idirect vrllogistics...

April 9, 2015

IPO Review

ICICI Securities Ltd | Retail Equity Research

VRL Logistics (VRL) is one of the leading pan-India surface logistics and parcel delivery service providers. The company was founded in 1976. VRL is currently the largest fleet owner of commercial vehicles in India with a fleet size of 3546 owned vehicles. The company operates through 624 branches of which 48 serve as strategic transhipment hubs and 346 franchises. VRL also provides luxury bus services across Karnataka, Maharashtra, Goa, Andhra Pradesh, Telengana, Tamil Nadu, Gujarat as well as Rajasthan. As part of the expansion plan, it is planning to increase its fleet size and reduce debt, which is the objective of this IPO.

Investment rationale Well established player with pan-India presence VRL, which has been operating for over 38 years, has managed to establish a brand name with its extensive goods transportation network across India. With 970 branches cross 70 locations, the company caters to a diverse mix of customers including corporate, small and medium enterprises (SMEs), distributors as well as traders.

Integrated hub-and-spoke model enabling optimised margins VRL has 48 transhipment hubs, which enables it to consolidate and distribute consignments effectively. This model enables the company to cater to a wide range of customers with multiple pick-ups and delivery points. This is done by optimal aggregation of less than truck load (LTL) and full truck load (FTL) freight parcels on select routes, which will maximise revenue per truck.

In-house capability in technology, vehicle customisation and maintenance VRL has developed in-house software technology capability, which helps it to track vehicle maintenance and optimise load planning. Further, its in-house vehicle body designing facility at Hubballi enables the company to fabricate vehicles with lighter and longer bodies to carry higher tonnage. An additional 14 satellite workshops in other cities/towns across India minimises on-road repair expense and downtime. These capabilities improve the utilisation level, further enhancing the operating margins.

Concerns • Inability to pass on any increase in fuel costs & other expenses • Legal proceedings against the company • Higher dependence on centralised hub at Hubballi • Competition from existing and new players • Risk of accidents and damage or theft of cargo • Low freight volumes and passenger occupancy due to a

slowdown in the overall economic environment

Priced at FY15E (annualised) PE multiple of 18x on lower band; 19x on higher band At the IPO price band of | 195-205, the stock is available at a multiple of 18-19x FY15E PE (post dilution).

VRL LogisticsPrice band | 195 – 205

Rating matrix

Rating : Unrated Issue Details Issue opens 15-Apr-15

Issue closes 17-Apr-15

Issue size (| crore) 451 - 468

No of shares on offer (crore) 2.28

Fresh Issue 0.58

PE Exit 1.70

QIB 50%

Non-institutional 0.15

Retail 35%

Minimum lot size 65

Objects of issue

Purchase of goods transportation vehicles

Repayment / Prepayment of borrowings

Shareholding Pattern

Pre Issue Post Issue

Promoter and Promoter group 77.2 70.0

Others 22.8 5.0

Public - 25.0 Valuation Parameters

| crore FY11 FY12 FY13 FY14 9MFY15

Total Income 892.9 1,135.3 1,335.3 1,503.8 1,279.4

EBITDA 170.0 196.8 205.0 216.6 219.5

EBITDA Margin (%) 19.0 17.3 15.4 14.4 17.2

Depreciation 50.9 69.6 82.3 86.6 69.2

Interest 47.9 65.1 59.1 59.9 45.0

Adjusted PAT 51.7 76.7 45.7 50.5 71.7

Research Analyst

Bharat Chhoda [email protected]

Ankit Panchmatia [email protected]


Company Background

Vijayanand Roadlines Ltd (VRL), founded in 1976, is one of the leading surface logistics and parcel delivery service providers. The company mainly provides less than truckload services (LTL) for general and priority parcels through its widespread transportation network of 603 branches and 346 agencies. With a fleet of 3,546 goods transportation trucks, the company caters to a broad range of industries like FMCG, textiles, apparel, furniture, metal and metal products, automotive parts, etc. Furthermore, the diverse mix of customers including corporates, SMEs, distributors and traders garners higher volumes for the company. This, in turn results in higher freight density through various geographies, thereby improving asset utilisation. For FY14, the largest customer and top 10 customers contributed only 0.9% and 5.4% of total revenues from the goods transportation business. The company manages parcels through 48 strategically located transhipment hubs to consolidate and re-distribute goods efficiently. The strategy behind owning vehicles is to reduce hiring & operational costs and maintain the reputation for timely delivery.

