Delhivery Ltd (NSE: DELHIVERY) Q3 FY23 Earnings Concall dated Feb. 11, 2023
Corporate Participants:
Sahil Barua — Managing Director and Chief Executive Officer
Amit Agarwal — Chief Financial Officer
Analysts:
Vijit Jain — Citigroup Inc. — Analyst
Sachin Salgaonkar — BofA Securities — Analyst
Hitesh Goel — CLSA Limited — Analyst
Gaurav Rateria — Morgan Stanley — Analyst
Mukesh Saraf — Spark Capital Advisors — Analyst
Aditya Mongia — Kotak Securities — Analyst
Alok Deora — Motilal Oswal Securities — Analyst
Sachin Dixit — JM Financial — Analyst
Presentation:
Vijit Jain — Citigroup Inc. — Analyst
Ladies and gentlemen, good day and welcome to the Q3 FY ’23 Earnings Conference Call of Delhivery Limited, hosted by Citi Research. And this is Jain.
So 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 any representatives from the media, they’re requested to drop-off this call immediately.
To discuss the results, I’m pleased to welcome Mr. Sahil Barua, the MD and Chief Executive Officer; Mr. Sandeep Barasia, ED and Chief Business Officer; Mr. Amit Agarwal, Chief Financial Officer; and Mr. Varun Bakshi, the Head of Investor Relations.
[Operator Instructions] I thank the management team for providing us the opportunity to host this call.
I now invite Mr. Sahil Barua to take us through key highlights for the quarter, post which we’ll open up for Q&A. With that, over to you, Sahil.
Sahil Barua — Managing Director and Chief Executive Officer
Thank you, Vijit. Good evening, everyone, and thank you for joining our earnings presentation for quarter three and for giving us the time. Welcome to the call.
Just a quick check, Apar [Phonetic]. I am audible?
Operator
Yes, sir. You are audible, loud and clear.
Sahil Barua — Managing Director and Chief Executive Officer
Great. Thank you all. So, as always, I’ll spend about 15 to 20 minutes walking through a summary and highlights of quarter three, and then we’d be very happy to take questions from everyone.
Apar, if you can move two slides forward to the summary of quarter three, yeah. Before we get into the slides, I think, some context on quarter three. Our objectives as a management team really were to achieve two major milestones in quarter three. The first was to continue on the operational and financial integration of Spoton, which was a PTL network that we acquired last year, as you would remember. And the second was to maintain and grow market share in our two critical transportation verticals and set us up well for quarter four and beyond. So, I’m pleased to announce that in quarter three, we have been able to achieve both of these objectives, and we have seen continued sequential improvement in profitability in the transportation business and in the Company overall and we saw growth in e-commerce volumes that have persisted so far into January and February and similarly in the PTL business growth that has set us up well for quarter four and beyond.
Moving on to the numbers for quarter three. We delivered about INR1,822 crores of revenue in quarter three financial ’23, which is a growth of about 1.5% over quarter two when we did close to about INR1,780 crores of revenue. Our adjusted EBITDA margin, importantly, continued to improve. If you will remember from our last earnings call, we had incremental gross margins of 50% in quarter two. The incremental gross margin trend for the business has continued into quarter three and operating leverage in the business has remained intact, while service standards have improved. As a consequence, we’ve seen adjusted EBITDA margins improved from minus 7% in quarter two to minus 3.7% in quarter three. We delivered about 170 million shipments, which is about 5.6% growth quarter-on-quarter in our e-commerce Express delivery business, which is the number that I referred to in quarter two as well.
We continue to have a leading market share as an independent third-party logistics player in this space. We’ve seen our overall share of market and share of wallet with customers persist into the New Year as well. We delivered 258,000 tonnes of Part Truckload freight in quarter three fiscal ’23. We’ve delivered about 3 million tonnes, since fiscal ’19. More importantly, in December — in October, November, December, in the month of December, we delivered about 98,000 tonnes of PTL freight. That trajectory has continued into the New Year as well. We continue to operate one of the largest networks in the country, we operate about 18 million square feet of logistics infrastructure. The integration of Delhivery and Spoton’s facilities continues as per plan, which I’ll talk about in the next slide. 26,000 customers continue to depend on Delhivery for multiple services, with over 58% of our revenue coming from customers who use two or more of our services across business lines, and we’ve expanded reach marginally between quarter two and quarter three. We continue to cover the entire country with 18,510 pin codes under direct coverage of Delhivery.
Moving to the next slide, just a quick snapshot of metrics as usual. As you can see, at the end of financial ’22, we were in 18,074 pin codes, that has expanded to 18,510 pin codes as of quarter three. This is a regular operational expansion that we expect will continue in quarter four and beyond. Through our partnerships with FedEx, Aramex and other global players, we continue to allow Indian customers of ours to access the rest of the world. We have about 26,845 active customers who continue to buy services from us across business lines.
On the infrastructure side, as you can see, the integration of Spoton infrastructure into Delhivery has continued in quarter three. We had 18.9 million square feet of real estate spread across 96 gateways, 21 automated sort centers, 189 processing centers, about 3,000 delivery centers and 237 freight service centers. This has now been consolidated to 17.9 million square feet of real estate in quarter three fiscal ’23 as per plan, with 92 gateways, 22 automated sort centers, 172 processing centers, 2,750 Express delivery centers and 150 freight service centers. And our team size continues to remain about 52,800 people across the country.
Moving on, yeah, key highlights for quarter three financial ’23. I think the first is really that our adjusted EBITDA improvements have continued quarter-on-quarter post the Spoton integration. As you saw on the previous slide, network footprint optimization has continued in quarter three. We are more or less now completely done with the footprint optimization that began in quarter one when we began to operationally integrated Delhivery and Spoton. There are a few locations that are still awaiting final optimization, which we expect will happen over quarter four and the first half of the next financial year.
We also continued to revise pricing across low-margin customers. This is something that we expect will continue into Q4 and will continue into the early part of the next financial year as well, which has had an impact both on yield, as well as on profitability. And we continue to drive capacity utilization across our operations, especially in the mid-mile operation.
On the PTL business specifically, I think we are entering the crucial March end period with excellent operational and business momentum. As you can see, tonnage continues to remain below the numbers that we were at in quarter four fiscal ’22. However, as of December and January, we have done 96,000 tonnes of freight at network service levels which are above service levels that the network has delivered at any point in the past. Our network service levels, as experienced by customers, continue to be in the 95% range. More importantly, network quality has improved significantly. This was an issue that we were dealing with immediately post the integration. Short shipments have dropped from 0.2% when the integration began to nearly 0.05% as of January and network speed has returned to pre-integration levels or better. So the PTL business has set-up extremely well for quarter four and beyond.
The Supply Chain Services business pipeline continues to expand. We continue to add new clients that are key verticals that we operate in, which are auto and auto spare parts, healthcare, home furnishing, beauty and personal care and consumer electronics. And we have also expanded existing contracts in the auto, industrial and consumer segments. This is a business that has stayed somewhat flat sequentially, owing to seasonality in the underlying business, but has grown 33% from the same time last year. We also completed the acquisition of Algorhythm Technologies in January 2023. Algorhythm has a suite of supply chain software products, which will enhance our SCS offering with inventory management and transport optimization solutions. So that’s a quick snapshot of quarter three.
Moving into the specific numbers. Revenue from services in quarter three stood at INR1,822 crores compared to INR1,796 crores in quarter two. Sequentially from the last year, this is lower by about INR170 crores, driven largely by the PTL business. Express continues to be our major business, form 66% of revenues, PTL is today 15% of revenues and our newer businesses, which our Supply Chain Services, Truckload services and Cross Border form the remainder, which is about 20%. On Express Parcel, between quarter two financial ’23 and quarter three, we’ve seen growth quarter-on-quarter of about 7%. We closed the quarter at about INR1,200 crores of revenue in quarter three fiscal ’23. We delivered close to 170 million shipments in quarter three fiscal ’23. This is despite the fact that the high season in e-commerce this year was earlier than in the previous year. This year, the high season was in quarter two. So we’ve seen a 6% growth sequentially. On the PTL side, revenues have declined from quarter three of last year and from quarter two of this year. We closed quarter three at INR277 crores of revenue versus INR293 crores in the previous quarter. Freight tonnage has been at 258,000 tonnes for quarter three versus 286,000 tonnes for quarter two. However, December, as I had mentioned, was 96,000 tonnes of freight. January has continued in the same vein. And we see similar momentum in February as well.
This is a quick snapshot of week-wise volumes in the Part Truckload business. The way to read this chart is, at the bottom is the period of every month from November to February, the red bars are November, the black bars are December, the gray bars are January and the yellow bar is February so far. As you can see, we can see a consistent increase in PTL volumes in every comparable week from the last — for the last 3.5 months, and February is trending well above November, December and January. This has been driven primarily by massive improvements in service quality across the network, which is a natural consequence of the operational integration being complete between Delhivery and Spoton. So an increase in network speed and increase in service precision and an improvement in service quality as evidenced by the reduction in network shortages. So we’ve seen January as an example, trend at about 10% to 15% higher than November in general. And so far, we see February trending at 15% to 20% higher than January.
