VRL Logistics: Potential Multibagger / IPO Note

VRL Logistics Ltd (VRL) is one of the leading pan-India surface logistics service providers of goods and passenger transportation. The company receives 75% of the revenue from road transportation business, 20% from bus operations and 5% from air chartering services and sale of power. The company owns the largest fleet of commercial vehicles in private sector in India and has got pan-India presence in goods transportation, while bus operations are concentrated in Southern and Western regions of India. Considering its past financial performance and promising growth outlook in road transportation business, I believe the IPO is attractively priced and hence we recommend SUBSCRIBE to the issue.

The promoter, Dr. Vijay Sankeshwar set up transportation business in 1976 with one truck and today the company owns 3,546 vehicles. The variety of goods transportation vehicles in its fleet enables it to serve diverse mix of consignments. Also, ~30% of the vehicles are less than 5 years of age and through IPO proceeds the company plans to buy another 248 transport vehicles.

Apart from goods transport business, the company, under the brand name “VRL” provides luxury bus services across the states of Karnataka, Maharashtra, Goa, Andhra Pradesh, Telengana, Tamil Nadu, Gujarat and Rajasthan. It provides ticket booking facilities through various leading websites.

During the period FY10-14, revenue has grown at a CAGR of 20.4% from Rs7,113mn to Rs14,938mn while PAT has grown at a CAGR of 18.7% from Rs287mn to Rs570mn. The company faced relatively lower growth and reduction in margins during FY13 and FY14 owing to the Telangana issue and rapid rise in diesel prices. However, during 9MFY15 the company’s gross margins bounced back to previous levels of ~30% thereby improving the PAT margins.

Key Investment highlights

• Company will benefit from growing demand of high margin LTL (Less-than Truck Load) business due to its large scale and wider reach
• Focus on in-house development of software, maintenance facility and vehicle body design facilities help to maintain operating efficiency in business
• Strong clientele relationship with diversified base.

Key Financials Rs.mm	FY12	FY13	FY14	9MFY15
Total Operating income	11,304	13,255	14,938	12,738
Growth %	27.2	17.3	12.7
EBITDA	1,919	1,952	2,066	2,195
Margin %	17.0	14.7	13.8	17.2
Net Profit	767	457	570	717
Growth %	48.5	(40.4)	24.7
Diluted EPS Rs	8.4	5.0	6.2	7.8

Risk factors

• Rapid rise in diesel prices may impact margins.
• Slowdown in business could impact margins due to high fixed cost nature of operations.

Key Investment Highlights

Company will benefit from growing demand of high margin LTL (Less-than Truck Load) business due to its large scale and wider reach Unlike FTL (Full Truck Load) operations, wherein consignment originates from a single source, LTL arrangement requires wider reach and adequate infrastructure. Under the LTL operations, the service provider aggregates consignments from various clients and sends them across to the desired destination. The India-wide network of collection and delivery points and its strategically located transhipment hubs have enabled the company to focus on the attractive LTL business. The LTL service offers higher rates per load compared to the full truck load (FTL) service as it involves consolidation and transportation of freight from numerous customers to multiple destinations and, thus, generates higher net revenue per vehicle. This has helped the company record better profitability compared with other big organised players who largely focus on the FTL business.

As per industry sources, non-bulk traffic, which essentially operates on LTL arrangement is expected to grow at 8-10% CAGR over FY14-19E, as consumption demand for consumer durables, pharmaceutical products and automobiles improves. Accordingly, the share of non-bulk segment in the overall primary freight traffic is expected to increase to 57-58% by 2018-19 from 47-48% in 2008-09. Focus on in-house development of software, maintenance facility and vehicle body design facilities helps to maintain operating efficiency in business and differentiates from peers VRL has developed in-house software technology capabilities, which enables all its offices, transhipment hubs, branches and agencies connect to central information network through an ERP system, facilitating real time monitoring of operations and tracking of consignments.

The company has a dedicated workshop facility in Hubballi, Karnataka with several satellite workshops in strategic locations across India. This has enabled the company to enter into spare parts supply arrangement with Ashok Leyland and VE Commercial Vehicles Ltd at competitive rates and reduce procurement timelines. It also has a tyre repair unit to increase the useful life of tyres. Additionally, the in-house vehicle body design facility at Hubballi, Karnataka aids in fabricating vehicles with lighter and longer bodies to carry higher payload resulting in increased margins per vehicle. Apart from the above in-house developments, the company’s engineering division has resorted to various innovations, which has led to cost savings and efficiency in operations. Strong clientele relationship with diversified base; Growth of e-commerce business will aid higher revenue growth.

The company has long standing relationship with its clients and has diverse mix of customers in the FMCG industry as well as in general commodities such as food, textiles, apparel, furniture, appliances, pharmaceuticals products, rubber, plastics, metal and metal products, wood, glass, automotive parts and machinery. Additionally, it also serves its clients in e-commerce business, which is a high growth sector. Government’s focus on development of road infrastructure and implementation of GST and Transport bill will increase and smoothen road transport: Government’s focus on overall road infrastructure development with special focus on eastern part of India, where VRL has relatively weak presence, will help the company to grow its business in this part of the country. The proposed implementation of GST in India is expected to remove the current multiple taxation effect of Octroi, CST, VAT, Entry tax, etc. Therefore, implementation of GST along with Transport Bill would benefit the logistics sector, particularly in terms of increased efficiencies.