VRL has a dedicated in-house vehicle body design facility at Hubballi, which enables it to increase the life of its vehicles, spare parts and components. This facility develops customised configurations to ensure a higher payload capacity, minimise on-road repair expense and undertake periodic preventive and remedial maintenance, thereby reducing the vehicle downtime and improving vehicle efficiencies. The huge fleet size enables the company to acquire spare parts and ancillaries at a bargain. The company also provides passenger bus services with a fleet of 308 buses across high density urban commuter cities like Bengaluru, Mumbai, Pune, Hyderabad and Panjim and also connect tier-II and tier-III cities. As on December 2014, the company has 15,000 employees, including 6,000 drivers with permanent benefits. These drivers are incentivised on the basis of safety record, timeliness, distance covered and fuel consumption. VRL, with over 38 years of operations and one of the largest distribution networks in India, has established a brand name in the logistics sector. Revenues have grown at 20% CAGR during FY09-13 while the EBITDA margin of the company has consistently remained above 15% since FY10 with a RoCE of 20% and RoE of 17% in FY14.

Exhibit 1: Key financials | crore FY10 FY11 FY12 FY13 FY14 9MFY15

Total Income 714.6 892.9 1,135.3 1,335.3 1,503.8 1,279.4

Growth YoY (%) NA 25.0 27.1 17.6 12.6 NA

EBITDA 141.1 170.0 196.8 205.0 216.6 219.5

EBITDA Margin (%) 19.7 19.0 17.3 15.4 14.4 17.2

Depreciation 46.4 50.9 69.6 82.3 86.6 69.2

Interest 50.8 47.9 65.1 59.1 59.9 45.0

Adjusted PAT 28.8 51.7 76.7 45.7 50.5 71.7

Adjusted PAT Margin (%) 4.0 5.8 6.8 3.4 3.4 5.6

EPS (|) 4.1 7.3 10.9 2.5 6.7 8.4

Post issue diluted EPS (|) 3.2 5.7 8.5 5.1 6.4 8.0

Source: RHP

Operational Data

Particulars FY12 FY13 FY14 9MFY15

Sale of products

Sale of power 25.39 27.11 25.01 19.87

Other sales 10.15 6.04 6.09 -

Sale of services

Goods transport 858.51 987.81 1,128.12 971.48

Bus operations 217.81 284.84 308.11 255.94

Income from hotel 0.00 0.00 1.02 1.44

Air chartering 4.77 4.17 7.75 8.80

Courier Service 4.50 4.52 5.31 4.69

Other income

Sale of Scrap 9.26 11.01 12.38 11.58

Total 1130.38 1325.50 1493.78 1273.81

Assets

Tangible Assets 694.20 710.09 739.36 693.75

No. of Vehicles

Goods transport 3079.00 3088.00 3352.00 3546.00

Passenger buses 449.00 502.00 522.00 455.00

Total 3528.00 3590.00 3874.00 4001.00 Source: RHP


Objects of issue The company aims to utilise the proceeds from the issue, after deduction of issue related expenses, to expand its existing fleet of goods transportation vehicles and utilise | 28 crore from the net proceeds towards repayment/prepayment of certain loans.

Exhibit 2: Object of issue

Particulars (amount in | crore) 2015 2016 2017

Purchase of goods transportation vehicles 67.42 - 67.42 - 51.78 15.63

Repayment / prepayment of borrowings 28.00 - 28.00 * 28.00 -

Total * - * * * *

Amount which will be financed from net

proceeds

Estimated net proceeds utilisation during fiscal

Total estimated costAmounts deployed as

on March 2015

Source: RHP

Exhibit 3: Detailed break up of purchase of vehicles

1 Ashok Leyland - 1212 30 1242760 325000 33102 25636 1626498 4.88

2 Ashok Leyland - 3723 218 2328770 450000 49548 40288 2868606 62.54

Total 248 * * * * 4,495,104.00 67.42

Total Amt (Crs)Sr. no Purchase Qty. Cost of body building (|)

Insurance Cost (|)Registration charges (|)

Total Per Unit Cost (|)Cost of Chasis (|)

Detailed break-up of per unit cost

Type of Vehicle

Source: RHP

Current vehicle profile

Exhibit 4: Fleet profile for goods transportation (9MFY15)

As of Small VehiclesLight

Commercial Vehicles

Heavy Commercial

VehiclesCar Carriers Tankers Cranes

Total Vehicles Owned

FY10 180 842 1,480 - 7 10 2,519

FY11 171 892 1,575 - 7 10 2,655

FY12 139 883 1,916 102 27 12 3,079

FY13 122 883 1,941 102 27 13 3,088

FY14 122 882 2,210 102 23 13 3,352

9MFY15 123 904 2,290 102 14 13 3,446

Source: RHP

Exhibit 5: Fleet profile for passenger buses (9MFY15)

