Delhivery Limited (DELHIVERY) Earnings Call Transcript & Summary

Hi. Good evening, everyone. Welcome to Q3 FY '25 Earnings Call of Delhivery Limited hosted by Macquarie. Before we start, Delhivery would like to point out that some of the statements made in today's call may be forward-looking in nature, and a disclaimer to this effect has been included in the earnings presentation shared with you earlier. Kindly note that this call is meant for investors and analysts only. If there are representatives from the media, they are requested to kindly drop off this call immediately. To discuss the results, I'm pleased to welcome Mr. Sahil Barua, MD and CEO; Mr. Amit Agarwal, CFO; Mr. Ajith Pai, COO; and Mr. Vivek Pabari, Head of Investor Relations at Delhivery. [Operator Instructions] I now invite Mr. Sahil Barua to take us through the key highlights of the quarter, post which we'll open up for Q&A. Thank you, and over to you, Sahil.

Thank you, Baiju. Thank you, Macquarie team for hosting us this evening. And thank you, all, for joining us on this Friday evening for discussion of our Q3 results. Before I begin, you must have seen the news already. I'd like to place on record a warm welcome to new -- 2 new independent directors on the Board of Delhivery: Mr. Sameer Mehta from boAt; and Ms. Namita Thapar from Emcure Pharmaceuticals. And an announcement that Ms. Mani Venkatesh will be joining us as Chief Business Officer of Delhivery from the 1st of March. We're very excited to have all of them on board. With that, getting into results for quarter 3. Broadly speaking, as you're aware, this is the peak quarter for e-commerce given the festive seasons. It's been a good quarter for us overall. The trend of profitability for the company, which we began in quarter 1 and quarter 2 has continued into quarter 3 despite some headwinds in the industry overall and continued muted growth in online commerce volumes. In terms of a quick snapshot of numbers, we closed quarter 3 fiscal '25 at INR 2,378 crores of revenue from the services, which represents a growth of 8.6% quarter-on-quarter and a growth of 8.4% from the same quarter last year. We delivered 206 million packages in our Express e-commerce parcel delivery business and INR 242 million, including return parcels, which represents a quarter-on-quarter growth of 11.2% and a year-on-year growth of 2.4%. Our Part Truckload business continued to be strong for quarter 3, which typically is not a peak quarter for the PTL business. We delivered 412,000 tonnes of freight in quarter 3 fiscal '25, which represents nearly a 17% growth Y-o-Y and a slight decline of 3% quarter-on-quarter. Overall EBITDA for the company stood at INR 102 crores or at 4.3% in quarter 3 fiscal '25, broadly flat versus quarter 3 fiscal '24. PAT margin came in at INR 25 crores in quarter 3 fiscal '25 at about 1%, broadly breakeven, doubling from PAT profit of INR 12 crores or 0.5% from the same quarter last year. The company continues to be well capitalized. We hold INR 5,488 crores of cash and cash equivalents on the balance sheet. A quick snapshot of our key operating metrics. Pin code reach continues to stay stable. We delivered to 18,780 pin codes across the country as defined by the Indian Post. We continue to deliver to the 220 countries around the world via our partnerships with FedEx and Aramex. Total number of active customers for the company increased in quarter 3 with deeper penetration within the D2C segment, the SME segment within e-commerce and the SME segment within the Part Truckload business. We now serve close to about 39,775 customers. Infrastructure in quarter 3 had grown to 20.6 million square feet. However, this includes close to about 0.5 million square feet of temporary infrastructure that's built up for the peak season, and this then let go off in quarter 4. We continue to operate 112 major gateways and hubs across the country, including 45 automated sort centers equipped with 65 sorters. Total number of freight service centers have remained broadly stable at 130 freight SCs across the country. And our total number of delivery points stood at close to 4,350, broadly stable from quarter 2, with a slight shift in mix between self-owned and partner centers, with a larger focus on self-owned centers across the country. We continue to operate 160 processing centers across the country as well. Overall team size in quarter 3 stood at 67,600 with about 40,000 partner agents across last mile operations, and a daily fleet size of close to about 16,700 vehicles. In terms of overall financial performance, total revenue from services stood at INR 2,378 crores, a growth of 9% Q-o-Q and 8% Y-o-Y compared to INR 2,190 crores of revenue in Q2 fiscal '25. This is the peak season for the Express Parcel business and its contribution to our overall revenue stood at 63% versus 59% in the previous quarter. The Part Truckload business is at 19% of total revenues in quarter 3 fiscal '25. Compared to the same quarter in the last financial year, you can see the