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VRL Logistics Ltd.
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Recommendation SUBSCRIBE BACKGROUND
Price Band Rs 195-Rs 205 VRL logistics Ltd (VRL) , a Karnataka based company is one of the leading pan-India surface logistics and parcel delivery service providers. VRL enjoys a wide distribution network in 28 states and 4 union territories comprising of 624 branches( incl 48 hubs) and 346 agencies. The company has its in-house preventive maintenance facility at Hubballi, Karnataka. In goods transport business the company serves a wide range of customers like FMCG, Imperishable goods, pharmaceutical products , machines etc
Details of the Issue: The public issue of VRL Logistics consists of a fresh issue of equity shares aggregating up to Rs 117 crore and an offer for sale of up to 17,116,000 equity shares by NSR-PE Mauritius LLC (diluting 14,550,000 shares) and promoters Vijay Sankeshwar (diluting 1,283,000 shares) & Anand Sankeshwar(diluting 1,283,000 shares) who currently holds 22.51% , 38.67 % and 38.05% respectively of the pre-offer capital of the company.
Objects of the Issue The issue consists of fresh issue as well as dilution by promoters and PE funds. The fresh issue will be used in (a) Purchase of goods transportation Vehicles (b) Repayment/pre-payment of certain borrowings (c) General corporate purposes
Valuation and Recommendation
Between FY10-14 VRL’s revenues grew at CAGR of 20.4% while EBIDTA grew at a CAGR of 10.7%. Going forward, with high capex and increase in number of vehicles, we expect the company to continue exhibiting high growth trend and Lower fuel prices would support to the increase in margin. Moreover, the high growth in the industry coupled with shift from unorganized to organized player will also fuel and support growth for company. On the valuation front, at the given upper band price of issue of Rs 205, VRL is offered at PE of 19.6 its post issue diluted FY15 EPS and 7.6x of its FY15 EV/EBIDTA which is lower than its peer. We recommend subscribing to the issue for listing gain as well as long term investment.
Financial Snapshot FY11 FY12 FY13 FY14 9MFY15
Revenues 888.8 1130 1325 1493 1273.8
%growth 25% 27% 17% 13% 13.7%
EBIDTA 165.9 191.9 195.2 206.6 214.0
% margins 19% 17% 15% 14% 17%
PAT 51.6 76.7 45.7 57.1 72.0
% margins 6% 7% 3% 4% 6%
EV/EBIDTA @ Rs 205 10.7 7.6
P/E @ Rs 205 32.8 19.6
P/BV @ Rs 205 6.1 5.5 Source: Company data,Prospectus
Bidding Date 15th
April-17th
April 2015
Book Running Lead Manager ICICI Securities, HSBC
Registrar Karvy Computershare Private Ltd
Sector Logistics
Minimum Retail Application- Detail At Cut off Price
Number of Shares 65
Minimum Application Money 13325
Discount to retail No discount
Cheque Payable To “Escrow Account – VRL
IPO - R”
Consolidated Financials (Rs Cr) FY14 9MFY15
Total Income 1493.8 1273.8
EBITDA 206.6 218.5
PAT 57.1 71.69
Valuations Lower Band Upper Band
Market Cap (Rs in cr) 1778.4 1869.6
EPS* 10.5 10.5
P/E ratio* 18.6 19.6
EV/EBITDA* 7.31 7.6
Enterprise Value (Rs Cr) 2083.8 2175.0
*calculated on FY15 annualised numbers
Post Issue Shareholding Pattern
Promoters 69.6%
Institutions 17.9%
Bodies Corporates & Public 12.5%
Offer structure for different categories
QIB (Including Mutual Fund) 50%
Non-Institutional 15%
Retail 35%
Post Issue Equity (Rs. in cr) 91.5
Issue Size (Rs in cr) 444.9–467.7
Face Value (Rs) 10
Akansha Jain Research Associate (+91 22 3926 8034) [email protected] Sunil Jain Head Equity Retail Research (+91 22 3926 8196) [email protected]
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VRL Logistics Ltd.
