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Higher volume can lead to further earnings upside

VRL Logistics (VRL) reported an in-line Q3FY22 performance, with EBITDA margin of ~18.9%. Top line grew 20% YoY and EBITDA was up 31% YoY. Reduction in diesel prices for Q3FY22 and strong volume growth in Good Transportation (GT) segment allowed VRL to further improve on gross margins to 34.5% (33% QoQ). VRL continues to benefit from volume tailwind with 4% QoQ volume growth, which allows management to guide for double-digit volume growth in FY23E. YoY volume growth in GT segment remains strong (12% YoY volume growth and 7% YoY pricing growth). The number of GT vehicles has increased by 19 (net) during Q3FY22; EBIT/vehicle has also reached an all-time high of Rs7.9mn. Passenger transport (PT) revenues also witnessed strong rebound with 44% YoY growth in Q3FY22, thereby turning EBITDA positive. We maintain BUY with a target price of Rs600/share (Rs490/share earlier).

GT segment EBITDA reached all-time high in Q3FY22. ~5% QoQ revenue growth consisted of ~2% volume increase and 2.7% QoQ realisation increase. Decline in diesel prices and continued volume strength (up 12% YoY) allowed gross margins to expand 150bps QoQ. Procurement of bio-fuel was at 8.01% of total quantity in 9MFY22, down by 24.78% compared to 32.79% in 9MFY21 (Q1FY22 - 13.49% of total quantity, Q2FY22 – 10.55% of total quantity, 1.95% in Q3FY22).

New branch additions, new regions targetted. VRL has added 29 new branches in Q3FY22 and overall 60 new branches in 9MFY22. It is planning to expand network by opening new branches in untapped markets. Focus on increasing presence in the North and Eastern zones leads to 40% new branches addition in the North & Eastern Zones in 9MFY22. South continues to lead with 38% of the new branch additions; 22% of new branches added in West India

Significant cost reduction + gain in volume share drive margin performance. VRL has earlier included a large part of the contractual workforce (drivers and hamaali) into the payroll. The move has left VRL with an inflated cost structure with asset-heavy model in an environment where 90% of routes plied in the country did not have return loads. FY21 gave an opportunity to regain some of the cost advantages, utilise ‘labour boards’ and make the cost structure more variable. The same shows in an extremely commendable gross margin performance in 9MFY22 despite a rise in fuel costs. As volumes grow and the gross margin performance improves, operating leverage has more than offset ~19% increase in employee costs YoY in 9MFY22.

PT revenues increased ~44% YoY. Increase in number of passengers travelled, higher realisations and operational efficiency allowed PT operations to turn EBITDA positive in Q3FY22.

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