Published on 12/07/2017 4:26:22 PM | Source: SPA Securities Ltd

Update On Patel Integrated Logistic Ltd - SPA Sec

Patel Integrated Logistics Limited (PIL) is a Mumbai-based logistics solutions provider to over 2000 clients. PIL's business segments (% contribution to total revenues in FY17) include Surface Transportation (39.6%), Co-loading of air cargo (6.6%) and Consolidation of Cargo (53.7%). PIL provides logistics solutions through all over urban and rural India. The Company is also engaged in the business of warehousing and secondary distribution. PIL's retail division is engaged in the surface transport business and provides Express Cargo Service to over 250 branches serving more than 450 delivery stations.


GST to be a game changer

With the introduction of the Goods and Services Tax (GST), interstate transportation of goods would become more efficient. And among all, the logistics sector, comprising inbound and outbound segments of manufacturing and services supply chains, is likely to get the much-needed boost. Unorganized players command ~60% share in domestic logistics industry. The shift from unorganised to organised as a trend has been already visible over the last few years. With implementation of GST, it should now further accelerate in coming years.


Increasing contribution of high margin express business to lift margins

PIL derived ~10-15% of its total revenue from express segment in FY 17 (near zero in FY14). Gross margin in express segment are ~1.5x that in surface business. With traction in both B2B and B2C segment, management expects contribution of express segment to reach 30% by FY19. On the back of increasing contribution of express segment, we expect margins of PIL to improve.


Cost rationalization and Investment in IT to lift margins further

Revenue of PIL has declined from INR 5794 mn in FY13 to INR 4501 mn in FY17 (CAGR of -6.1%). With improvement in EBITDAM ~3% in FY13 to 4.8% in FY17, PIL could register an EBITDA growth of 4.7% CAGR in the same period. Focus on high margin clients and deliberately shunning low margin ones helped PIL to improve profitability. Recently, PIL has upgraded its IT backbone with data analytics and real time tracking tools that enables them to reduce idle time and optimize resources. With express business and improved IT backbone in place, management expects ~100 bps improvement in EBITDAM in FY18.


Thrust on warehousing to leverage roadway backbone

To leverage its roadway business backbone, PIL is determined to scale up warehousing business. Management intends to invest INR 200-300 mn to set up warehouses of 300000 sqft across the country in FY18. With an investment of ~ INR 1000 mn, PIL envisages to scale it to 1 mn sqft. EBITDA margin in the business ranges from 50% to 70%. PIL's rental expenses for current warehouses stands at ~INR 40 mn. With shift to ownership model, management expects ~50% fall in rental cost in FY18.


Outlook and Valuation

Implementation of GST would lead to rationalizing of taxes on production, distribution and inventory management. This would lead to consolidation of warehouses and shift towards hub and spoke distribution model. PIL's roadway business which forms the backbone of the entire distribution is poised to exhibit sustained growth however thrust on warehousing and consolidation in domestic e commerce business is expected to accelerate the overall revenues. At CMP of INR 85, PIL trades at 19.1x its FY17 EPS of INR 4.4.

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