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Higher capex overshadows strong margin outlook

VRLL’s Q2FY25 EBITDA beat street/our estimates by 22%/25%, respectively, as realizations improved 8% YoY owing to price hikes undertaken across customers. Management’s plan to acquire transshipment hubs via internal accruals and borrowings is expected to strain VRL’s balance sheet and return ratios in the near term, but given the strategic nature of the investment, should be value accretive over the long term. With various players announcing freight hikes, investor concerns around volume trajectory should abate, in our view. Factoring in the beat in Q2, we increase our EBITDA estimates by 9%/8% for FY25/26, respectively, but cut our PAT estimates by 4% for FY26 owing to higher depreciation and interest expenses. We are maintaining our BUY rating given the inexpensive valuations (CMP implies 24x FY26E PER, vs LTA of 35x). Our revised Sep-25E TP stands at Rs625 based on DCF methodology.

Freight rate hikes bolster margins

VRLL reported revenue growth of 13% YoY in Q2FY25 on the back of volumes growing 4%, and improvement in realization by 8% YoY on account of price hikes taken in Jul-24 of up to 10% to shift inflationary costs onto the customer. Gross margins expanded by 382bps YoY on the back of COGs increasing meagerly by 6%. EBITDA stood at Rs1.3bn (+45% YoY). Cost efficiencies improved owing to: 1) lower hiring of outsourced vehicles; 2) increase in bulk procurement of fuel; and 3) higher utilization of owned vehicles. SG&A expenses remained flat on YoY basis. EBITDAM expanded by 369bps YoY. Depreciation costs increased 22% YoY on the back of vehicle additions. Finance costs rose 21% YoY, while net debt declined 1% at Rs2.6bn for period ended Sep-24 vs Mar-24. Q2 capex was reported at Rs698mn. PAT was up 80% YoY on the back of strong operating performance. Interim dividend of Rs5/sh has been declared

Outlook and risks

Management’s plans of acquiring strategic transshipment hubs at Bengaluru and Mysuru for a capex of ~Rs2.7bn, financed by internal accruals and external borrowings (up to Rs1.5bn), is likely to strain the company’s balance sheet and return ratios. While recurring impact of these transactions on cash flows will be limited in the medium term (lease rentals will be substituted by interest outgo), over the long term, these investments seem necessary given the nature of the business. Absorption of rate hikes in Q2 across customer base should allay concerns around margins contracting over the last two years due to lack of volume growth as well as rising costs. In line with trends visible during Q2, we expect volumes to grow by mid-single digits for FY25 as customers digest the steep price hike. We model FY24-27E volume CAGR of 9% and realization CAGR of 3% with margins expanding by 300bps over FY24-27E on the back of operating leverage and rate hikes. Key risks: Slowdown in the economy, rise in fuel prices, shortage of labor, competition from unorganized players, and modal shift to rail on the impending commissioning of DFC.

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