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Recent price hike to support margins; branch expansion to drive volume growth

We hosted VRL Logistics (VRLL) for a non-deal roadshow (NDR). Following are the key highlights:

* VRLL initiated a price hike of 10% in Jun’24 (blended hike of 6% implemented after negotiations). This would help to offset the cost increases caused by toll, labor charges, etc. The management expects margins to come back to 14-15% because of the price hike.

* While VRLL faced growth challenges in the recent past due to elections and driver shortages, volume growth could improve going forward. Volumes picked up in Jul’24, thanks to good monsoons and easing labor shortage. The pickup in agricultural and textile commodities, which make up to 40% of total volumes, should boost volumes further. Good monsoon and a pickup in the rural economy would support volume growth in 2HFY25.

* VRLL plans to focus aggressively on branch expansion, with net 36 branches added in 1QFY25. It aims to add at least 100 branches in FY25, with a focus on eastern/northeastern markets. The management plans to incur a capex of INR1.5b in FY25, which could increase if tonnage growth exceeds expection.

* Driven by branch network expansion, the management expects volume growth of 10% in FY25 and 12-14% in FY26 (vs. 6-8% currently). We expect FY25 volume growth of 9%.

* Organized pan-India players like VRLL should gain market share and new customers from the unorganized sector owing to heightened compliance. With good monsoons and a price hike, the management expects tonnage growth and margins to improve in the coming quarters. We expect VRLL to clock a CAGR of 11%/14%/18%/52% in volume/revenue/EBITDA/PAT over FY24-26. We reiterate our BUY rating with a TP of INR660 (based on 28x FY26E EPS).

Price hike to offset the increasing costs

* After several quarters of no price hike, VRLL initiated a 10% price hike for spot customers in Jun’24 (blended hike of 6% implemented after negotiations).

* This comes as a big positive as prices were unchanged despite a sharp increase in toll charges, labor costs, etc. The hike should provide a push to margins from 2QFY25 itself.

Branch additions in untapped regions to be the growth catalyst

* VRLL added 560 branches and five transshipment hubs from Apr’21 to 1QFY25. It has a network of 1,245 branches and 50 transshipment hubs (as of Jun’24), along with allied warehousing. The company targets to add 100 branches (36 added in 1QFY25) in FY25 to boost volumes.

* The expansion efforts will be focused on the eastern and northeastern regions, where the company currently has less exposure. This strategy has allowed VRLL to grow faster than peers, as almost half of the incremental growth is coming from market share gains owing to the expansion of new branches.

One of the largest asset owners with in-house repair and maintenance infra

* VRLL is currently one of the largest fleet owners of commercial vehicles in the country (with 6,177 trucks having a total capacity of 88,198 tons as of Jun’24). This enables the company to seamlessly handle LTL cargo across India through its hub-and-spoke model.

* Further, VRLL has an in-house fleet maintenance facility with a tie-up for spare parts and an in-house scrapyard for disposing of the old fleet, which helps the company to control overhead costs.

* Going forward, VRLL would add fleet in line with volume growth. It would go slow on capex incase if volume growth does not support.

Valuation and view

* While VRLL faced growth challenges in the recent past due to elections and driver shortages, volume growth could improve going forward. Volumes picked up in Jul’24, and with good monsoons, the pickup in agricultural and textile commodities should boost volumes. Further, with price hikes across commodities and customers, margins should also improve going forward.

* We expect VRLL to report an 11% volume CAGR over FY24-26, with faster branch additions in the untapped regions. We estimate VRL to deliver a CAGR of 14%/18%/52% in revenue/EBITDA/PAT over FY24-26. We reiterate our BUY rating with a TP of INR660 (based on 28x FY26E EPS).

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