CMP:
Rs. 370.30; Market Cap: Rs. 3,378.74 Cr; 52 Week High/Low: Rs. 406.70 /
Rs. 261.05
Total Shares:
9,12,43,495 shares; Promoters : 6,34,80,000 shares – 69.57 %; Total Public
holding : 2,77,63,495 shares – 30.43 %; Book
Value: Rs. 42.92; Face Value: Rs. 10.00; EPS: Rs. 9.67; Dividend: 40.00 %;
P/E: 39.26 times; Ind. P/E: 35.64; EV/EBITDA: 13.81x
Total
Debt: Rs. 443.35 Cr; Enterprise Value: Rs. 3,805.40 Cr.
VRL Logistics
Limited: The Company was founded in 1976 and is headquartered in
Hubballi, India. It was formerly known as Vijayanand Roadlines Ltd. and changed
its name to VRL Logistics Limited in August 2006. VRL Logistics Limited
provides goods and passenger transportation services in India. It offers
various goods transportation services, including general parcel and VRL
priority, courier, less than truck load, and full truckload services through
its transportation network in 28 states and 4 Union Territories. The company came out with an
IPO on April 15 2015 offering 2,28,23,333 equity shares of Rs. 10 each for Rs. 205
per share raising Rs. 467.88 Cr. The issue consisted of fresh issue of
57,07,333 of equity shares and offer for sale of 1,71,16,000 equity shares by
the seller shareholders. It got listed on April 30, 2015 at Rs. 288 making a
high of Rs. 309.00 on listing day. The object of offer for sale was to purchase
of goods transportation Vehicles and repayment & prepayment of certain borrowings.
The company’s goods transportation service
business serves a range of industries, including fast moving consumer goods
sector, as well as other industries comprising food, textile, apparel,
furniture, appliances, pharmaceutical products, rubber, plastics, metal and
metal products, wood, footwear, and machinery. It has a fleet approximately
3,500 owned vehicles. The company also provides bus services in the states of
Karnataka, Maharashtra, Andhra Pradesh, Telangana, Tamil Nadu, Gujarat, Rajasthan,
and Goa through its owned fleet of approximately 455 buses (including 53 staff
buses), including Multi Axle Volvo seater buses, Multi Axle Volvo I-shift
sleeper buses, Isuzu seater buses, non-Volvo A/C sleeper, sleeper buses, and
semi sleeper buses. In addition, the company engages in liquid transportation
and car carrying operations. Further, it is involved in the sale of power and
sale of certified emission reductions units generated from operation of wind
mills; and provision of air charter services. As of March 31, 2014, company had 81 branch offices of
which 74 were leased offices and seven were owned offices, 739 agencies and 416
prepaid agencies for its bus operations business. Company also provide
ticketing facilities through its website www.vrlbus.in, as well as through its
network of commission agents and online travel agents such as www.redbus.in, www.mybustickets.in, www.makemytrip.com and www.abhibus.com. Company also operate
car carrier vehicles for transportation of cars, vehicles for liquid transportation,
as well as a courier service business across the State of Karnataka. Company
also have minor business interests in wind power, air charter services and
hospitality. VRL’s fleet size for goods and passenger transport business grew
from 2,730 in 2010 to 3,874 as of March 31, 2014. VRL LOGISTICS LTD is locally compared to Patel
Integrated logistics ltd, Transport Corporation of India Ltd, Shreyas Shipping,
Costal Roadways ltd, Gati Ltd, Gateway Distripacks Ltd, Allcargo Logistics
Limited, Blue Dart Express, Snowman Logistics nationally and globally with Senko
Co of Japan, AMERCO Inc of USA, CSX Corp of USA, Con-way Inc of USA, Kansas
City Southern of USA, PAM Transportation Services of USA, SixtSE of Germany,
VTG Aktiengesellschaft of Germany, Stagecoach Group Plc of United Kingdom,
Northgate Plc of United Kingdom, National Express Group Plc of United Kingdom,
DSV A/S of Denmark, Dazhong Transportation of China, ComfortDelGro Corporation
Ltd of Singapore, CJ Korea Express Corporation of South Korea, Central Japan
Railway Co of Japan, CAR Inc of China, Bangkok Metro Public Co of Thailand,
Asciano Ltd of Australia, Canadian Pacific Railway Ltd of Canada, USA Truck Inc
of USA, Universal Truckload services of USA.