Risk & Concerns 

Rapid rise in diesel prices may impact margins 

Fuel cost is the single largest input cost at ~28% of the company’s revenue. So any rapid rise in diesel prices (in deregulated environment) is difficult to pass on to the clients as company is able to change price only on periodic basis. In the past, VRL has been able to pass on the incremental cost to the customers and has maintained the operating margins except in FY13 and FY14 where margins took a dip due to rapid price rise in diesel. 

Slowdown in business could impact margins due to high fixed cost nature of operations 

The transportation industry is cyclical in nature and susceptible to trends in economic activity. VRL operates an asset-heavy business model and this makes it difficult for it to pass on the incremental cost to the customers in case of an economic downturn. This could impact margins of the company due to high fixed cost nature.

Outlook and Valuation

In India, freight is transported across the country mainly through roadways, railways, coastal mode and pipelines. In recent years, the accessibility, door-to door service and reliability have earned road transportation a higher share of passenger and freight traffic vis-à-vis other transport modes. Share of freight transported through road is estimated to have increased by 8.5% in the last decade to about 63% in 2013-14. During the same period, the share of railways is estimated to have decreased by 7% to 27.4% in 2013-14.

VRL has been in existence in the road transport business for the last 40 years and is one of the largest in terms of fleet size with pan-India presence across the country. Owing to this, it is well placed to benefit from the growing demand of LTL (Less than Truck Load) arrangement. The company has also resorted to various in-house development of software, maintenance and body design facility, which has helped it to increase its efficiency.

During the period FY10-14, revenue has grown at a CAGR of 20.4% from Rs7,113mn to Rs14,938mn, while PAT has grown at a CAGR of 18.7% from Rs287mn to Rs570mn.The company faced relatively lower growth and reduction in margins during FY13 and FY14 owing to the Telangana issue and rapid rise in diesel prices. However, with Telangana issue sorted, the company’s performance during the 9MFY15 has improved and gross margins have bounced back to 29.5% compared to 27% in FY14 thereby improving its PAT margins to 5.6% from 3.8% in FY14. Additionally, the company earns high cash flow from operations and debt equity (post issue) will come down to comfortable levels from current 1.1x.

At the upper band of issue price of Rs205, the IPO is valued at P/E of 19.5x FY15 annualized earnings. I believe, P/E multiple of 19.5x with an RoE of 18-19% and positive growth outlook of 15-20% over the next 2-3 years provides healthy upside from upper price band. In this backdrop, I recommend SUBSCRIBE on VRL Logistics IPO.

Key Financials Rs.mm	FY12	FY13	FY14	9MFY15
Total Operating income	11,304	13,255	14,938	12,738
Other Income	49	98	100	56
Total Income	11,353	13,353	15,038	12,794
Total Expenditure	9,385	11,303	12,872	10,599
Operating Expense	7,911	9,626	10,912	8,991
Employee Costs	1,289	1,483	1,745	1,457
Other Expenses	184	194	216	151
EBITDA	1,919	1,952	2,066	2,195
Depreciation	696	823	866	692
Finance Cost	651	591	598	450
Exceptional Cost	0	0	66	0
PBT	621	636	768	1,053
Tax	(147)	179	198	336
Pat	767	457	570	717

Balance Sheet	FY12	FY13	FY14	9MFY15
Source of Funds
Equity Share Capital	707	1,812	855	855
Reserve & Surplus	1,166	1,082	2,208	2,513
Shareholder’s Funds	1,873	2,894	3,064	3,368
Deferred Tax (net)	692	776	834	832
Long Term borrowings	4,035	2,852	2,529	2,131
Other liabilities (long)	78	87	89	89
Long Term Provisions	22	29	26	49
Current Liabilities	2,623	3,014	3,235	3,260
Short Term borrowings	729	938	1,094	1,045
Trade Payable	56	50	93	64
Other Current Liabilities	1,761	1,655	1,825	2,054
Provisions (Short)	77	371	223	97
Total Liabilities	9,323	9,652	9,777	9,729
Application of Funds
Fixed Assets	7,064	7,243	7,544	7,091
Investments	1.3	0.8	1.1	1.0
Loans & Advances	917	967	907	819
Current Assets	12	7	25	25
Current Investments	1,347	1,434	1,299	1,792
Inventories	87	97	135	167
Trade Receivables	785	854	800	883
Cash	136	154	151	130
Loans & Advance (Short)	151	185	198	259
Current Assets (Other)	187	143	16	353
Total Assets	9,323	9,652	9,777	9,729

Issue Details

Issue Details
Issue Size	22.8
Issue Open/Close	April 15/17 2015
Face Value	10
Price Band	195-205
Lot Size	65
Pre Issue paid up capital (Rs.mm)	855
Post Issue paid up capital (Rs.mm)	912
Post Issue Market Capital (Rs.mn))	18,705
BRLM	ICICI Securities and HSBC
Registrar	Karvy
Pre Issue Pattern	%
Promoter	77.2
Public	22.8
Post Issue Pattern	%
Promoter	69.6
Public	30.4
Offer for different categories	%
QIB	50
HNI	15
Retail	35
Promoters	Dr.Vijay Sankeshwar Mr.Anand Sankeshwar