How Much Does Delhivery Cost, and Why Are Rates Rising?

Delhivery is experiencing a significant increase in parcel delivery costs. Just a year ago, it was charging around 60 rupees for a parcel, a rate that has now risen to 148 rupees. This steep increase in rates is a cause for concern, not just for customers, but also for investors and stakeholders who wonder if such a sharp rise in costs is sustainable for the long term.

However, within the context of business operations, cost fluctuations are part of the natural evolution of the industry. The question then becomes, is Delhivery using its resources efficiently? With the upcoming IPO in 2023, it's crucial to examine how the company allocates its capital and whether it is achieving high returns on investment, particularly in light of the recent capital raise.

Delhivery's Capital Efficiency and the Latest Tech IPO in India

Delhivery has recently completed its Initial Public Offering (IPO) in India, targeting a valuation of 5 billion USD. This IPO comes with a backdrop of market softening, indicating that the current valuation of over 4 billion USD might be inflated. This scenario raises questions about whether the company should have timed its IPO during a bull market, or if it's worth the risk now that market sentiment has shifted.

Measuring Capital Efficiency

A startup's capital efficiency can be measured through the capital efficiency ratio, which divides current revenue by the total capital raised. A more capital-efficient startup is one that can achieve similar revenue with less venture capital. For Delhivery, a calculating the cash conversion score (CCS) is particularly relevant:

Cash Conversion Score (CCS)

The CCS formula is: Current ARR / (Capital Raised Equity Debt – Cash in the bank). For Delhivery, as a supply chain company, we use the Annualized Revenue Run Rate to estimate ARR, since it's not a subscription-based service.

Calculating Delhivery's CCS

Revenue and EBITDA for a 9-month period: 700 Mn and -0.57 Mn. Total capital raised from the 1.1 Bn IPO and sold secondaries: 1.1 Bn - 0.29 Bn 0.81 Bn. Assuming the company had 50 Mn left from the 75 Mn round in September 2021, we adjust the revenue to an Annualized Run Rate: 700 Mn * 1.5x 1050 Mn. CCS 1050 Mn / 1050 Mn 1.

This CCS score places Delhivery in the top tier for capital efficiency, indicating that it has efficiently used its capital. However, it's important to note that Delhivery's revenue and burn rate are highly dependent on market conditions, making long-term predictions challenging.

Risks and Market Sentiment

While Delhivery's capital efficiency is impressive, the company currently continues to burn through capital. This dynamic is influenced by market sentiment and valuations. In 2021, many new unicorns emerged, and several successful IPOs took place, giving investors confidence that future valuations would skyrocket. Delhivery was part of this ecosystem, with shares initially available at 700 rupees, but the actual IPO price flagged lower, resulting in a loss for early investors.

The divergence between private market valuations, which are often based on projections and potential, and public market valuations, which focus on earnings and cash flow, underscores the risks of investing in private markets. Investors should be aware that private market investments lack the regulatory safeguards found in public markets, such as those provided by the Securities and Exchange Board of India (SEBI). Additionally, the commitment period for listed shares can limit liquidity, even if share prices are rising.

Conclusion

Delhivery's rising costs and capital efficiency are crucial factors to consider for both customers and investors. While the company has shown capability in managing its capital efficiently, the dynamics of the supply chain business and the current market conditions present ongoing challenges. As Delhivery navigates these challenges, the importance of capital efficiency cannot be overstated in ensuring sustainable growth and profitability.