IGI Logo

Q1FY24 review: Yet again a subdued quarter though earnings are likely to have bottomed out

Q1FY24 marked the third successive quarter of subdued earnings for the logistics companies under our coverage. Key points: 1) almost all the covered companies performed below our expectations; 2) shipments/volumes increased across the board, but fell short of our expectations; 3) street has cut its EBITDA estimates and target prices for all the covered companies except Gateway Distriparks (GDL) and Mahindra Logistics (MLL); 4) there has been mixed stock reaction post the results with GDL rising 4% and Blue Dart Express (BDE) paring 4%. Going ahead, we believe, the earnings trajectory for most companies has bottomed out though EXIM activity remains key. Our preferred picks in the logistics space are: VRL Logistics (BUY; TP: INR900) and GDL (BUY; TP: INR94).

Performance continues to underwhelm

Performance of the companies under our coverage was below expectation (mainly due to lower volume growth than expected and subdued realisation). Key points: 1) highest volume growth was witnessed for VRL Logistics at 10% YoY; 2) automobile and FMCG sectors showed improvement though e- commerce growth remained lower than expected; 3) both CONCOR and BDE reported volume growth of 8-9%, but at the cost of profitability; 4) most companies maintained their volume growth guidance for FY24 banking on the festive season and expectations of pick-up in economic activity; 4) EXIM volume weakness and imbalance between exports and imports is a concern. We believe margins have bottomed out for all the covered companies, but management commentaries had a cautious tone.

What street did post earnings...

Post Q1FY24 earnings, consensus FY24 EBITDA has been trimmed by 7.5% and 5.4% for BDE and CONCOR respectively. In the case of other companies, the street has largely retained its earnings estimates. However, it has reduced TPs of BDE and CONCOR by only 2-3%, suggesting that the respective valuation multiples have been raised due to trough in the earnings level. That said, in the case of TCIE, street has cut EBITDA estimate by a mere 1.2%, but slashed TP by 5.2%, implying that the valuation multiple has been trimmed. For GDL, on the other hand, while EBITDA has been trimmed slightly (by 1%), TP has been raised by 2.7% implying that the multiple has been raised.

What we did post earnings...

Among the companies under our coverage, we have maintained the estimates for all except BDE, where we have cut FY24E/FY25E EPS by 18%/16% respectively. That said, we have raised the valuation multiples for GDL, BDE and MLL as we believe margins have likely bottomed out and would improve going ahead. Further, we believe volume growth will be the key earnings driver with companies such as VRL Logistics standing above the rest owing to better asset turn and profitability.

Preferred picks in the sector

We prefer VRL Logistics (BUY; TP: INR900) and GDL (BUY; TP: INR94). For VRL Logistics, our TP is 18% ahead of consensus, though EBITDA is broadly in line, possibly due to higher valuation multiple (27x) vs consensus. In our view, VRL Logistics’ multiple deserves rerating as its margin is superior compared to other surface logistics players, volume growth is the highest and RoE gap with respect to TCIE has narrowed down. On the contrary, our TP is 17-18% lower vs consensus for CONCOR and BDE, despite EBITDA bring 3% higher for CONCOR and just 3% lower for BDE as compared to street. Street’s higher TP seems to be driven by higher valuation multiple; however, we believe, given the significant erosion in margins, multiples too should be lowered.

To Read Complete Report & Disclaimer Click Here

Please refer disclaimer at https://secure.icicidirect.com/Content/StaticData/Disclaimer.html
SEBI Registration number INZ000183631

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