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Focus on volume growth; aggressive branch expansion continues

* VRL Logistics (VRLL) is on track to deliver 15% volume growth in FY24E on the back of: a) growth in underlying business and b) market share gains through significant branch additions in the last couple of years. VRLL has expanded its branch network aggressively by adding 275 branches since Apr’21 (~30% additions to the network). VRLL is looking to add another 100 branches in FY24E.

* Following the sale of non-core businesses (Bus, Wind and Transportation by Air segment), VRLL is now a pure-play Goods Transport player, with focus on the highly profitable LTL segment.

* The company is also adding new trucks by incurring a capex of INR4.5b in FY24, which would raise its tonnage handling capacity by ~20%. Additionally, VRLL is also looking to add two more owned fuel pumps in Delhi and Ambala, which will complement the existing six pumps. These additions are expected to help the company in controlling fuel costs better and support margins.

* We expect VRLL to benefit from the: a) growth opportunity in the LTL business and b) extensive branch additions in new geographies. We expect VRLL to clock 15% volume growth in FY24 with 16% margin. As the share of organized players is likely to improve in the coming years, the outlook appears promising for established PanIndia players like VRL. We reiterate our BUY rating with a TP of INR825 (based on 25x FY25E EPS).

Aggressive branch network expansion continues

* VRLL has added 275 branches since Apr’21, which is expected to support a majority of the incremental growth. The branches are being added in new geographies such as North and East where it has less presence. These expansions would enable the company cater to new customers. VRLL is also providing initial discounts while opening new branches to garner volumes faster and stabilize the branch.

* VRLL would be adding 20-25 branches per quarter in FY24E. The focus of this expansion effort will primarily be on the eastern and northeastern regions.

* This strategy has allowed the company grow faster than peers as almost half of the incremental growth is coming from the market share gains owing to the new branch expansions. 

Large capex plan to boost truck capacity

* In compliance with the government’s vehicle scrappage policy, VRLL is expected to withdraw ~1,220 vehicles in FY24, which have been in operation for more than 15 years.

* Subsequently, it has ordered 1,667 trucks: a) 1,560 trucks from Ashok Leyland and b) 107 from Tata Motors, which will result in an addition of 30,092 MT to its capacity. The company would incur a capex of INR4.5b in FY24 for this.

* The capacity addition would allow VRLL lower its dependence on third-party vehicles and also cater to the high-growth LTL segment. As the old vehicles get replaced with the new ones, the efficiency would improve thus supporting margin performance.

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