For the other businesses, the Truckload business has grown to INR102 crores of revenue in quarter three fiscal ’23 versus INR103 crores in quarter two fiscal ’23. This was driven by underlying seasonality in the Truckload business. The business has grown 33% over the last year. The Supply Chain Services business has grown to INR178 crores in quarter three fiscal ’23, more or less flat versus quarter two, but 33% again higher than the same period last year. This has been driven both by expansion of existing accounts, as well as new accounts, as I had mentioned earlier.
The Cross Border Services businesses declined year-on-year and sequentially from INR96 crores of revenue to INR66 crores of revenue. However, this has been driven by a compression of yields in both the air freight and the ocean freight markets globally. Volumes in the ocean freight business have grown significantly over this financial year. And there has been a shift away from air freight volumes toward ocean freight volumes in the same period.
On the adjusted EBITDA front, I think this is where the most positive news for the quarter is. Revenues have grown, as I mentioned, from INR1,796 crores in quarter two fiscal ’23 to INR1,824 crores in quarter three. Service EBITDA in the same period, however, has grown from INR86 crores to INR139 crores. So service EBITDA margins have improved from 4.8% in quarter two fiscal ’23 to 7.6% in quarter three fiscal ’23, which is a reflection of the underlying operating leverage in the business.
Our incremental gross margins in the Transportation business especially continued to be high.
Corporate overheads, as we discussed last time. We continue to exercise control over central costs. Corporate overheads have remained more or less constant between quarter one and quarter three. As a percentage of revenue, they’ve dropped from 12% to 11.3% as of quarter three. We foresee corporate costs remaining broadly constant going forward as well. What this has led to is a massive improvement in adjusted EBITDA. As of quarter one fiscal ’23 when we began the integration, adjusted EBITDA stood at negative 12.5%. As of quarter three fiscal ’23, owing to improvements in gross margin in the Transportation business, as well as operating leverage on the fixed costs, we’ve seen adjusted EBITDA improved to negative INR67 crores or negative 3.7% as of quarter three.
Moving to the next slide. The key driver of adjusted EBITDA continues to be massive incremental gross margins in the Transportation business. Our quarter two fiscal ’23 adjusted EBITDA stood at negative INR125 crores. Our incremental revenues in the Transportation business in quarter three stood at INR59 crores. The incremental gross profit that we’ve seen in Transportation is INR58 crores. Of this INR58 crores, approximately half of it comes from improvements in the gross margin or operating leverage. In addition, we had three specific programs that began in quarter three once the operational integration with Spoton was complete. One of which was revising pricing and rationalizing business with less profitable customers. I had alluded to this on our previous earnings call. The second is improving capacity utilization, deploying more of our tractor-trailers across high-density routes across the country. And the third is ongoing cost optimization measures, including improvement in weight capture, all of which have had an influence both on yield, as well as on profitability.
The network footprint has continued to be optimized as well. We’ve seen a decrease in transport fixed cost by INR3 crores, net result of this is an improvement in adjusted EBITDA from negative INR125 crores to negative INR67 crores for quarter three.
This is a quick snapshot of how various costs have trended as a percentage of revenue. The two bars that are highlighted are quarter one fiscal ’23 and quarter three. As you can see, total freight, handling and servicing costs between quarter one and quarter three, while revenues have increased, costs have actually reduced on an absolute basis from INR1,453 crores in quarter one to INR1,409 crores in quarter three. Therefore, total freight, handling and servicing cost as a percentage of revenue has declined by nearly 6% from 83.2% in quarter one to 77.4% in quarter three. We’ve seen an improvement across all key cost elements, line haul, which is our trucking expense has reduced from 37% in quarter one to 33.4% in quarter three. We’ve seen manpower expenses also reduce with improvements in productivity and higher loans. Manpower expenses have dropped from 13.8% to 11.7%. In addition, most of the fixed costs of the business have also scaled as volumes have grown between quarter one and quarter three. So overall, the profitability trend has been positive in quarter two and in quarter three. And going forward, we expect this trend to continue.
So a quick snapshot of adjusted EBITDA. As of quarter one, as I had mentioned, we were at negative 12.5%. As volumes have grown across the integrated network in quarter two and quarter three, we’ve seen sequential improvements in adjusted EBITDA from negative 12.5% in quarter one to negative 7% in quarter two to negative 3.7% in quarter three. So nearly a 50% improvement in adjusted EBITDA quarter-on-quarter. As operating leverage in the business continues with higher volumes, we expect this trend to continue.
A quick bridge on adjusted EBITDA. I’ve walked through this before, so I’ll do this quite quickly. In quarter three, total revenue from customers stood at INR1,824 crores, total expenses stood at INR2,126 crores. There are three categories of expenses that are added back. The first is, INR5 crores of finance cost on borrowings. The second is lease adjustments due to AS 116, where we expense the leases versus capitalizing them which has a net impact of INR5 crores and an add-back of non-cash recurring costs, which include depreciation and amortization, which stood at INR157 crores for quarter three and ESOP expenses, which have declined from INR95 crores in quarter three last year to INR67 crores this year. The net impact of this is that, adjusted EBITDA has improved to negative INR67 crores compared to negative INR125 crores in quarter two.
A similar graph on the cash PAT side. Overall cash PAT has turned green again. We were at 5% and 6.6% cash PAT last year at about the same time. In quarter one, cash PAT had dropped to negative 10.4%. Again, the same story of operating leverage plays out. We’ve seen cash PAT improved from minus 10.4% to minus 1.7% in the previous quarter, which has now improved to positive 1.8% as of quarter three financial ’23.
The cash PAT bridge follows the same logic as the adjusted EBITDA bridge. Profit after tax for the Company improved from quarter two to quarter three from negative INR254 crores to negative INR196 crores. Adding back non-cash regarding costs, principally gives us the adjusted cash PAT of INR34 crores for this quarter.
With that, I’d like to end the call. Again, I’ll just quickly summarize. Quarter three, from a management team standpoint, has been a positive quarter in terms of improvement in profitability, consolidating market share on the e-commerce side and stabilizing the Part Truckload business. We’ve seen improvement as the logistics business, service quality reach, speed are the three major metrics that we look at, we have seen improvements across all of these. We are well-positioned in quarter four. The momentum from the end of quarter three has continued. And we’re confident about quarter four and the financial year ahead.
With that, I’ll pause. Thank you for listening to me. And we’re happy to take questions.
Questions and Answers:
Vijit Jain — Citigroup Inc. — Analyst
Thank you, Sahil. Operator, can we have the first question from Sachin Salgaonkar. Thank you.
Sachin Salgaonkar — BofA Securities — Analyst
Hey, Vijit. Hi, guys. This is Sachin here. Three questions. Firstly, Sahil, just wanted to understand the 6% Q-o-Q shipment growth in 3Q. It looks like even adjusted for Shopee, this appears to be slower than historical trend. So just wanted to understand any specific drivers which impacted this quarter.
Sahil Barua — Managing Director and Chief Executive Officer
Sure. Sachin, do you want to go through all three questions? I can note all three.
Sachin Salgaonkar — BofA Securities — Analyst
No. Why don’t you answer this, then I’ll ask the next one?
Sahil Barua — Managing Director and Chief Executive Officer
Yeah, sure. I think this year’s was a little atypical between quarter two and quarter three, because the sale impact came in, in quarter two this year, whereas last year, the sale impact came in, in quarter three. From our standpoint, as we look at the market, we’ve done 170 million shipments odd in quarter three. Our momentum going into quarter four continues to be similar to what we saw in quarter three in terms of shipment volumes, in the sense that, our share of wallet with customers has grown in this period. That is broadly a summary of volumes from quarter three.
Sachin Salgaonkar — BofA Securities — Analyst
Got it. And just to extend that further. Any thoughts on outlook for shipments for 2023? And I’m asking that because we are seeing the impact from funding winter where the e-commerce, social commerce, D2C companies are not as aggressive and everyone is focusing on their cost control.
Sahil Barua — Managing Director and Chief Executive Officer
Absolutely, Sachin. I think we’ve spoken about this before. Our view has always been that while individual players in the e-commerce marketplace may go through ups and downs based on their respective funding situations. The broad arc of e-commerce continues to remain positive. It is a growing category. We continue to see new categories coming into the market. We continue to see new buyers coming into the market and that’s not just in e-commerce alone. You’ll see this across all consumer Internet businesses. I think the reality is that, the last year was slower than people expected, partly because a lot of growth had been pulled forward during the COVID period, but I don’t think that fundamentally alters the path for e-commerce in the country.
The other thing worth remembering also is, if you look at the new participants in the e-commerce marketplace, I think you will find that they are not necessarily affected by funding situations in the private markets. The new entrants in the e-commerce space as an example, include the likes of Reliance, Unilever, for instance, Dabur, for instance, which are also entering with direct-to-consumer brands. And so, our view on e-commerce continues to remain positive. I think, in any given quarter, there will always be volatility based on how individual players and their ability to raise capital, but for e-commerce as a category, we remain unconcerned.
Sachin Salgaonkar — BofA Securities — Analyst
Yeah. So, 2022, as you rightly indicated, was a bit slower than expected. What your sense on 2023? Should we see a 25% to 30% shipment growth? Or we see a downside risk out there? Generally, as an industry, I’m asking.
