Buy VRL Logistics Ltd for the Target Rs. 600 by Motilal Oswal Financial Services Ltd
Price hike to support margins despite tepid volumes; branch expansion to drive volume growth
* VRL Logistics’ (VRLL) management implemented a price hike of 8-10% in Jun’24, which was rolled out across customer segments. The price hike’s impact on revenue became visible from 2QFY25 and is expected to sustain through 1QFY26. This, coupled with cost optimization measures—such as increasing the share of refinery-sourced fuel to ~40% in 3QFY25 (~22% in 3QFY24)—resulted in record-high margins of ~20% in 3QFY25. Management expects EBITDA margins to remain healthy at around 18% in FY26.
* Given the muted volume environment in the industry, we anticipate VRLL to achieve 5% volume growth and ~2% realization growth in FY26, resulting in a 7% growth in revenues (management expects 8-10% revenue growth in FY26). Following the recent price hike, margins are expected to remain at elevated levels.
* The company incurred a total capex of INR4b in 9MFY25, which includes property purchases in Bengaluru, Mysore, and Mangalore. Further, it plans to spend INR1.5b on vehicle capex in FY26 and FY27.
* The company is focused on expanding its branch network, targeting 80-100 new branches annually, particularly in untapped regions such as the Northeast, North, and East of India. Over the past two years, these new branches have contributed 8-10% of total tonnage.
* In the current environment, we expect volume growth to remain muted until there is a remarkable improvement in consumption demand. VRLL margins are expected to remain elevated following the recent price hike, thus supporting earnings. We expect VRLL to clock a volume/revenue/EBITDA/PAT CAGR of 5%/9%/18%/35% over FY24-27. We reiterate our BUY rating with a TP of INR600 (based on 24x FY27 EPS).
Price hike across customers and regions; continuous branch/hub expansion to drive volume growth and cost savings
* With price hikes now in place, VRLL is focused on generating higher volumes through existing and new branch networks.
* The company has significantly expanded its branch network, adding 82 new locations over the past year. Expansion efforts are focused on the eastern and northeastern regions, where the company currently has less exposure. As of Dec’24, VRLL's network included 1,248 branches.
* Further, the company has acquired a property in Bengaluru worth INR2.3b, funded by INR1.9b debt. The property will help reduce rental costs by ~INR150m and generate third-party rental income of INR15m annually. Management highlighted that interest costs on the newly acquired hub are lower than rental expenses previously incurred for the same location. VRLL has also purchased a property in Mysore for ~INR210m.
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 6,101 trucks having a total capacity of 85,950 tons as of Dec’24). This enables the company to seamlessly handle LTL cargo across India through its hub-and-spoke model.
* Further, the company 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 in controlling overhead costs.
* Going forward, VRLL plans to add fleets in line with volume growth. However, if volume growth falls short, it will take a conservative stance on capex.
Valuation and view
* VRLL stands out among its peers, with margins returning to normalized levels following the price hike, despite subdued volumes amid ongoing industry challenges. Volume growth is expected to pick up from 2QFY26 as economic conditions improve. Additionally, the price hike has been fully absorbed by the market, and management has guided for a sustainable EBITDA margin of around 18%.
* We expect VRLL to clock a volume/revenue/EBITDA/PAT CAGR of 5%/9%/18%/35% over FY24-27. We reiterate our BUY rating with a TP of INR600 (based on 24x FY27 EPS).
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