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Volume growth to drive earnings

* We released our Logistics thematic report recently, wherein we highlighted that a) the Logistics sector is set to move towards formalization and b) there would be strong growth opportunities for some of the established players in this space. With a robust growth outlook, we expect strong upside in the stock from current levels.

* The strong tailwinds for VRL would drive consistent growth in volumes and earnings over the next few years. The company would benefit from a) the uptick in economic activity, b) the general price hikes taken post 1QFY22, and c) easing fuel prices (on account of tax cuts).

* VRL is focusing on the high-margin LTL business (driven by the B2B segment) and expanding its network into newer markets. We expect VRL Logistics to clock a revenue/EBITDA/PAT CAGR of ~19%/19%/45% over FY21–24. We reiterate our Buy rating, with TP of INR540/share (35x FY24E EPS).

Festive demand and easing restrictions result in strong volume uptick; momentum likely to sustain

* The company has seen capacity utilization moving towards pre-COVID levels in the last few months. 2Q saw ~35% YoY growth in volumes, driven by the buildup in festive season inventory and easing of transport restrictions.

* The volume momentum is expected to continue with the pickup in economic activity and normalization of transportation activity. Over the medium-to-long term, we expect growth to be driven by an uptick in the overall Logistics sector (driven by economic growth) and increasing formalization, leading to market share gains in organized players such as VRL.

Owned fleet to help maintain profitability; focus on branch network expansion to capture higher volumes

* VRL operates its own fleet, which leads to a higher payload. It uses biodiesel (15–25% of its fuel demand is met through biodiesel), which reduces fuel costs. VRL is able to bargain on costs (such as maintenance costs) given its fleet size and scale of operations – this is not possible for those operating with hired vehicles. The operating leverage would play well for VRL as volumes improve.

* With improved demand, VRL looks to add 100 vehicles per quarter in 2HFY22. The company is also adding new branches to capture higher volumes. It looks to add 100 branches over the remaining months of FY22.

Valuation and view

* With a demand pickup and branch additions in untapped regions, we expect VRL to clock 19% revenue CAGR over FY21–24E. With robust volumes and cost efficiency measures, VRL would be able to maintain its EBITDA margin profile at 14–15% over the next two years.

* We expect the company to clock a revenue/EBITDA/PAT CAGR of ~19%/19%/45% over FY21–24E. The stock trades at 30x FY24 EPS. We maintain our Buy rating, with revised TP of INR540/share (35x FY24E EPS).

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