue Dart ranks as India’s premier courier and express package distribution company, covering 220 countries and accounting for 47% of the Indian air express (express courier sent by air) market. It also accounts for 13% of the ground express segment (packages or goods sent by road or rail transport). To top it all, it has raked in post-tax profit of ₹187 crore for FY13, the highest in 17 years, making it the top dog in the express industry. “Over the years, Blue Dart, as a brand, has evolved to become synonymous with value, quality, speed, responsiveness and service experience,” boasts Anil Khanna, managing director, Blue Dart Express. But then, Khanna is not dishing out marketing spiel, as the growth the express major has dished out over the past and in recent years, despite the turbulence, is nothing less than commendable (see: Express growth). 

Charging ahead

To understand how Blue Dart has achieved all this, take a closer look at the express industry in India. The ₹10,870-crore industry is evenly split between organised and unorganised players. The organised accounts for just 48% of the market. This can be further sub-divided into two categories — air express and ground express. The ₹2,340-crore air express industry is expected to grow at a CAGR of 13% over FY13-15. Ground express, with a market size of ₹2,870 crore, is expected to see a 19% CAGR over the same period.

While a number of players such as DTDC, FedEx, First Flight and Gati exist, none has achieved the extensive reach or size and scale of Blue Dart in the air express segment. Blue Dart services 33,751 locations domestically and has a ground fleet of 7,719 vehicles. Its nearest competitor, DTDC, has a 12% market share in the air express segment and a reach of 11,000-plus locations. What explains the wide gap? Blue Dart’s first-mover advantage and extensive reach, along with the fact that it is the only operator to have its own fleet of seven aircraft (for courier delivery through subsidiary Blue Dart Aviation), has given it the edge. “Blue Dart has made a name for itself in providing customised solutions for its customers. The investment done at the front end, the hub-and-spoke model it has in place and the fact that through Blue Dart Aviation it has its own airline for delivering airmail have enabled it to differentiate itself from others,” says Sonam Udasi, head of research at IDBI Capital.

The big fillip for Blue Dart came in 2005, when international courier giant DHL acquired a controlling 81% stake, thus giving it access to far greater markets and geographies and enabling it to leverage DHL’s extensive worldwide network. But even before that, Blue Dart was in a league of its own due to its continuous investment and emphasis on technology. In 1991, the company introduced Cosmat ITM, an ERP system which taps into the company database over a wide area and tracks shipments, a key advantage in an industry where timeliness of delivery is the order of the day. In the ground express segment, Dart Surface Line, a door-to-door ground distribution express service, and Dart Surface Line Plus, for bulkier shipments that are more time-sensitive, have worked well.

“Both these products have helped the company provide economical, time-bound door-to-door ground distribution services to 34,000 locations in India,” says Amit Aggarwal, analyst with Kotak Securities. Additional features such as freight on delivery and real-time tracking have helped it garner market share in the ground segment from 6% in FY06 to 13% in FY13. Besides the cash-on-delivery services, temperature-controlled logistics for pharmacies and hospitals has been another attempt to widen its service bouquet.

Abhishek Chakraborty, executive director, DTDC Courier & Cargo, believes that to be successful in the express courier industry, it is necessary to provide customised solutions to clients. “The ground and air express segments are the most lucrative. This is where you have the highest yields and premium consumers, such as corporates. But, to be successful, any organisation has to position itself as an end-to-end solutions provider. As long as you are doing that, you will do well, irrespective of whether you are focusing on the ground or air segment.” According to Kotak’s Aggarwal, Blue Dart has also built a reputation for secure delivery of shipments, while others are not seen to be as trustworthy. 


Nearly 94% of Blue Dart’s customers are institutional customers. Chakraborty says, “IT, consumer durables, pharmaceuticals, auto and BFSI sectors are the fastest growing verticals for express courier companies and are the main driver of volumes. So any good market player will want to focus on these.” One sector, in particular, that is seeing good growth and holds potential is the e-commerce space, which is expected to grow to ₹54,014 crore by 2016. With internet penetration in India now at 11% and set to increase in tier 2 and 3 towns and cities, the scope for online transactions is steadily increasing and the sector is growing at a CAGR of 40%. With clients such as Homeshop 18, Flipkart, Snapdeal and Myntra, the e-commerce space contributes 10% of total revenues for Blue Dart, which enjoys 35% market share, according to a Kotak Securities report. 