impact of growth in the PTL business, where it was 17% in quarter 3 in the previous year and 19% this year. We continue to see growth in both the Supply Chain Services business and some growth in the Truckload business as well. The Express Parcel business grew 15% quarter-on-quarter from a revenue of INR 1,298 crores in Q2 fiscal '25 to INR 1,488 crores of revenue in Q3 fiscal '25, year-on-year growth of about 3%. Total shipments grew by 11% between quarter 2 and quarter 3 from 185 million shipments to 206 million shipments in Q3 fiscal '25, broadly flattish growth of about 2% compared to quarter 3 of fiscal '24. In terms of Part Truckload revenues, we've grown revenues Y-o-Y by 22% from INR 379 crores of revenue in Q3 fiscal '24 to INR 462 crores of revenue in Q3 fiscal '25, broadly flattish between quarter 2 and quarter 3. Freight tonnage has grown 17% in the same period Y-o-Y from 354,000 metric tons of freight in Q3 fiscal '24 to 412,000 tonnes of [ billable ] freight in Q3 '25, broadly flattish from 427,000 tonnes to 412,000 tonnnes between Q2 and Q3. Truckload business has remained broadly flat. We've been at that INR 155 crores to INR 160 crore mark since the same time last year. The Supply Chain Services business continues to show robust growth. We've grown from INR 173 crores of revenue in Q3 fiscal '24. Revenues have grown by nearly 30% to INR 222 crores in Q3 fiscal '25, driven by both growth in existing accounts as well as signing on new accounts and a quarter-on-quarter growth of 12% between Q2 and Q3 as well. The cross-border services business has grown Y-o-Y from INR 39 crores to INR 43 crores. However, there's a sequential decline from INR 59 crores to INR 43 crores between Q2 and Q3. A quick snapshot of overall service supplying-wise profitability. As I mentioned at the top, revenue from services has grown from INR 2,172 crores in Q1 fiscal '25 to INR 2,378 crores of revenue in Q3 fiscal '25. Total service EBITDA between these quarters has remained broadly flat. Service EBITDA margins are range bound in the close to 11% range overall. The Express Parcel business saw a marginal growth in revenues between -- in service EBITDA between Q2 and Q3 with growth from INR 196 crores of service EBITDA in Q2 to INR 232 crores of service EBITDA in Q3, a improvement in the overall service EBITDA margin from 15.1% to 15.6%. Margins were slightly depressed compared to the same quarter last year, owing to a buildup in fixed costs and a certain inflation in fleet costs, which we typically see in this Q3 period. The Part Truckload businesses service EBITDA margin has improved from 2.9% to 3.8%, which is the highest service EBITDA margin that this business has generated in the last 11 quarters. Sequential improvement will continue. We generated INR 18 crores of service EBITDA for this business in Q3 fiscal '25. Supply Chain Services business has returned to service EBITDA profitability after Q2 from a loss of INR 9 crores in Q2 fiscal '25 to a profit of INR 5 crores in Q3 fiscal '25. Overall, corporate overheads have remained broadly flat for the last 11 quarters. They are currently at INR 211 crores, which represents 8.9% of total revenue versus 10.2% at the start of the year. And the broad sort of glide path down towards 6% of revenues continues. Wages have remained broadly flat. Marketing expenditures have remained flat. Technology investments remain flat and G&A expenditures remain flat as well. On a net basis, therefore, adjusted EBITDA has come in at INR 45 crores or close to 2% of revenue for Q3 fiscal '25, a growth of INR 35 crores versus Q2 fiscal '25 and broadly flat versus Q1. Overall PAT has improved to INR 25 crores for Q3 fiscal '25 or 1%. A quick snapshot of overall PAT growth for the company. As you can see on the right, we've had 3 consecutive quarters of positive PAT from INR 54 crores in Q1, INR 10 crores in Q2 and INR 25 crores in Q3 as opposed to only 1 quarter of PAT profitability in the previous financial year, which was Q3. In terms of overall quarterly financial performance, as I've mentioned, Q3 fiscal '25 revenue from services came in at INR 2,378 crores, a growth of about 8.5% versus the same quarter last year. Total freight handling and servicing costs have come in at INR 1,751 crores versus INR 1,572 crores, a growth of about 11.4% Y-o-Y, largely driven by increases in fleet expenses. Other costs have remained broadly flat or declined in this period. Total expenses came in at INR 2,451 crores versus INR 2,290 crores in the same quarter last year and in Q2, a growth of 7%, less than the growth in revenue, which leads to net PAT of INR 25 crores for Q3 fiscal '25, a growth of INR 15 crores versus Q2 fiscal '25 and a similar growth versus Q3 fiscal '24 with overall EBITDA at INR 102 crores or 4.3% of revenue versus INR 109 crores in the same quarter last year and INR 57 crores versus Q2 of this financial year. It's a quick snapshot of our results. With that, I'd like to pause and very happy, as usual, to take questions from all of you.

