VRL Logistics - Records ~20% EBITDA margin - ICICI Securities

VRL Logistics (VRL) reported a better than expected Q2FY21, with an all-time high EBITDA margin of ~20%. The margin surprise (I-Sec 13%) was driven by: i) increased prices in the goods transportation (GT) segment, which more than compensated for the diesel price hikes; ii) lower employee costs, down 22% YoY driven by better payout control and lower mandays; iii) some regulatory support including lagged concession on vehicle taxes and effective utilisation of 'non-use' for vehicle categorisation. Cost control and increased realisations allowed for higher margins, despite 17% YoY volume decline in the GT business. Bulk of the volume decline was witnessed in first two months of Q2FY21. YoY volume growth was witnessed in Oct'20. There was significant release of working capital in H1FY21, with meaningful reduction in trade receivables. That, coupled with no meaningful capex, ensured net debt reduction to Rs1,146mn from Rs1,890mn HoH. Maintain BUY.

- GT segment margin surprised on price hikes and better cost control. VRL increased prices by 13% YoY. Volumes declined ~17% YoY. Company has been able to surprise on costs by reduced number of drivers and hamaali expenses; it enjoyed holiday on vehicle taxes and saw significant reduction in vehicle running expenses. Significant savings were made in employee costs with perhaps adoption of a more variable (manhours-linked) pay structure; part of the reduction will be lost in subsequent quarters as manhours increase. Also, procurement of biofuel has increased to 53.2% of the blend, from a typical blend of 28-29% pre-pandemic.

- Pandemic can be an opportunity to downsize costs. VRL has earlier included a large part of the contractual workforce (drivers and hamaali) into the payroll. The move left VRL with an inflated cost structure with 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 regain some of the cost advantages, utilise 'labour boards', make the cost structure more variable and even increase lorry hire and reduce own fleet as much as possible. Q2FY20 has seen a net reduction in fleet due to scrappage.

- Passenger transport revenues plunged ~78% YoY. The decline was mainly due to fall in the number of passengers. Despite such a significant plunge in revenues, EBITDA loss was limited to only Rs12mn, which we think is impressive. This wouldn't have been possible without an eye on cost control. This also underscores the extent of unprofitable operations on some of the routes the company plies.

- Maintain BUY. We maintain our BUY rating on VRL with a target price of Rs216/share, based on 20x FY22E EPS.

Shares of VRL Logistics Ltd was last trading in BSE at Rs.169.45 as compared to the previous close of Rs. 165.4. The total number of shares traded during the day was 14327 in over 614 trades.

The stock hit an intraday high of Rs. 170.75 and intraday low of 166.95. The net turnover during the day was Rs. 2416280.

Source : Equity Bulls

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