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Good performance in testing times

VRL Logistics’ (VRL) Q4FY23 performance was in line with our estimates. Key takeaways: i) EBITDA margin of GT segment expanded 30bps QoQ to 16%; ii) volume rose 16% YoY (2.2% QoQ) at 1,031kte; 3) added 57 new branches in Q4FY23; 4) net debt rose Rs381mn YoY owing to buyback of shares amounting to Rs613mn in Q4FY23; 5) FY23 capex stood at 4.1bn; and 6) cash return of Rs11.9/share to shareholders through buyback and dividend of Rs5/share.

We believe VRL’s performance was better than peers as it has shown improvement in realisation, volume and margins. Going ahead, management has guided for volume growth of 15-20%, static realisation and EBITDA margin of 16- 17% for FY24. Despite the guided capex of Rs4.7~4.8bn towards the addition of 1,667 trucks in FY24, we do not envisage leverage going up. Besides, we expect RoE to increase to 21% by FY25 as new trucks would start contributing from Day 1. We introduce FY25 estimates at this stage and roll-over the valuation to FY25E. We raise P/E multiple to 27x (earlier 25x) – 10% discount to peers as VRL is expected to deliver higher EPS CAGR compared to peers, but a lower RoE in FY25 (mainly due to revaluation of assets). Our revised TP works out to Rs900 (earlier Rs775), implying 25% upside from CMP. Retain BUY on VRL and recommend it as our top pick in logistics space.

* Impressive performance. VRL’s Q4FY23 EBITDA of Rs1.14bn (down 11% YoY, but up 11% QoQ) was in line with our estimates. Key points: 1) GT business recorded its highest-ever revenue of Rs7bn (up 15.1% YoY; 2.4% QoQ) driven by focus on volumes; 2) GT volumes have increased 16% YoY (2.2% QoQ) at 1,031kte; 3) EBITDA margin was impacted by higher costs YoY, though it improved by 30bps QoQ at 16%; 3) new branch addition – 57 in Q4FY23, 184 in FY23 – resulted in branch network enhancement to 1,126 by Mar’23 end; 4) added 1,338 new GT vehicles and sold/scraped 483 vehicles leading to a net increase of 855 vehicles in FY23; and 6) cash return to shareholders for FY23 has been Rs11.9/share including buyback and dividend of Rs5/share. Going ahead, management has guided for volume growth of 15-20% and EBITDA margin of 16- 17% for FY24.

* Expect EPS CAGR of 22% through to FY25. During the concall, the management mentioned that the company is targeting to open up to 25 branches per quarter and add 1,667 vehicles at a cost of Rs4.7-4.8bn in order to increase its reach. Besides, the management had restarted the bulk purchase of diesel (cheaper by Rs2/litre) in Dec-22. Currently, almost 28.5% of total diesel requirement is procured through bulk purchase. The key differentiator in case of VRL compared to peers is assets (new vehicles) contributing to profitability from Day 1. Hence, VRL’s our estimate of EPS CAGR of 22% (FY22-FY25E) is higher than that for peers. We also expect RoE at 20.9% by FY25, despite earnings getting boosted by profit made from the sale of bus transport and wind power assets.

* Outlook: Simple business model, sound execution. Unlike its peers, VRL is into asset-heavy PTL business, thus, giving it control over assets, significant reach and higher margins. The volume growth profile of the company, 15-20% YoY in FY24 and stable realisation come as a whiff of relief in a highly competitive industry, where companies are struggling to gain cost efficiencies from middle mile logistics. We value VRL at 27x (earlier 25x) due to its superior EPS CAGR through to FY25 despite lower estimated RoE compared to peers. Hence, VRL stock is at a discount to peers due to its lower estimated RoE vs peers]. We maintain BUY on VRL with a revised TP of Rs900/share on 27x FY25E EPS (earlier Rs775 on FY24E EPS).

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