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India’s road logistics sector — a highly fragmented and unorganised industry — was allowed to carry out operations during the lockdown, but was severely impacted due to stranded vehicles and for want of migrant labourers, a key resource for the segment.
Resultantly, the stock price of VRL Logistics (VRLL), one of the top transporters in India, fell by almost 52 per cent in March from its pre-Covid levels. The recovery since then has made the stock gain 20 per cent from the March-low.
The steep fall in the stock price presents a good opportunity for investors with a high risk appetite and long-term horizon to accumulate the stock gradually over the coming months. Presence across the country, diversified customer base catering to various industries and a focus on high-margin segments are key positives that are likely to hold the company in good stead over the long run.
At the current market price of ₹166, the stock is also attractively valued at about 16 times its trailing 12-month earnings, which is way lower than the average of 30-plus times that it traded over the past three years. Being small-cap (market capitalisation of ₹1,512 crore), the stock could see some volatility in the near term.
However, investors with a very long-term horizon can consider the stock for a small portion of their portfolio.
But much of the outlook for the company depends on how fast the demand revives and if increased pricing post-lockdown is sustainable or not.
Asset-heavy business
VRL Logistics is an asset-heavy business and derives its revenue significantly from goods transport (81 per cent) and bus operations (16 per cent).
The company has 4,754 trucks and 337 buses and the business was running at about 100 per cent capacity utilisation before the Covid-19 outbreak.
The asset-heavy business model has helped rein in operating costs.
The model helps in effectively implementing the spoke-hub model, enabling it to aggregate and transport smaller parcels from customers at a lower cost to one large hub, from where the freight to particular destinations is transported together.
This facilitates effective utilisation of the trucks and saves input costs.
The net profit margin of 4-5 per cent is better than most other listed entities in the space.
The company operates across 23 States and four Union Territories , and is primarily focussed on southern and western parts of the country.
It caters to various industries, including agri-products, pharma, textiles, machinery, FMCG, metals, garments, appliances, plastics, food products and rubber.
In the past five years, the company’s revenue grew at a compounded annual growth rate of about 5 per cent.
The emergence of start-ups in the industry, intense competition, and demonetisation and GST implementation impacted the firm’s business in the past few years.
However, VRL Logistics has been trying to reduce inherent risks by adding drivers, labourers and others to the payroll and by adding new fleet and shifting to bio-fuels to reduce the cost of fuel .
For FY20, the revenue and net profit of the company were about ₹2,128 crore (up 0.5 per cent from FY19) and ₹90 crore (down 2 per cent), respectively.
While sales remained subdued due to weak economic activity and a few days of lockdown in March 2020, profitability contracted due to higher fixed costs.
Impact of Covid-19
VRL hardly generated any revenue during the lockdown period. But it continued incurring fixed expenses such as salaries, vehicle taxes and compensation to drivers and labourers on the back of its asset-heavy business model. (However, 90-90 per cent of the landlords waived the rent for April 2020).
The business has now started to operate at 50-60 per cent utilisation levels.
The lockdown and the resultant restrictive mobility have had a significant impact on the logistics sector. In the near term, slowdown in domestic consumption and uncertainties in global trade can continue to impact the sector.
However, VRL with its widespread branch and hub network across the country, is well-placed to revive soon and gain market share.
That said, the company was aggressive in new vehicle addition (around 319 vehicles) in the first quarter of the calendar year 2020, which led to an increase in debt — to ₹177 crore as on March 31, 2020, as against ₹ 128 crore as on March 31, 2019.
This may result in higher interest cost for the company in the near future and can exert pressure on the profitability margins.