Sahil Barua — Managing Director and Chief Executive Officer
So it’s a tough question to answer. Last time when we spoke about this on the earnings call, I had signalled that we would see about a 5% to 8% growth in shipment volumes in quarter three. It turned out that we were at about 6%, more or less on track, But as I look forward, our sense is that, at the conservative end, e-commerce volumes should be expected to grow in sort of the 15% to 20% range. That said, I think some of the inflationary pressures is, and depending on how individual players react, you could see growth rates which are higher than that as well.
Sachin Salgaonkar — BofA Securities — Analyst
Got it. And if there is a slowdown there should be an impact on your operational leverage on the negative side or directly [Phonetic] the kind of results what you shared showed the 3Q those kind of results from an operational leverage will continue?
Sahil Barua — Managing Director and Chief Executive Officer
We will absolutely continue. From our standpoint, what’s important to note is that, the further improvements in operating leverage in our business, because we are an integrated network, will actually come from growth in PTL volumes. And so, as a management team, as we look at the business towards the end of quarter three and quarter four has begun I think, but [Phonetic] the satisfactory is the growth in PTL volumes. As the PTL volumes continue to grow, our overall unit economics will get significantly better and the fundamental reason is because our mid-mile utilizations of the hubs and the trucks will improve drastically as volumes go up. So we’re not as dependent on what happens to e-commerce volumes necessarily.
And from a margin perspective, it doesn’t make any difference. For us also, I should point out that any volatility in an underlying market which places pressure on our competitors is ultimately good for us. We have always maintained that our objective is to commoditize the space. We are the lowest-cost player. We have the highest gross margins in this space and the ability to absorb pressures in the market. And if it is necessary, we will exercise whatever steps we have to maintain or grow market share.
Sachin Salgaonkar — BofA Securities — Analyst
Thanks, Sahil. Last question from me, your thoughts on competition on both PTL and Express, is it increasing, decreasing or status quo?
Sahil Barua — Managing Director and Chief Executive Officer
I think on the PTL space, the good thing in India, not just for Delhivery, but for all players, listed or unlisted, is the fact that it’s a highly fragmented and unorganized market. The top 10 players in PTL, organized players in PTL in India today will form less than 20% of the market. And so, there is significant headroom for growth without any of us trying to ploy [Phonetic] each other’s eyes out. As long as we continue to deliver high-quality service across a wide network and at costs that customers are used to seeing. There’s almost, in some senses, no limit to the headroom for growth, not just for Delhivery, but for other PTL players as well. And so, our job remains pretty simple, which is essentially to continue to deliver service quality, to continue to deliver precision, and to continue to add new customers. So competitive intensity on the PTL side is not even a factor.
Coming to the e-commerce space, I think obviously, when volumes go up and down, individual players, again, like I had mentioned, see different levels of strain on their businesses. For us, we realized long back and when we set up the business, it was part of our strategy that an integrated network is the only way to go. The lowest-cost player in our space generally is not the one that faces the pressure in the market. And so, from our standpoint, even if e-commerce were to stay absolutely flat next year, all degrow should it, which is very unlikely. For us, strategically, nothing will change. Our financials will not change, our strategy in no way will change. If anything, I think it will increase competitive intensity in our favor, which seems to be what we have seen in January and February as well. Our numbers suggest that we have gained share in this quarter.
Sachin Salgaonkar — BofA Securities — Analyst
Got it.
Vijit Jain — Citigroup Inc. — Analyst
Thank you. The next question will be from Hitesh Goel. Hitesh, please go ahead. I just have a housekeeping thing, please keep your questions limited to two per person. Thank you.
Hitesh Goel — CLSA Limited — Analyst
Sure. Thank you. I have only 1 question. On the PTL side, just wanted to understand the unit economics. So I understand that the volume growth or mid-mine utilization will go up and that could reduce the cost — unit cost per kg. But when I see your yield versus competitors, that is quite low, right? So that is also an important element to improve profitability. So can you give us some sense and how should we look at the PTL yields? Can that go up further from here? Or you are still the — you want to become the lowest-cost operator in the PTL itself, that will give profitability, how should we think about that?
Sahil Barua — Managing Director and Chief Executive Officer
Good question, Hitesh. I think there are two separate questions for me to unpack here really. The first is, what is the strategy and the second is, really what are the economics. On the strategy, again, in PTL, exactly as we did in Express, Delhivery exists to be the lowest-cost and most efficient player in any market that we are in. And so, that will be our strategy in PTL as well. Now, unlike the Express or the e-commerce space, whether we will continue to pass efficiency gains in our PTL business back to customers or not, is a decision that we will take based on how various market participants operate. So our pricing strategy may be different in PTL compared to Express. But strategically, the cost objective of the business will remain the same. Now, why we believe we have that ability is very simple. We run the biggest trucks. We run the largest hubs, we run the most efficient hubs. And that’s a significant portion of the cost in PTL.
In terms of yields — so that answers the question on what our strategy will be. In terms of the yield, it’s misleading to look at yield across different PTL players because the yield depends on the distances that you are traveling, the yield depends on where the business is coming from. There are PTL players as an example where a significant portion of their business comes from retail customers. Retail customers typically may pay rates which are anywhere from INR14 to INR20 per kilogram. Equivalently, if your Delhivery as an example, we do a significant portion of our business from large enterprises, where rates are not INR14 to INR20 per kilo, but the difference is that you’re typically carrying more predictable and larger loads. So yield by itself cannot really be compared across different PTL players.
In terms of how the unit economics work, the PTL business is actually a fairly simple business. There are fundamentally two large costs. The first is pickup and delivery costs, which typically will range for most players between about 15% to 20% of yield, and there is linehaul, which is the trucking cost, which will typically be anywhere from 35% to 40% depending on the specifics of the load that they carry. Outside of which, there are the costs of handling the load, which is the manpower costs, which will again typically be in the range of about 5% to 7% for most players. Effectively, our view is that, this creates a gross margin opportunity between 25% and 30% in the PTL business. And then depending on the underlying infrastructure strategy, could yield EBITDA margins in the range of anywhere from 14% at the lower end to 20% at the upper end.
Hitesh Goel — CLSA Limited — Analyst
Okay. Just a follow-up there, can you give me the list of the small enterprises and the large enterprises [Technical Issues]?
Sahil Barua — Managing Director and Chief Executive Officer
Hitesh, I’m sorry, I didn’t catch that fully. You said a list of small enterprises?
Hitesh Goel — CLSA Limited — Analyst
Revenue mix between the large enterprises and SMEs, [Technical Issues] customers, that you pointed out in the [Technical Issues].
Sahil Barua — Managing Director and Chief Executive Officer
We don’t declare that, Hitesh publicly, number 1. And the second thing is that, this is a mix which changes practically every month because we continue to be in a customer acquisition mode and different segments of customers have different sales cycles. And so, really, any quarter is not going to be an indication of what our mix will be 2 quarters hence. So this is unfortunately information that we don’t put out publicly.
Vijit Jain — Citigroup Inc. — Analyst
Thank you. The next question will be from Gaurav Rateria. Gaurav, please go ahead.
Gaurav Rateria — Morgan Stanley — Analyst
Hi. Am I audible?
Sahil Barua — Managing Director and Chief Executive Officer
Yeah, Gaurav. Please go ahead.
Gaurav Rateria — Morgan Stanley — Analyst
Yeah. I’ll list down all my questions, and you can take the top two questions. If you have time, you can take the third one as well. The first question is, basically on Slide 10. If you look at your services EBITDA margins is 7.6% compare it to fiscal ’22, which was 10.4%. It’s a 300 basis point lower. On a similar revenue scale, much reduced infrastructure that you have right now, rationalized infrastructure and a lower cost structure. So what explains the lower services EBITDA margins compared to fiscal ’22 on a similar revenue scale? That’s question number one.
Question number two is, on the cost side, your incremental GM is 50% on Transportation business. For how long you can sustain this? Post which there should be a normalization back to 25%, 30% incremental margin on gross margins.
And last question is on the pricing side. On Express Parcel yield strategy, do you think the current market situation is right for kind of disrupting the market, given the private players were struggling to raise money and you can actually try and gain more market share by using your pricing lever, which may not necessarily dip into your unit economics but may help you to gain a significant amount of market share? Thank you.
Sahil Barua — Managing Director and Chief Executive Officer
Thanks, Gaurav. Let me answer all three of the questions. I think they’re all important. The first one is on the decline in service EBITDA year-on-year, there’s actually a pretty simple answer to that. One of the major reasons for the change in service EBITDA is, we do a larger proportion of our trucking now on 46-foot container trucks compared to the same time last year when it was much, much smaller. You remember that one of the big investments that we have made through this financial year and that we expect to continue to make is expanding our fleet of 46-foot container trucks. So essentially, when the volumes are lower, which they are in this quarter compared to the same time last year, you’ll see that our linehaul costs, but effectively our linehaul utilization on a network level is lower. The good news, though, is that, the capacities that we have are larger. And so, as the business continues to grow, the incremental margins, which sort of linked to question number two, the incremental margins will remain high because these trucks will essentially be able to absorb the excess load that’s coming in. This is a key part of our strategy going forward. We will continue to actually expand our fleet of tractor-trailers.