Investment
Rationale:
VRL Logistics Ltd owns and operates the largest fleet of commercial
vehicles in the private sector in India. VRL has now grown into a logistics and
transport company which is currently the largest fleet owner in India with a
fleet of 4,077 Vehicles including 373 Passenger Transport Vehicles & 3,704
Goods Transport Vehicles as of 10 May 2015. VRL also has its mentions in the
Limca Book of Records as a single largest fleet owner of commercial vehicles in
India in the private sector. VRL provides general parcel
and priority parcel delivery (less than truckload services, LTL),
courier and full-truckload (FTL) services through its widespread
transportation network in 28 States and 4 Union Territories across India. Its
operational infrastructure for the goods transportation business as of June 30,
2015 comprised 624 branches comprising 604 leased branches and 20 owned
branches and 346 agencies across India, and of such 624 branches, 48 (41 leased
branches and seven owned branches) served as strategic trans-shipment hubs for
its operations. VRL employs
nearly 4,506 drivers for its fleet of 4,024 vehicles, who are provided with pension
benefits, accident insurance coverage, etc. The company also provides attractive
incentives for efficient driving, on-time performance, etc, which increases overall
remuneration and hence provides drivers with job satisfaction. The logistics sector presents
an incredible arena of opportunity because nearly 90 % of the market is still
controlled by the unorganized sector. The Indian logistics industry is expected
to grow at 15 % to 20 % per annum, reaching revenues of $38,500 Cr by 2016. The
demand for focused supply-chain services has been fuelled by industries with a
high propensity to outsource from industries like automobiles, consumer
packaged goods, hi-tech, telecom and retail amongst others. In India, Logistics
sector has generated employment for near about 4.5 Cr people. India currently
spends 12 % to 13 % of its GDP on logistics as compared to 8 % to 9 % in
developed economies. For the sectors moving physical products this percentage
is much higher because 55 % of India’s GDP is generated by the service sector. The
industry as a whole is very fragmented and disorganized. India's logistics
sector continues to be attractive for global investors and Investment in
logistics in India is projected to grow annually at 10 %. VRL Logistics is differentiated itself in service offerings and building
a large integrated hub-and-spoke
transportation network and extensive operational infrastructure, including advanced
technology systems which enabled VRL to establish a leadership position in the
surface logistics industry with a strong brand name across India.
VRL’s
hub-and-spoke operating model enables it to transport various parcel sizes and
provide its customers with access to multiple destinations for booking and
delivery of goods, and provide “last mile” connectivity to even remote
locations in India. This involves effective consolidation of goods from
multiple locations at its trans-shipment hubs, which are continuously operated
on a 24X7 basis throughout the year, and redistribution thereof to their
respective destinations, resulting in operating and cost efficiencies, optimal capacity
utilization of co’s transportation vehicles, rationalization of routes, as well
as flexibility in operation, allocation and optimal utilization of resources
including manpower. Road transport is competitive even at higher prices given its advantages
of flexibility, better service quality and end-to-end delivery. Freight transporters
are broadly classified as small fleet operators (SFOs), medium fleet operators (MFOs)
and large fleet operators (LFOs) on the basis of number of trucks they own or
control. Typically, an LFO is one who
owns more than 20 trucks, while SFO is one who owns less than 5 trucks. VRL
is one of the largest LFO in India with a fleet of 3,649 trucks. Road freight transportation
is highly fragmented, with Small Fleet Owners cornering a high market share of
approximately 77 %, as per CRISIL. Low entry barriers have led to a proliferation
of small truck operators in SFO segment, resulting in high fragmentation of
this segment leading to competition, offering
customers better bargaining power also the lack of service differentiation
amongst the smaller operator’s results in very competitive pricing. Large
fleet operators though enjoy distinct advantages over Small Fleet Operators. Large
Fleet Operators typically enjoy scale advantages and provide a variety of
value-added services as well such as warehousing, express service, third-party
logistics (3PL), consulting, etc. and the key factors impacting the
profitability of freight transporters include freight rates, fuel costs, fleet
utilisation rates, load flexibility and regulations among others. Given that
