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Elbee Services: Diluting gains

Jun 18, 2001

Elbee Services is the second largest courier company in the country, with a market share of around 20%. The company has undergone a massive restructuring exercise in the recent past, which is bearing fruit now. The company has registered a smart turnaround in its fortunes after being in red for couple of years. To improve profitability, the company changed its product mix drastically, in favour of high margin businesses. In the courier industry, domestic operations are more profitable compared to international business. Again, within the domestic business, non-documents business is more profitable compared to the document one because of competition from unorganised players and proliferation of advanced communication devices.

Elbee Services- Changing Product Mix
Particulars 2000 2001 E
Domestic Business 49% 56%
International Business 51% 44%

The operating margins of the company have shown a sharp improvement from 6.8% in FY00 to 10% in 3QFY01, following the restructuring. Apart from product mix change, the company has also decided to use commercial airlines for its operations. It has decided to sell off its 5.5 Fokker aircraft. This would result in low fixed cost and high variable cost model, which would enable it to have flexibility to scale down its operations, in case of a slowdown scenario.

The survival strategy in the courier industry now, is to offer complete logistics management. Courier companies are integrating supply chain on behalf of their clients to help them cut on inventory carrying costs. A sophisticated hub and spoke model coupled with investments in technology, enabling real time tracking of transportation pipeline is required to offer value differentiation. Elbee Services is in the process of putting in place its new hub, which is likely to be operational in a couple of months (after witnessing some legal hitches). The company has also tied with 70 leading portals to cash in on E-commerce opportunities.

The domestic express industry is likely to grow at around 25-30% in the next few years. Established players with well-entrenched networks, value added offerings and competitive technological edge are expected to maintain growth momentum. Elbee's restructuring exercise as well as other initiatives seem to be in the right direction. However the flip side is, though the financials of the company are expected to witness a smart turnaround, the effect would be diluted to a large extent due to substantial private placements carried out in the recent past.

The company's shareholders recently approved a second preferential allotment of 3 m shares to financial institutions and mutual funds (at a minimum price of Rs 140). In the first preferential allotment the company had placed around 3.3 m shares to ICICI, UTI and others. The share capital of the company is expected to increase by 94% following these placements. The company plans to utilize these funds to retire debts, which should result in interest savings in the current year. At the current market price of Rs 112, the stock is trading at 12 times its FY01E earnings.


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