Shares of Blue Dart Express gained as much as 6 percent on Wednesday after brokerage firm Motilal Oswal upgraded the stock to buy from its earlier rating of neutral, citing increasing volumes in the express distribution space.

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The brokerage has also ascribed a price target of Rs 8,040 for Blue Dart, which implies a potential upside of 16 percent from Tuesday's closing levels.

Motilal Oswal believes that the cost of Aviation Turbine Fuel (ATF) accounts for nearly 40 percent of Blue Dart's direct operating costs. A significant correction in ATF prices seen recently will boost margin for Blue Dart going forward, the note said.

Blue Dart is focusing on tier-II and tier-III cities and has added two new aircraft to cater to them as it sees healthy demand outlook in these cities for the long-term.

The broking firm said that the courier and logistics major has leadership in Air Express space and it is focusing on increasing market share in the e-commerce sector.

It expects Blue Dart's operating profit margin or EBITDA (earnings before, interest, taxes, depreciation and amortisation) margin to shoot up to 13-14 percent from second half of FY24 onward from the current level of 10-11 percent.

With lower ATF prices and its annual general price increase which has taken effect from January this year, Motilal Oswal expects Blue Dart's EBITDA margin to improve to 13-14 percent from the second half of financial year 2024 from current levels of 10-11 percent. Addition of new aircraft, which will boost capacity, will also aid margin expansion.

The brokerage expects Blue Dart's revenue, EBITDA and net profit to grow at a compounded annual growth rate (CAGR) of 14 percent, 21 percent and 26 percent respectively over financial year 2023-2025. The firm also finds Blue Dart's valuations to be attractive after it has corrected over 30 percent from its October 2022 peak.

Shares of Blue Dart are trading 6 percent higher at Rs 7,147.45. Despite the surge on Wednesday, the stock is still down nearly 9 percent on a year-to-date basis.