[Operator Instructions] With that, we'll take the first question from Sachin Salgaonkar.

I have 3 questions. First question, Sahil, more on the margins for the core Express business. What should we think about the steady-state margins for this business? And how far are we from that number? And does anything change with one of the top operators sort of insourcing in terms of how you guys look at a steady-state margin?

Sachin, do you want to go through all 3 questions...

Yes. Sure, sure. My second question again is on margin, but more on the PTL side. Last 2 years, if you see, we have some solid improvement in the margin. But versus that last 3 quarters, we are not seeing a sharp improvement. So just wanted to understand the trend of margin improvement going ahead, i.e., it should be gradual or we should see a good bump up there? And lastly, I just wanted to know a bit of an update in terms of how the 2-hour rapid commerce is scaling and your general thoughts in terms of how big the D2C operator contribution could be in the medium-term to volumes for Delhivery?

Thanks, Sachin. So let me address them one by one. In terms of margins, the overall steady-state margins for the business, we think will remain in the range that we've spoken about before. I think for the Express Parcel business, service EBITDA margins will remain in the 17% to 20% range. As I mentioned, that obviously assumes that there will continue to be sort of pricing efficiencies that are passed on by Delhivery. But the reality is, I think we're reaching an industry structure where potentially further price discounts do not have to continue to be passed on to customers. So the reality is this could evolve to a world where margins are slightly higher as well. So nothing sort of changes on overall steady-state margins for the parcel business. I think the Q3 numbers obviously are a little lower than they were at the same time last year. And partly, the reason is, one is a slight expansion in the fixed cost. We had our Bangalore mega facility which went live, which has contributed rent expenses in this Q3. But the other equivalently, I think, in this Q3 was a slight bump up in overall fleet sourcing costs, which was a little unanticipated for us at the start of the quarter, but those have normalized since. And so I don't think there will be any sort of structural change to the Express margins. In terms of the insourcing impact, I think let me sort of answer this 2 ways. One is, obviously, there's been more insourcing. I think from a Flipkart and Amazon perspective, the extent that they've insourced has sort of remained steady through the year because they've already sort of reached the logical sort of conclusion of their insourcing. The reality in the last 2 years has obviously been the increased insourcing by Meesho towards its Valmo platform. I think that's now reached a fairly large percentage of their total volumes. And so I'm not sure that, that will continue to have too much impact. But I think what it has done over a period of time is that it's essentially eroded the profit pool for the express industry as a whole. And even if you include sort of the first-party players when you sum up, as I mentioned before, the total profitability of this industry delivery is more than 100% of the profit pool. I had said this in Q2. And the reality in Q3 is that our share of that profit pool has actually increased as opposed to Q2. So our belief is that cumulative losses in this industry outside of delivery have increased between Q2 and Q3. So I suspect that we should see -- I mean, it stands to reason that we should see correction in this either in the form of increased pricing from other 3 peers who are finding current pricing unsustainable, which is good for Delhivery, because either it manifests with increased volumes or increased price. And so actually, I think the reality is the insourcing impact on profitability should disappear in a couple of quarters. On PTL margins, I think the reason why I'm not seeing a more sharper uplift is because, as I'd mentioned, one of the sort of benefits and sort of one of the dis-benefits perhaps in some senses of running the integrated network is that when investments are made to essentially boost express capacity, the PTL network shares a certain percentage of that cost because we run on the same trucks, we run in the same hubs. And in Q3, which is the Express peak season, we obviously have to invest towards the Express business. And so the PTL network has taken some of those costs. I think if you were to eliminate those, the PTL margin uptick would be even higher. I think what we're very happy about is that despite the investments in Express, as we look at the PTL margins, there's been an expansion of margins. Our yields also have gone up Y-o-Y. And we expect that this trend will continue. The PTL business will continue to grow. In fact, December was our highest month ever since the integration with Spoton at close to about, if I'm not mistaken, about 147,000 tonnes of freight and January has continued more or less in the same vein. So overall, I think PTL margins are in good shape, and will continue. In terms of the 2-hour rapid commerce business, we've launched and are currently live in 3 cities. We're live in Bangalore. We're live in Hyderabad. We're live in Chennai. We have gone live with 2 core customers with another 15 scheduled to start at some point over sort of this quarter in the early part of the next. Volume uptick in most of the dark stores actually has been pretty reasonable given that we've started barely about 45 days ago. I think the first set of dark stores are already approaching close to about 500 orders per day, which is actually pretty impressive given that these are from stand-alone B2C brands. And I think, the breakeven point for these dark stores, obviously, is much lower than the breakeven point for sort of the broader quick commerce industry. Broadly speaking, I think we breakeven at close to about 700 to 800 orders per dark store per day. And so we're nearly there. That said, as I mentioned before, I think rapid Commerce is sort of more a feature. It's an add-on product for the top 8 cities for specific SKUs to specific customers. I think broadly, if I look at it, I expect that this business will add maybe somewhere between INR 80 crores and INR 100 crores of revenue to [ delivery ] through the financial year, and the margin structure will broadly be similar to the Express business as a whole. So it's an interesting business. It's a good capability for Delhivery to build. It helps us sort of serve our D2C customers and their customers much better. But it is ultimately relative to the broader scale of e-commerce, still a fairly small opportunity. In terms of contribution of D2C overall, I think one of the things in our Express volumes that obviously, we don't break up, but 3 segments that we track very carefully. One is obviously direct-to-consumer brands, whether they ship through us directly or whether they ship to us via the form of an aggregator of some shape or form. And the other, obviously, is we track our direct SME business. The heartening sort of piece of our volumes has been that our direct-to-consumer business has grown close to about 30% Y-o-Y, and our SME business has actually grown over 50% Y-o-Y. So we continue to have a pretty compelling proposition with that group of customers. And our belief is as we give them sort of the right kind of pricing, the right kind of reach and the right kind of service quality, there's no reason to believe that these segments within e-commerce won't be a more material portion in the medium-term.

One quick follow-up. This is regarding your comment in terms of boosting the Express capacity. We've seen investments into the capacity on Express every year to a certain extent, and I presume that should continue going ahead as well. So does that also mean that the PTL margin improvement should also be at the similar pace going ahead as well?

No, I think PTL margins actually will improve at a faster rate. So a couple of things will happen. One is, as I've mentioned, that we've continued to sort of improve overall yield. If you look at it yield, I think, over a 6, 7-quarter period has gone from about INR 10.3 per kilo to nearly about INR 11 to INR 11.1 per kilogram. So I think that is part of what will continue to drive growth in margins. The second, of course, is the heavier loads that are coming into the network are improving utilization of the core Tractor-Trailer network as well as outside the Tractor-Trailer network. And so that margin uplift will come. And the third thing, of course, is that we're also, as I mentioned in the past, our reseller program is becoming larger. We are starting to target retail markets and smaller PTL markets which sit on reverse line haul routes, where essentially the incremental margins are much higher because these loads will typically flow in on half empty trucks. So for instance, in markets like Kanpur, in markets like Nagpur, in markets like Guwahati, et cetera. And so actually, margin uplift will become higher. So the PTL margin uptick will be faster than Express.

We'll take the next question from Gaurav Rateria.

I have 4 questions for you, Sahil. The first on Express Parcel service EBITDA margin, not just being lower for this quarter, but also on a 9-month basis, it seems that the operating leverage has played negatively given the volume growth has been muted in low single-digit. Is this also driven by we becoming more heavier on our own share of the vehicles in the network and which is why it kind of played negatively and this can kind of reverse very sharply as volume growth kind of improves? That's question number one. Question number two is on infra addition. Has that been in line with our overall volume growth in the system? Or we have built more spare capacity in the last 9 months compared to the last year, which kind of allows us to go slower on capacity building for the next year as we grow revenues? The third is that on PTL, what we can do to further accelerate growth in this business? Or we should look at this as a 15%, 20% volume growth business when the industry is barely growing at high single-digit? And lastly, on the competition, you kind of gave some color on the -- that they are bleeding a lot more and we are more than 100% of the profit pool. But what makes us believe that they would be required to take some pricing action, which could favor us in terms of volume share in the near-term? I mean, this can go on for like maybe 1 or 2 more years, right, before anything of that sort happens. So this could be a low burn period or slower move to kind of benefit delivery from a medium-term perspective? So these are the 4 questions.

