 "VRL Logistics: Take the ride")
VRL Logistics plans to raise up to Rs 468 crore from a mixture of offer-for-sale and new shares. From an issue of the latter worth Rs 117 crore, VRL intends to buy trucks worth Rs 67 crore and repay borrowings (Rs 28 crore); the rest is for general corporate expenses.
A good record, vast and integrated network, an improving environment and strong growth potential, coupled with reasonable valuations, make this offer attractive for long-term investors. At the lower and upper price bands, VRL is available at 18.5-19.5 times its FY15 estimates, at a discount to peer TCI (24.7 times).
VRL is one of the largest of road freight transport operators (4,000 vehicles). About 75 per cent of revenue comes from goods transportation and the rest from passenger transport. Within the goods business, its focus is on the more profitable less-than-truckload segment (the other one is full truckload). Here, VRL acts as an aggregator before sending the goods to destinations. While it is a pan-India logistics service provider for the goods business, its bus services are confined to the western and southern parts.
The key component of its revenue growth is freight rates, which are governed by availability of freight and existing truck capacities. While freight traffic growth has been subdued recently (FY15 growth estimated at six per cent), it has over a 10-year period grown 10-15 per cent annually in value/volume terms.
Analysts expect the sector to grow at a slightly higher pace of 12-15 per cent annually over the next three years, on expectations of an economic recovery, lack of capacity in the railways and improved road infrastructure. As consumption plays a key role in freight availability, improving demand in the consumer goods, automobile, pharmaceutical and other sectors is expected to lead to higher freight requirements.
VRL's pluses over competitors are its vast network of 1,000 branches/agencies in 32 states and Union territories, 48 trans-shipment hubs and a strong truck fleet. Further, its back-end network, which includes a body designing facility to customise vehicles, and a central information technology network to enable real-time monitoring of vehicle location, helps it to improve efficiencies and optimise utilisation. It plans to expand the network, fleet and storage capacities.
Improving financials
Cost control is the other lever which could improve profitability. Tight control has helped improve Ebitda (earnings before interest, taxes, depreciation and amortisation) margins to 17 per cent for the nine latter months of FY15. Within operating expenses (72 per cent of revenue), diesel is the biggest cost, about 27 per cent of revenue. VRL has been able to improve its margins through a tie-up with Indian Oil. Its relationships with original equipment makers such as Ashok Leyland, Volvo, Michelin and Ceat help it get discounts on purchases/spare parts. A captive body building unit, repair facilities and preventive maintenance also helps curb costs.
Revenue growth and margins did take a hit during FY13 and FY14, due to the Telangana agitation. While revenue growth came down from 25-27 per cent in FY11 and FY12 to 13-17 per cent, margins were down from 17-19 per cent to 14-15 per cent. Revenue growth and margins, which have improved in FY15, should gain further ground.
A good record, vast and integrated network, an improving environment and strong growth potential, coupled with reasonable valuations, make this offer attractive for long-term investors. At the lower and upper price bands, VRL is available at 18.5-19.5 times its FY15 estimates, at a discount to peer TCI (24.7 times).
VRL is one of the largest of road freight transport operators (4,000 vehicles). About 75 per cent of revenue comes from goods transportation and the rest from passenger transport. Within the goods business, its focus is on the more profitable less-than-truckload segment (the other one is full truckload). Here, VRL acts as an aggregator before sending the goods to destinations. While it is a pan-India logistics service provider for the goods business, its bus services are confined to the western and southern parts.
The key component of its revenue growth is freight rates, which are governed by availability of freight and existing truck capacities. While freight traffic growth has been subdued recently (FY15 growth estimated at six per cent), it has over a 10-year period grown 10-15 per cent annually in value/volume terms.
Analysts expect the sector to grow at a slightly higher pace of 12-15 per cent annually over the next three years, on expectations of an economic recovery, lack of capacity in the railways and improved road infrastructure. As consumption plays a key role in freight availability, improving demand in the consumer goods, automobile, pharmaceutical and other sectors is expected to lead to higher freight requirements.
VRL's pluses over competitors are its vast network of 1,000 branches/agencies in 32 states and Union territories, 48 trans-shipment hubs and a strong truck fleet. Further, its back-end network, which includes a body designing facility to customise vehicles, and a central information technology network to enable real-time monitoring of vehicle location, helps it to improve efficiencies and optimise utilisation. It plans to expand the network, fleet and storage capacities.
Improving financials
Cost control is the other lever which could improve profitability. Tight control has helped improve Ebitda (earnings before interest, taxes, depreciation and amortisation) margins to 17 per cent for the nine latter months of FY15. Within operating expenses (72 per cent of revenue), diesel is the biggest cost, about 27 per cent of revenue. VRL has been able to improve its margins through a tie-up with Indian Oil. Its relationships with original equipment makers such as Ashok Leyland, Volvo, Michelin and Ceat help it get discounts on purchases/spare parts. A captive body building unit, repair facilities and preventive maintenance also helps curb costs.
Revenue growth and margins did take a hit during FY13 and FY14, due to the Telangana agitation. While revenue growth came down from 25-27 per cent in FY11 and FY12 to 13-17 per cent, margins were down from 17-19 per cent to 14-15 per cent. Revenue growth and margins, which have improved in FY15, should gain further ground.