Recent Reforms and Competitive Strengths Should Lead VRL Logistics Limited On Road to Success

Planned infrastructure push sounded by Indian Government awaits implantation and this should bring economic revival and should support VRL Logistics Limited. The company continues to focus on high-margin LTL business and on expanding network into newer markets. Reliance on organized sector should lead to robust business opportunities for big players in this space.

Overview of VRL Logistics Limited

VRL Logistics Limited is a nationally renowned logistics and transport company, currently being categorised as largest fleet owner of commercial vehicles in India. The company was able to pioneer in providing safe and reliable logistics network in avenues of parcel service. The company ensures last mile delivery in remote locations. VRL Logistics Limited has integrated hub-and-spoke operating model, enabling optimal aggregation of consignments from diversified customer base across multiple industries and locations.

Growth Enablers of VRL Logistics Limited

• Recent Reforms: GST rules and higher cost structure continue to impact unorganized players. These players constitute 80-85% of Truck Logistics market in India. As a result of this, customers prefer organized players over unorganized ones. VRL Logistics Limited procures diesel directly from refineries as it has established its own fuel pumps in key locations. This helps in optimizing fuel costs which represents major portion of operating costs. It focuses on expanding network of own fuel stations and fuel storage capacity which should help reduce impact of higher fuel costs and improve profitability margin. Pickup in demand and significant branch additions in untapped regions should help the company compound revenue at ~17.4% over FY21-24E. Strong volumes and cost efficiency measures should help it maintain EBITDA margin profile at 12%-15% over upcoming 2 years.

• Standalone Strengths of VRL Logistics Limited: The company has most efficient collection mechanism as it has annual bad debt of less than INR5 lakh on ~INR2,000 Cr. revenue. The company saw 3Q22 revenue of INR683 Cr, up by 20.18% year-over-year and 7.08% quarter-over-quarter. This was highest ever revenue which the company has posted. Its 3Q22 EBITDA was INR134 Cr., with margins of 19.6%. Margins of the company are best in industry. Internal accruals of the company should be enough to finance its capex.

• Competitive Strengths: VRL Logistics is a well-established brand in India for surface transportation and it has secured place of industry leader in parcel transportation space. Having track record of 4+ decades, the company has a large size and diversified scale of operations. The company operates on pan India basis, with strong distribution network. Two principal advantages that the company has over its competition are its well-established network of branches and franchisees and the company’s owned fleet of commercial vehicles which has in-house vehicle body designing and vehicle maintenance facilities. This is for catering to parcel transportation. The company operates across 22 states and 4 UTs in India and it has strong reach for offering of LTL goods transportation services. VRL Logistics Limited has built up capability to maintain owned-vehicle fleet internally. Cost savings are being achieved because of economies of scale through tie-ups with fuel suppliers, vehicle manufacturers for supply of spare parts, tyres etc. The company has well diversified customer base. The company has no dependencies on any customers or product categories. Similarly, VRL Logistics Limited has no geographical or product related dependencies for its business. This insulates the company vis-à-vis competition.
• Strong Pick-up: Year gone by saw uncertainties due to pandemic and financial performance, with 1Q of fiscal year seeing massive operational cash losses. Gradual recovery and eventual stunning growth in volume seen in later portion of fiscal year aptly exhibited inherent business model strength of VRL Logistics Limited. Operationally, the company was ready to revive and handle business coming its way. Strong inherent ability supported the company in bearing brunt of COVID-19 and recover fast in face of adversity. The company added 29 new branches in 3Q22 and 60 new branches in 9M22. It plans to expand network by opening new branches in untapped market. During 9M22, 19 EVs were added. Over past few years, the company has seen strong and consistent growth in cash profit.

• Capitalising on Opportunities: FY22 can see some disruptions on business volume front. Lockdowns which were imposed in various states affected brick and mortar industries, resulting in lower demand, conservative consumer behaviour and restrictions in movement of men and materials which impacted everyone in surface logistics industry. Freight volumes are increasing and should be able to surpass pre-Covid-19 days in short-term. This is so because being organized helps the company to better handle ongoing scenario as several unorganized smaller operators decided to shut their shops. This happened because they were unable to cope up with financial stress presented by pandemic. Given that industry is seeing domination by unorganized players and they are bearing financial brunt, organized players like VRL Logistics Limited should benefit.
• Optimism Around Vehicle Scrappage Policy: Vehicle scrappage policy is government-initiated program focusing on replacing old vehicles from Indian roads. As per new policy, commercial vehicles of 15+ years and passenger vehicles of 20+ years should be mandatorily scrapped. This will happen if they fail to pass fitness and emission tests from Apr 1, 2022. Eventual situation of increased demand for vehicles should work favourably. Inevitable freight rate hike as result of this policy implementation should result in higher margins for VRL Logistics Limited. The company has internal expertise on vehicle maintenance front which should result in availability of all useful spare parts from vehicles being scrapped for usage. This will be in addition to one-time salvage income expected. Any such scrappage should not entail any hit to profitability as vehicles are fully depreciated.
• High-Margin LTL Segment: LTL freight service focuses on transportation of consignment, belonging to multiple customers in one vehicle to multiple destinations. This helps the company in generating higher net revenue per vehicle in comparison to FTL service. FTL service focuses on transportation of one customer’s freight to single destination. The company has an integrated hub-and-spoke model, entailing consolidation of goods from several locations at transhipment hubs and then redistributing at respective destinations. LTL business is a principal revenue enabler and margin contributor, which accounted for 80% of the company’s FY21 total revenues.
• Healthy Financial Profile: The company continues to have a healthy financial profile, with solid profitability indicators and strong cash accruals. VRL Logistics Limited’s comfortable capital structure makes up for an attractive opportunity. Liquidity position remains adequate which seeks support from undrawn working capital lines and financial flexibility so that more credit lines can be availed in case any need arises. At 3Q22 end, the company had much lower debt level of ~INR102 Cr.

Conclusion

Logistics cost in this country is ~14% of GDP in comparison to global average of ~8%. India has 2^nd largest road network globally, totalling 5.5 million kms. Despite this, national highways make up for less than 2.7% of total network. This puts strain on national highway network, carrying ~40% of road traffic. Indian road transport sector transports goods worth $150 billion/year. Trucks provide more benefits in comparison to railroads. Indian logistics sector saw recovery after seeing disruption in 1Q21 due to nation-wide lockdown, resulting into demand side and supply side challenges. These challenges were eased in subsequent months on account of recovery in economic activities. After restrictions eased and there was revival in economic activity, freight availability for logistics companies saw an improvement.

To talk about profitability, logistics companies were able to keep earnings contraction within bounds to significant extent even though these companies saw lower revenues and higher fuel prices. This was seen because of aggressive rationalisation of fixed overheads and cost-control initiatives.

Higher volumes, branch additions and economies of scale should help the company compound EPS at ~40% over FY21-FY23E.

Stock of the company has seen a run up of ~81.7% between Mar 15, 2021- Mar 15, 2022. In comparison, Sensex has risen only ~10.7%. Growth in stock price was principally supported by revival in economic activities and better management of demand supply gap.

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