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In search of normalised profitability

We visited the multi-tenanted BTS facility of Mahindra Logistics (MLL) in Luhari, Haryana. Two blocks have come up (FC + DC for three clients and a FC for Amazon) with one more block under construction. Three blocks put together have an area of 1.4mn sqft. The entire 1.4mn sqft has been contracted out to customers. Bajaj Electricals contributed ~70% of the volumes in the first block of ~0.5mn sqft, which we visited. With Luhari, MLL's BTS portfolio has reached 2.4mn sqft, which the management intends to take up to 6mn sqft in medium term. MLL expects significant improvement in gross margins in end-to-end solutions contract with maturity (12-18 months); reiterated FY26 revenue target of Rs100bn and a significant improvement in profitability concurrently. We maintain ADD on MLL with a revised target price of Rs465 (earlier: Rs550/share).

* With maturity of contracts, profitability should improve. Management highlighted that warehousing and transportation (service) contracts reached peak (desirable) margins in 6 months, while integrated solution contracts (like that of Bajaj Electricals) should reach peak (desirable) margins in 12-18 months. While utilisation may not necessarily increase given the nature of contracts (85% of Minimum Guaranteed Volumes - MGV), cost savings of 5-7% accrues p.a. (to manage the contracted volumes). We believe, given the management commentary, some (systematically relevant) contracts may have seen an upfront sharing of the future cost savings. Nevertheless, contract pricing still ensures a desirable profitability within 12-18 months. The underlying assumption is, which management also emphasised, the enterprise account won’t keep incrementally nibbling at the cost savings that MLL incrementally brings in. The reason being (as per management), with contract maturity in integrated solutions contract, switchover costs for customers increase materially. Caveat emptor: This has been one of the key investment arguments for MLL all through, while it didn’t impede PAT margins to fall to <1% (FY22) -- delayed cost optimisation in Bajaj Electricals contract, unexpected variability in e-commerce volumes in FY22 and sharp inflation were the key impediments.

* Targetting to reach Rs100bn of revenue by FY26. MLL targets revenue mix of 60% 3PL, 30% network services and 10% mobility. Currently, out of Rs8.5bn of network services revenue (~22% of overall supply-chain revenue), freight forwarding business revenue is Rs4.5-4.6bn. Three points driving growth in freight forwarding 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 freight forwarding business is: i) Volumes should improve, ii) start charter services offering, and iii) invest in lanes internationally). MLL doesn’t see any significant reduction in the prices which volume increase can’t offset. In B2B express, MLL expects ~30-35% annualised growth -- the revenue has already expanded to ~Rs2.5bn in FY22.

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