Sure. I'll address each of them in order. Express on service EBITDA, I think the Express service EBITDA in Q2, Q3 were muted. And you're right, for the 9 months have been slightly muted compared to the previous year, largely because some of our fixed investments, especially one of them being the Bangalore Hoskote facility coming live and redundant facilities being there. So that's one of the overhangs on service EBITDA margins. And in Q3, specifically, as I had mentioned, at the start of Q3 with the volume surge in the first sort of week of October, I think fleet costs went up a little more than we expected in the key metro cities. And I think the learning for us really is from the next quarter on, one option is to see whether we get into better fixed contracts as opposed to sort of doing spot vehicle placements in that week. So I think that's ultimately caused an overall drag of about INR 12 crores to INR 15 crores on the earnings. But otherwise, as I'd mentioned, structurally nothing changes on the Express service EBITDA margins. We see no reason to believe that we will not be in the 18% to 20% sort of range overall. In terms of infra addition, I think broadly, infra addition has been in line with capacity. In fact, if you look at our CapEx as a percentage of revenue, we are, in fact, ahead of the guidance that we've previously provided to analysts and investors. I think this year we will end up with CapEx as a percentage of revenue being 5.6% or lower. And this has been declining Y-o-Y. We've indicated that over the long-term, we expect CapEx to settle at between 3.5% and 4% of revenue, which is largely going to be sort of maintenance CapEx, upgrade CapEx as we need. I don't think we have any very significant CapEx that's planned for the next year. There will be some routine hub upgrades, but outside of that, nothing very major coming out. We have sufficient capacity in the network. So in that sense, I think you'll see capacity utilizations also going up in the next financial year. On PTL, absolutely not. The business is not expected to grow at just sort of the 16% to 20% range despite the fact, of course, that the rest of the industry in the last quarter has been flattish or sort of very low single-digit sort of growth numbers. I think our ambitions are much larger. The PTL market, as I mentioned, is a deeply unorganized market and Delhivery is really growing into that unorganized market and our ability to grow, therefore, is not constrained by other players in this market. Our own ambition internally is certainly to grow the business overall at nearly 25% to 30% in the next financial year. And I don't see any reason for not being able to achieve that. I think as I've mentioned in the past, picking the right markets to grow in, picking the right clients, picking the right pricing is important. And that's something that, as you can see, we've been getting better at quarter-on-quarter. So there's no reason for our growth to not be at that 25% to 30% benchmark for the next year. In terms of competition, your question is valid. That said, I think in this industry, we are reaching sort of in some senses, a reckoning. The reality is that last year, we had the same discussion in terms of how long can these losses sustain. And I think the reality is that incremental capital flow into this industry is now going to be severely constrained. And I think in the interest of sort of sustaining themselves as going concerns, I think competition is going to have to look at sort of their business model. So I don't think that additional capital sort of will be available. So I'm not very confident that the industry structure that we currently have will continue. I think the industry structure from here should become more favorable towards delivery. If we were, let's say, x percent or -- we were over 100% in any case, but whatever percentage of the overall profit pool we were in Q2, that's increased in Q3. And our view is that structurally, there's no reason to believe that, that won't increase. Also, the reality is that with a lot of the networks having shifted towards variable cost models, the fact is that there is no operating leverage in a lot of the underlying models. And as a consequence, as volumes grow, many of our competitors do not have the ability actually to improve their margins with time. Their only sort of approach at this point has to be increases in yields, which will eventually either sort of lead to Delhivery also increasing yields or will lead to lower volumes for them. So either way, it's accretive to Delhivery. So I actually think that we're getting closer and closer to a reckoning in this industry. I think we've said it in the past. There are too many players in the Express Parcel business and this industry has to consolidate. And I think the consolidating forces are becoming tighter and tighter.

We'll take the next question from Lokesh Maru.

Sahil, one fundamental question on our model, which is integrated in nature, right? So in last 1 year, what has also happened is Valmo has challenged that one way of working, right, which is their model would be more variabilized in nature, let's say. But then the ramp-up you have seen in the last 2 years has been significant, right? So in your opinion, like what an integrated model took, which was capital and time both, right? So going forward, one is, let's say, Valmo serves Meesho, but if it is externalized, how do you see that scenario panning out? And also, it raises question on the entry barriers in this industry, right? So your thoughts on the same?

Sure. I have said this in the past, the entry barriers in logistics, if you consider entry to merely be the ability to deliver a package are 0. If you own a bike, you're a logistics company. So in that sense, I don't think that the entry barriers to logistics to start off are high. I think the last mile, as I mentioned multiple times, is the most commoditized part of logistics and therefore, setting up a last mile heavy network is not always very difficult to do. Signing up franchise partners who work for, let us say, the other self-logistics arms is a valid way to quickly and rapidly set up a last-mile delivery network. And the advantage, of course, is that the self-logistics arms don't necessarily have exclusive tie-ups with the franchise partners that they work with. And so they are free to work with a Valmo or somebody else. That said, there are significant barriers to scale in logistics, even if there aren't significant barriers to entry, reliably delivering 800 billion packages a year on time and with the speed that is required for customer satisfaction is a fairly difficult task. I think we've done our benchmarking and we're pretty confident that Delhivery service metrics outstrip any of our third-party competitors and first-party competitors with variabilized networks. Variabliized networks unfortunately don't work as well. A network which comprises of one entity performing sortation, a second entity performing line-haul, a third entity performing last mile, only loosely connected is, by definition, going to have very significant speed problems and very significant coordination problems. The other thing, of course, is the cost of running these networks is higher than the cost of running delivery. I mean, we've done the benchmarking, and our belief is that our cost of delivery is anywhere between 8% and 10% lower than even the in-house sort of variabilized networks. So I think the in-house logistics network scaling up, as I have mentioned before, I had called this out last year and I've called this out on multiple quarterly calls, the impact of these networks was always going to be significantly detrimental to our competitors much more than Delhivery, because they were also running variabilized networks. And I think that's going to be a problem. The second thing, of course, that will have to be contended with is that third-party players in this market who were servicing the player in question prior to their self-logistics adventure have been loss-making. And so the reality is when you internalize those volumes, those costs accrue to you, whereas those costs were previously being paid by the private equity investors in those third-party businesses. And so it will be interesting to see what happens. I think there are interesting challenges ahead. But I don't fundamentally believe that it changes our answer on an integrated network being better and being the right network. Our speed metrics suggest that, our quality metrics suggest that, our return rates are lower, our cost per shipment is lower.

