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Inflationary cost pressures impact margin

The focus is on providing complete Logistics solutions to drive growth

* MAHLOG reported a revenue growth of ~28% YoY to INR13.3b in 2QFY23 (12% above our estimate). Revenue growth was driven by a recovery in the Auto industry and consumption-end markets, including Telecom.

* EBITDA margin stood at 5.1% in 2QFY23 (up 55bp YoY, but down 40bp QoQ). EBITDA grew by ~45% YoY to INR676m. APAT increased by ~130% YoY to INR122m (16% below our estimate). Margin was impacted by the inflationary environment, increase in frontline manpower costs, and supply shortages of trailers and car carriers in 2QFY23.

* The supply chain recorded a revenue of INR12.6b (up 29% YoY) and an EBIT margin of 5.4% (down 70bp YoY and 120bp QoQ). Enterprise Mobility reported a revenue of INR629m (up 15% YoY) and an EBIT margin of 5.9% (up 150bp YoY, but down 100bp QoQ).

* We expect the momentum in volumes to continue, led by a strong outlook for key end-use verticals. We have revised our FY23/FY24 EPS estimate lower by 13%/2% to factor in its weak margin performance in 2QFY23 and cost pressures. We expect MAHLOG to clock a revenue/EBITDA CAGR of ~24%/34% over FY22-24E. We maintain our Neutral rating, with a revised TP of INR510/share (35x FY24E EPS).

Growth driven by a recovery in the Auto and Farm segment; the share of the Mahindra group increases

* Strong demand recovery was seen in the Auto sector as channel stocking picked up prior to the festive season.

* Contribution from the Mahindra group to the Supply Chain segment rose to 56% in 2Q (from 54% in 1QFY23).

Highlights from the management commentary

* In the last few years, significant investments in network services (last-mile, Express Logistics and freight forwarding), led to additional capacity. MAHLOG has now moved into the consolidation phase.

* The growth momentum in the e-commerce sector continued, fueled by: a) better Logistics infrastructure, b) a higher level of awareness, c) greater technology driven platforms, d) increasing number of offers in online shopping, and e) a broader level of digital adoption after the lifting of COVID-related restrictions.

* MAHLOG witnessed the impact of inflation, increase in frontline manpower costs, and supply shortages of trailers and car carriers. It aims to achieve 20m sq. ft. of warehousing space by early FY24, with launches in Guwahati, Patna, Lucknow, etc.

Valuation and view

* While we remain positive on the volume momentum, margin remains volatile and can be under pressure, given the inflationary environment.

* We expect MAHLOG to clock a revenue/EBITDA CAGR of ~24%/34% over FY22–24E. We maintain our Neutral rating, with a revised TP of INR510/share (35x FY24E EPS).

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