the industry is highly fragmented, typically, LFOs have a better bargaining power
than SFOs due to the contractual nature of the former’s business. LFOs have the
flexibility to offer services like full truckload (FTL), less than truckload (LTL)
and express cargo transportation. LTL & FTL are higher-margin services. In the
express cargo segment, LFOs realise positive cash flow even at 40 % utilisations
due to higher realisation per tonne. With this flexibility in the kind of load
services being offered, LFOs are able to restrict the impact on their margins
during periods of low freight availability. On the cost front, fuel (diesel) is
the single largest cost component. LFOs generally operate on a yearly contract
basis and include a fuel cost pass-through clause to hedge against hike in fuel
prices. However, due to weak freight availability, SFOs who operate largely in
the spot market are unable to completely pass on such increases. The implementation of GST is
expected only by CY2016. The logistics sector is likely to respond positively to
GST by making more use of the hub and spoke systems, large scale warehousing
and specialized services. A gradual opening up of key sectors like retail,
aviation, defense etc. will also help to boost this sector. The entry of
multinational companies (MNCs) in sourcing, manufacturing and distributing
could be the other growth drivers.
Outlook and
Valuation:
VRL has
pioneered in providing a safe and reliable delivery network in the field of
parcel service. It has spread its operations to Courier Service, Priority Cargo
& Air Chartering to meet the growing demands of its burgeoning customer
base. VRL Logistics (VRL) is one
of the largest commercial vehicle owners in the Indian private sector, and
provides goods transportation and passenger bus operations across India. Its
goods transportation segment contributes around 78 % to the company’s FY15
revenues, and its higher-margin parcel delivery business contributes around 77 %
to its revenues. 3PL & Warehousing solutions offered by VRL are
tailor-made and cater to unique needs of its diverse customer base. With the
largest goods transportation network in India, VRL parcel service is
indispensable for a large number of Corporate Houses. This network spans the
length and breadth of the country and is supported by strategically located
transshipment hubs. In the goods transportation business, it serves a number of customers in
the FMCG industry as well as in general commodities such as food, textiles,
apparel, furniture, appliances, pharmaceutical products, rubber, plastics,
metal and metal products, wood, glass, automotive parts and machinery. The
company’s hub-and-spoke operating model helps to serve a diverse mix of
end-consumers in various industry verticals, which
enables it to transport various parcel sizes and provide customers with access
to multiple destinations for booking and delivery of goods. Its extensive
network with large number of fleets enables VRL to provide last mile
connectivity to even remote areas in India. The large fleet, most of which is
owned by the Company, enables it to reduce dependence on hired vehicles, retain
control of the value chain and service quality, and establish a reputation for
reliable and timely delivery of consignments. VRL owns an in-house vehicle body designing facility
at Hubli, Karnataka, to build customised vehicles with lighter and longer bodies
to carry higher payload, resulting in increased margins per vehicle. The
company hires third-party vehicles only during periods of high demand and in emergency
situations. Operating owned vehicles enables VRL to significantly reduce vehicle
hiring and operational costs. VRL’s large fleet of owned vehicles allows it to
cover a large number of routes, and maintain timely delivery of consignments. The
variety of goods transportation vehicles in its fleet enables the company to
serve a diverse mix of consignments while the range of passenger buses enables
to serve transportation requirements of different customer segments. The
company’s goods transportation fleet primarily comprises heavy commercial
vehicles carrying capacity of more than 7,500 kg with the same accounting for 66
% of its goods transportation fleet as of Mar’15. VRL also enjoys the benefits
of economies of scale (discounts, etc.) especially during bulk procurement of
key items like vehicle chassis, diesel, tyres, spare parts, etc. The company
relies largely on Ashok Leyland to supply it with vehicle chassis as per customised
requirements. In the case of spare parts, VRL has entered into supply
arrangements with Ashok Leyland and VE Commercial Vehicles who have set up
dedicated outlets at the Hubli facility, which allows VRL to source spares
parts at competitive rates and reduce procurement timelines. GST will help make India’s
manufacturing competitive by cutting high logistics and warehousing costs.