Sahil, one more thing on externalization of, say, Valmo or ATS or Instacart. How do you see that -- I'm just calling out these names because they are the ones who have that backing internally and then again, the scale, right? So in any way, do you see that disrupting some bit of volumes going forward?

Not in the least. For very simple reasons, I think let's ignore Valmo for a second. If you take the other first-party players, I think one of them has released its financial results as well. And as I've mentioned in the past, the losses quintupled between fiscal '23 and fiscal '24, which is problem number one. Problem number two is, if you are, let us say, a first-party logistics arm for Flipkart and for Amazon and peak season rolls around, how much additional volume are you going to get as a percentage of your total. Let's say, you were delivering 500 packages in a delivery center for Flipkart or 500 for Amazon and you got another 30 D2C parcels. Your customer service is obviously going to take precedence over anyone else's. And I think this adventure has been tried in the past and it has failed. I would argue that externalization is more or less -- it's a dead on arrival proposition which has been tested and hasn't worked. Talking about something doesn't make it viable. And over 2 or 3 years, these companies have repeatedly said that they are going to externalize services without necessarily being able to break into anything of consequence because the service metrics don't hold up, the cost metrics don't hold up. And as far as the variabilized model goes, the reality is why would you, if you're a high-quality D2C brand or an SME, entrust your packages which have much higher relative value to you than in a marketplace environment to a third-party network where you can't even identify if the parcel is damaged or lost, who's damaged or lost it. There is a value to running an integrated network. And I don't see that this is a threat at all.

Understood. Last question from me. The fleet size bump up, which you mentioned, if you could just elaborate on that piece, that's it.

Increase in the fleet size? Costs you mean.

Yes, fleet size cost bump up which we saw this quarter.

Yes. I think [ essentially ] what happened in the first 7 days of the festive season is that our heavy volumes actually were much higher, heavy volumes across e-commerce, in fact, were much higher. The platforms have also reported this. And so the overall demand for vehicles of a fleet of specific kinds, intercity fleet in the major cities, so if you take Delhi, Bombay, Bangalore, et cetera, I think increased quite a lot. And as a consequence of that supply was limited and overall pricing of fleet went up compared to what we had expected. I think we had been operating so far with a completely third-party fleet. And our decision is that we will sign more long-term contracts with our fleet partners, locking in these rates for next year a lot better. So far, we've been able to always persist with sort of spot contracts. Those will shift to fixed contracts next year.

[Operator Instructions] We'll take the next question from Mukesh Saraf.

Sahil, just -- sorry to kind of go back to the Express segment margins. If I look at your overall line-haul expenses that you have on Slide 18, it has come off Y-o-Y as a percentage of revenue. So -- but you do mention that that's one of the major reasons why your margins in this segment is down like 500 bps Y-o-Y. So I'm just wondering, you've been able to kind of manage these higher line-haul expenses in other segments ex of this Express segment, but you haven't been kind of able to manage that in this Express segment. So I'm still not able to understand that. If you could kind of explain?

Sorry, line, I'm talking about the fleet costs that went up Y-o-Y were the vehicle rental expenses. This is the intracity fleet.

So the vehicle rental that you have called -- that you have on the same Slide 18, is that only the last mile fleet?

That is the inter -- intracity fleet. So Mukesh, the line-haul vehicles are vehicles that go from one city to the other. Then the same city from a hub to a delivery center, there is what is called a [ Karting ] run. And then there is, of course, the last mile fleet. So the expenses that went up were the intracity fleet. So to give you an example, there's a warehouse which has, for instance, disbursing a lot of sofa sets or call it, gym kits or whatever it is. When they are consigned to stock in, let's say, Gurgaon to our sorting facility in Tauru, those vehicles are the ones where we saw a shortage of supply. And as a consequence of that, we saw an inflation in the cost, which you can see. So vehicle rental expenses went from 19.8% or INR 434 crores in Q3 fiscal '24 to 20.2% in Q3 fiscal '25. Now ideally speaking, this number with scale should have been lower than the 19.8% that we saw in Q3 fiscal '24.

Right. So even if I look at this INR 43 crores going to, say, INR 49 crores, it still doesn't explain the 500 bps hit. I mean, that hit is like more than, say, INR 40 crores, INR 50 crores for us Y-o-Y in this segment.

[ This ] INR 4 crores going to INR 488 crores.

Yes, yes. Sorry. Yes. INR 434 crores going to INR 488 crores, correct.

It should broadly have been at about INR 430 crores, INR 435 crores. So if you take the call it, INR 30 crores, INR 40 crores on the INR 1,750 crores on revenues overall for the Transportation segment.

Okay. That's entirely in this segment largely.

Yes. So the main impact is there. And there's some impact, as I have mentioned, from the coming in of the Bangalore Hoskote facility, which has also increased fixed costs a little bit, but that will normalize for the next year. But the biggest impact is from the vehicle.

