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In search of better tidings

Mahindra Logistics (MLL) tried to assuage investor concerns around ~1% PBT margins. Q2FY22 has witnessed margin headwinds from higher diesel prices. Also, the aggressive ramp-up in warehousing portfolio is leading to up-fronting of certain expenses under Ind-AS accounting. Weakness of the largest customer segment, i.e., automotive, also doesn’t augur well. Management expects better tidings in H2FY22 driven by consumer, ecommerce – Q3FY22 in particular where MLL has tied up ~1mn sq. ft. under its Flex warehousing solutions for ecommerce. We maintain HOLD.

* Largest customer base (automotive) continues to face challenges. The automotive segment continued to witness significant pressures in Q2FY22. Global semiconductor shortages have affected every OEM in India which resulted in a sharp volume drop, especially in Sep’21. This resulted in significant operational challenges for logistical companies, with high variability in volumes and higher detention time of fleets. Drop in automotive volumes have also led to a decline in stockyard under management, in effect resulting in improvement of warehousing mix.

* Other sectoral trends. The farming sector continues to witness positive business momentum. Q2FY22 observed growth in shipment volumes of tractors and farm equipments, consistent with strong demand in the upcoming festive season. The ecommerce sector saw a sharp increase in volumes, with continued traction from Tier 2 and Tier 3 towns. MLL continues to see uptick in personal care, food segments. Electronic appliances and consumer durables are impacted by cross border logistics. This is leading to further spend (by these companies) towards supply chain. Many companies are trying out omni-channel distribution model. Last year MLL has won a large contract with Bajaj Electricals to provide end-to-end supply chain logistics solutions. MLL continues to scale up the same, with ramp up of the contract expected from Q3FY22.

* Significant increase in diesel costs impacted transportation margins. Management highlighted 5-6% increase in diesel cost through Q2FY22 and particular challenges faced in passing through the same to customers. Transportation segment revenues ex freight forwarding were ~Rs5bn for Q2FY22. The impact of higher diesel prices was Rs300-310mn. This has been addressed and will lead to betterment of margins from Q3FY22.

* Maintain HOLD with a target price of Rs 657/share. MLL’s business model has multiple pivots to ensure growth and augment an already attractive investment story. These include contract manufacturing, freight forwarding, multimodal offering and entry into express logistics. We wait for the ‘beat-upgrade’ cycle to resume which has taken a pause for the past few quarters.

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