Currently, each of India’s 29 states taxes goods that move across their borders
at different rates. As a result, freight that moves across the country is taxed
multiple times. Worse, there are long delays at inter-state checkpoints, as
state authorities review and examine freight and apply the relevant taxes and
other levies. Truck delays average five-to-seven hours at inter-state
checkpoints. This, combined with other delays, keep trucks from moving during
60 % of the entire transit time. As much as 65 % of India’s freight moves by
road, hence GST is critical for India. Simply halving the delays due to
roadblocks, tolls and other stoppages could cut freight times by some 20-30 %
and logistics costs by an even higher 30-40 %, according to World Bank estimates.
This alone can go a long way in boosting the competitiveness of India’s key
manufacturing sectors by 3-4 % of net sales. GST, when implemented, will free
the decisions on warehousing and distribution from tax considerations, which,
henceforth, would be based purely upon operational and logistics efficiency. This
will lead to changes in logistics requirements of clients, forcing logistics
service providers (LSPs) to rethink their business operations, including
creating new warehousing and logistics locations and expanding or closing
existing warehouses at certain other locations. GST will score over the
existing regime in the transportation and logistics industry, where a tendency
is seen to engage with the unorganized players for tax considerations. The GST
regime will see the emergence of the organized service providers since taxes
will no longer be added costs for the businesses. Given the highly fragmented
nature of the Indian transportation and logistics industry (the leading 10 listed
firms command less than 5 % of the overall market), implementation of GST is
expected to unleash a plethora of opportunities for companies in the organized
sector. On financial side, posted a Net Profit
(standalone unaudited) of Rs. 35.38 crore posting a strong increase of 40.93 %
as compared to Rs. 25.1 crore for the first quarter Q1 FY16 ended June 30,
2015. The Net Profit increased 82.67 % as compared to Rs. 19.37 crore in Q4
FY15. The Total Income from operations increased to Rs. 447.011 crore up 9 %
from Rs. 411.36 crore for the quarter. The segment revenue of the Goods
transport business increased to Rs. 339.69 crore up 12.66 % in Q1 Fy16. The
segment revenue from Bus operations stood at Rs. 94.69 crore in Q1 FY16. The
segment revenues from sale of power increased to Rs. 7.1 crore up 10.54 % in Q1
FY16. VRL operates a 42.5MW wind farm in Karnataka, and owns
two aircrafts, which provide charter services to corporate clients. The
contribution from these non-core businesses remains very small a 1.3 % from
wind energy business and 0.7 % from air charter business in FY15. The company
came with a successful IPO and those funds would be used mainly for Purchase of
goods transportation vehicles and Re-payment/pre-payment of certain borrowings. VRL’s debt totalled Rs. 443 Cr as of FY15,
and is expected to decline further as a small component of IPO proceeds approx.
Rs. 28 Cr will be used to repay debt. VRL’s ‘net debt to equity ratio’ is
expected to fall to almost 0.4 x by FY16 aided by strong free cash flow
generation. Despite the industry slowdown, VRL has generated positive FCF in four
of the last five years, and we expect FCF generation to continue to improve
aided by higher volumes and fleet utilisation. The company plans to spend
approximately Rs. 51.8 Cr towards vehicle purchases in FY16. A strong balance
sheet provides further headroom for targeting growth. At
the current market price of Rs. 370.30, the stock is trading at 28.92 x FY16E.
Earnings per share (EPS) of the company for FY16E could be Rs. 12.80 & for FY17E could be seen at Rs. 18.40. It
is expected that the company will keep its growth story intact in the coming
quarters also with rationalization of haulage charges by IR or Pickup in
containerized trade both in EXIM and domestic segment. It is expected that the company’s surplus scenario is likely to continue for the next three years keeping its growth story in the coming quarters also.
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