On the fully utilized trucks, Gaurav, as we mentioned in the past, we continue to see unit economics that are superior by anywhere from 15% to 35% on other truck form factors that the rest of the industry uses.
To your second question on incremental margins, we continue to see 50% incremental margins across the network. Across different pieces of the network, we are seeing capacity utilization as load has come back, start to hit the levels of 80%, 85% thereabouts. That said, I think we still have some distance to go before the incremental margin starts returning to normalized levels because we have, as we mentioned this year, expanded our overall fleet of tractor-trailers, and we continue to run our mega facilities in Tauru, Bhiwandi and Bangalore and have expanded some capacity. So I think it will still persist for a while. We are probably at least a quarter or two away before margins start normalizing. At which point, again, we’ll consider whether or not to expand capacity.
Your third question was on pricing. I think it’s a good question, and it’s sort of — I think it’s an answer that has never really set in stone, Gaurav. We look at market conditions, we look at our competitors, we look at who’s financing them and what kind of runway they have before we make a decision. Fundamentally, because as a market leader, I don’t really see any use to us setting fire to our own profit pool. At this point in time, our competitors do not have a current or a future ability to meet our cost structure. Their inability to meet our cost structure is not driven by a lack of volume. It is driven by an underlying structure of the network, and so our costs are not achievable. In that situation, we really don’t have any need to price any lower than we are at this point in time. What is important, though, like in some senses, like a nuclear deterrent is that, we have the ability to do it. And should we feel the need to defend our market share in any given customer account or if we see a customer performing exceptionally well for us and growing volumes at the margins that we expect, we are more than happy to pass those efficiency gains on to customers proactively. So I think it’s a good question. It’s one where, as a management team, I think we will look quarter-on-quarter customer-by-customer at the incremental margins that we are generating and then decide whether or not to pull a pricing lever.
Vijit Jain — Citigroup Inc. — Analyst
Thank you. We’ll take the next question from Mukesh Saraf, please. Thank you.
Mukesh Saraf — Spark Capital Advisors — Analyst
Yeah, hi. Good evening, and thank you for the opportunity. Two questions, largely. So first is on the PTL business. Last quarter, I think you had mentioned that you had exited around, say, about 3,500 tonnes per day on an average. We have done close to 2,980-odd tonnes this time around on average for the quarter. And December is, in fact, higher. So it seems like this October or November, one of them have been weak or probably both have been quite weak. So any sense on that? Could you give some sense if there was some one-time disruption or something of that sort in that month?
Second, on the Express Parcel business, growth is largely flattish on the number of shipments. Could you give some sense on your market shares that you have in this 3Q? Because industry probably, in the commentary we are hearing from the large players, like [Indecipherable], etc., seem to be much higher. So some sense on that would be helpful.
Sahil Barua — Managing Director and Chief Executive Officer
Sure. I can start with the first one. On PTL volumes, the start of October was muted for the quarter. The reason for this was, if you remember, on September 24, there was unseasonal rain in Gurgaon. And as a precautionary measure at our Tauru facility, we had taken down the total amount of load that was being transacted both with Tauru as an origin, as well as with Tauru as a cross-talking or destination location. Given our experiences, when we did the integration in April, I think the conservative call and in retrospect, the right call for the business was really to inform customers early and to tell them that we had seen an unseasonal rain situation in Tauru, which could cause delays. And as a consequence, we would take down loads for a period of time. We continue to watch that through the September peak and the first part of October. And when we were confident that network delays would not occur, we decided to go ahead and readmit loads into the network, which is also why loads recovered pretty quickly going into November, as well as December. So it was a conservative call at that time.
On the second question, in terms of volume growth, I think we saw an overall growth of 9 million shipments between quarter two and in quarter three absolute terms, which is about 6% growth. We monitor our share of wallet with all of our customers individually, as well as collectively sort of an estimate that we have because they really aren’t published, of course, [Phonetic] with the market share data. Going into January and February as well, as I look at our numbers, I am pretty confident that we have gained share in the market, and we will continue to gain share in the market. Our share of wallet with key customers has increased in this period. We expect it to continue to increase over this quarter and through next financial year.
Vijit Jain — Citigroup Inc. — Analyst
Thank you. Can we take the next question from Gaurav Rateria on the back. Thank you. Gaurav, you can go ahead, if you had any questions?
Okay. So I do see some questions on the chat panel. Maybe I can take the first one there. This is from Aditya from Macquarie. He has three questions. Could you provide some broad flavor on your Express Parcel volume mix versus, say, one year ago? How do you see your volume mix for the year ahead? And what does that mean for your blended yield? And I’ll then have the second — read out the second and the third questions, Sahil.
Sahil Barua — Managing Director and Chief Executive Officer
Sure. Aditya, very quickly, we do not declare a breakup of our Express Parcel volume mix by customer, obviously, it’s sensitive data. But that said, let me put it this way, we find our customer volume mix highly satisfactory. Unlike other players in the industry, we are not heavily dependent on any single customer. This is something that we have discussed before. It’s something that our management team looks at very carefully. The added advantage, of course, that we have is that, Express itself is 66% of our business. And so, our overall contribution from any single customer is not particularly significant. So that’s one of the things that we manage carefully. Obviously, on top of that, we are a very large player when it comes to independent players who are not in the three marketplaces. We have a high share of wallet with all of these customers. And we continue to maintain that. So across the marketplaces, I think we are a significant and important third-party partner to all of them. And for anybody who’s not a marketplace, we are usually partner of choice.
Vijit Jain — Citigroup Inc. — Analyst
Okay. Great. Thanks, Sahil. The next question he’s asked is, how has the recent uptick in PTL volumes improved your service margin in Jan?
Sahil Barua — Managing Director and Chief Executive Officer
I can’t comment on margins for January, unfortunately. But what I can tell you is that, operating leverage in the business, you’ve now seen two quarters where operating leverage has played out. And I think as long as volumes continue to come in, the operating leverage in the business will continue. There will be, obviously, depending on where the volume is coming from and where it’s going to, the 50% may vary a little bit if it’s going into underutilized versus overutilized locations, and we don’t micro-optimize that. But the broad underlying trend of operating leverage will continue.
Vijit Jain — Citigroup Inc. — Analyst
Sahil, and the last question he has asked is, tactically, what are your top three process level KPIs/priorities?
Sahil Barua — Managing Director and Chief Executive Officer
Logistics business, service quality and cost per shipment. There are no top three, there are only two. As long as we deliver high-quality service, as long as we continue to improve efficiencies internally, market share is a direct consequence. It’s as simple as that. As I’ve mentioned multiple times, the strategy behind Delhivery is very simple. We are here to commoditize our space. This is one of the rare industries where it is possible to deliver the lowest-cost and the highest quality of service at the same time. We believe that we have the model that allows us to do that. And so, these are the two KPIs that we track at all points in time.
Vijit Jain — Citigroup Inc. — Analyst
Great. Thanks, Sahil. We’ll take the next question on the line from Sohan Joshi [Phonetic]. Sohan, you can go ahead, please.
Sahil Barua — Managing Director and Chief Executive Officer
He’s put them in the chat window. I’m happy to read them out and answer them.
Unidentified Participant — — Analyst
Am I audible, sir?
Sahil Barua — Managing Director and Chief Executive Officer
Yes, Sohan. Now you are. Please.
Unidentified Participant — — Analyst
Yeah. Congratulations for two things, Sahil. I mean, first of all is numbers and second is the entrepreneurship spirit that you guys are supporting like down, but not odd [Phonetic], Sahil, I mean, that was superb.
Now the two questions I want to ask is, now, as you have said that we have a pull — we had a pull ahead of e-commerce for 2020 and 2021. So do we — will we compromise our margins going ahead? And ultimately, will it affect our bottom line? Is it the case which we are seeing going forward?
Sahil Barua — Managing Director and Chief Executive Officer
Sure. So I think that’s a good question. And it’s similar to the question asked earlier. I think, as I mentioned, we already are the lowest-cost player in the market, and our pricing, to a large extent, does reflect our cost advantages. So we do not anticipate that we will pass on broad-based pricing incentives to customers at this point, nor is there any demand for it at this point. So we have no reason to make sort of big pricing changes or to compromise our gross margins in any way. In fact, we will — we need to protect our gross margins.
Unidentified Participant — — Analyst
Okay. One — just one small question. Even if we have a moderate growth volume, for, say, 2023 because somewhat various slow down in e-commerce, will this push back — will we push back our plans for starting the two new truck terminals which we had acquired from Welspun and GMR in Mumbai and Bangalore? I mean, we were supposed to get operationalized in 2023. So now will we push it to 2024 or 2025? I mean, what is the plan for that, too?
Sahil Barua — Managing Director and Chief Executive Officer
Great question, Sohan. And that’s why the PTL business recovery is so important. Our decision to move to these larger facilities is not underpinned by e-commerce because, as you can imagine, e-commerce, the shipment volume and count may be high, but the tonnage is very low. So the movement to the larger facilities and the larger truck sizes is really driven by the freight business. We have seen the recovery in the PTL business. We are seeing it continue into January and February. So we will move into our Bombay facility, the Welspun 1 facility during sometime towards the end of quarter two or the early part of quarter three of this year, actually, probably the early part of quarter three conservatively. The Bangalore facility is only scheduled to arrive in the next financial year.