Okay. Got that. Got that. And secondly, on the PTL segment, I think after like 6, 7 quarters, we have seen first time a sequential decline in volumes. So -- and I mean, when I look at some of your other peers, listed peers, they've also seen some kind of a pressure on volumes this quarter. Are you seeing some signs of difficulty there, especially in the SME segment in terms of the PTL?

No, Mukesh. So as I'd mentioned, actually, December, we closed very strong. So we were at about 147,000 tonnes of billable freight in December, and we've continued very strongly into January. And we also announced, of course, that we have a big partnership which is starting with HPCL, which is going to significant network into the -- significant volume into the LTL network. So we are not seeing that. One of the things, obviously, is that Q3 typically tends to be a slightly flattish quarter versus Q2 because a lot of ship out happens before the festive season. So that's one of the things. The other is that at our end also, one of the things that we do in the first part of October, the first 2 weeks or so is that we tactically moderate PTL volumes in a couple of origins where we believe that heavy volumes are going to be very high, just the volumes. So in that sense, we could have seen a Q-o-Q increase also, but in defense of the Express business and just to make sure service levels were not in any way sort of affected, we tactically tweaked a little bit of volume on the PTL business, but that was recovered in December and has continued into Jan. So no structural shift.

Okay. No shift there.

We'll take the next question from Abhisek Banerjee.

Sahil, the first question is on the customer profile for the Express Parcel business. You mentioned how your contribution of D2C has gone up, right? So what would the breakup be around now? And given you believe that most of the headwinds from Meesho insourcing is now out, right? So what is kind of a number to kind of build in, in terms of revenue growth? Because if you're saying D2C is growing by 30% and if it is a certain percentage of your contribution, so how do you look at the revenue growth number for FY '26 now?

Yes. We don't break up our Express Parcel volumes by customer segment. That said, I can tell you that the non-marketplace portion of Delhivery's total volumes is fairly meaningful, and that continues to grow. From a revenue guidance standpoint, I think a couple of things. One is, overall, as I'd mentioned, e-commerce industry continues to sort of have headwinds. We continue to gain share. The market situation is a little complicated because, as I mentioned, I think last year, the reality is that some of the other 3PLs in this space chose to take price actions to boost volumes for a short period. I don't believe that, that is something that will continue into the next financial year given sort of the capital position and general sort of situation in the market. So there is potentially a revenue upside opportunity for us, which I think -- we'll see how it plays out over the next 30, 40 days because this is sort of the period when most people are renegotiating contracts with key customers. Don't have full insight into that just yet. But I think broadly, whatever sort of market growth is, we will more or less be able to maintain our growth in line with market growth.

Sir, any signs of the in-house, say Flipkarts, internal captives losing some share? And are you seeing any incremental share coming from these guys as they try to focus on quick commerce and all?

Yes, I think things are pretty dynamic overall. There are quarters where outsourcing does increase. There are quarters where outsourcing reduces a little bit. I think there is still a lack of sort of a coherent strategy on the first-party logistics side. What's very clear though is that the first-party logistics operations are a drag on the overall earnings of the [ principals ]. And so the question is sort of at what point do you make the rational financial decision? Because outsourcing another 10% to third-party logistics will be net accretive to the principles and does not significantly alter the sort of illusion of control over one's own logistics. So it would be a great decision for themselves and for the industry at large. That said, I'm not entirely sort of sure just yet. These things will play out over the next couple of quarters. I think there are many pressures to bear on each of these companies and we'll see what decisions they take.

Got it. So in terms of the rapid intracity deliveries that you spoke about, so why do you think only INR 80 crores to INR 100 crores is where you can go in the next 1 year? I mean, what would be the rough idea in terms of number of warehouses that you believe you can set up and how is it that you charge customers? Is it per delivery or do you take a warehousing fee? Or how does that model work?

It's a per delivery fee, and there's also a warehousing fee included in this. Typical pricing is in the range of between INR 80 and INR 100 per order that is serviced. We expect to set up 50 dark stores in the top 8 cities. The good thing is on a note, unlike acquiring thousands of dark stores, if you have a 2-hour delivery network, you can service the top 8 metros with just 50 dark stores, which are not too expensive to set up. So that's going to be the extent to which we will set up. And then depending on sort of what the demand pattern looks like, we may add a couple of dark stores here and there. But I don't anticipate that it will be significantly different from that INR 50. Now why it will not be materially much larger is because I think you have to look at e-commerce as a whole. First of all, metros as a total percentage of the volume within e-commerce and specifically, if I take what is called zone A volume, which is sourced in the metro and delivered in the metro, is close to only about 8% or 9% of total volumes within e-commerce, right? This is material which is, for example, sourced in Delhi, warehoused in Delhi and delivered in Delhi. Now you're talking about, first of all, therefore, the addressable market being limited to that 8%. Then on top of that, the question is what kind of goods lend themselves to that kind of delivery to begin with. Half of e-commerce is soft lines, is sort of long range items, which don't lend themselves to quick commerce, like somebody wants to buy a specific T-shirt or wants to buy some specific kurta, for example, that doesn't lend itself very easily to this quick commerce kind of model. So that's half the market nearly gone out of the 8%, which are down to about 4%. Then on top of that, you say how much inventory will the brands themselves realistically want to stock in quick commerce. Even if you're a cosmetics brand and you have whatever, let us say, 100 SKUs, all 100 of them don't lend themselves to quick commerce. At best, maybe about 10 or 15 of them will lend themselves to quick commerce. You're really talking about a small percentage of a small percentage of a small percentage lending itself to the rapid commerce kind of model, right? Any further than that, like of course, you can make the argument that I would like to make 75,000 items available to a customer within 2 hours. The problem then, of course, is that you have to set up gigantic pods. And the ability to set up a gigantic pod, for example, in Bombay is not going to come at a rental cost of INR 30 a square foot. It's going to come at INR 300 a square foot, which will obviate the profitability instantly. And if you go any further back in the supply chain, which is to say that I will set up gigantic pods, then you're essentially reinventing Amazon. So I think that's why the market is broadly limited.

