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Drop in warehousing revenues drive miss

Mahindra logistics (MLL) Q4FY21 numbers were lower than expected. Non MnM supply chain revenues declined 13% QoQ, as warehousing revenues declined 25% QoQ. The drop in high margin warehousing revenues for the quarter also impacted margins.

EBITDA margins fell 40bps QoQ. Given the strong underlying trend in fulfillment and warehousing and the consistent large integrated deal wins that we see for MLL, the current quarter drop in Non – MnM SCM warehousing revenues don’t project a trend. A weak base (Q4FY20) still allowed for 17% YoY growth in Non MnM warehousing revenue growth. We do see scope for earnings downgrade for FY22 as Covid impacts Q1FY22 auto revenues. We would like to reiterate MLL as a structural organised play on improving warehousing and integrated solutions. Due to recent runup in stock price and the near term overhang on earnings we downgrade MLL to ADD from BUY.

* Major contract wins in Q4FY21. Two major logistics contract entered in Q4FY21, highlights that MLL is well poised to take advantage of industry trends in SCM. This includes i) increase in adoption of Omni-channel strategy across businesses, making returns more costly ii) higher tech integration – ability to provide plug and play model for different customers iii) tremendous growth witnessed in fulfillment and warehousing, driven in part by growth in ecommerce and post GST consolidation trends and iv) need for integrated service offerings which inturn is leading to wallet share increase. Management reiterated the revenue target of Rs100bn by CY26.

* Bajaj Electricals’ (BEL) integrated logistics services deal. MLL has entered into complete end to end redesign and outsourcing of Bajaj Electricals’ Logistics. The scope of the contract was guided at Rs10bn for a period of 5 years and while it will lead to a per SKU cost reduction of > 20% for BEL, can still accrue meaningful margins to MLL.

* Partners with Flipkart. Flipkart partnered with MLL as one of its key logistics partners to help fast track deployment of electric vehicles across its logistics fleet in the country. Mahindra Logistics will play a significant role in working with various OEMs and help Flipkart’s sustainable transition to EVs. MLL through EDeL will enable Flipkart in its journey towards building a green supply chain by not only deploying a large fleet of EVs but also creating a conducive environment for EV deployment and operations across the country. This includes building supporting infrastructure and technology such as charging stations and parking lots, training workforce, route planning and even battery swapping stations in the near future.

* Downgrade to ADD with an increased target price of Rs 624/share (Rs 572/share earlier). MLL’s business model has multiple pivots to ensure growth and augment an already attractive investment story, the pivots being: contract manufacturing, freight forwarding, multimodal offering and entry into express logistics.

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