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Conference call takeaways
VRL Logistics (VRL) management said volume growth would be the company’s main focus going forward as axle load benefits start to accrue. GT tonnage/realisation growth in FY19 was restricted to 6.0/5.1%, and margins were flat YoY. Axle load and decreasing diesel prices were the key highlights for Q4FY19. Company continued to give a discount in Q4FY19 (~6-7%) in the GT segment and has guided to pass on any additional benefit accruing from new axle load norms to customers, with an exception of increase in diesel prices. PT segment witnessed 1.9 / 4.1 / 4.2% increase in number of passengers / realisation per passenger / occupancy level in FY19. FY20 capex is pegged at ~Rs600mn. Maintain HOLD with a target price of Rs258.
* Tonnage expansion to be the core value driver for GT segment.
Axle load benefits started to show in the Q4FY19 print. In the quest for higher tonnage, VRL passes on incremental benefits to customers. With GST benefits yet to accrue in full, higher lead distance may also lead to growth in tonnage.
* Lower diesel prices added to higher GT margins.
Average diesel cost for the company in Q4FY19 was Rs62 per litre. This, as a percentage of GT revenue, was lower at 24.86% in Q4FY19 vis-à-vis Rs25.88% in Q3FY19.
* PT segment operations improved despite capacity reduction.
The PT segment saw a net reduction of 15 buses YoY. Q4FY19 occupancy was up 4.3% YoY and flat QoQ. Realisations have increased nearly 4.7% YoY and decreased 9% QoQ. The YoY increase in realisation largely indicates softening of systemic competitive pressures. Stabilising the bus segment is necessary for any investment thesis on VRL.
* Capex for FY20 cut to Rs600mn.
With ~10% increase in tonnage expected out of axle load benefits, the company plans to add only ~100 trucks in FY20 (entailing a capex of Rs250mn-300mn). Surat facility is now expected to get operational by H1FY20 (earlier expected by FY19). Capex for FY19 was Rs2.11bn (Rs1.9bn for GT, of which Rs840mn was spent on addition of trucks).
* Capex appears lower than expected.
Spare capacity introduced in the system on account of the new axle load norms is ~8%. This precludes the need to buy any truck for FY20 (after factoring-in the possible volume delta that Surat facility is expected to bring). Volume growth during Q4FY19 was a meagre 1.36% YoY, which we think is too disheartening. VRL will buy trucks in Q4FY20 to meet FY21E volume growth requirements and to avoid the need for price increase on account of BS VI emission norms.
* FCF yield for FY20 is pegged at 6.5%.
In line with the lower capex guidance (we have factored capex of Rs800mn vs the Rs600mn guided), We estimate an FCF yield of 6.5% for FY20E. Maintain HOLD with an unchanged target price of Rs258, based on 20x FY21E EPS.
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