But the real game-changer, analysts believe, will be the implementation of a uniform goods and service tax (GST) across the country. Avoidance of double taxation will reflect in lower pricing of manufactured products, leading to price reductions. “GST will make it economically viable to simplify distribution network and result in economies of large-scale operations,” says Khanna. Manufacturers can do away with multiple warehouses — a strategy to save on multiple taxes — leading to better supply chain management and better efficiencies for logistics players. If in place of multiple warehouses, a manufacturer establishes one central warehouse, then Blue Dart’s fleet can be parked near that location.

Besides, the incidence of trucks running at half or less than full capacity will be reduced since all the goods are stored in that one warehouse. So, fixed costs will remain constant but revenue per truck will increase. Given that nearly 80% of Blue Dart’s costs are fixed in nature, rising volumes will result in higher, more operational leverage. “Having GST in place means having fewer warehouses at centralised locations with optimum fleet loading capacity, plus it will bring down fixed costs. This is a very significant move for both logistics players and retailers,” says Bharat Chhoda, associate vice-president, research, at ICICI Direct. Better road infrastructure and logistics parks in future will further enhance this. 

Turbulence ahead?

Not all is hunky dory, though. The fate of the logistics sector is heavily tied to the state of the economy — typically, the sector grows at a multiple of 2.2 times the GDP growth rate. In the weak current economic environment, all logistics players have been hit hard, and Blue Dart is no exception. In the first quarter of this fiscal, declining demand leading to lower volumes and increase in fuel costs saw operating margins decline to 10.7% from 12% last year. But Chhoda of ICICI Direct believes the company’s volumes and margins have not been impacted as much as other players. “This is because as far as margins are concerned, other players don’t have their own dedicated airline fleet and so have to use the belly cargo of private airlines, in which they incur significant costs. But since Blue Dart owns its own fleet, it does not have to bear this burden. On the volume front, Blue Dart’s institutional clients sign annual volume contracts for express freight delivery. Even if they don’t hit the agreed volume, they still have to pay the charges. So revenues don’t decline,” says Chhoda.

High operating costs, however, remains a challenge. Aviation turbine fuel constitutes 20% of Blue Dart’s overall costs, which has been further compounded by a weak rupee. Not just that, as Khanna puts it, “The depreciating currency has also impacted aircraft lease and maintenance and other allied input costs as well. Though we have a mechanism called the currency adjustment factor (additional fee payable every time the dollar appreciates  by a rupee), we have nonetheless suffered.” Though sales in Q2FY14 were up 13% at ₹471 crore, PAT fell 7% to ₹30 crore. 

The management is, however, banking on growing volumes to offset margin pressure. “Growth in sectors such as pharmaceutical, automotive, consumer electronics, financial services and e-retailing has given a further impetus to the industry. We are further focusing on tier 2 and tier 3 cities, which are important not only from the consumption point of view but also from the production angle. Besides, we are also looking at SMEs as a bigger opportunity to us,” says Khanna. Not surprising then that Blue Dart increased its market share in Air Express from 46% to 49% and in Ground Express from 11.8% to 13.3% over the past three months. “In recent year, it has also ramped up the number of ground hubs from 20 to 65, leading to better operational dexterity and reach,” says Chhoda.

For now, most analysts are bullish on Blue Dart’s stock, given the firm is debt-free and has an asset-light business model, since almost 80% of its vehicle fleet is outsourced and warehouses, hubs and aircraft have all been leased. They estimate revenues and net profit to show a CAGR of close to 13.5% and 14.5% between FY13-15. At ₹2,726 a share, the stock is trading at a forward multiple of 37 times, and is up 13% for FY14. Interest costs will also rise as the company intends to issue non-convertible debentures. If economic growth does not revive soon, margin pressure could continue. Against such a backdrop, investors will be better off waiting for a price correction.