IGI Logo

New branch additions to support volume growth

We attended VRLL’s investor call to get a sense of the recent developments and business outlook in the Logistics sector. The management touched upon various aspects like: a) volume movement in recent times, b) rising fuel prices, c) branch addition strategy, and d) market share shift towards organized players. Here are the key takeaways from that interaction:

Business activity: Logistics activity has been pretty strong in 4QFY22. VRLL expects to end 4QFY22 with a growth on a YoY basis. Improved economic activity is also evident from the recent GST and e-way bill data.

Shift towards the organized sector: After 1st Apr’22, e-invoicing will be mandatory for entities with a revenue of over INR200m (from INR500m earlier). There is a lot of pressure on small fleet operators due to compliance, technology, maintenance, billing, etc., leading to higher cost of operations. This will shift a lot of business towards the organized sector. In the current system, long haul transfers have turned to organized players, but intra-state transfers are still unorganized.

Impact from fuel price hikes: From current levels, fuel prices were ~10% higher in Oct’21. Despite the elevated levels, the company delivered a strong margin in 3QFY22. This shows its ability to pass on the fuel price increase to customers. VRLL does not see any major risk to its margin from price increases in diesel.

Branch expansion: VRLL is aggressively pursuing branch expansion, which will aid higher volume growth. It is on track to open 90-100 branches in FY22 and aims to open a similar number of branches in FY23.

Capex: VRLL is looking at major capex in FY23, primarily towards fleet addition, the details of which will be provided in the near term. Vehicle utilization levels are at peak levels with good volume growth. Given the shortcomings in hired vehicles, the company is looking to build its own vehicle fleet. The Centre’s scrappage policy is also prompting it to boost its fleet capacity. It has almost scrapped the plan to acquire a trans-shipment hub in Bengaluru.

Diesel procurement: VRLL is currently sourcing its entire diesel needs from retail pumps. Its fuel cost in 4QFY22 is lower as compared to that in the last two quarters. The company has cut its bio-fuel usage to 2-3% from 23% levels in FY21 given higher palm oil prices.

Volume outlook: The management expects 15-20% volume growth going forward, driven by: a) new branch additions, b) higher demand from new enduse industries, and c) shift towards the organized sector.

Margin outlook: VRLL clocked very strong margins in 2Q and 3QFY22 when diesel prices were higher than current levels. The management sees no impact of higher fuel prices on margin. With improved volume and scale, efficiency in operations will improve further, leading to additional cost benefits.

New business opportunities: Within the GT segment, there has been a strong pick-up in demand from new end-use industries like betel nuts, tea leaves, etc. VRLL is aggressively trying to penetrate further in this new customer category.

Valuation and view

VRLL is well placed given its strong presence in the LTL segment, focus on branch addition, and tight cost control. Its comfortable Balance Sheet position and strong cash flow generation will enable it to meet its capex requirements for future growth

With a pickup in demand and branch additions in untapped regions, we expect VRLL to clock 21% revenue CAGR over FY21-24E. With robust volume and cost efficiency measures, it will be able to maintain its EBITDA margin profile at 16% over the next two years.

We expect the company to clock a revenue/EBITDA/PAT CAGR of ~21%/26%/65% over FY21-24E. The stock trades at 19x FY24E EPS. We maintain our Buy rating, with a TP of INR690/share (30x FY24E EPS).

To Read Complete Report & Disclaimer Click Here

For More ICICI Securities Disclaimer https://www.icicisecurities.com/AboutUs.aspx?About=7

Above views are of the author and not of the website kindly read disclaimer