Unidentified Participant — — Analyst
Okay. And one last question for Transition Robotics. I mean, what is the way — I mean, are we seeing the revenues towing from the Transition Robotics? Is government coming with the revenue guideline for drone logistics? What is the way? When the revenue will start get start reflecting in P&L?
Sahil Barua — Managing Director and Chief Executive Officer
Sure. I think it’s a good question. Transition Robotics, essentially, what we have built, Sohan, is the capability to deliver using a fixed wing aircraft up to a 4 kg payload over a 40-kilometer distance. In India, so far, what we have been doing is really testing out the drone capabilities that we have. Transferring the technology because drones have to be manufactured in India for them to be used in India. And then we will have the capability to deliver. We have tested. We’ve done trials so far, obviously, with the approval of the regulator, both national and local. And as the policy from DGCA becomes clearer, then we will decide what we want to do. We are evaluating other possible revenue streams for the IP that we have created. And we will look at other markets to see whether this IP can be monetized. I think that is something that we will do in fiscal ’24.
Vijit Jain — Citigroup Inc. — Analyst
Great. Thanks. We’ll take the next question from Aditya Mongia. Aditya has also put a question on chat. Would you prefer to speak it out, Aditya?
Aditya Mongia — Kotak Securities — Analyst
Yeah, sure. I hope I am audible to you all.
Sahil Barua — Managing Director and Chief Executive Officer
Yeah, Aditya. Please go ahead.
Aditya Mongia — Kotak Securities — Analyst
Great. First of all, congratulations on kind of improving the cost structure quite meaningfully in a matter of a quarter. The question that I had was, firstly, on this lost shipment expense that appears to spike up every second quarter. So it happened in the first quarter. It’s happened this time around also that almost 2% of your — 2.7% of your sales has been expensed as line item. Also, you have seen service levels become better than the Spoton in 2Q and then 3Q, the start has been weak. I’m just trying to get a sense of, a, what are the learnings from this kind of volatility that has happened in your service levels and on your lost shipment expense? And b, should we be expecting any such spikes incrementally unknown [Phonetic]?
Sahil Barua — Managing Director and Chief Executive Officer
Sure. Let me address the lost and damage very quickly, Aditya. I think in quarter three, there is a INR12 crore write-off that we have taken. It’s a conservative provision that we have made in quarter three for one of our customers who is not in the transportation segment. So it doesn’t affect the PTL and the Express businesses in any way. This is a conservative provision that we have made for one of our customers on the Supply Chain Services business. We’re moderately confident actually that we will be able to reverse this provision. But in the interest of being conservative, we’ve made that in quarter three. Going forward, claims are ultimately linked to underlying quality of service, whether it is short deliveries, whether it is damages or service quality-related claims that customers may place. Usually, their claims are lagging financial metric. So when service quality improves in any given quarter, the reduction in claims is seen typically about three months down the line. I think I’m pretty comfortable. And Amit and I — Amit, CFO and I were discussing this earlier, I think we’re pretty comfortable with the fact that claims will revert to their FY ’22 levels or below with the improvement in service levels that we have seen. We already have some early indicators to show that claims are reducing across the entire network. We will, of course, continue to follow a conservative policy of provisioning, which is what we have done in quarter three this year. So hopefully that answers the question claims.
What is the other question? I’m sorry, your other question was service quality, yes. On service quality…
Aditya Mongia — Kotak Securities — Analyst
Essentially one would have thought that probably there will be 1 quarter of problem. And then once you’ve already come back to better than previous quarter levels and I think that was your comments in 2Q. In 3Q, there won’t be any surprises. But if I take away the Jan data point and think about October and November, you were still fall in below pre-Spoton service levels. The question basically is, you’ve seen improvement in Jan and Feb. Should we be extrapolating that improvement in volumes or can service levels again kind of be volatile from there?
Sahil Barua — Managing Director and Chief Executive Officer
Sure. I don’t expect service levels to be volatile unless, of course, we happen to be in a season where there is snow and where there is rain. We are in an operational business. I think the one thing that you should absolutely weigh very carefully is that, Delhivery does not alter its service levels. One of the practices in the logistics industry, of course, is to change the expected date of delivery and to demonstrate a higher service level in response to network events. Our service level is on a constant base. And so, in the event that there are weather-related or political disruptions that affect our ability to deliver, we still report service failure as service failure on the original promise that we have with customers.
As I had mentioned in September end, when we saw rain in Tauru, there were obviously consequent delays throughout North India, which affected service levels in October. Even one week of service levels being affected in an entire month has the ability to drag the average for the month and the average for the quarter down. In an operations business, Aditya, service is only as good as whatever you did last week or last month. And none of our customers cares about what service level we offered to them in September or October as long as we’re doing well beyond. And so, I think the recent history of the last 3.5 months or so is quite important to look at. There are structural changes that we have made. A couple of the important structural changes that we have made are, of course, to bolster the infrastructure across our key hubs as these hubs have gotten consolidated. There is a significant improvement in service quality as you consolidate locations. That’s number one.
The larger tractor-trailers also improve service level with time. The reason is that, because we have more fixed capacity versus ad hoc capacity, typically, we would buy pre-tractor-trailer anywhere from 15% to 20% of our trucking requirements in the spot market. Today, we see that having come down to between 9% and 11%. Now, spot market trucks run at significant delays compared to our own network, for obvious reasons. As soon as [Phonetic] that comes down, we see service quality improve. And so, we should expect that to continue. Apart from which, our technology systems and our monitoring have been significantly upgraded in the last four months. To give you one example, in the Express space, for instance, we have seen misrouting of parcels reduced by nearly 40% with a new data science tool that we launched in the later part of last quarter. That said, on a service quality basis, Aditya, whether it’s Delhivery or any other logistics network in the country, I can assure you that absolutely nobody can give you a picture of exactly what their service quality will look like on a consistent basis in any given month. It depends on the weather. It depends — yesterday, the Prime Minister was in Bombay, that would certainly have affected service levels in Bombay yesterday. So there are events that affect service quality. Our ability to deal with one-time events, whether they are weather, whether they are any other form of disruptions, I think is significantly improved compared to where we were last year.
Aditya Mongia — Kotak Securities — Analyst
Got that. The second question that I had was, Sahil to you. Maybe this is actually — so if we — one of the captives who are there in the market want to basically potentially replicate Delhivery. Okay? Now, if you were to be putting the hat of a consultation and kind of guiding them on steps and time lines to become a Delhivery, and just — and I’m just talking about Express Parcel to start with kind of putting that PTL machine part on top. What would be your advice to them here?
Sahil Barua — Managing Director and Chief Executive Officer
I mean, may I begin on lighter note simply by saying that imitation is the sincerest form of flattery. And so, if there are captives would insist on becoming Delhivery, I think that speaks — we are quite proud of that fact and quite happy to hear, that’s the case. My advice to captives trying to become Delhivery is 1 word, which is don’t. It’s not possible. There is a reason that captives cannot approach the efficiencies that are third-party logistics companies. They are subject to internal volatilities. They are subject to internal processes. They’re ultimately apart from everything else. Culturally have never been run as profit centers. There are multiple reasons that are well understood across multiple industries as to why captives cannot be externalized easily.
If you happen to be a captive for a large marketplace and 85% or 90% of your volume comes from the marketplace, it’s worth asking whether you’re building capacity for average or for peak. If you build capacity for peak, you’re never going to make money. If you build capacity for averages, when you have the peak, whose volumes are you going to jettison. So the entire idea of a captive player somehow magically turning into a highly profitable and efficient third-party logistics partner, frankly, is ludicrous.
The second question is that, if you look at the business model between Delhivery and the captives, while we may appear to be doing the same thing in the sense that we move boxes, nothing could be further from the truth. Unless a captive logistics player for a marketplace suddenly decides that it is their business to deliver automotive spare parts from an automotive manufacturing company to its dealers, which is a completely inexplicable shift and strategy. They are never going to be able to achieve either the service quality, the scale or the efficiencies that Delhivery is able to achieve. So the entire idea behind the captives externalizing hopefully and taking on, not just Delhivery. Here, I’ve said multiple times, I don’t speak just for ourselves, I speak for the entire industry, whether it’s Blue Dart, us, Ecom Express, Safexpress, whoever it is, our threats come from our own ability to service our customers and not from a misguided attempt from a marketplace to become a third-party logistics company.
Aditya Mongia — Kotak Securities — Analyst
Now, this is the third question that I have on the chat box. Do I have to speak that out or whichever way you insist?
Sahil Barua — Managing Director and Chief Executive Officer
I’m afraid I’ve lost it, so you might as well.
Aditya Mongia — Kotak Securities — Analyst
No, I’ll just read it out. I have a limitation of two, that’s why — I can actually speak it out, that’s fine. See, the question relates to your linehaul expenses, okay? They appear to be down as a proportion of sales, probably even Y-o-Y. And the Truckload revenues have only gone up, which should have been better into this happening. I’m just trying to kind of understand what exactly is happening over here that is leading to an improvement, is it — is there a fixed cost element of this and the benefit of it that are happening at least on a Q-on-Q basis? And is the pieces of tractor-trailers and tonnage share growing over there so significantly.
