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Weakness in Bus segment drags overall margins

New branch additions to drive volumes

* VRL Logistics (VRL)’s revenue grew 15% YoY to ~INR7.3b (flat QoQ, in line with our estimates) led by 14% YoY growth in Good Transport (GT) business.

* EBITDA margin stood at 13.6% (-420bp YoY,-240bp QoQ) v/s our estimate of 16.7%. EBITDA margin was severely impacted by a sharp drop in profitability in the Bus segment (5% margin in 2QFY23 v/s 20% in 1Q). Bus segment’s margins were hurt primarily by lower capacity utilization. Further, there was an EBITDA margin contraction in the GT segment (-370bp YoY/-80bp QoQ) due to engagement of more outside vehicles driven by a surge in festive bookings and increase in Lorry hire charges.

* EBITDA stood at INR992m (v/s our estimates of INR1.2b). Weak operating performance and higher depreciation saw APAT decline to INR315m (v/s our estimate of INR509m). VRL added 97 new branches in 1HFY23, thereby enhancing its presence in untapped markets. Management expects to close VRL’s Bus sale transaction during 3QFY23.

* VRL’s margin performance has been extremely weak mainly due to cost pressure across Bus and GT segments. The company is not looking to increase freight rates as it focuses on gaining volumes and market share. We revise our FY23E/FY24E EPS by -21%/-15% to factor in weak 2QFY23 performance and cost pressures due to inflationary environment. We maintain our BUY rating with a revised TP of INR730 (premised on 28x FY24E EPS).

Highlights from the management commentary

* VRL handled 0.96m tons in 2QFY23 (+14% YoY, +7% QoQ) and a total of 1.9m tons in 1HFY23 (+27% YoY). For 2QFY23, the cost of diesel procurement was INR90 per liter v/s INR93 per liter in 1QFY23.

* Going forward, EBITDA margin would be ~16% in the GT business. If margin falls below 16%, only then VRL would look to increase its freight rates.

* VRL had 0.4m customers during pre-Covid period, which has increased to 0.7m currently.

* Contribution from new branches (added from Apr’21) has reached ~8% of total tonnage during 2QFY23 from 2-3% in earlier quarters and the management expects contribution from new branches to improve further

Valuation and view

* We expect VRL to clock 21% volume CAGR over FY22-24, with faster addition of branches in untapped regions. Margins, however, are likely to be lower than earlier estimated due to: a) rising cost pressures and b) VRL not looking to increase freight rates as it focuses on gaining volumes and market share.

* We revise our FY23E/FY24E EPS by -21%/-15% to factor in higher costs. We expect VRL to clock revenue/EBITDA/PAT CAGR of 15%/13%/20% over FY22- 24E, respectively. Maintain BUY with a revised TP of INR730 (premised on 28x FY24E EPS).

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