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Expect margin bounce-back in Q3…

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

Q2FY22 Results: Margins were lower than estimates, impacting profitability.

* Revenues grew 22% YoY to | 1019 crore, led by better-than-expected SCM segment performance

* EBITDA grew 34% to | 50 crore with margins at 4.9% (vs. expected 5.6%)

* However, PAT de-grew 37% YoY to | 9 crore (vs. expected | 16 crore), as operating performance was impacted by higher interest and depreciation

What should investors do?

While the company has been facing challenges w.r.t. auto sector in the short run (non-passage of crude oil price, optimisation of SCM, etc), the company is adding customers on the 2-W and non-auto segment (more warehousing) and continuously improving its service mix.

* We remain positive on the long term growth prospects of the stock and maintain our BUY recommendation

Target Price and Valuation: We value the stock at | 750 i.e. 49x P/E on FY23E EPS

Key triggers for future price performance:

MLL has been steadily building up its presence in non-auto segments like e-com, pharma, consumer segment enabling it to

* Shift buying behaviour (more online shopping), leading to higher warehousing space requirement and 3PL relevance

* Increased investment in technology and multi-modal transport offering to customers

* Asset light business model, with projected 30%+ RoIC in FY23

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 |1950 (37x PE on FY23E EPS)

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