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Diversification into fast growing segments

About the stock: Mahindra Logistics is an end-to-end 3PL logistics solution provider, from performing milk run to in-factory logistics, warehousing to first mile and last mile logistics.

* Serves over 400 customers via its two business segment: supply chain management [(SCM), 96% of revenues] and enterprise mobility

* Revenues from Mahindra comprise 52% of SCM revenues (FY21) while the rest is contributed by non-Mahindra

Q2FY23 Results: Results were better than I-direct estimates on all fronts.

* Revenues grew 28% YoY to | 1326 crore, led by better-than-expected SCM segment performance

* EBITDA grew 44% to | 68 crore with margins at 5.1% (vs. expected 5.1%)

* Subsequently, PAT grew 2.5x to |13 crore

What should investors do? Along with its core 3PL business (up 32% to | 1052 crore), MLL diversified into a bouquet of services called network services (up 18% to | 211 crore). Network services comprise freight forwarding (up 5% to | 106 crore), express (up 18% to | 51 crore) and last mile (up 55% to | 55 crore). Range of services would help MLL to capture larger wallet share of its customers.

* We maintain BUY due to long-term growth drivers in MLL

Target Price and Valuation: We value the stock at | 610 i.e. 36x P/E on FY24E EPS.

Key triggers for future price performance: Although auto is expected to dominate the mix in near to medium term, continued business addition in non-auto business and higher warehousing utilisation, along with cost-control measures are expected to keep MLL’s long term ambitions intact

* The above enables it to shift buying behaviour (more online shopping), leading to higher warehousing space requirement and 3PL relevance

* Asset light business model, with projected 35%+ RoCE in FY24E

Alternate Stock Idea: Apart from MLL, we remain positive on TCI Express.

* TCI Express is a leading asset light B2B (95% of revenues) express logistics company with 28 sorting centres, 800+ owned pan-India centres covering 40000 pick-up and delivery points

* We have a BUY rating on the stock & value at | 2195 (41x PE on FY24E EPS)

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