VRL Logistics—Readying To Fly Higher And It’s A BUY From Us

VRL Logistics had emerged very successful in its maiden public equity offering. The issue was then oversubscribed over 74 times making it one of the most successful IPOs in the last decade. The stock was listed at Rs 288 on bourses on April 30. VRL Logistics share prices gained more than 92 per cent on its IPO price of Rs 205 as it clocked over Rs 400 during the third week of May. But, the company’s share prices plunged about 20 per cent to Rs 315.1 on May 24, when promoters Vijay Sankeshwar and Anand Sankeshwar announced their plans to venture into regional airline business through a separate entity. Interest among investors has increased in these days for the stock.

Industry

Indian logistics sector is expected to grow at a CAGR of 12.17 per cent by 2020 driven by growth in manufacturing, retail, FMCG and e-commerce sectors. India spends around 14.4 per cent of its GDP on logistics and transportation as compared to less than 8 per cent spent by most of the other developing countries. The third party logistics market in India is expected to be worth USD 301.89 billion by 2020.

The government has plans to set up various industrial corridors along the dedicated freight route which will metamorphose the warehousing business– from small warehouses spread across the country to large, global-size warehouses concentrated in a few hubs. The hope for GST passage from the Upper House of Parliament is rising day by day.

Understanding VRL business

VRL Logistics is engaged in the business of providing goods and passenger transportation services. The company's focus segments include goods transport, passenger bus operations, sale of power and air chartering services. It offers services for the transportation of goods, which include less than truck load (LTL), full truck load (FTL) and priority services. VRL Logistics’ goods transportation network spans around 28 states and four union territories. It covers nearly all cities and towns throughout India. The company operates through its owned fleet of nearly 381 buses, which includes the multi axle Volvo seater buses, sleeper buses and semi sleeper buses. Its wind farm consists of around 34 wind turbine generators. In addition, the company provides charter services to individuals and corporate clients. VRL Logistics’ passenger transportation business operates in the states of Karnataka, Maharashtra, Andhra Pradesh, Telangana, Tamil Nadu, Gujarat, Rajasthan and Goa.

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Too early to talk about its airline business

VRL Logistics’ promotors will foray into the domestic airline business from their personal investment. As of now we don’t expect any impact on the company’s balance sheet. Its management also have clarified that the proposed airline business will be run by a set of professionals with strong sector experience. VRL Logistics’ preliminary estimate of investment of Rs 1400 crore over next 3 to 4 years of which Rs 400 crore promotors’ equity and Rs 1000 crore will be debt.

VRL Logistics’ promotors have 69 per cent which is largest stake in the company. Though the company’s new business funds commitment will be fulfilled by owners’ equity, promotors will divest their stakes as per the requirements in the future term.

According to the company’s management, the opportunities in regional airline business is growing fast across the world. Its cost focus and high utilisation made VRL Logistics leader in the domestic transport, which would enable to succeed in aviation sector also. Meanwhile, it did not file for the licence for the aviation business. The regional airline business plan is being studied by the promotors.

GST booster for the sector

The proposed new goods and services tax (GST) regime and e-commerce will alter the landscape in warehousing, supply chain management and third party logistics business. GST implementation will be a game-changing event for businesses and particularly for organised logistics players.

There are various opportunities for transport and logistics sector in the medium-to-long term. The consolidation of warehouses GST presents an opportunity for industry players to consolidate their warehouses and set up larger facilities which will bring in supply chain efficiencies.

Various factors leading to the downtime of vehicles is trade barriers, such as check-post inspection, filing of waybills or entry permits, compliances under Entry Tax laws and local levies. The minimising barriers will improve efficiencies of the sector. After GST in practice, there will be removal of check-post related compliances. This will lead to optimisation of delivery schedules and the operational costs of transporters, resulting in competitive pricing.

Under the present indirect tax regime, the e-commerce industry is facing significant challenges. Disputes exist with respect to payment of VAT in the destination states. Some of the states have also levied entry tax on e-commerce goods. Further, the industry has also faced significant bottlenecks due to scrutiny at check posts. Under the GST regime, it is expected that clear guidelines on the taxability of e-commerce transactions will be issued, providing much-needed relief to the e-commerce industry.

If the GST law extends benefits of tax-free supply to Free Trade Warehousing Zones (FTWZ) unit for onward exports, the FTWZ units will be able to attract significant volumes.
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The process of roll out of GST

Rajya Sabha to pass Constitution Bill

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Release of draft GST legislation

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Release of GSTN (GST Network) processes for compliance

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Finalisation of GST rates

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Development of IT platform

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Passing of GST legislation by the central and state governments

Key Events

VRL Logistics introduced bio diesel with 26.69 per cent of total quantity in FY16. The company’s net addition of 24 locations to the existing network of goods transport business. It also added 223 Goods Transport (GT) vehicles, 50 Vehicles sold or scrapped. VRL Logistics’ net total GT vehicles stood at 3872 as on Q4FY16.The company’s emphasis on plying of own vehicles and thereby reducing dependence on outside vehicles as is evident by the decrease in kms of outside vehicles. It is following consolidation of bus transport fleet by concentrating on premium routes.

