VRL Logistics - To consolidate on market share gains - ICICI Securities

Price increases undertaken by VRL Logistics (VRL) since Apr'20, cost control initiatives particularly towards employee costs and lower hiring of outside vehicles - combined to contribute to the impressive ~20% EBITDA margin for Q2FY21. Management hinted at maintaining 15-16% margin for H2FY21 as some of the benefits unwind. Management intends to consolidate its market share gains (~7-8%) with special focus on augmenting volumes through added services and product-specific strategy. Also, subdued volumes in the textile segment is not allowing optimal returns from the Surat facility - but we believe it can be achieved with normalisation of volumes. Management does not foresee any capex in the near to medium run and expects net debt to further moderate to Rs500mn by end-FY21 (from Rs1,146mn at present). Maintain BUY.

- Realisation grew >10%, volumes declined >15%. This largely helped the Q2FY21 margin expansion. GT-km decreased 8% YoY in Q2FY21 while H1FY21 witnessed 9-10% YoY decline; QoQ it increased 2.4x. However GT-km reduction is more concentrated for hired vehicles, as own vehicles witnessed only 5% decline in Q2FY21. Reduction in use of hired vehicles also helped margins.

- 15-16% EBITDA margin can be maintained in H2FY21. Salary costs for Q2FY21 reduced by ~Rs70mn per month, partly driven by variable pay structure, reduced manhours and salary cuts. Savings of Rs50mn/month will sustain for H2FY21. However, the increased freight rates since Apr'20 are being partly rolled back through selective discounts across routes. Also, most of the vehicles categorised under 'non-use' are back on the streets. While under 'non-use' classification, the vehicles had no driver allotment and no payment of government taxes. Also, quantity of biodiesel in the mix will reduce in the winter months in North India. Management did mention some alternate bio-diesel sourcing arrangements in Tamil Nadu, which can help increase usage in South India during H2FY21. All these levers combined are expected to ensure moderation in H2FY21 EBITDA margin from the 20% print of Q2FY21.

- Vehicle addition targets. Management continues to guide for low capex in the GT segment (and overall) for H2FY21 and FY22. It would look for 2-3 months of sustained demand, during which rented fleet can be utilised before deciding on whether to add new vehicles. As of now, neither demand nor availability of hired vehicles warrant any fleet addition. Management however was categorical that outside fleet does not contribute to equivalent margins as compared to own fleet since cost per mile is much higher for the former.

- Working on volume accretion. Company is looking at location-wise services and products to consolidate upon the 7-8% market share gains witnessed in course of the pandemic. Subdued demand in the textile segment, which contributes to 15-16% of total volumes, was instrumental for >15% tonnage decline in Q2FY21. The same has ensured subdued economics for the Surat facility commissioned in FY20. Normalisation of textile demand, apart from improving volumes, would also help improve return profile of the Surat facility.

Maintain BUY with a target price of Rs216/share

We have factored-in a 10% decline in tonnage volumes for FY21E. We have also assumed increased realisation per passenger in the passenger transport business for FY21E/FY22E given significant churn in unorganised sector operators, which will lead to better pricing power for VRL. We have maintained our fuel price assumptions for FY21E/FY22E keeping in mind the Rs7-8/litre increase in diesel rates seen across the country of late.

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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