Mahindra Logistics - IPO Analysis
IPO Rating - 40*
About the Issue
Mahindra Logistics plans to open an IPO of Rs. 829.36 crore through Offer for Sale (OFS) of 1,93,32,346 equity shares with face value of Rs. 10 per equity share. The price band for the IPO is fixed at Rs. 425-429 per share. Eligible employees of the company would get a discount of Rs. 42 per share. The minimum lot size for subscription is 34 shares. The issue will remain open from October 31 to November 2, 2017. Post allotment, company will get listed on both BSE and NSE.
Purpose of the issue
The objects of the offer are to achieve the benefits of listing the equity shares on the stock exchanges and the company will not receive any proceeds from the Offer for Sale as all the proceeds will be received by the selling shareholders namely Mahindra & Mahindra Ltd. (the promoter), Normandy Holdings and Kedaara Capital Alternative Investment Fund.
Company Background
Mahindra Logistics is India’s largest 3PL (third-party logistics) solutions providers. It follows an ‘asset-light’ business model in which assets necessary for operations such as vehicles and warehouses are owned or provided by a large network of business partners. This has enabled the company to gain scalability of services as well as have flexibility to develop and offer customized logistics solutions across a diverse set of industries.
The company's two business segments are Supply Chain Management (SCM) and People Transport Solutions (PTS).
Supply Chain Management business
Under this segment, the company offers customized and end-to-end logistics solutions and services including transportation and distribution, warehousing, in-factory logistics and value-added services. It has over 350 clients, who are serviced from a pan-India network of 24 city offices and operating locations as on August 31, 2017. It has a network of over 1,000 business partners providing vehicles, warehouses and the other assets and services. The company manages over 10 million square feet of warehousing space spread across multi-user warehouses, built-to-suit warehouses, stockyards, network hubs and cross-docks. It serves over 200 domestic and multinational companies operating in several industry verticals, including automotive, engineering, consumer goods, pharmaceuticals, e-commerce and bulk. Company’s key clients include Volkswagen India, Vodafone India, Thermax, JSW Steel, Ashok Leyland, Siemens, Bosch, BMW India, 3M India, and Mercedes-Benz India.
People Transport Solutions
Under this segment, company provides technology-enabled people transportation solutions and services to over 100 domestic and multinational companies operating in the IT, ITeS, business process outsourcing, financial services, consulting and manufacturing industries. As on August 31, 2017, it operated PTS business in 12 cities across India. The key clients for PTS business include Tech Mahindra, AXISCADES Engineering Technologies and ANZ Support Services India.
Industry Overview
Indian logistics industry is expected to grow at a CAGR of approximately 13% to Rs. 9.2 trillion in Fiscal 2020. Government is investing approximately Rs. 10.3 trillion in roads (national highways, state roads and rural roads) between Fiscals 2018 and 2022. The 3PL market in India was at Rs. 325-335 billion in Fiscal 2017, which is expected to grow at a CAGR of 19-21% to reach ₹570-580 billion by Fiscal 2020. It is anticipated that sectors such as automobiles, e-commerce, consumer goods, organized retail and engineering are expected to have high 3PL growth potential. The PTS industry would grow at a CAGR of 8.5-9.5% to Rs. 85-95 billion in Fiscal 2020, driven by the IT and ITeS sectors.
Financial Performance
In FY17, FY16, FY15, company’s consolidated revenue were Rs.2,676.25 crore, Rs.2,077.12 crore and Rs.1,939.55 crore, respectively. The SCM and PTS segments contribute 89% and 11%, respectively towards the total revenue. Revenue from SCM segment has grown at CAGR of 64.45% for FY15-17. Company’s profit after tax for FY17, FY16, FY15 were Rs. 46.06 crore, Rs. 35.96 crore and Rs. 38.52 crore, respectively. The company's PAT has grown at a CAGR of 22.26% for FY15-17. EPS in FY15 was Rs. 6.64 which rose to Rs. 6.7 in FY17. PAT margin has been in the range of 1-2% for the past five years which is very low.
Valuation
On upper price band of Rs. 429, with EPS of Rs. 6.7 in FY17, company’s P/E works out to 64.03x. We see that this P/E is high. Company’s RoNW (Return on Net Worth) was 15.19% in FY15 which decreased to 12.84% in FY17. As there are no listed peers for the company, the issue price cannot be compared to ascertain whether it is over or under priced.
Our View
We are sector positive in the long term. However, we are concerned about company's inconsistent performance and thin margins it is running in. Company has not been paying dividend because of low profitability. Also, capital infusion in operations would have helped company however as it is OFS we see that company will not be receiving any money to strengthen its operations. Valuation is higher as compared to industry average ratio. We recommend investors to avoid this IPO.
*40 or lower – Avoid Investment, 41 to 45 – Risky, 46 to 50 – Invest with limited exposure, 51 to 55 – Investment recommended, 56 & above – Excellent Investment
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