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Business VRL logistics is one of the leading pan-India surface logistics and parcel delivery service providers. The company is mainly engaged in goods transport business and bus operations. The company also generates revenue from sale of wind power and air chartering services. The company has around 3500 owned vehicles as on Dec 2014. VRL enjoys a wide distribution network in 28 states and 4 union territories comprising of 624 branches (incl 48 hubs) and 346 agencies.
Goods Transportation - This business contributes around 76% to the total revenue.In 9MFY15 the sales from goods transport business stood at 976.10cr with EBIT margin of 14%. The goods transportation service business serves a broad range of industries, like FMCG, imperishable food, textiles, apparel, furniture, appliances, pharmaceutical products, etc.
They provide general parcel and priority parcel delivery (less than truckload services, “LTL”), courier and full-truckload (“FTL”) services. For general parcel and priority parcel delivery the company charges a customer a rate based on the weight and volume characteristics of the parcel as well as the distance over which they are required to be transported. However in FTL the freight is charged based on the rate per kilometer. Since, in LTL the company can load goods of some other customer as well and charge them too for the distance covered, the company generates higher profit from LTL transport.
VRL uses hub and spoke model in its business i.e. the company collects the goods from different places and bring to the nearest hub and then re assembles the goods on basis of locations and accordingly send them.
Bus Operations - This business contributes to around 21% to the total revenue. Revenue from this business for 9MFY15 stood at Rs 257.3cr and contributed around 10% EBIT margins. They provide luxury bus services across the States of Karnataka, Maharashtra, Goa, Andhra Pradesh, Telengana, Tamil Nadu, Gujarat and Rajasthan. As of Dec 30, 2014, the company owned and operated 455 buses (including 53 staff buses).
Others - Wind Power business contributes to around 2% and Air Chartering services business around 1% to the total revenue.Rs 28 cr (9MFY15) came in as revenue from this business and contributed around 27% EBIT margins. The company had commenced the wind power business in 2006 at Kappatgudda, Gadag district in the State of Karnataka by setting up a wind farm of 42.5 MW capacities. The company sells this power to Hubli Electricity Supply Co Ltd.
Source: Company data, Prospectus
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Industry Prospects
The road transport has earned a higher share of both passenger and freight traffic in comparison with other ways of transport given its advantages of flexibility, better service quality and end-to-end delivery. Railways, besides facing infrastructure constraints like line capacity on busy routes and terminal detentions, they are also facing supply crunch of wagons. As a result, goods transports by rail have grown at a slower pace compared to roads. Since these constraints are likely to continue going forward with improving condition of road, the road freight operators are in a better position to capitalize on incremental demand in coming years.
Non-bulk traffic, are typically expensive and fragile so it is mostly transported by road, is expected to grow at 7-9 % CAGR during the 2013-14 to 2018-19 period following expected improvement in consumption demand, especially consumer durables, pharmaceuticals and automobiles. The share of the non-bulk segment in the overall primary freight segment is thus expected to increase to 57-58 % by 2018-19, from 47-48 % in 2008-09. On the other hand, bulk traffic is likely to grow at a slower pace of 4-6 % CAGR, driven by segments such as coal, fertilizers, iron and steel, etc. Share of different modes of transport in the total freight are ––— Source: Company data, Prospectus *E-Estimated P - Projected
The transport operators or freight transportation services providers can be broadly classified as small fleet operators (SFOs), medium fleet operators (MFOs) and large fleet operators (LFOs) on the basis of the trucks they own or control.
1978-79 1993-94 2002-03 2008-09 2014-15E
SFO ( operators own upto 5 trucks) 98 85 77 74 65-70
MFO (operators own upto 6 to 20 trucks)
2 13 17 15 15
LFO (operators own upto more than 20 trucks)
2 6 11 15-20
Source: Company data, Prospectus
Since, SFOs have a small presence they do not have wide range of network. So to ensure consistency in availability of freight, SFOs typically have to depend on brokers for business. MFO’s have a higher presence as compared to SFO’s; however lesser number of vehicles becomes an obstacle to tap the growing market. So, although SFO dominate the market they in turn have to depend on LFO for consistent earnings.
