Add VRL Logistics Ltd for the Target Rs. 260 by Emkay Global Financial Services Ltd
VRL Logistics (VRL)’s Q4 print was better than our muted expectations, as EBITDA beat our estimate by 6%. Signs of volume recovery (+3% YoY), though nascent, are emerging, as the company begins to recoup tonnage lost during its deliberate exit from low-margin accounts and broader freight hikes undertaken in FY25. Buoyed by the uptick in Q4, the management remains confident about achieving 6-7% volume growth in FY27 and maintaining the current margin trajectory. However, given the current macro environment (fuel inflation) and persistent competitive intensity in the LTL segment, we model 6%/8% volume/revenue CAGR, respectively, over FY26-28E. While the management remains confident about passing on any fuel price escalations to customers, we expect the full impact of recent diesel price hikes (and more, if any) to weigh on margin trajectory going forward. Thus, we build in ~200bps EBITDA margin contraction over FY26-28E. Accordingly, we trim FY27E/FY28E EBITDA by ~2% each and trim Mar-27E TP by ~5% to Rs260 from Rs275 (DCF methodology). We retain ADD on reasonable valuations (CMP implies 17x FY28E PER vs LTA PER of 29x).
Signs of recovery emerging
Revenue grew 5% YoY to Rs8.5bn, beating our/street estimate by 1%/2%, respectively, as both volumes and realization grew 3% YoY. Volume has started stabilizing after the discontinuation of low-margin businesses (with profitability being prioritized), on the back of the influx of new customers, along with returning customers. Gross margin narrowed by 124bps YoY, as lorry hire charges and vehicle maintenance charges grew 51%/24% YoY, respectively, partially offset by a decline in fuel costs owing to lower fuel consumption. EBITDA margin narrowed by 225bps YoY to 20.6%, led by gross margin contraction and an increase in employee costs (+74bps). PAT declined 3% YoY to Rs721mn. Q4 capex was Rs1.8bn; FY26 capex came in at Rs3.0bn, including Rs2bn for buying land and buildings for setting up own premises. Net debt was Rs4.4bn in Mar-26.
Outlook and risks
Buoyed by the uptick in volumes in Q4, the management has guided for 6–7% FY27 volume growth, driven by ~2–3% contribution from new branch additions (~100 net adds) and ~4% from existing and returning customers. Inflationary trends (recent hike in diesel prices, manpower cost) would, however, curb margin expansion ahead, in our view. The management, however, remains confident about its initiatives to maintain margins at ~20% by passing through any fuel price hikes and selectively increasing freight rates. We model 8% revenue CAGR over FY26-28E and expect ~200bps of EBITDA margin contraction over this period. Healthy cash conversion and improving working capital cycle should alleviate balance sheet concerns, if any. We reiterate ADD on conservative valuations (the stock currently trades at 17x FY28E PER vs LTA of 29x). Key risks: Slowdown in the economy, rise in fuel prices, shortage of labor, and competition from unorganized players.
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