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New capex plan to capitalize on the growth opportunities

* VRL Logistics (VRLL) announced a capex plan of INR5.6b to purchase 1,600 trucks (~25,000t carrying capacity) spread over the next 12-18 months. This capex is essential to: a) replace its older fleet that moves out due to the vehicle scraping policy and b) capture the pick-up in demand in the LTL segment.

* VRLL currently has a fleet capacity of ~69,000t and with this capex, there would be a net capacity addition of 20% (adjusted for scrappage of old trucks). The capex would be funded by internal accruals and debt.

* We believe VRLL would be very well placed to capitalize on the growth opportunity after this capacity addition. With strong balance sheet, VRLL would comfortably manage the capex funding by availing an additional debt of INR3-3.5b along with internal accruals. We revise our numbers to incorporate the higher capex numbers as well as the expected rise in debt. We now expect VRL to clock a revenue/ EBITDA/PAT CAGR of ~22%/29%/63%, respectively, over FY21-24. The stock trades at 22x FY24E EPS. We maintain our BUY rating with a TP of INR665 (premised on 30x FY24E EPS).

Capex to help replace the older fleet and capture the pick-up in demand

* VRLL has announced a purchase of 1,600 customized trucks (with ~25,000t capacity) comprising 1,000 trucks of TATA LPT 2818 make, 200 trucks of TATA LPT 1415 make, 100 trucks of TATA 610 SFC make, 200 trucks of Ashok Leyland 1920 make and 100 trucks of Ashok Leyland 4620 make with a total capex of INR5.6b spread over the next 12-18 months.

* The planned capex (including registration, insurance cost, etc.) will be funded by debt and internal accruals.

* The proposed capex would result in a net capacity addition of ~13,000t (around 20% of existing capacity). This would allow VRLL to cater to the expected growth in industry volumes and reduce VRLL’s dependence on hired vehicles.  The proposed 1,600 vehicles are likely to be having the latest features and technology that would help in reduction of maintenance time, fewer stop overs, and better efficiency resulting in better uptime.

Valuation and view

* The proposed capex reinforces the robust demand outlook, which VRL has been indicating since the last few quarters. Its comfortable balance sheet position and strong free cash flow generation will enable it to meet the capex requirement with an additional debt of ~INR3-3.5b.

* We revise our numbers to incorporate the higher capex numbers as well as the expected rise in debt. We now expect VRL to clock a revenue/ EBITDA/PAT CAGR of ~22%/29%/63%, respectively, over FY21-24. The stock trades at 22x FY24E EPS. We maintain our BUY rating on the stock with a TP of INR665 (premised on 30x FY24E EPS).

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