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  • Stock Recommendation | VRL LOGISTICS LIMITED (VRL) – BUY – Target Price : 355

    Publish date: DECEMBER 17, 2018

    Continued strong performance in the trucking segment led by double digit tonnage growth, improving country-wide GST compliance, favourable regulatory environment, improvement in domestic trade, correction in diesel prices and positive sentiments bodes well for VRL Logistics. Maintain estimates and continue to Recommend BUY with an unchanged TP of Rs 355 at 24x FY20E.

    The government recently increased the official maximum load carrying capacity of heavy vehicles, including trucks, by 14-20 % besides scrapping the mandatory annual renewal of fitness certificates for freight carriers. The change has come for the first time in 35 years providing impetus to the organised trucking industry. The change has brought India’s permissible truck axle load limits to levels prevalent in developed nations. VRL has already registered more than 100 vehicles from its current fleet under the new axle load scheme and is in the process of registering the remaining vehicles within FY19. Management indicated the new axle norms would save cost and also bring down capex requirement.




    The trucking industry typically grows at one time GDP. With the Indian economy estimated to grow at 7% each in FY19, FY20 and FY21, the 14 to 20% increase in freight carrying capacity would be equivalent to two to three years of incremental freight for organised trucking industry without any capex.

    Large fleet operators including VRL would be able to carry more freight, improving their margins.

    It would hurt the unorganized trucking industry and intra- state good movement, where overloading is already prevalent

    Increase in supply capacity (owing to the new norms) on trunk routes would lead to a reduction in fleet utilization for large fleet operators, as they would need fewer trucks to carry the same amount of load.


    In H1FY19, the trucking segment for VRL reported revenue growth of 13.2% YoY was led by 10%/3% YoY growth in tonnage/realization. We believe the strong volume growth was on the back of 1) Improvement in trade; 2) Increase in haulage charges for rail leading to shift in volumes towards road;3) GST implementation and 4) geographical expansion by the company. We consider the volume growth as commendable despite the impact of Transporters strike and delayed festive season. With the above mentioned factors continue to play, we estimate the strong volume growth trend to replicate for VRL in H2FY19

    Passenger segment reported revenue growth of 3.8% in H1FY19 to Rs 1.88 bn with a marginal EBIT of Rs 36 mn (versus Rs 152 mn in H1FY18), primarily due to higher fuel cost. We are not so bullish on the prospects of the passenger bus segment for VRL due to competition, seasonal nature of the business and limited geographical reach of the company (only in Maharashtra, Karnataka and Goa).




    Higher diesel prices weren't passed on to the customers completely in H1FY19, which impacted the EBITDA margin. Diesel prices in Mumbai is currently at Rs 67.7 per litre (down from Rs 80 per litre or down 15.4% in the last 2 months). The healthy correction in diesel prices is positive for VRL.




    Management of VRL had indicated that the company has most of the infrastructure in place to cater to the changing requirement of clients in the medium term, Accordingly, we had envisaged that the next phase of capex for the company would be now primarily towards purchase of larger and modern trucks, new Volvo buses and expansion of hubs. The upcoming capex would be in sync with the requirement mandated by GST and adhere to the new Axle Load norms, we estimate the company to spend around Rs 5.3 bn over FY18 to FY21E (approx. Rs 1.8 bn per annum) as capex of which the company has already planned capex of Rs 4 bn towards modern trucks (10 to 12 wheeler trucks). Also with strong operational cash flow of ~ Rs 2 bn per annum, we expect the capex program to not impact the BS of the company.




    We estimate that the various legislative changes like GST Act, Motor Vehicle Amendment Act, Scrappage policy and Axle Load norms, to fully yield benefits for VRL from FY21. Healthy GDP growth, improvement in trade and various road infra projects of the government would further add to the growth of the company.

    For VRL we expect,

    Improvement in tonnage in the trucking segment with enhanced client base

    Improvement in occupancy in the bus segment with improved geographical reach

    Operating leverage to play-out which would lead to improvement in margins and return ratios

    Management has guided for 10% YoY volume growth per annum over the next 3 years


    We see VRL as a Logistics player which has created a niche for itself in the transport industry and a player who has overcome the nuances of the industry through effective practices within the company. This has enabled the company to outperform its peers in every financial parameter. The GST Act, Motor Vehicle Act and E-way bill are expected to improve business prospects of the company with full benefits accruing from FY21E. We estimate strong earnings growth in long term for the company with improvement in EBIDTA margins and return ratios. We continue to remain positive on the company and value the company at 24x FY20 earnings and Recommend BUY with an unchanged TP of Rs 355.


    VRL is a leading Pan-India surface logistics, parcel delivery and luxury bus services provider, owning and operating a large fleet of commercial vehicles and luxury buses providing general parcel, priority parcel delivery, courier, full-truckload (FTL) and passenger bus services through its widespread transportation network. We believe that the differentiated service offerings, large integrated hub-and-spoke transportation network, extensive operational and maintenance infrastructure and in-house technology systems would enable the company to report healthy growth


    BUY - We expect the stock to deliver more than 12% returns over the next 12 months
    ACCUMULATE - We expect the stock to deliver 5% - 12% returns over the next 12 months
    REDUCE - We expect the stock to deliver 0% - 5% returns over the next 12 months
    SELL - We expect the stock to deliver negative returns over the next 12 months
    NR - Not Rated. Kotak Securities is not assigning any rating or price target to the stock. The report has been prepared for information purposes only.
    SUBSCRIBE - We advise investor to subscribe to the IPO.
    RS - Rating Suspended. Kotak Securities has suspended the investment rating and price target for this stock, either because there is not a Sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon.
    NA - Not Available or Not Applicable. The information is not available for display or is not applicable
    NM - Not Meaningful. The information is not meaningful and is therefore excluded.
    NOTE - Our target prices are with a 12-month perspective. Returns stated in the rating scale are our internal benchmark.


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