VRL Logistics’ gradual shift to automated toll payment from manual toll payment (following a tie-up with ICICI Bank) which will increase time and efficiency by reducing vehicle blocking at various toll booths. The company is registered as a member of International Air Cargo Association (IATA). With this registration, it would offer better services in the air cargo arena both domestically as well as Internationally. 

As on		Small Vehicle	Light Commercial Vehicle	Heavy commercial Vehicle	Car Carrier	Available Capacity(Tons)	Tanker	Cranes	Total Vehicles Owned	Buses	Total Fleet
FY16		119	982	2639	102	49861	17	13	3872	381	4253
FY15		120	975	2423	102	45538	16	13	3649	375	4024
FY14		122	882	2210	102	40087	23	13	3352	477	3829
FY13		122	883	1941	102	34882	27	13	3088	460	3548
FY12		139	883	1916	102	34518	27	12	3079	423

VRL Logistics’ operational infrastructure consists of 733 branches & 291 agencies in 1024 locations. The company strategically placed 48 (7 owned) trans-shipment hubs. It added 24 new branches in FY16. VRL Logistics has focus on growth in the north and the central parts of the country.

Improving Financials

Considering last five years, VRL Logistics’ top line increased by CAGR of 8.79 per cent and stood at Rs 1723 crore in FY16. The company’s EBITDA also rose by CAGR of 6.89 per cent to Rs 268 crore in FY16. VRL Logistics’ bottom line increased by CAGR of 5.93 per cent and stood at Rs 102 crore in FY16 as compared to previous five financial years.

On yearly front, VRL Logistics’ top line increased by 3.07 per cent to Rs 1723 crore in FY16 as compared to previous financial year. However, the company’s EBITDA declined by 1.86 per cent to Rs 268 crore in FY16 on yearly basis. Its EBITDA margin contracted by 78 basis points to 15.54 per cent in FY16 as compared to previous financial year. VRL Logistics’ bottom line boosted by 12.16 per cent to Rs 102 crore in FY16 on yearly basis. The company’s net profit margin expanded by 48 basis points to 5.94 per cent in FY16 as compared to previous fiscal year.

VRL Logistics has healthy net debt to equity ratio which is improved from 1.2x as Q4FY15 to 0.53x as on Q4FY16. The company’s gross debt reduced from Rs 443 crore as on Q4FY15 to Rs 291 crore as on Q4FY16.

Considering latest quarter results, VRL Logistics’ revenue increased by 4.59 per cent to Rs 416 crore in Q4FY16 as compared to same period in previous financial year. The company’s EBITDA declined by 8.46 per cent to Rs 17.59 per cent to Rs 48.59 crore in Q4FY16 on yearly basis. Its EBITDA margin contracted by 315 basis points to 11.69 per cent in Q4FY16 as compared to previous fiscal year. VRL Logistics’ PAT also reduced by 31.75 per cent to Rs 13.22 crore in Q4FY16 on yearly basis. The company’s PAT margin contracted by 169 basis points to 3.18 per cent in Q4FY16 as compared to previous fiscal year.

On segmental front, VRL Logistics earned 79.48 per cent from goods transport segment, 18.61 per cent from bus transport segment, 1.25 per cent from sale of power segment and remaining 0.66 per cent from air charter segment during FY16.

VRL Logistics’ promotors have plans for regional airline business on table. The part of fund requirement will come from equity divestment of about 8 to 10 per cent i.e. Rs 300 crore to Rs 400 crore in next three years. The remaining funds will be borrowed from financial institutions.

Peer Comparison

On valuation front, VRL Logistics’ share price is trading at trailing twelve month PE multiple of 24.84x times which is quite lower as compared to peers Allcargo Logistics (31.79) Transport Corporation (25.53), Sical Logistics (40.63) and Container Corporation of India (34.17). The industry PE multiple of 34.25x times. Its PB multiple of 4.95x times and book value of Rs 58.28. VRL Logistics’ ROE and ROCE stood at 19.92 per cent and 29.35 per cent respectively.

Conclusion

VRL Logistics share price is trading below its IPO listing price of Rs 288. The stock is trading discount of almost 6.75 per cent from its IPO listing. The company’s airline business will be a separate entity as its management has already clarified. The part of fund raising will be from promotors divestment of about Rs 400 crore and will be in the range of 3 to 4 years. VRL Logistics promotors have not yet applied aviation business licence. The plan for aviation business is on paper itself. Upcoming GST passage, attractive valuations; we recommend our readers to BUY this stock.

(Analysis by Lohit Bharambe)