On The Right Path To Deliver Growth

ON THE RIGHT PATH TO DELIVER GROWTH 

VRL Logistics, founded in 1976, is a surface logistics and parcel delivery company. The company offers various goods transportation services, including general parcel and VRL priority, courier, less than truck load, and full truckload services through its transportation network in 28 states and 4 Union territories. Currently, VRL is the largest fleet owner of commercial vehicles in India with a fleet of 4360 vehicles (Including 419 passenger transport vehicles & 3941 goods transport vehicles, among others). VRL has a strong presence in southern and western markets which also accounts for about 80 per cent of the company’s revenue. 

BUSINESS SEGMENTS:
Logistics: This segment includes general parcel and priority services, courier service and full truck load services. Due to growth in realisation per tonne through the freight volume, the segment recorded a growth of over 5% from Rs 1,357.94 crore to Rs 1,426.15 crore in FY2016-17. 

Travel: The company has a considerable presence in the Indian passenger travel industry among private sector players. The company’s revenue in the segment grew 2.7 per cent from Rs. 317.60 crore to Rs. 326.20 crore in FY17. 

INDUSTRY OVERVIEW
Lately, the logistics infrastructure has gained a lot of attention both from business industry as well as policy makers since inadequacy in logistics infrastructure creates bottlenecks in the growth of any economy. It is estimated that the Indian logistics industry will continue to show robust growth of 10 to 15 per cent annually, leading the pace of growth of the economy at large. There exist several challenges and opportunities for logistics sector in the Indian economy. The challenges faced by the industry include insufficient integration of transport networks, information technology and warehousing and distribution facilities. The logistics firms are moving from a traditional setup to the integration of IT and technology into their operations to reduce the costs incurred as well as to meet the service demands. The growth of the Indian logistics sector depends upon its soft infrastructure like education, training and policy framework as much as the hard infrastructure. The government’s initiatives such as investments on highway and infrastructure, dedicated freight corridor, Goods and Services Tax and Make in India will give a fresh impetus to India’s growth engine, particularly in the corporate and SME sector which in turn will expand demand for the logistics sector. The industry has moved from being just a service provider to a position where it provides end-toend supply chain solutions to their customers. Thus, all this has paved the way for further growth of logistics and warehousing industry in the coming years. 

IMPACT OF GST
The implementation of GST was a major boost for the logistics business. There will now be a free movement of goods across different states, which will, in turn, ensure a major shift and consolidation in warehousing locations, transportation costs and will also impact the trends of certain commercial vehicle classes. It is expected that there would be a noticeable change in the operating model of surface transporters in the country. 

The companies, which were earlier forced to set up many small warehouses across multiple cities, can set up just a few big warehouses region-wise and can follow the hub-and-spoke model for freight movement from the warehouses to different manufacturing plants and wholesale and retail outlets. 

Also, GST will gradually shift customers from the unorganised sector to the organised service providers. VRL will benefit from GST as it is market leader in organised service providers. 

SHARE BUYBACK PROPOSAL
VRL recently announced a proposal to buy-back the fully paid-up equity shares for an aggregate amount not exceeding Rs 414 million at a maximum price of Rs 460 per share. This would constitute nearly nine lakh equity shares, or 0.99 per cent of the total number of paid-up equity shares of the company. 

IMPROVEMENT IN TRUCK TURNAROUND TIME
Post removal of the inter-state checkposts, the company has experienced lower turnaround time and improvement in utility of trucks. However, there is further room for improvement to lower the turnaround time for trucks, which would aid the margins of the company going forward. Improvement in turnaround time and with improved utilisation of its current fleet, the capex requirement of the company in the trucking segment is expected to come down. 

IMPACT OF FUEL PRICES
Crude oil prices, which had declined in the first quarter of FY18, have now spiked up again and are now hovering over $60/barrel, higher by almost 17 per cent since April this year. The last time India's crude oil basket was above 60-dollars-a-barrel was in December 2014. However, VRL has tie-up with Indian Oil Corporation for supply and purchase of fuel at a lower cost as compared to the market. Besides, the company has its own two petrol pumps located at Chitradurga and Varur in Karnataka. This not only helps in lowering the cost of fuel for the company but also in maintaining the quality of fuel used in the vehicles. VRL has also established a body-building plant for trucks, which focuses to keep the overall weight of the truck less, resulting in fuel saving or higher material load. The company source original parts directly from the manufacturer or the supplier, which helps its trucks to run uninterruptedly and reduce the overall cost of parts. 

FINANCIALS
On a quarterly basis, the net income of the company increased 1.12 per cent to Rs 451.93 crore in the second quarter of FY18, as against Rs 446.91 crore in the same quarter last year. The company’s PBT increased 42.14 per cent to Rs 31 crore in the second quarter of FY18 on a yearly basis. The company’s net profit also increased 55.73 per cent to Rs. 21.6 crore in Q2 FY18, as against a net profit of Rs. 13.87 crore in the Q2 of the previous year. 

The company incurred a one-time expense (as penalty) of Rs 45 million in the quarter for its dealing with unregistered GST traders during the quarter. The government has started waiving these penalties since October, 2017.

On an annual basis, the company’s net income increased 5.66 per cent to Rs 1803.09 crore in FY17 on a year-on-year basis. The company’s PBT decreased 31.62 per cent to Rs 105.3 crore in FY17, as against Rs 153.99 crore in the previous fiscal. The net profit of the company decreased 31.12 per cent to Rs. 70.47 crore in FY17, as against Rs. 102.31 crore in the previous fiscal. 

VALUATIONS
On the valuation front, the company maintained a PE ratio of 44.11x. The company’s return on equity (RoE) and return on capital employed (RoCE) stood at 13.45 per cent and 17.12 per cent, respectively. The company has a debt-to-equity ratio of 0.34. The company has also been maintaining a healthy dividend payout of 43.75 per cent. However, the company has delivered a nominal growth of 9.79 per cent over the past five years. 

CONCLUSION
VRL is well-placed in the Indian logistics sector with an established brand name in goods transportation network across the country. We expect VRL Logistics to grow in the long term on the back of effective internal control systems, improving consumer demand, implementation of GST and strong credible history of the company. We recommend our readerinvestors to HOLD the stock for now.