Stock Call. What makes Mahindra Logistics a good bet over the long term?

The outbreak of Covid-19 has hugely impacted the logistics sector, with labour and motor vehicle drivers becoming unavailable and demand environment turning weak.

Mahindra Logistics, too, has been severely impacted during the lockdown, catering only to the logistics requirements of essential products. In the June quarter, the company’s revenues fell by 54 per cent y-o-y , and it reported a net loss of ₹ 16.6 crore as against a net profit of ₹18.6 crore a year ago.

But sanguine rural demand outlook, stable business from Mahindra & Mahindra (M&M), focus on warehousing (that aids higher margins) and negligible debt levels augur well for the company in the coming months.

By June, the company’s revenues reached 70 per cent of pre-Covid levels. That aside, amid the pandemic-led disruption in the fragmented logistics sector, consolidation could well be on the cards.

Mahindra Logistics will be one of the significant beneficiaries in the third-party logistics segment in such a scenario.

That said, the valuations are not cheap. At the current price, Mahindra Logistics trades at over 50 times its one-year forward earnings estimate (as per Bloomberg), against a two-three- year historical average of about 47 times.

While higher valuation and near-term growth headwinds could limit the upside in the short run, long- term investors can start accumulating the stock.

M&M’s backing

Mahindra Logistics, an asset-light business, was formed in 2007-08, initially catering to the logistics business of M&M.

Today, the company operates in two segments — supply chain management (SCM — almost 90 per cent of FY20 revenues) and public transportation system (transport services provided by corporates to its employees — 10 per cent of revenues).

Mahindra group and non-Mahindra clients constituted 55 per cent and 45 per cent, respectively, of SCM revenues in FY20. M&M’s share in revenues was much higher in FY19 at 65 per cent, before the onset of auto slowdown.

Mahindra Logistics provides almost the entire logistics requirements of Mahindra group’s agri and farm division.

Going ahead, the demand for farm equipment (tractors) is expected to be sanguine, thanks to signs of pick-up in rural activity.

With high exposure to rural markets, M&M is well-positioned to benefit from rural recovery, considering its dominance in the tractor segment.

Despite the lockdown, M&M has revived its production and its plants are operating at over 80 per cent capacity; over 90 per cent of the farm segment dealers of M&M have restarted business after the lockdown, according to the management.

Diversification plans

On the non-Mahindra client side, besides the auto segment, Mahindra Logistics has been steadily building its presence in the e-commerce, freight forwarding, pharma and consumer segments. These segments formed about 34.6 per cent of SCM revenue in FY20 (against 29.5 per cent a year ago).

In FY20, the company added 25-30 clients, mostly in non-auto segments. Going ahead, the management expects a similar or higher addition in clients. The company has about 300 customers (across all segments) as at the end of March 2020.

Higher logistics business from non-Mahindra clients (especially FMCG, e-commerce) is expected to bring higher warehousing revenues, which provides higher gross margins.

Generally, margins from warehousing and other value- added services are higher than that from transportation.

The blended operating profit margin of the company in FY20 was 4.56 per cent. Demand for additional warehouses is expected to increase going ahead with continued demand for essential products such as FMCG, pharma and e-commerce — an expected big beneficiary of the impact of Covid-19.

The management guided to add 1.5 million sq ft of warehousing space to the existing ~16.5 million sq ft in FY21. Having said that, for significant growth in revenues, pick-up in auto segment sales will be important. Also, the demand prospects of discretionary items such as durables and apparels look bleak.

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