Amit Agarwal — Chief Financial Officer
So I’ll take this question, Aditya. One part is related to business mix, where you can see that in Cross Border business. There has been a decline from INR96 crores of revenue to about INR66 crores of revenue. This business has a significantly high proportion of linehaul cost as a percentage of revenue. That has led to reduction. That’s one part.
The important part is that, for about INR58 crores higher revenue that we have generated in — INR59 crores higher revenue we have generated in our Express Parcel and PTL business put together combined in quarter three versus quarter two, not meaningful incremental linehaul cost was incurred for this revenue. Now that is getting driven from improved utilization of trucks and a higher portion of tractor-trailers in the network.
Vijit Jain — Citigroup Inc. — Analyst
Thank you. We’ll take the next question from Alok Deora. Alok, please go ahead.
Alok Deora — Motilal Oswal Securities — Analyst
Hi. Am I audible?
Sahil Barua — Managing Director and Chief Executive Officer
Yes, Alok. Please go ahead.
Alok Deora — Motilal Oswal Securities — Analyst
Yeah, yeah. So thanks for the opportunity. So just had two questions. So one is, if you could also indicate how — what’s your growth outlook in the Part Truckload segment for FY ’24? So I think you mentioned about 15% to 20% that’s for the e-commerce side. Any view on the PTL segment, what we are targeting or for the industry what we are looking at?
Sahil Barua — Managing Director and Chief Executive Officer
Sure, Alok. On the PTL side, in general, what we have seen so far is that, the market grows anywhere between about 10% and 12% a year. Now, there are two broad shifts that are happening, though, in the PTL space that are worth noting. One of them is that, there is a very significant shift that is happening away from unorganized players towards organized players. Organized players have historically been a very small minority of the total market. As I had mentioned, the top 10 players will form less than 20% of the market. By way of comparison, in the United States, the top 10 players will form 70% of the market. So I think that’s one big shift that is positive for all organized players, not just for Delhivery.
And the second is that, there has been a shift from non-Express Part Truckload to Express Part Truckload. As the quality of roads has improved, as the average form factor of trucking has improved, as people have invested in Grade A infrastructure and automation, again, not just Delhivery, multiple players in this space. There has been a shift from non-Express to Express. And once again, what that means is that, organized large-scale players who have the ability to invest and build capacity will continue to gain share. And so, in some senses, for all of us, again, not just Delhivery, whether it’s Delhivery or VRL or TCI or Safexpress, whoever it is, for all of us, the headroom for growth is massive. We are not limited by growth in the market.
On the e-commerce and Express side, obviously, growth in the market is one of the factors that influences our ability to grow. But on the PTL side, I think we are limited only by our ability to build capacity, maintain service quality and cost and obviously, our business development capabilities. So I think our outlook for growth in PTL is very positive. We’ve seen a pretty significant movement. If you look at it even from November to February, so far, we’ve seen growth in volumes, which is north of 30% and industry growth is nowhere near 30% in this four-month period. So I think not just Delhivery, multiple players in this space ultimately have the opportunity to go and grow significantly faster than industry and gain share. We are gaining share at the expense of the unorganized market. And I think that trend will continue, not just next year, but will continue into the midterm.
Alok Deora — Motilal Oswal Securities — Analyst
Sure. Thanks for the elaborate answer. And also on Express, you mentioned that during one of the questions that, even in Express, you are looking at a 15% to 20% growth for the industry, but Express is not really over the criteria, which would kind of lead to the operational efficiency, changing the operational efficiency. So even if the growth was much lower than what it is then 5% to 10%, then also it would not impact. Could you just elaborate a little more on that? Because I’m sure we would not be expecting a single-digit growth rate in that segment, right?
Sahil Barua — Managing Director and Chief Executive Officer
We don’t expect it, obviously, but the — Alok, but the reality is that, ultimately, in the e-commerce marketplace, any given quarter, anything could happen. Our expectation is that, the underlying market conservatively will support a 15% to 20% growth. Our numbers in terms of new customers coming into the market, new categories seems to suggest that. That said, what I meant was, when I was talking about our economics is, when you look at our business as a whole, because we run an integrated mid-mile between Express and Part Truckload, that is the one that is most sensitive to utilization. On the Express business, outside of the mid-mile, which it shares with the PTL business, on the first mile, as well as at the last mile, our capacity utilizations are significantly higher, and we have developed the ability over the years to maintain and run those at consistently high capacity utilizations. And so, a decline in volumes is not necessarily going to immediately translate into a drop in our — or a reduction in our cost per shipment because we will adjust capacities accordingly. It’s also variable. The mid-mile is where the bulk of the cost obviously sits. And if Express volume drops, it doesn’t cause a major change in utilization of the trucks.
Let me give you an example. The average weight of an Express Parcel is approximately, let’s call it, I don’t know, in any given month, it’s probably somewhere between 800 grams and a kilogram. Now, if you deliver 170 million shipments in a given quarter, you’re talking about 170,000 tonnes of freight. By comparison, even in our lowest quarter, which was quarter three, our total PTL tonnage was 258,000 tonnes of freight. So it is already about in a ratio of 60:40. And as the PTL business grows, the relative share that the PTL business has in mid-mile will be larger. And so, even if Express volumes drop, our utilization of the mid-mile will not drop. And so, in that sense, the Express unit economics are impervious to changes in Express volumes. We have variabilized the first and the last mile. And at the mid-mile, we have the ability to absorb the decline in volumes. By the way, to all of the questions that were asked earlier, that is also the fundamental difference between an integrated network and a stand-alone network.
Vijit Jain — Citigroup Inc. — Analyst
Thanks, Sahil. [Operator Instructions] We’ll take the next question from Sri CA HS [Phonetic]. Please go ahead. We can’t hear you, Sri. Can you please unmute yourself?
Sahil Barua — Managing Director and Chief Executive Officer
I can actually read out Mr. Sri’s question. The first one is, again, on captive e-commerce logistics companies. What will be the impact on our share? I think I’ve already answered that question. And I think there’s a specific question he’s asked about B2C customers and long-tail customers. Again, I’ll just point out that for a captive logistics company, which is used to servicing large fulfillment centers and warehouses, it will be interesting to see how they manage to service a small long-tail customer who wants to ship 1 parcel in a week. And again, on behalf of, not just Delhivery, but the entire third-party logistics industry, I can assure you that this is a harder problem than it sounds, looks better on Excel than it does in real life.
Question two is on Slide #23 of presentation, what is the vehicle rental cost? Amit, would you like to comment on this?
Amit Agarwal — Chief Financial Officer
So the vehicle rental cost, there is a combination of intra-city vehicle that is hired to either pick up goods from customer doorstep or to deliver goods to the consignee — and to deliver goods to the consignee and for movement of goods between the various facilities of Delhivery, plus it also includes payments to agents and vendors who do deliveries for us on a per parcel basis. This expense should be typically be looked in combination with the linehaul expense to calculate the total fleet expenses for us, primarily because some change in network design or mix of shipments, whether being picked from the interiors of cities versus the outskirts of cities could have an impact on where the proportion of cost is lying in.
Vijit Jain — Citigroup Inc. — Analyst
Thank you. We’ll take the next question from Sachin Dixit. Sachin, please go ahead.
Sachin Dixit — JM Financial — Analyst
Hi. Congratulations on decent set of results. I have the first question on the lines of the improvement in adjusted EBITDA, right? So of the INR58 crores gross profit that we are seeing, almost INR29 crores seems to have come in from improvement in, say, realization from customers or from cost optimization. I wanted to understand how sustainable is it? Like can this realization upward move or cost optimization continue quarter-over-quarter over the next fiscal year?
Sahil Barua — Managing Director and Chief Executive Officer
So there are two factors here. One of them is just underlying — of the INR58 crores, as you’ve pointed out, INR29 crores is from just basic operating leverage, which is greater utilization and greater productivity of our staff. I think as I had mentioned, we still have spare capacity in a number of locations. And as volumes continue to go up, I think that increase in utilization is natural and should continue. Now, obviously, all locations across the network are not at exactly the same capacity utilization. And so, some locations, we may have to expand some capacity. But broadly, the incremental gross margin trend we expect through this quarter, and we have no reason to believe into the next quarter. It will not reverse. Eventually, as capacity utilization across the entire network sort of gets to 80%, 85% kind of levels, our overall incremental gross margin will converge to the business’s natural gross margin, which will be close to the 26 to 30 kind of percent range. But we expect that to continue.
On the cost optimization, I think you asked an important question. We have seen about INR29 crores of improvement in this quarter — in the last quarter, I’m sorry, come even from cost optimization measures. This has included two or three things. One of them actually has been prevention of revenue leakage, which comes from weights, logistics companies all over the planet have this issue. We are increasingly directing a larger and larger percentage of our consignments through automated weighing machines. We are routing them. One of the advantages that we have because we do dynamic routing is, we have the ability to route consignments through weight capturing locations. And so, that has also had an impact on our yield. We are more accurately capturing yield. We are also more accurately capturing shipment densities.