As of 2010 2011 2012 2013 2014 9MFY15

Fleet Size 211 323 449 502 522 455

Source: RHP


Key Financials

Exhibit 6: P&L summary

| crore FY10 FY11 FY12 FY13 FY14 9MFY15CAGR

(FY10-14)

Total Income 714.6 892.9 1,135.3 1,335.3 1,503.8 1,279.4 20.4

Growth YoY (%) NA 25.0 27.1 17.6 12.6 NA

EBITDA 141.1 170.0 196.8 205.0 216.6 219.5 11.3

EBITDA Margin (%) 19.7 19.0 17.3 15.4 14.4 17.2

Depreciation 46.4 50.9 69.6 82.3 86.6 69.2

Interest 50.8 47.9 65.1 59.1 59.9 45.0

Adjusted PAT 28.8 51.7 76.7 45.7 50.5 71.7 15.1

PAT Margin (%) 4.0 5.8 6.8 3.4 3.4 5.6

EPS (|) 4.1 7.3 10.9 2.5 6.7 8.4

Diluted EPS (|) 3.2 5.7 8.5 5.1 6.4 8.0

Source: RHP

Exhibit 7: Balance sheet summary

| crore FY09 FY10 FY11 FY12 FY13 9MFY14

Total non-current assets 533.6 618.7 797.6 821.8 848.0 793.7

- Tangible fixed assets 693.7 739.4 710.1 694.2 498.8 469.0

Total Current assets 85.9 115.8 134.7 143.4 129.9 179.2

Total Assets 619.5 734.5 932.3 965.2 977.9 972.9

Total Non-current liabilities 299.0 353.0 482.7 374.3 347.7 310.1

Total current liabilities 213.9 248.0 262.3 301.4 323.6 326.0

Total Shareholders Funds 106.6 133.6 187.3 289.4 306.5 336.8

- Equity Share Capital 70.7 70.7 70.7 181.2 85.5 85.5

- Reserves & Surplus 2.1 6.6 30.8 53.3 79.4 110.4

Total Liabilities 619.5 734.5 932.3 965.2 977.9 972.9

Source: RHP

Exhibit 8: List of agencies, branches & transhipment hubs

Source: RHP


Key concerns Inability to pass on any increase in fuel & other costs The most significant costs include fuel costs, toll charges as well as rent. In case there is an increase in such costs and an inability to pass them on to customers that will adversely affect the company’s profitability. As on 9MFY15, fuel costs were 30% of total operating costs. Deregulated diesel prices in India, withdrawal of subsidies on diesel prices, and fluctuations of diesel prices will impact operating expenses and further dampen the profitability. Promoters and directors involved in a number of legal proceedings The company, promoters and directors are involved in number of legal proceedings, which are currently being adjudicated before various courts, tribunals and other forums. These include certain criminal and tax proceedings, which, in case of an adverse outcome, could affect the company’s business, operations as well as financials. Insufficient freight volumes and passenger occupancy The business is dependent on availability of sufficient freight volumes and passenger occupancy to achieve acceptable margins or avoid losses. The high fixed costs do not vary significantly with variations in freight volumes or the number of passengers carried while a relatively small change in freight volumes, passenger occupancy, freight rates or the price paid per ticket can have a significant effect on results of operations. Inability to attract, recruit and retain qualified and experienced drivers A shortage of drivers could affect the company’s ability to meet goods transportation delivery schedules or provide quality services to bus passengers. Inability to attract and retain a sufficient number of qualified drivers, could compel the company to increase its reliance on hired transportation, reduce the number of pick-ups and deliveries and more idle vehicles. This would adversely affect the results of operations. Higher dependence on centralised hub at Hubballi The Hubballi facility in Karnataka includes a vehicle maintenance facility in addition to serving as a centralised hub for the company. Interruptions in the same due to a breakdown or failure of equipment, power supply or processes, natural disasters and accidents could significantly impact maintenance related activities for the company’s vehicles. Domestic economic slowdown may adversely affect business The performance and growth of the business are dependent on the health of the overall Indian economy. As a result, any slowdown in the domestic economy could adversely affect the business, operations, financial conditions as well as prospects.


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ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No. 7, MIDC, Andheri (East) Mumbai – 400 093

[email protected]


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