Ecom Express Faces Headwinds Ahead Of IPO Amid High Client Concentration

IPO-bound logistics firm, Ecom Express is grappling with challenges stemming from low operating leverage and a high concentration of clients, despite drawing the majority of its business from tier-2 cities. According to a report by InCred Equities, 82 per cent of Ecom Express's shipments in FY2024 originated from tier-2 cities, well above the industry average of 62 per cent.

In FY24, Ecom Express held a 27 per cent market share in shipments, ranking second after rival Delhivery. The company's express shipment CAGR from FY2020 to FY2024 stood at 33.5 per cent, comparable to Delhivery's 34.7 per cent, though shipment growth in FY2024 was flat.

InCred Equities estimated that Ecom Express processed 430 million shipments in FY2024, equivalent to 58 per cent of Delhivery's volume, while its sales were 51 per cent of Delhivery's express revenue. Despite this, Ecom Express’s sales CAGR lagged behind the industry average and its EBT losses doubled between FY2022-24. In contrast, Delhivery managed to reduce its losses by 21 per cent.

Additionally, Delhivery’s operating leverage is three times that of Ecom Express, benefiting from synergies in the part-truckload segment. Ecom Express also faces significant client concentration, with its top five clients contributing 75 per cent of FY24 sales, compared to just 34 per cent for Delhivery. While Ecom Express has a client base of 6,384, this is only a fifth of Delhivery's.

The company's contract manpower costs surged at a 39 per cent CAGR from FY2022 to FY2024, outpacing its volume growth of 18 per cent, due to the rising share of gig workers. According to Ecom Express’s DRHP, the company employed 70,000 people as of March 2024, with only 22 per cent being full-time staff.

In India, online penetration stood at 6.5 per cent in FY24, lower than China’s at 31 per cent and the US’ at 16 per cent. The InCred Equities report also noted that Flipkart and Amazon, both of which have been loss-making from FY2015 to FY2023, controlled 70 per cent of India’s ecommerce market. Meanwhile, the market share of third-party logistics firms declined to 44 per cent in FY24, partly due to Meesho’s launch of its own logistics arm, Meesho Express. InCred Equities anticipates a further decline in the market share of 3PL providers in FY25 as Meesho continues to insource its logistics operations.

"We believe this is a risk for 3PL (even beyond FY25) if ecommerce players start/ increase captive logistics," the research and trading services firm argued. Moreover, Delhivery's express cargo saw a one per cent year-on-year decline over the past six months.

Ecom Express is set to raise Rs 2,600 crore through its upcoming IPO. Supported by Warburg Pincus, Partners Group and British International Investment, the offering will consist of a fresh issue of shares valued at Rs 1,284.5 crore and an offer-for-sale (OFS) of up to Rs 1,315.5 crore by the company's promoters and existing investors.