Another piece that I think will continue into the next financial year on cost optimization is, we continue to get better at filling our trucks. The axle of every truck has a payload capacity, which is what we are trying to optimize apart from just the volumetric capacity of the container, which is a unique advantage that we have as an integrated network. I think we will continue to deploy our algorithms and our technology on truck filling. And as we get better, there will be some natural improvement that comes through that as well.
And finally, there’s obviously an element of engineering and design. As an example, in Bombay, as we consolidate multiple transportation facilities, whether it’s our sortation center or our hub or our service centers or our return processing centers into a single large facility, as an example, at Welspun 1. We will see improvement in economics for that facility as well. So cost optimization measures in an operational business are — I gave you an all answer, but they are sort of never-ending for us.
Sachin Dixit — JM Financial — Analyst
And on the realization piece?
Sahil Barua — Managing Director and Chief Executive Officer
On the realization piece, I think what’s important to understand is that, we will not — we are not in the business of increasing prices. We have the cost structure that allows us to pass on efficiency gains to customers while maintaining extremely healthy gross margins at a business line level and at a client level. So we will not push up realizations because we have no need to. We will, in fact, use that to bolster our competitive position and to make sure that we maintain or grow market share.
Sachin Dixit — JM Financial — Analyst
Understood. And quickly, on the second question, can you explain the seasonality that you talked about in Supply Chain Services, how should we think of it? I mean, last year same quarter, we did not see a similar sort of seasonality happening.
Sahil Barua — Managing Director and Chief Executive Officer
Yeah, sure, happy to. In different businesses that are our clients in this business, we see a certain amount of seasonality. As an example, one of our large customers is a consumer durables company. Now, we would expect the consumer durables company to see significant outflow in this quarter and quarter one as opposed to quarter two and quarter three. So there’s a natural seasonality there. The second thing that’s also that I should point out in the Supply Chain Services business is that, it also depends on the stage of every customer. Last year, you saw growth because our pace of acquisition on a smaller base was larger. And so, even though seasonality existed, given the fact that we were coming off of a smaller base, it looked like the seasonality didn’t exist, whereas in this year, overall client starts are still happening, we will still continue to see new client warehouses coming in, in quarter four and quarter one and so on. And so, to some extent, in any given pair of quarters, that seasonality is kind of not easy to read into. The way I would put it is this, it depends on customer mix. Individual customers, depending on which business we are in have their seasonality. Our businesses overall seasonality depends on the mix of customers that we have.
Sachin Dixit — JM Financial — Analyst
Got it. One final question, if I can squeeze in?
Vijit Jain — Citigroup Inc. — Analyst
Sorry, can you please jump back into the queue, Sachin?
Sachin Dixit — JM Financial — Analyst
Sure. Okay.
Vijit Jain — Citigroup Inc. — Analyst
Yeah. Thank you. We’ll take the next question from Vikram — Vikram Kota [Phonetic]. Thank you. Vikram, can you please go ahead? Okay. So we’ll just — in the interest of time, we’ll just read out some questions on the chat.
The next question I can see on the chat, which was not answered is. ESOP expense, can you share how it will fare in future, a road map? And I’ll just combine a couple of questions. Why has PTL tonnage declined Q-o-Q? This, you’ve already answered, I suppose? And then the next question is, what will be the impact of Shopee in Q4? So ESOP expense, can you share how it will fare in future, a road map? And then the second question will be what will be the impact of Shopee in Q4?
Sahil Barua — Managing Director and Chief Executive Officer
I think I can answer the second one very quickly, which is Shopee has ceased to exist in the Indian market. And so, they will have 0 impact on our Q4, because they’re not there, overall. I think when you adjust for Shopee volumes from last year’s Q4 versus this year’s Q4, you will see growth in our volumes year-on-year.
Amit, you may want to answer the ESOP question.
Amit Agarwal — Chief Financial Officer
Yes. So there is a detail that has been added in the presentation that was uploaded, which shows what our granted and granted stock options are and out of which how much is vested, which basically means has been costed for in the P&L and what is not. Corresponding to these grants, there is a cost schedule as well that has been given where the expected cost of time-based stock options that have been granted will cost about INR143 crores in FY ’24. And corresponding to the performance-based stock options, which are linked to company achieving a stock price of INR800 a share, INR1,000 a share and INR1,200 a share in about five to six to eight years’ time frame from listing will cost — has a INR94 crores of cost corresponding to it. This is the total cost corresponding to the — of INR477 crores and INR204 crores for time-based options and performance-based options based on the grants done so far.
The right-hand table also lays down the schedule of costing that is done based on accounting principles where year one has about 42.5% of costing in the year one. You can see nearly 75% that’s accounted for in first two years, first stock option grants.
Vijit Jain — Citigroup Inc. — Analyst
Great. Thanks, Amit. The next question I’ll read out from the chat. It’s from Mukesh Saraf. On the margin improvement in 3Q, would it be fair to assume that a good portion of that would have come from the PTL business? The reason is that, I see the number of freight service centers come off to 150. Is the overlap that Spoton and Delhivery had in its system now entirely out of the system?
Amit Agarwal — Chief Financial Officer
So the freight service centers and the fixed infrastructure cost improvement was called out in one of our slides at about INR3 crore. If you look at it, where we had explained the WACC from minus INR125 crore in quarter two to minus INR67 crore in quarter three. So total reduction in network optimization is INR3 crore. The remaining bit of it is INR58 crore improvement is coming in from the operating leverage in the business and additional efforts being undertaken on improving the profitability of the business.
Vijit Jain — Citigroup Inc. — Analyst
Thanks, Amit. The next question is, any thoughts on the management on a potential buyback, given the return to cash profitability again this quarter, large cash balance and stock price significantly below IPO price. I also saw a question related to that, if you can comment on Q-o-Q cash and cash equivalents.
Sahil Barua — Managing Director and Chief Executive Officer
So I can take that, Amit. On Q-o-Q cash balance, our cash — as I had mentioned, our cash PAT actually was positive this quarter. Overall, apart from that, we’ve continued to have over INR5,000 crores of cash on the balance sheet. So we are adequately capitalized. On the buyback, I don’t think it would be appropriate for us to comment on any such sort of moves in — on this call. And at this point in time, I think we have a massive growth opportunity ahead of us. Our service quality has remained consistent. Our costs have been in line. We continue to improve profitability. We continue to gain market share. I think investors should be looking at us to deliver growth and profitability going forward.
Vijit Jain — Citigroup Inc. — Analyst
Thanks, Sahil. The next question is, what is the pricing differential between you and the next best competitor in PTL? I guess, you can answer that on a like-to-like basis.
Sahil Barua — Managing Director and Chief Executive Officer
It’s hard again because it depends on every single account and what our strategic objectives for each of those accounts are. What I can tell you is that, we do not offer a discounted pricing compared to anybody else in the market of any size in the PTL space. I think PTL pricing is something that is well understood and has persisted in the market for a period of time. Our objective, as I had mentioned, will remain the same. We will continue to establish cost leadership in the PTL space as well. We believe that an integrated network and a network at our scale will be significantly more efficient than a network of any other size. Most PTL networks in the country are significantly smaller than ours, especially when you add our SCS volumes and our Express volumes as well, that allows us to be more efficient. Now, whether we will — whether that will ultimately manifest as higher gross margins because we will maintain market prices, or pass some efficiency gains on to specific customers will depend on our relationship with those customers.
Vijit Jain — Citigroup Inc. — Analyst
Thanks. The next question is rental expense as a percentage of revenue has increased from 2% to 4% despite number of gateways and total infra going down? What explains this?
Amit Agarwal — Chief Financial Officer
I’ll take this, Sahil. So the rent expense should be looked in conjunction with the — what is expensed plus what is amortized under Ind AS 116. If you add the cash payout — rent paid out against the capitalized leases to the rent as well, then the total rent for the quarter has increased on a year-on-year basis from INR118 crore to about INR134 crore. Out of this, the — primarily the rent is getting increased on two counts. One is an annual inflation in rent, which typically ranges from — ranges between 6% and 9% for our facilities. And the remaining bit is about expansion of offices that was undertaken in the early part of the previous calendar year because of expansion and teams. But as Sahil has called out, there is no expansion of management cost and hence, do not see any expansion of overheads related to offices either.
Vijit Jain — Citigroup Inc. — Analyst
Thanks, Amit. The next question is, you mentioned Jan, Fab — this is from Lavina Quadros. You mentioned Jan, Feb, you gained market share in Express Parcel. On 3Q, did we gain share?
Sahil Barua — Managing Director and Chief Executive Officer
I think our share in quarter three towards the end would have increased, but we would broadly have remained constant prior to that. Post the end of — towards the end of Q3, as the service improvements and network speed have become more apparent. And as we have had strategic discussions with a number of customers, I think it’s quite evident that we have gained share.
Vijit Jain — Citigroup Inc. — Analyst
Got it. Thank you. The next question is from Mr. Vikas Manohar [Phonetic]. I hope I spelled your name right, pronounced your name right? Sorry, can you go ahead, please? I see you have also raised your hand. Vikas, please go ahead.
Unidentified Participant — — Analyst
Yeah, yeah. So sir — yeah, yeah. Is it audible?
