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Volume guidance upped

VRL Logistics’ (VRL) management guided for ~45% tonnage growth along with 7- 8% realisation growth in FY22E, followed by 15% tonnage growth in FY23E. This will be achieved by ~ 100 branch additions over next 4-5 months mostly targetting North, East and North Eastern regions. Through this aggressive branch additions, management expects to increase North and West share of business from current 20% each to 30% each, and augment North east share of business higher (from 10% at present). Not only is VRL ramping up branch additions, it is also planning to add 100 new vehicles in H2FY22, given the strong volume outlook. We increase our earnings and target price (Rs490/share from Rs460/share). Maintain BUY.

* Meaningful outperformance from textile business takes revenue share to 18% from 15% YoY. Strong recovery in the textile business allowed for expansion in revenue share of the same from 15% to 18% YoY. This has also helped in achieving 1x asset turn for VRL’s Surat hub. There has been broad-based recovery in industrial goods, pharmaceuticals and commodities, allowing these segments to maintain share despite ~40% QoQ volume growth. Management guides for 15% YoY volume growth in H2FY22. Coupled with ~65%YoY volume growth in H1FY22, this translates into ~45% YoY volume growth for FY22E.

* Management optimism in guidance (45% volume growth in FY22E and 15% volume growth in FY23E) shows in branch addition, vehicle addition guidance as well. Management has added (net) 138 vehicles in H1FY22 and plans to add another 100 vehicles in H2FY22. Increasing volumes will be targetted through deployment of own vehicles, while hire charges will be maintained at ~7% (similar to H1FY22). Q2FY22 lorry hire charges were maintained QoQ at 7% of top line (absolute lorry hire charges increased from Rs250mn to Rs410mn QoQ). To control costs, VRL is also looking to add electric vehicles for hub to spoke transport (current EV fleet is ~ 29). Management is weighing higher capex vs much-lowered opex in the economics. VRL is also looking to add 100 branches in H2FY22 (after adding 22 branches in H1FY22). Currently (as per Q2FY22 runrate), each branch is contributing ~ Rs30mn revenue. Thus addition of 100 hubs has the potential to add ~ Rs3bn of revenues in the next few years. Management is looking for ~ Rs1bn in 12- 15 months timeframe from these new branch additions (mainly in North, East and North East regions). FY22E capex has been maintained at ~ Rs1.5bn.

* Passenger transport starts getting back on track. Q2FY22 witnessed increase in the number of passengers from 133,000 to 477,000 YoY. Realisation is still at 1000/1001/passenger. Fleet occupancy has increased by 7%YoY to reach 78%. Q3FY22 performance is also expected to be strong.

* Maintain BUY. We have increased earnings to factor in revised management (volume) guidance. We maintain BUY with a revised target of Rs490/share.

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