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At an inflection point

Mahindra Logistics (MLL) surprised on the top line in Q2FY22; however margin contraction and below-EBITDA items led to a PAT miss. We believe revenue momentum should accelerate hereon as MLL can potentially add ~20mn sqft over the next 4–5 years (historical average 1.5-2mn annually). MLL added 1.2mn sqft in Q2FY22.

In terms of capability, MLL’s 3PL track record is good, and we believe non- M&M warehousing is the joker in the pack with potential to drive growth and margins over the next 5–7 years. We are cutting FY22 estimates by 26%, but retaining FY23/24 estimates. Retain ‘BUY’ with a TP of INR758 (up from INR710) on a valuation rollover to FY23E.

Mixed performance but business at inflection point

MLL posted mixed results with revenue up 22% QoQ (against our expectation of 12%). However, EBITDA margin contracted 30bps QoQ to 4.9% due to start of new warehousing contracts. The company added 1.2mn sqft of warehousing in Q2FY22, a significant uptick given historically it added 1.5-2mn sqft annually. Q2FY22 PAT was up only 5% due to the EBITDA margin dip and higher depreciation on account of addition of warehousing space (as per Ind AS116).

FY22 outlook and beyond: Non M&M warehousing to drive earnings

We saw momentum in top line in Q2FY22, and though profits disappointed, we think the lower margin scenario is behind. MLL has aspirations of adding ~20mn sqft over the next 4–5 years, which can potentially add revenue of INR25bn and INR3.5bn of EBITDA to the business. Our bullish thesis for MLL hinges on this strategy playing out.

The contract win of Bajaj Electricals is a prime example of how large contracts for 3PL can flow in, and as scale attracts more scale, earnings can accelerate over the next five years, in our view. Given MLL’s capabilities and strong presence in ecommerce and consumer durables logistics, the non-M&M pie (particularly warehousing) should be the largest contributor to profit in the years ahead.

Outlook and valuation: Poised for a ramp-up

Given a poor H1FY22 (one-off and unlikely to repeat), we are cutting FY22E PAT by 26% due to lower margin/higher depreciation, but retain FY23/24E estimates. Rolling forward the valuation to FY23E, we are raising our DCF-based TP to INR758 (from INR710). Retain ‘BUY’.

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