VRL Logistics - Higher volume growth can lead to further earnings upside - ICICI Securities

VRL Logistics (VRL) reported a better than expected Q4FY21, with EBITDA margin of ~16%. The margin surprise (I-Sec 13%) was driven by: i) increased volumes in the goods transportation (GT) segment, which more than compensated for the diesel price hikes leading to a significantly better than expected margin performance in the GT segment; and ii) lower employee costs, down 7% YoY (down 17% YoY for FY21) driven by better payout control and more variable nature of payout. GT segment volumes increased by 15.3% YoY and 5.99% QoQ. Capex continue to remain muted, with Rs264mn spend in H2FY21; number of GT vehicles has declined QoQ (74) and YoY (179) to end FY21 at 4575 vehicles. Despite such a rapid increase in diesel price, working capital buildup in H2FY21 is not material. We maintain BUY on VRL with a revised target of Rs380/share (Rs 266 earlier).

- GT segment margin surprised on higher volumes and better cost control. ~29% YoY revenue growth consisted of 15.3% YoY volume growth and 13.3% YoY realisation growth. Similarly 6.9% QoQ revenue growth was on account of 6% QoQ volume growth and 0.9% QoQ realisation growth. Sixteen new branches have been added in Q4FY21. Also GT kms of owned vehicles increased by 7.2% QoQ and 16.6% YoY. Higher volumes and higher owned GT kms allowed for 18% margins in the GT segment despite increase in fuel costs by 21.53% QoQ and 44.08% YoY in Q4FY21. Seasonality led to lower procurement of bio-diesel (5%) in the mix for Q4FY21 - 23.3% for FY21. Six electric vehicles have been added in Q4FY21. VRL has scrapped old and high maintenance vehicles which have also lead to lower repair and maintenance costs.

- 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 did not have return loads. FY21 gave 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. This shows in a commendable cost performance for FY21, with employee costs reducing by ~ 7% YoY. VRL has been able to maintain 'gross margins' despite ~17%YoY revenue decline in FY21.

- Passenger transport revenues declined ~20% YoY. This is the second successive year where PT segment has witnessed a 20% YoY revenue decline in Q4. 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 Rs44mn, which we think is impressive.

Maintain BUY with a target price of Rs380/share

We have factored-in a 6% increase in tonnage volumes for FY22E. We have also assumed double digit % increase in realisation given the sharp spike in diesel rates. The sharp spike in inflation is behind a relatively more muted volume growth assumption. We expect higher volume growth (~10%) in FY23E and lower pricing as diesel prices normalise in FY23E.

We increase our target price to Rs380/share (20x FY23E) from Rs266/share earlier. We have assumed a higher volume growth trajectory for FY23E. Also better price performance in FY21 allows for increase in margin assumptions for FY22E.

Key risks

Key upside risk: higher volumes leading to better operational leverage as manufacturing activity recovers. Key downside risk: increased competitive pressures from shifting freight traffic to rail leading to increased cost pressures for asset-heavy LTL players like VRL Logistics.

Shares of VRL Logistics Ltd was last trading in BSE at Rs.280.9 as compared to the previous close of Rs. 296.85. The total number of shares traded during the day was 172126 in over 5316 trades.

The stock hit an intraday high of Rs. 302 and intraday low of 272.9. The net turnover during the day was Rs. 49414823.

Source : Equity Bulls

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