We'll take the next question from Vineet Prasad. Since Vineet is unresponsive. We'll take the next question from Sachin Dixit.

My first question is on Express Parcel basically. So during the last earnings call, you mentioned that roughly 78 million-odd shipments happened in October. November and December seems tepid from that perspective, right? We were on a good trend in October, but it dipped quite sharply. Can you elaborate more on that? What happened? Was it just the overall e-commerce demand evaporating or there was something else that turned around?

No. In fact, if I go back to my quarterly call at that time when we've spoken about it, I had said that the 30% uptick that we had seen from broadly the 60 million, 61 million kind of benchmark to the 78 million, in fact, I believe my exact quote at that point was this is par for the course. It's similar to what we saw last year. Of course, this has been volatile in e-commerce over sort of a 10-year period. There have been occasions where the season has been 50% higher than the average. And there have been seasons where it's been significantly less than 30%. But I think that 30% was par for the course. If you look at that 78 million after that to 206 million, we've added about 128 million-odd shipments in the remaining 2 months, there's always a step down after the peak season. I think there's also buying fatigue, right? People have bought whatever they want to online in October. And so volumes do sort of take a dip in November and December. And there's been a broader sort of softness in consumption. You can see it, for example, in the food delivery numbers, for instance. And that's, of course, affected e-commerce as well. I think broadly, the consumption slowdown does affect e-commerce, and that's sort of what we saw.

Understood. And it's just like -- 59-odd million run rate for the remaining 2 months, it just feels it's probably even lower than what we saw last year during the same non-festive season. So that's why I was hopping on that.

We did 206 million for the quarter, 78 million in October, which gives you, I think, 128 million for the remaining 2, so 128 million by 2 is not 59 million.

Understood. Understood. Okay. Sorry, bad math. My next question is on gross margin side. So basically, largely maybe driven by the less operating leverage that we've got, expansion has been slightly muted compared to what we have seen in previous years. I understand there was a Bangalore facility which came on board and could have resulted in some hit. I wanted to understand how does this shape up going forward in the coming quarter, right? Because generally, your gross margins tended to dip Q-o-Q in Q4. Do you see that trend reversing this year or it's likely to sustain?

I think we should -- broadly quarter 4 will be normative to quarter 4s that we have had in the past. Some of the expenses that were one-time expenses or in the sense, we build up some capacity during the peak season, and we shed that capacity after the peak season. So that capacity we've obviously shed in January. And the second thing is, as I mentioned, as the PTL business grows, it does have a knock-on positive effect on the Express business as well. And January volumes in PTL have been solid. February so far has been pretty good. And so as the PTL volumes grow, there will be a knock-on positive impact on the Express business because line-haul expenses, for instance, will come down. And some of the overheating that we saw on the fleet cost side in the first week of October, which dented margins for quarter 3, obviously, that impact is not there in quarter 4. So that will also, to some extent, reverse. So overall, I don't think we'll see anything structurally very different in quarter 4.

We'll take the next question from Aditya Mongia.

I had only one question. I just wanted to get a sense from you that at an overall Express Parcel level, if the growth for the company is what it is, is it safe to infer that the overall marketplace otherwise is actually starting to grow less than 10%?

I think overall e-commerce growth has certainly moderated, Aditya. There's no question -- in this financial year. I think there's no question. The larger marketplaces, obviously, are private. So I don't know exactly what their numbers are going to turn out to be. But every indicator that we have from them is that volume growth has been fairly muted for all of them. And I know Meesho had a pretty blazing start when they set up as a company. But the reality is that your base catches up with you over a period of time. So I think even their growth rates will sort of come back to sort of what is normative and similar to what Flipkart and Amazon are also experiencing, which to my best of our knowledge is sort of growth has been muted. Where we have seen growth is in the B2C segment and the SME segment overall as a category, even though individual players, as I mentioned, may go up and down sort of in any given quarter. But those segments of e-commerce, I think, continue to have reasonable growth.

And just a follow-up question, as in, do you see levers that your customers can pull to make this number go back into the mid-teens? Or -- that's a conservative estimate as you plan incrementally? Do you think numbers are growth?

I think I've said this in the past. If our customers shut down self-logistics arms, they would be able to inject $0.5 billion back into marketing and growing the market. That's the biggest lever they have. And on behalf of the industry, we warmly encourage them to do that.

We'll take the next question from Vineet Prasad. In that case, we can take a follow-up question from Gaurav Rateria.

I again have a couple of questions. First, assuming that volume growth in the overall Express business remains subdued, do we have levers to get back to 17% to 20% margin range? Or will it be a function of growth and thereby operating leverage in that? Second question is why wait for price action from competition and why we don't act as leaders and try to force consolidation? Is it not a good strategy? And lastly, just a data point to understand better the cost per parcel metrics. Should it be looked upon more in terms of cost per tonne or cost per kg in order to better understand the cost structure for delivery as a whole?

