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Slowdown in the Auto sector poses near term challenges

* We released our Logistics thematic report recently, wherein we have stressed on the growth potential of the Indian logistics sector and the upcoming opportunities for value added services players like Mahindra Logistics (MLL). We had assigned a Neutral rating to MLL, due to: a) near to medium term growth challenges in the Auto sector, b) owing to its rich valuation.

* The Auto sector has been facing challenges due to semiconductor shortages, which is impacting Auto production and the requirement for Logistics activity. However, non-Auto verticals like Consumer and e-commerce are expected to do well with an improved demand outlook. The easing of fuel prices (on account of excise duty cuts) will comfort margin.

* Over the long term, we expect MLL to benefit from a pickup in industry growth, growing need for integrated solutions, and MLL’s strong presence in the 3PL segment. We expect it to clock a revenue/EBITDA/PAT CAGR of ~18%/32%/58% over FY21-24E. The stock currently trades at 36x FY24E EPS. We retain our Neutral rating, with a TP of INR725/share (40x FY24E EPS).

Volumes up in 2QFY22 with festive demand and new business wins

* MLL registered 22% YoY revenue growth in 2QFY22 driven by festive season demand and new business wins in Consumer, freight forwarding, and ecommerce.

* Its revenue share in Supply Chain Management (SCM)/Enterprise Mobility Services (EMS) segments stood at 96%/4% in 2QFY22.

* The global semiconductor shortage has been impacting the Auto segment. Cross border Logistics is being impacted by container shortages and volatility in freight prices (both ocean and air), which is putting pressure on the domestic business.

Excise duty cuts in diesel in Nov’21 to aid MLL’s margin

* The rise in fuel costs impacted MLL’s profitability as the company found it difficult to pass on the increase to its customers due to the challenging demand environment, especially in the Auto sector.

* MLL would benefit from the ~10% plunge in diesel prices from the excise duty cuts announced in early Nov’21, which would aid margin.

The addition of high yield Grade A Warehousing to continue

* It has been reducing the low yield stockyard space under management, which is resulting in an increase in blended revenue per sq. ft. It has already reduced 2.3m sq. ft. of low yield stockyard space in 2QFY22.

* MLL and LOGOS, a leading Asia Pacific Logistics specialist, have announced a long-term lease agreement for 1.4m sq. ft. of three Grade A warehouse facilities at the LOGOS Luhari Logistics Estate in Delhi NCR, of which 0.5m sq. ft. is already operational. The other two facilities are expected to be delivered by early CY22. It would be India’s largest Warehousing facility in a single park.

* It plans to add 20m sq. ft. of Warehousing space over the next five years, of which 4m sq. ft. has already been contracted and its construction is expected to be completed by 2QFY23.

Acquisition of Meru Cabs to boost its presence in Enterprise Mobility

* MM had completely acquired Meru Travel Solutions Pvt (MTSPL) in May’21. In Nov’21, MLL entered into a share purchase agreement with parent MTSPL to acquire three of its wholly owned subsidiaries for INR505m. It also entered into an agreement with MM to acquire 100% stake in MTSPL for INR504m in Nov’21. Post-acquisition, all four Meru companies would become wholly owned subsidiaries of MLL and would continue to remain subsidiaries of MM. The acquisition is expected to be complete by the end of Dec’21.

* The company intends to invest in Meru companies with the aim to grow its presence in the shared Mobility space and to consolidate its ownership in the Mobility business.

Valuation and view

* Robust industry growth, its asset light business model, and strong parentage of the Mahindra group are key growth triggers for MLL.

* We expect volumes to pick up over the next couple of years, with the easing of semiconductor shortage in the Auto industry, although its margin is likely to improve only gradually due to higher fuel costs.

* We expect MLL to clock a revenue/EBITDA/PAT CAGR of ~18%/32%/58% over FY21-24E. The stock trades at 36x FY24 EPS. We retain our Neutral rating with a TP of INR725/share (40x FY24E EPS).

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