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Investment Rationale
Lower Fuel cost make VRL more cost competitive VRL logistics purchase fuel at a lower cost as compared to the market as it has tie up with Indian Oil Corporation for sole supply. Other than this the company has its own 2 petrol pumps located at Varur and Chitradurga in the State of Karnataka which ensures quality fuel supply and reduced fuel costs. In addition, the drivers are required to purchase fuel only from certain designated pumps during transit which helps the company to receive fuel at competitive rates and also maintain the quality of fuel. Fuel cost comprised of around 27% of revenue in FY14. This efforts made by the company ensures a timely and a competitive rate fuel which not only helps in lowering the cost of the company but also in maintaining the quality of a vehicle.
Apart from this company has its own body building plant for trucks wherein company design the body to keep the overall wait of truck less resulting into fuel saving or higher material load. Company gives higher stress on preventive maintenance and source original parts directly from manufacturer or supplier. This help truck to run uninterruptedly and overall cost of parts also comes lower for company.
Continuous capex on vehicles to capitalize on increasing opportunities VRL continuous its capex and increased number of vehicles every year including weak years. This increase in number of vehicles along with its proper utilization has not only helped VRL to have a wider presence and also reduced the dependence on hired vehicles. Lorry hire consists of around 10% of the total sales as on FY14. VRL has done a capex of Rs 59cr(in 9MFY15 ) and the number of vehicles as on Dec 2015 stands at around 3500.The company will further incur around Rs 67.4cr in purchasing vehicles from the money received from fresh issue. Apart from this VRL Logistics is also trying to expand its operations to Central and Eastern region.
FY11 FY12 FY13 FY14 9MFY15
Capex (incl cap adv) 135.8 243.3 91.5 110.1 59.4
No of owned vehicles (goods and transport fleet)
2655 3079 3088 3352 3546
Additons in vehicles 136 424 9 264 194
Source: Company data,Prospectus
Diversified customer base minimizes risk for VRL Goods transport business is getting major revenue to the company, VRL has a diversified consumer base in goods transport business which reduces the dependence on any particular consumer. In FY14 the contribution from large customer came down to 0.91% from 1.48% in FY13. And , the contribution from top 10 customers in goods transport segment was at 5.41%. As on 9MFY15 the contribution from large customer stands at 1.10% and from top 10 customer stands at 6.08%. Apart from this company serves to diversified industries comprising of FMCG, imperishable food, textiles, apparel, furniture, appliances, pharmaceutical products, etc. VRL operation is widely distributed across India with presence in 28 states and 4 union territories.
Improvement in its bus operations reduces the dependence on one segment VRL provides luxury bus services across the States of Karnataka, Maharashtra, Goa, Andhra Pradesh, Telengana, Tamil Nadu, Gujarat and Rajasthan. Due to issue related to Telangana and Andhra state and increase in fuel cost the margin of this segment was under pressure in last few years
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FY10 FY11 FY12 FY13 FY14 9MFY15
Fleet size 211 323 449 502 522 455
Revenue 84.01 122.9 203.2 267.9 288.9 241.18
EBIT 10.72 16.88 1.61 17.27 23 26.41
EBIT margin 12.78% 13.7% 0.8% 6.4% 8.0% 11.0%
Source: Company data,Prospectus However with the settlement of state issue and decline in fuel cost the margin in 9MFY15 has again bounced back to around 11%. There has also been a continuous increase in fleet size in past 5 years and same is likely to continue in coming period.
Improvement in ROE The ROE of the company declined in FY13 and FY14.The PAT margins of the company was just 3.8% and 3.4% in FY14 and FY13 respectively whereas in FY12 the Pat margins stood at 6.8%. This decline in margins was mainly due to increasing fuel prices and issues between Andhra Pradesh and Telanagana States. However, with decreasing Fuel prices and resolving state issues we see improvement in performance in 9MFY15. We expect this improvement to continue in coming period. Based on 9MFY15, annualised PAT margins comes to 5.63% which will lead to an increase in the ROE of the company to 28.38%.
Source: Company data,Prospectus Fy 15annualised
Good Dividend Paying Company VRL cash flow from operation continue to remain high in past and company has consistently distributed high dividend to shareholder.
