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To exit Bus operations; to focus on the high growth Goods Transport

* VRLL announced the sale of its Bus division for INR2.3b to Vijayanand Travels Pvt. (VTPL), an entity owned by the promoter group. The slump sale is being undertaken on the basis of an independent valuation obtained from Grant Thornton Bharat and has been executed at an arms-length basis. The transaction is subject to the receipt of requisite approvals.

* As per the management, average revenue per passenger in the Bus segment has been declining, while costs have been on a rise. VRLL has been unable to pass on the cost increase to customers due to rising competition. The majority of its Bus fleet is above nine years old and is due for replacement, which will require a higher capex. VRLL has seen a sharp drop in capacity utilization of Buses to 50% in FY22 from 60% in FY18. Due to the above-mentioned concerns and a weakening outlook, the management has decided to exit this business.

* Sale of the Bus segment is a positive for VRLL as the management will be able to better focus on the high growth Goods Transport business. The proceeds accruing to VRLL will be used to partially fund truck fleet additions. It may take on lower debt than that estimated earlier. EBITDA margin can be better in FY24 than that expected earlier as the Bus segment was generating lower margin and was a drag on overall profitability. We have revised our FY24 EPS upwards by 8% to incorporate a higher EBITDA margin and lower debt. We now expect VRLL to clock a revenue/EBITDA/PAT CAGR of ~14%/17%/30% over FY22-24. The stock trades at 21x FY24E EPS. We maintain our Buy rating with a revised TP of INR860 (28x FY24E EPS).

Overall performance to improve with the sale of the low growth Bus business

* VRLL is selling its Bus segment, which is engaged in Passenger transportation and currently owns a fleet of 277 buses. It operates buses in Karnataka, Maharashtra, Andhra Pradesh, Telangana, and Goa.

* The sale, at INR2.3b, is in line with the valuation of its Bus operations as conducted by Grant Thornton Bharat and its net worth is INR0.35b. VRLL is likely to see a net cash inflow of INR1.9b after taxes.

* The Bus segment has been struggling with low capacity utilization, lesser margin, an ageing fleet, and excessive competition from the Railways and regional Airlines with an increase in new routes and capacities.

Valuation and view

* We have revised our FY24 EPS estimate upwards by 8% to incorporate improved profitability, with a better EBITDA margin and lower debt in FY24.

* We now expect VRLL to clock a revenue/EBITDA/PAT CAGR of ~14%/17%/30% over FY22-24. The stock trades at 21x FY24E EPS. We maintain our Buy rating, with a revised TP of INR860 (28x FY24E EPS).

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