Sahil Barua — Managing Director and Chief Executive Officer
Yes. Please go ahead.
Unidentified Participant — — Analyst
Sir, like just on the margin side, sir, just like I’m a retail investor. So this EBITDA margin, sir, like, say, five years down the line or like where do we see this EBITDA margin percentage? Or are we anytime [Phonetic] closer to any of the competitors, say, like 15%, 20% EBITDA margin? Is there anything that the team is thinking on, sir, in which financial five years, 10, whatever the number, sir — what are the number of years, you have any road map or anything that you can think through?
Sahil Barua — Managing Director and Chief Executive Officer
Certainly, Mr. Manohar. I think from our standpoint, as we mentioned, if you look at the margins and compared to our competitors, the two businesses that obviously are the most comparable are the Express Parcel business and the LTL business. On the Express Parcel business, at the service EBITDA level, we have always enjoyed margins which are supernormal compared to our competitors as well. It’s a business where the money that we generate is used to finance the growth of the other businesses, which are critical to our overall strategy. And this has happened while we have continued to compress rates, and we have continued to do that in response to improving operational efficiency in our business. So I think there, we are pretty well set overall.
On the LTL side, I think as volumes continue to grow, margins in that business will keep improving. As I had mentioned, the gross margins in the LTL business should look like 25% to 30% sort of range. And then depending on our operational efficiency and operating leverage, which depends on engineering and technology ultimately, we should see EBITDA margins in the range of 16% to 20%. In our estimation, we expect that we should start seeing gross margins in the range that we expect probably sometime towards the end of the next financial year or the part of the financial year subsequent. But that said, this is highly dependent on sort of volume and mix of volume. But there’s nothing structurally in our business that prevents us from achieving those.
The second thing I should point out is, given the sensitivity of the PTL business to mid-mile costs and specifically in mid-mile costs to trucking, since we run a highly efficient fleet of trucks, which is the 46-foot tractor-trailer truck and our ability to actually fill those trucks up to their maximum axle load limit. There is an opportunity for us to gain supernormal margins even by sheer design of our trucking. That’s something that we are seeing positive movement on. So if you look at our linehaul costs, they actually have significantly reduced and our per unit costs actually are at target levels that we had designed actually for slightly higher tonnages. So I don’t think it will take us five years. I can’t comment on exactly when we will get to those target margins. But I don’t think that it will take us five years to get there.
Unidentified Participant — — Analyst
Thank you, sir. All the best.
Sahil Barua — Managing Director and Chief Executive Officer
Thank you very much.
Vijit Jain — Citigroup Inc. — Analyst
Thank you. I’ll just read out a couple of more questions on the chat from Abhisek Banerjee. This is — number one is, can we share a market share number for Q4 FY ’23 3PL Express Parcel?
Sahil Barua — Managing Director and Chief Executive Officer
So Abhisek, we cannot — because this is not something where there is a Nielsen or somebody who is doing this. That said, we are the market leader in this space. And obviously, we have a daily relationship with tens of thousands of shippers across the country and a pretty good sense of what is moving out of their warehouses. And I think we’re very confident with where we are from a market share standpoint and very confident that we’ve gained share in this quarter.
Vijit Jain — Citigroup Inc. — Analyst
Right. The next question is, given the new expressways nearing completion, are your efficiencies from using 40-foot tractor-trailers not increasing further? Can you share your experience using the Shirdi-Nagpur expressway?
Sahil Barua — Managing Director and Chief Executive Officer
Absolutely correct. As highway infrastructure has improved, yes, we do see improvement in service time and therefore, improvement in utilization of our vehicles. There are obviously a whole bunch of other externalities, which also go away as an example, wear and tear and damage of the trucks reduces as the quality of expressways increases. So it’s a very good question. Yes, we have seen improvement in efficiencies. I can’t comment exactly on Shirdi-Nagpur because that’s a fragment of one of the expressways that we will be operating on. But I can tell you that across the last two years, as expressway quality has improved, as even general highway quality has improved, we have seen an improvement in service times. We’ve seen an improvement in service speed and an improvement in linehaul costs.
Amit Agarwal — Chief Financial Officer
Yes. I’ll just add a data point, this is a very important question to our overall strategy. Roughly in about 2015 or ’16, I think the average truck for Delhivery would have operated about 10,000 to 12,000 kilometers in a month, which increased to about 17,000 to 18,000 kilometers in 2019, 2020. And today, many of our trucks, if not all, are clocking well above 20,000 to 23,000 kilometers per month.
Vijit Jain — Citigroup Inc. — Analyst
Thanks, Amit. We are almost on time. So maybe we’ll just — if you guys don’t mind taking a couple of questions from me, and then we’ll close it out.
Sahil Barua — Managing Director and Chief Executive Officer
No. Please go ahead, Vijit.
Vijit Jain — Citigroup Inc. — Analyst
Yeah. Thanks. Sir, my first question is, just looking at that weekly table that you provided on PTL volumes, if I just look at the February number, just multiply that by 52 weeks, it seems like you’re back to 90% of pre-integration volumes there. Sir, I’m just wondering if there is a seasonality to be mindful of in that number. And if you can clarify whether on an account basis, are you pretty much close to 100% pre-integration wallet share, given you did let go of some customers here?
Sahil Barua — Managing Director and Chief Executive Officer
Sure. The PTL business, Vijit, does not see seasonality in February. Typically, there is an annual seasonality where March, obviously, is the big month because it’s year end and quarter end, but there’s also an intra-quarter seasonality. So there’s an intra-month seasonality where the end of the month is significantly larger than the first two weeks of the month. There’s an intra-quarter seasonality where the end of the quarter is larger than the averages for the previous months. And then there is, obviously, an intra-year seasonality, which is the end of the year and the end of the quarter. So February first week meets none of those criteria. It is not the end of a month. It’s not the end of a quarter, it’s not the end of a financial year. And so, that isn’t seasonality that you’re seeing. I think what you’re seeing is the consequence of consistently delivered high-quality service over the last several months.
We’ve spoken about this multiple times. When we integrated Spoton in quarter one, of course, it was a challenging period for the company, we had to go back and assure customers that service quality would be maintained. And fortunately, the changes that we’ve made, which are very real specific changes in operations, infrastructure upgrades, training, more technology and automation in our hubs has led to service levels which are beyond what they were receiving even prior to the integration. And so, they’ve rewarded us in that regard with a higher share of wallet and more loads. And I think one of the questions that was always asked is, would we have to discount to get these customers back? I think the good news, and we’ve consistently maintained this is that, customers react to service, and that’s what we’re seeing here.
Vijit Jain — Citigroup Inc. — Analyst
Got it. Thanks, Sahil. Sahil, my last question is, this acquisition that you talked about of Algorhythm Tech to build out some more capabilities in the Supply Chain Services business. If you can talk a little bit about the choice between building out these capabilities versus acquiring this company? And how are you looking at M&A in the near future? Going forward, specifically also within PTL, any acquisitions of smaller or regional players still on the table or not in the foreseeing future?
Sahil Barua — Managing Director and Chief Executive Officer
Sure. On Algorhythm, very narrowly this was an acquihire situation. What we were particularly interested in was the product capability. It added very well on top of our warehouse management system because a number of our enterprise customers, not just want us to run warehouses, would also want us to help them optimize inventory placement and optimize transport selection. And this is a product that enables supply chain planning. Every acquisition that we make, every single one on the tech side, specifically, the first thing that we weigh off is, what is the cost if we were to do it ourselves, and not just what is the speed to market and so on. And so, very simply put, let me put it this way, our cost to do this ourselves would have been higher than the price that we paid to make the acquisition. None of our tech acquisitions are very large ticket acquisitions in any case. The other thing, obviously, is that, unless it’s a special situation like Falcon, where we have a strategic stake, we typically tend to do a complete buyout. That remains sort of our broad M&A strategy.
In terms of the PTL business, in terms of acquisition in general, I think we’ve been clear. The Indian market is rapidly changing. There’s a huge change from unorganized players to organized players. And as that happens, there is an opportunity for us to consolidate the market under us. And when you think about it, one of the reasons why consolidation has not happened in India so far is that, small companies cannot make large acquisitions. You have to be a large player making acquisitions to make it meaningful. We are that large player in the market. We have been, we are, and we will continue to be the natural consolidator in this space. Our consolidation, though, is driven by very simple factors. One is, is there a geographic or a customer sort of capability that we want to acquire? So as an example, networks, in specific regions that are complementary to us, of course, we will look at those. Networks which operate in specific industries where we want to gain share, of course, we will look at those as well. We, however, are not interested in networks that overlap exactly with ours. We’re not interested in paying for revenue because we believe with our service quality and our cost structure, we have the ability to get revenue in any case. So we will look at acquisitions. All — let me put it this way, I don’t think in the logistics space, there are any acquisitions that will happen that will not first pass through or at some point, pass through our team.
Vijit Jain — Citigroup Inc. — Analyst
Got it. Thanks, Sahil. We are almost on time. So we close this call for now. Thank you to the team at Delhivery for taking the time out and doing this call on behalf of the rest of us. Thank you so much.
Sahil Barua — Managing Director and Chief Executive Officer
Thank you all. Thank you for joining.