FY10 FY11 FY12 FY13 FY14 9MFY15
Cash Flow from operations 137.2 146.7 165.9 162.9 203.2 185.8
Dividend paid and tax thereon 13.2 37.1 17.2 30.4 56.3 60.3
Dividend paid incl tax as a % of cash flow from operations
9.62% 25.29% 10.37% 18.66% 27.71% 32.45%
Source: Company data,Prospectus
The company’s cash flow from operations in FY14 stood at Rs 203.2cr out of which VRL had paid Rs 56.3cr as dividend i.e. around 27.7% of cash flow from operations. Even looking at 9MFY15 numbers the company’s cash flow from operations stood at Rs 185.8cr out of which VRL paid Rs 60.3cr as dividend. With this cash flow from operations the company not only does a high capex but also gives high dividend.
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Key Risks and concerns
• Fuel being the main cost any increase in fuel cost would impact the profitability of the company.
• An inability to attract, recruit and retain a sufficient number of qualified and experienced drivers may affect the business
• A change in government policies in the capacity of loading a truck or age of truck may lead to under utilization of its capacity
• Further issues in Telanagana and Andhra Pradesh may affect the company’s operations
Valuation and Recommendation
We have compared VRL with Snowman Logistics and Gati Ltd. The business of VRL Logistics is not comparable to Snowman Logistics and Gati Ltd since they are in cold storage logistic and express cargo business respectively though both are logistic companies. Valuations for VRL at 7.6x its FY15E EV/EBIDTA are lower than the peer group.
Rs in cr Source: Company data,9MFY15 annualised numbers
Sales EBITDA Margins PAT EPS P/E EV/EBITDA ROE
Snowman Logistics
198.79 44.05 22.16% 13.99 0.8 108.3 33.63 3.43%
Gati Ltd 1376.87 141.04 10.24% 39.83 4.6 53.0 17.19 6%
VRL Logistics Ltd 1698.40 285.22 16.79% 95.59 10.48 19.6 7.6 28%
Between FY10-14 VRL’s revenues grew at CAGR of 20.4% while EBIDTA grew at a CAGR of 10.7%. Going forward, with high capex and increase in number of vehicles, we expect the company to continue exhibiting high growth trend and Lower fuel prices would support to the increase in margin. Moreover, the high growth in the industry coupled with shift from unorganized to organized player will also fuel and support growth for company. On the valuation front, at the given upper band price of issue of Rs 205, VRL is offered at PE of 19.6 its post issue diluted FY15 EPS and 7.6x of its FY15 EV/EBIDTA which is lower than its peer. We recommend subscribing to the issue for listing gain as well as long term investment.
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Financials
An
Source: Company data, Nirmal Bang Research *Annualised FY15 ratios
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Financials Rs in cr
Source: Company data, Nirmal Bang Research
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Disclaimer:
Nirmal Bang Securities Private Limited (hereinafter referred to as “NBSPL”) is a registered Member of National Stock Exchange of India Limited,
Bombay Stock Exchange Limited and MCX stock Exchange Limited. NBSPL is in the process of making an application with SEBI for registering as
a Research Entity in terms of SEBI (Research Analyst) Regulations, 2014.NBSPL or its associates including its relatives/analyst do not hold any
financial interest/beneficial ownership of more than 1% in the company covered by Analyst (in case any financial interest is held kindly disclose).
NBSPL or its associates/analyst has not received any compensation from the company covered by Analyst during the past twelve months. NBSPL
/analyst has not served as an officer, director or employee of company covered by Analyst and has not been engaged in market making activity of
the company covered by Analyst. The views expressed are based solely on information available publicly and believed to be true. Investors are
advised to independently evaluate the market conditions/risks involved before making any investment decision. This document, at best, represents
Analyst opinion and is meant for general information only. NBSPL, its directors, officers or employees shall not in any way be responsible for the
contents stated herein. NBSPL expressly disclaims any and all liabilities that may arise from information, errors or omissions in this connection.
This document is not to be considered as an offer to sell or a solicitation to buy any securities
Nirmal Bang Research (Division of Nirmal Bang Securities Pvt. Ltd.)
B-2, 301/302, Marathon Innova, Opp. Peninsula Corporate Park
Off. Ganpatrao Kadam Marg Lower Parel (W), Mumbai-400013 Board No. : 91 22 3926 8000/8001
Fax. : 022 3926 8010
