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Muted activity in 1Q amid polls and driver shortage; volume growth to improve in 2H

* Tonnage growth in FY24 was hit by a slowdown in agro and textile commodity volume in southern states, which contribute ~40% to tonnage. Amid general elections in 1QFY25 and a severe driver shortage, tonnage growth is expected to be subdued. However, as normalcy returns in 2QFY25, we expect VRLL to post double-digit volume growth in 2HFY25. We expect FY25 volume growth of 10%. The company has also taken a price increase recently, which should support realizations from 2QFY25 onward.

* Organized pan-India players like VRLL should gain market share and new customers from the unorganized sector owing to heightened compliance. Further, VRLL’s healthy operating efficiency is projected to improve with inhouse fleet maintenance linked to spare parts supply, in-house scrapyard for disposal of old fleet, CNG vehicles for last-mile delivery, and procurement of diesel from refinery. These factors should help VRLL sustain its profitability in a competitive environment.

* We estimate VRLL to deliver a CAGR of 14%/18% in revenue/EBITDA over FY24-26, driven by: 1) a shift in market share from unorganized to organized LTL operators, b) recent price increase, and c) overall improvement in the economy after elections. VRLL is well positioned to capitalize on its dominant position in the LTL segment given its strong network and diversified customer base.

* We reiterate our BUY rating with a revised TP of INR660 (based on 28x FY26E EPS).

Branch additions in untapped regions to be the growth catalyst

* The LTL business continues to be the main revenue driver and margin contributor, accounting for ~90% of its total revenues in FY24. Given this model, the expansion of VRLL’s reach and penetration across cities through branch addition remains critical to its growth.

* VRLL added 524 branches and five transshipment hubs during FY22-24. It has a network of 1,209 branches and 50 transshipment hubs (as of Mar’24), along with allied warehousing. The company targets to add a significant number of branches 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 the company 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; future capex to be linked to volume growth

* VRLL is currently one of the largest fleet owners of commercial vehicles in the country (with 5,994 trucks having a total capacity of 86,405 tons as of Mar’24 vs. 84,726 tons as of Sep’23). 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 volume growth does not support.

Valuation and view

* VRLL's transition into a pure-play GT player, integration of additional branches, expansion of fleet capacity, growing customer base, and market share gains from less-organized competitors position the company favorably for steady volume growth and sustainable earnings growth.

* While VRLL faced growth challenges in recent past (due to elections and driver shortage), volume growth could improve materially in 2HFY25. We expect VRLL to report a 12% volume CAGR over FY24-26, with faster addition of branches in untapped regions. We anticipate the company to deliver a revenue/EBITDA/PAT CAGR of 14%/18%/51% over FY24-26. We reiterate our BUY rating with a TP of INR660 (based on 28x FY26E EPS)

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