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Eyes revenue of INR100b in five years; near term challenges remain

We attended MLL’s investor meet, wherein the management reiterated its vision of achieving a revenue of INR100b over the next five years. It also touched upon the near term challenges: a) slowdown in the Farm segment, b) increase in fuel prices, and c) startup costs related to the Bajaj contract. Key highlights from the meet are:

Demand environment: While the Auto segment has seen an improvement over the last few months, the Farm segment has been weak. Recovery in the Farm segment is expected by 2HFY23. Segments like FMCG and Pharma have been picking up well, while the Electronics segment has been impacted due to semiconductor shortages.

Revenue growth for MLL over the last few quarters has been driven by new client acquisition. Growth within existing clients has been lower than expected.

The e-commerce segment has seen subdued growth in the last few months. Around 70% of this market is driven by Electronics, Groceries, Durables, and Apparel. These segments have seen muted growth in recent times.

Business areas: MLL focuses on three key verticals: a) Core 3PL, where the client is acquired first and then a network is built for the client; b) Network Services (includes freight forwarding and B2B Express) where the network is first built and clients are acquired later; and c) Enterprise Mobility. Core 3PL is the largest business for MLL with 75% revenue, followed by Network Services (20%) and Enterprise Mobility

Fuel price impact: All contracts have a fuel cost pass through clause and don’t see a major impact. There may be a timing issue where the fuel price hike is not passed on for a few months, but is eventually passed on to customers

Long-term revenue target at INR100b: MLL aims to achieve INR100b in revenue over the next five years. While the industry itself will grow, there will be a strong business shift towards organized players. The share of 3PL will also increase. Revenue from the Core 3PL business may double to INR60b, whereas the Network Services business may see exponential growth on the current low base and touch INR30b.

Margin Improvement over the long term: Margin is expected to improve, with increasing share of Warehousing going forward within the Core 3PL segment. In the Network Services business, improving scale will usher operational efficiencies, leading to higher profitability

Business from Bajaj: Profitability was impacted in 3QFY22 as there were startup costs linked to the Bajaj contract. The project is big and will stabilize over the next few months.

The acquisition of Whizzard will help enhance MLL’s presence and capabilities in the last-mile delivery and fulfillment services. It will also accelerate technology adoption and geographical coverage. MLL will acquire 60% stake in a staggered manner for a total consideration of ~INR710 m.

Share of Auto and non-Auto verticals: The share of the Auto vertical has fallen to 50% at present from 70% earlier. The management is continuously focusing on diversifying its sectoral mix. Out of the non-MM business, 20% would be Auto and the balance others.

Growth in the Logistics industry: The fastest growing segment in Logistics is B2C Express, followed by B2B Express, freight forwarding, and Warehousing services.

Valuation and view

The long-term strategic roadmap is in place to becoming a sizeable name in the Logistics industry, with revenue of ~INR100b. Strategic acquisitions, presence in value-added segments, and new customer wins augur well for MLL. In the near term, challenges with respect to: a) slowdown in Farm segment, b) increase in fuel prices, and c) start-up costs related to the Bajaj account remain.

We expect MLL to clock a revenue/EBITDA/PAT CAGR of ~20%/31%/48% over FY21-24. We retain our Neutral rating with a TP of INR500/share (34x FY24E EPS).

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