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Large-ticket deal win

Bajaj Electricals Limited (BEL) and Mahindra Logistics (MLL) have announced they have signed a contract for innovative logistics optimisation and outsourcing. The deal is a complete end-to-end redesign and outsourcing of BEL’s entire logistics by MLL, with the twin objective of achieving enhanced and industry-best service levels, coupled with a logistics cost saving in excess of 25%. The total contract value of this deal will be in excess of Rs10bn over the next five years (>Rs2bn p.a). Margins, we believe, can be in the 9-10% range given the typical mix of warehousing and transportation involved in any end-to-end supply chain management contract. More importantly, the deal signals the way forward for an integrated logistics service provider like MLL and MLL’s potential for further large ticket deal wins. Maintain BUY with an unchanged target price of Rs572/share.

* Margins, the key ponderable... The nature of the deal win is significant in terms of value of the contract (>Rs2bn p.a.), the largest (till date) for MLL. A suitable mix of high value-added, high margin warehousing and a relatively low-margin transportation can take the overall margin to 9-10%. To note here, in the non-M&M supply chain segment, the transportation:warehousing ratio is still 2:1 for MLL (a typical contract over its lifecycle will have higher contracting mix); nevertheless, upfront margins may surprise given a higher mix of warehousing. The competitive intensity leading up to the contract also needs to be kept in mind, given that the contract endeavours to achieve 25% logistics cost savings for BEL.

* …along with signalling. The >Rs10bn deal win (five-year execution) underlines: i) the opportunity for an integrated logistics service solution provider like MLL; ii) capability buildup and the benefits of first mover advantage; and iii) paving the way for many more such large-ticket deal wins to help consolidated scale and leadership within the sector (resulting in a much faster growth rate in the warehousing area under its management). Such large-ticket deal wins are also prospective for profitability, as (post Ind-AS) margins of 9-10%, can add ~Rs200mn of EBITDA from a single contract. Our FY22E and FY23E EBITDA estimates for MLL are Rs2.1bn and Rs3bn respectively.

* MLL best placed to incrementally win wallet share of customers. Focus on: i) integrated service platforms, ii) multimodal offerings, iii) operational excellence to drive cost competitiveness, and iv) technology platforms (for transport management, warehouse management, integrated site management) to help service delivery is showing in an increasing trend of order wins favouring integrated services.

* Maintain BUY. 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 gradual entry into express logistics.

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