VRL Logistics: En route to growth

The stock of road transportation solution provider VRL Logistics (VRL) had a great run last year, doubling from the IPO subscription price of ₹205 within six months.

The stock’s run was aided by good quarterly results, low crude prices, upbeat sentiment about growth prospects in logistics support for e-commerce, and expectations of a GST rollout.

However, delays in the GST legislation and a 14 per cent fall in the third quarter profit led to a nearly 25 per cent price correction in the stock in early February. While the price has somewhat recovered, investors can use the current opportunity to buy the stock.

The current price of ₹359 discounts VRL’s trailing 12-month earnings by 29 times. This is lower than the 36 times multiple for local peer Gati and VRL’s own valuation of over 35 times after listing.

The stock is fairly priced and investors can take comfort in the VRL’s established track record of revenue and earnings growth — 17 and 15 per cent respectively in the last five years. Its operating margin is robust at 17-18 per cent, compared with the average margins of 7-9 per cent in the sector.

Also, the company’s leadership position in the segment, expansion plans and operational improvements bode well for its long-term prospects.

Plans to improve road infrastructure and the recent Budget push to the passenger transport segment could aid revenue and profit growth.

Goods transport, with a large fleet of 3,739 owned vehicles and a presence in 28 states and four union territories, accounts for over three-fourth of VRL’s revenue.

Revenue growth in this segment dipped 1.5 per cent in the December 2015 quarter. However, revenue increased 5 per cent year-on-year in the nine months in 2015-16.

The company added 23 new locations and 113 vehicles in this period. Revenue growth in the future will be aided by planned fleet additions and expansion to the north and eastern regions.

About 20 per cent of the revenue is from its Vijayanand Travels segment with a fleet of 368 owned passenger buses.

Revenue in this segment decreased nearly 4 per cent in the first nine of 2015-16, as the company consolidated its bus fleet and concentrated on premium routes with high occupancy.

As a result, margin improved (7 percentage point Y-o-Y and operating profit increased 34 per cent. The bus fleet is relatively new, with an average age of 4.2 years, reducing capex needs.

While profitability in the passenger segment improved, the margin in goods transport slipped to 13.7 per cent in the December 2015 quarter from 16 per cent in the September quarter due to higher employee expenses.

Overall margins have however remained stable at 17 per cent in the nine months of 2015-16. Margin is expected to recover aided by a few factors. One, the pan-India reach enables the company to command a 10-15 per cent rate premium. Two, it is also not locked in on long-term rate contracts with its clients and has the ability to revise prices.

Also, its operational efficiency is high, thanks to the use of owned vehicles instead of leased ones. The share of distance covered by outside vehicles decreased to 11.7 per cent in the nine months of 2015-16, from 13.7 per cent in the same period a year ago.

Additionally, it has in-house capability to design the vehicle body and maintain vehicles, thus improving utilisation.

The company has been using bio-diesel to reduce overall fuel cost (accounting for about 27 per cent of revenue). These factors should aid operating margin.

VRL’s debt reduced to ₹238 crore as of December 2015, down from ₹443 crore in March.

Aided by lower interest outgo, VRL’s net profit jumped 23 per cent in the nine months of 2015-16 compared with a year ago to ₹89 crore.

Its debt is at 0.47 times equity, a comfortable leverage ratio for a capital-intensive business.

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