Add VRL Logistics Ltd for the Target Rs 290 by Emkay Global Financial Services Ltd
VRL Logistics (VRL)’s 1Q print was better than our expectations, as revenue grew 18% yoy, largely on the back of freight rate hikes taken due to an increase in fuel prices. Operating leverage from volume growth (9% yoy) led to EBITDA margin expanding by ~90bps yoy, despite inflationary cost pressures. The management remains confident of sustaining volume trajectory, buoyed by new customer/branch additions and regaining lost wallet share of customers last year owing to freight-rate hikes. This, in addition to fuel prices remaining elevated, results in an increase in our FY27E/FY28E revenue by 6%/5%, respectively. We raise our EBITDA margin estimates by 180-220bps over FY28- 29, on the back of improving volume trajectory and ensuing operating leverage. This results in an upward revision of 16%/17% to our FY28/FY29 EBITDA estimates. We raise our Jun-27E TP by ~12% to Rs290 from Rs260 (DCF methodology), implying 14x FY28E PER, and retain ADD.
Strong print in a challenging environment
Revenue grew 18% yoy to Rs8.8bn, beating our/street estimate by 13%/9%, as both volumes and realization grew 9% 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 (contributing 6-7% to volume growth), along with returning customers (2-3%). Fuel price increase led to freight rates being hiked by ~5%. Gross margin narrowed marginally yoy, as fuel costs/lorry hire charges/vehicle maintenance charges grew 18%/33%/40% yoy, respectively. EBITDA margin, however, expanded by 86bps yoy to 21.2% (+273/211bps vs our/street estimates), led by a moderate increase in employee costs (+13% yoy) and flat operating expenses. PAT grew 61% yoy to Rs805mn as depreciation/interest costs declined 4%/13% yoy. Net debt was Rs3.9bn in Jun-26. The company announced a buyback of 8.75mn shares at a price of Rs320/share (buyback size: Rs2.8bn). Capex for 1Q was Rs760mn.
Outlook and risks
Buoyed by the uptick in volumes in 1Q (+9% yoy, driven by ~2–3% contribution from existing and returning customers and the balance from new branch additions), the management has revised its FY27 volume growth guidance upward to 8%. The management stated that volume growth will remain at 7-8% over the next 3-4 years, on the back of current branch expansion. While fuel prices remain volatile, the management indicated that no further rate rationalization is planned, and remains confident of maintaining margins at ~20-21% by passing through any fuel-price hikes and improving freight mix. We model 9% revenue CAGR over FY26-29E on the back of 7% volume CAGR over the same period. We await the sustainability of volume trajectory, in the absence of which sustaining current margins would be difficult, in our view. Despite elevated capex (owing to purchasing hubs), healthy cash conversion (FY26 OCF/EBITDA: 101%) should alleviate balance-sheet concerns, if any. We reiterate ADD. Key risks: Slowdown in the economy, rise in fuel prices, shortage of labor, and competition from unorganized players.
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