VRL Logistics - Will benefit from sector consolidation - ICICI Securities

VRL Logistics (VRL) has reported better-than-expected Q1FY21 earnings. Goods transport (GT) has reported better than expected topline with ~5% QoQ price increase; full impact of diesel price hikes will be felt in Q2FY21. What impressed us is cost control. Despite 70% YoY decline in revenues, VRL could maintain gross margins of 22% (against 35% YoY) - this is impressive because of the asset-heavy model VRL operates. Employee costs have also been controlled, down 28% YoY. The current environment is conducive for VRL to roll-back some of the measures instituted around demonetisation i.e getting significant part of drivers and Hamaali workforce in the payroll. Net debt remains under control; and the stress in leveraged/unorganised segment remains the key competitive advantage for VRL. Maintain BUY.

- GT segment surprised on the back of price hikes and better cost control. While majority of diesel price hikes will impact VRL's cost structure from Q2FY20, the company did increase prices by 5% QoQ and 4% YoY. Volumes declined by ~60% YoY. VRL has been able to surprise on costs by reduced driver and Hamaali expenses; enjoyed holiday on vehicle taxes and saw significant reduction in vehicle running expenses. Utilisation in July, '20 has reached 70-75% YoY and should be able to achieve profit at current utilisation. VRL has been able to undertake price hikes in Q2FY20 to offset large parts of diesel price hikes witnessed.

- The pandemic can be an opportunity to downsize costs. Around demonetisation, driven by government policy, VRL included a large part of the contractual workforce (drivers and Hamaalis) into the payroll. The move left VRL with an inflated cost structure with an asset-heavy model in an environment where 90% of routes plied in the country do not have return loads. The current pandemic is an opportunity to gain back some of the cost advantages, utilise 'labour boards', make cost structure more variable and even increase lorry hire and reduce fleet as much as possible. Q1FY20 has seen a net reduction in fleet due to scrapage.

- Passenger transport operations witnessed ~95% YoY decline in revenues. The decline is mainly on account of fall in the number of passengers. Despite such a significant decline in revenue, EBITDA performance has been impressive with only Rs23mn of EBITDA loss. This wouldn't have been possible without an eye on cost control. This also brings out the extent of unprofitable operations in some of the routes which VRL plies.

- Maintain BUY. We maintain our BUY rating on VRL with a target price of Rs216/share, based on 20x FY22E EPS. Net debt has increased to Rs1.9bn from Rs1.8bn QoQ (ex-lease liability); 89% of VRL's vehicles are debt free.

Shares of VRL Logistics Ltd was last trading in BSE at Rs.150.95 as compared to the previous close of Rs. 149.95. The total number of shares traded during the day was 22915 in over 866 trades.

The stock hit an intraday high of Rs. 152.6 and intraday low of 148.6. The net turnover during the day was Rs. 3459662.

Source : Equity Bulls

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