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Margin improvement expected in

Mahindra Logistics (MLL) highlighted that the supply chain management (SCM) segment has seen growth driven by auto, e-commerce, consumer and freight forwarding business. Margins were impacted by i) slowdown in farm volumes, ii) decline in gross margins of Enterprise Mobility segment and iii) loss in JV (2x2 logistics carriers). Levers for margin improvement are i) improvement and recovery program in manpower cost, inflation and productivity and ii) improved utilisation. The Bajaj project optimisation is scheduled to be completed in Q1FY23 now. MLL remains focused on improving its 3PL services along with network services, transportation offerings including freight forwarding, B2B express business, last mile delivery and increase EV cargo. Technology investments for improving the scalability in the business also remains a management priority. We downgrade MLL to ADD from BUY after the stock price run-up yesterday, with an unchanged target price of Rs550/share

* Network services (freight forwarding, B2B, last mile delivery and EV cargo business) outlook. The company expects firm growth in these segments; MLL has been increasing its own capabilities and also looking for inorganic opportunities to further accelerate the growth. The acquisition in the freight forwarding business (2-3 years back) is able to derive strong revenue, margins and derive synergies. Similarly, with the acquisition of Whizzard, MLL is expecting similar growth in last mile delivery services. In EV cargo business, MLL has close to 500 vehicles now and it has committed to a long-term vision of 3000 vehicles (combination of 3W and 4W) over next 2-3 years. In B2B express, MLL expects ~30-35% annualised growth (slightly slower growth in Q4FY22 due to pandemic, disruption in operations).

* Freight forwarding acting as a key revenue and margin trigger. Out of Rs8.5bn of network services revenue (~22% of overall supply chain revenue), freight forwarding business revenue is Rs4.5-4.6bn. EBIDTA margins in freight forwarding business is ~5.5% in FY22 as compared to 3.9% in FY21. Freight forwarding business has been strong revenue and margin driver. Freight forwarding business has seen growth and it doesn’t have anchor customer, the largest customer is contributing 5% of the revenue. Three points driving growth in this segment are i) Product mix change (more ocean as compared to air freight), ii) price increase and iii) volume growth (~double digit increase YoY). Outlook of the freight forwarding business is i) volumes should improve, ii) start charter services offering, and iii) investing in lanes internationally). MLL don’t see any significant reduction in the prices.

* Key update on end-user segments. Auto segment -- The segment has been impacted due to headwinds such as semi-conductor shortage, higher fuel and commodity prices, slowdown in the economy. E-commerce: Volume growth should remain steady (cont’d).

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