Buy VRL Logistics Ltd For Target Rs.400 by Motilal Oswal Financial Services Ltd
Strong 2Q performance; volume growth to drive earnings
* VRL’s revenue grew 21% YoY to INR9.6b (7% above our estimate).
* EBITDA grew 46% YoY to INR2.2b in 2Q FY27 (17% above our estimate).
* EBITDA margin was 23% (+400bp YoY/+180bp QoQ) vs. our estimate of 21%.
* Driven by strong operating performance, APAT rose to INR 1.03b in 2Q FY27 v/s INR 499m in 2Q FY26 (32% above our estimate).
* During 1HFY27, Revenue/EBITDA/APAT grew by 19%/35%/84% YoY
* Volume grew 11% YoY to 1.08MT, driven by regaining customers lost during the earlier freight rate rationalization, adding new contractual customers, and exiting the low-margin business. Realization rose 9% YoY to INR8,840/ton.
* VRL delivered a strong performance in 2QFY27, driven by 9% higher realizations and 11% volume growth, with EBITDA margin reaching an alltime high of 23%. Going ahead, management remains focused on driving tonnage growth, while realizations are expected to remain broadly stable.
* We raise our FY27/FY28 APAT estimates by 14%/18%, factoring in healthy volume growth and sustained margins. We expect volume growth momentum to continue in FY27-28, supported by branch additions and higher tonnage from existing customers. We expect VRL to clock a CAGR of 9% in volume and 14%/14%/26% in revenue/EBITDA/PAT over FY26-28. Reiterate BUY with a revised TP of INR400 (based on 18x FY28E EPS).
Highlights from the management commentary
* Management expects to sustain the current realization level of around INR8,800/ton, with the next leg of revenue growth expected to be driven primarily by volume expansion.
* Fleet size stood at 5,941 vehicles in 2QFY27, up from 5,782 a year ago, with a net addition of 159 vehicles in line with volume growth. Of the total fleet, 11% is fully depreciated, while 76% is debt-free, reflecting a healthy asset profile.
* Management expects its expansion into untapped Eastern Indian markets, particularly West Bengal and Bihar, through new branch additions to gradually drive volume growth. An increase in average lead distance is also expected to support higher realizations over the medium term.
* For 2HFY27, management has guided for a total capex of ~INR1.5-1.6b vs INR1.6b in 1HFY27. This would be largely for vehicle procurement and expansion of owned logistics infrastructure.
Valuation and view
* Management expects to drive volume growth through higher volumes from existing customers and the addition of new clients while maintaining realizations at current levels and sustaining margins.
* We raise our FY27/FY28 APAT estimates by 14%/18%, factoring in healthy volume growth and sustained margins. We expect volume growth momentum to continue in FY27-28, supported by branch additions and higher tonnage from existing customers. We expect VRL to clock a CAGR of 9% in volume and 14%/14%/26% in revenue/EBITDA/PAT over FY26-28. Reiterate BUY with a revised TP of INR400 (based on 18x FY28E EPS).
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