On Express, to get to the 17% to 20% margin, can we get there without significant volume growth? I think the answer is yes. We can. One is obviously, as I'd mentioned, the PTL business continuing to grow will improve line-haul costs for both the Express and the PTL business. So we should be able to get to that. And I don't anticipate that there will be very significant sort of price movements downwards in any way. So, no reason to believe that we can't get to those EBITDA margins. I think as the PTL volumes grow, that should happen to some extent naturally. And the second, obviously, as I mentioned, is that the fleet costs in quarter 3 were a little abnormal, which are starting to reverse. They've already reversed in Jan, Feb. So as we negotiate these fixed contracts, I think we will get to -- back to those 17% to 20% margin kind of range. Why not force consolidation? I think the issue obviously is sort of in what sense, the reality is M&A opportunities for Delhivery. There's not much that we would be able to acquire in this case because the fact of the matter is that the volumes are highly concentrated for most of our competitors. And so it's not clear sort of what value we should ascribe to those volumes. I think the reality is it's better to let discipline sort of enforce itself. So we'll wait and watch. If the right consolidation opportunity becomes available at the right price, then obviously, Delhivery is a natural consolidator in the market. But I don't believe it's necessary for us to try to force anything at this point in time. In terms of cost per parcel, a slightly different answer for e-commerce versus LTL. On LTL, you should absolutely look at cost per kilogram or cost per tonne because internally we look at it at not just cost per tonne, but also distance traveled overall, but cost per kg, cost per tonne is an absolutely valid metric. On the parcel business, you can choose to look at it either as cost per kilogram, billable kilogram or cost per parcel as a whole. Of course, the problem is that the cost per parcel as a whole for delivery is very different for different package types and so the composition matters a lot. So we look at it as cost per parcel delivered, say, sub-250 grams, cost per parcel delivered sub-500 grams and so on in those slabs and cost per parcel delivered in different zones, zone A, zone B, zone C, zone D, zone E and so on. So it's a little more complicated than that. But as a broad sort of indicator, cost per parcel for the e-commerce business -- e-commerce parcel business is also a reasonable metric.

Got it. I was asking more because it may not be comparable for competition because competition may have a very different composition of the volumes in terms of the weight they carry, average weight per parcel or the distance that they travel?

You're right. And that's why we look at it when we talk of cost per parcel, we also compare versus competition at every price slab at every zone slab. So when I talk about deliveries cost per parcel being lower, it's not just at an aggregated level. It is -- we know, for example, that our cost is competitive, is lower at Zone A sub-250 gram, zone A sub-500 grams, Zone A up to 1 kg and so on and so forth. So it's across all slabs and all weight categories.

We'll take the next question from Koundinya Nimmagadda.

Sir, I'm just trying to add up this growth numbers. I mean, our volumes grow at only 2%. But if I were to compare that with the growth in, say, a D2C or a vertical players, I mean, that's roughly at around 20%, 30%. And when you say that non-marketplace volumes rose are fairly meaningful for us, I'm just trying to bridge this gap, I mean, 20%, 30% growth for these players and then our total volumes being only 2%. So where is the gap? Like what would be the mix of e-commerce volumes or online commerce ex non-marketplace in total share? And how will that add up to this 2% growth, if you can provide some color over here?

See, we don't share client level overall volume. So we can't reveal sort of individual clients and segments. That said, you're right. The overall growth in the D2C, SME aggregator segments has been higher in the range of a -- minimum is 30% for D2C, 50% plus for SME. Put together, as I mentioned, is a meaningful percentage of our business. Of course, a larger percentage than this comes from the marketplaces that we serve. And obviously, not just the marketplaces, even the likes of verticals like, for instance, in Nykaa and Ajio and so on. Some of these accounts as an example, where that Reliance has had a year where volumes have been lower in this financial year than in the previous year. So there are also clients that we've had where their overall volumes have degrown. Similarly, we used to service a customer called AEPL, which was acquired by Amazon, which now has been folded into Amazon, and I believe volumes from there are 0, because that effectively has been shut down. And so we have some clients which also churn out. We have some clients where their volumes decline. And the marketplace volumes grow by less than obviously what the D2C, SME and aggregator volumes grow.

Sir, if I were to ask, I mean, I understand that you don't want to give client level data, but on an approximate level basis, would Valmo still -- or rather Meesho would still be around 20%, 30% of your volumes? Or is it a lower number and therefore, the impact of insourcing should not be meaningful from you for here? In that case, what is the kind of tentative range in volume growth that you're looking at for FY '26? Should it be in double-digits? Or do you think that it's going to be in single-digits? Any color that you can put over here, please?

Sure. So we don't reveal individual client volumes, and I would prefer not to reveal sort of what individual clients make up is. Our top clients, as I've mentioned, our top 3 or 4 clients put together, largest customers for top 5 customers will form close to less than half of the overall revenue of Delhivery. So we don't have very significant sort of client concentration as a whole. In terms of volume growth guidance for next year, I think, look, it's hard to say because there are a couple of competing factors. One is obviously headwinds facing e-commerce as a whole. I think it remains to be seen sort of how these companies continue to drive growth next year. I think more investments in marketing, more investments in consumer acquisition, driving more category growth. If those continue a pace, then there's no reason to believe that volume growth in e-commerce will not come back. I think there is demand and going into Tier 2, Tier 3, Tier 4 cities a bit more, localizing a bit more will help because that's really where a bulk of the growth has to come from. So we'll see. Our anticipation is that hopefully, these measures will come in, and we will get our fair share of that. I think there are also cost pressures that, as I mentioned, first-party logistics companies face, third-party logistics companies, of course, face it as well. And as people look at their mix, I do believe that a more financially prudent decision would be to outsource a little more to third-party players. And we'll see how that plays out. These are active conversations that we are having with all of our customers. And if there's even minor shifts in the strategy, the upside to delivery could be large. But it's hard to say at this point, I think, because the strategies are still relatively fluid. But I think the reality is that, overall from an insourcing standpoint, most of the sort of insourcing that could be done by the 3 platforms is already sort of evident. And so the impact of additional insourcing per se will not be as large as sort of it's been in the past. So I don't anticipate there's going to be a very big headwind. But again, this industry is pretty dynamic. Things change on a weekly basis. So we'll know more as we go along.

Sahil, hope things -- better things pan out in future.

Thank you everyone. That was the last question. Please reach out to the IR team for any further questions. And before we end, on behalf of Macquarie, I would like to thank Delhivery for the opportunity to host this earnings call. Over to you, Sahil, for any closing remarks.

Thank you, all, for joining the earnings call. Thank you to the Macquarie for hosting us this evening, and look forward to speaking with all of you after our Q4 results. Thank you.