IGI Logo

Volume growth can lead to earnings upside

VRL Logistics (VRL) reported lower than expected Q1FY22, with EBITDA margin of ~8.6% vis-à-vis 16% QoQ. There has been a sharp increase in diesel prices (procured diesel prices for VRL went up 6.3% to Rs84/litre), yet VRL could maintain gross margin at 30.8% (31.9% QoQ). This has been helped with the decrease in lorry hire charges, hamaali, rent etc.

Goods transportation (GT) segment witnessed ~ 28% QoQ decline in volumes and 2% QoQ decline in realisations (change in route mix). Number of GT vehicles have increased by 54 (9 electric vehicles) during Q1FY22. VRL has also ordered 15-20 busses; new additions targetted profitable routes for continuity of service. Capex in Q1FY22 stood at Rs380mn; capex target for FY22E stays at Rs500-600mn. We maintain BUY on VRL with a target of Rs380/share.

* GT segment EBITDA declined on account of lower volumes. ~28% QoQ revenue growth decline consisted of ~28% volume decline and 2% QoQ realisation decline. Due to such an adverse impact on operating leverage on account of lower volumes, GT EBITDA declined to 11.2% from 18.1% QoQ. Despite increase in diesel prices, VRL has been able to maintain gross margins. Procurement of Bio- fuel was at 13.49% of total quantity, increased 8.58% QoQ and decreased 17.54% YoY. (Q4FY21 was 4.91% of total quantity, Q1FY21 was 31.03% of total quantity).

Nine new branches have been added in Q1FY22, VRL has also started to highlight 46 hubs in the investor presentation instead of 45 hubs – business pickup is expected from Gujarat hub in FY22E. July, ’21 witnessed ~10% price hikes and higher volumes (similar to pre-pandemic levels). This should allow for significant expansion for gross margins and earnings, unless diesel prices shoot up again.

* 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. The same shows in an extremely commendable gross margin performance in Q1FY22 despite rise in fuel costs.

* Passenger transport revenues declined ~69% QoQ. VRL is again looking at selective route expansion to ensure business sustainability of the passenger transport segment. Further, one can expect significant earnings ramp-up as inter/intra state travel resumes.

To Read Complete Report & Disclaimer Click Here

For More ICICI Securities Disclaimer https://www.icicisecurities.com/AboutUs.aspx?About=7

Above views are of the author and not of the website kindly read disclaimer