Asset light model backed by heavy growth
Mahindra Logistics Limited (MLL) is a part of Mahindra & Mahindra group and
works as a 3 rd party logistics services provider. MLL was incorporated in 2007 and has become one of largest 3 rd party logistics solutions providers in India. MLL follows an asset light business model in which most assets (vehicles and warehouses) are owned /provided by its business partners. The company operates in two business segments i.e. Supply Chain Management (SCM) and corporate People Transport Solutions (PTS).
Operating in an attractive industry: Domestic logistics industry, valued at Rs. 6.4trillion, is expected to grow by ~13% to reach Rs. 9.2trillion by 2020. Within the industry, the 3rd party logistics segment is expected to witness a growth of ~21%. The industry is highly fragmented and post GST implementation, organized large players are expected to see improved cost structure and gain market share. We believe that MLL is operating in an industry with tailwinds.
Impressive growth in non-Mahindra revenues: MLL was dependent on its parent Mahindra and Mahindra to derive its revenue. In the last few years however, company has successfully diversified its business and 45% of its revenues are derived by non-Mahindra clients. Company has hired global consultant McKinsey to devise its sales strategy which has clearly helped the company to diversify and report a healthy growth rate of 17.5% in the top-line over last three years.
Strong return profile: While MLL reported EBITDA margins of 2.9% in FY2017 and 5 year PAT CAGR of 17.2%, the adjusted numbers show a different picture with 3.2% EBITDA margins and PAT CAGR of 25.2%. FY2017 adjusted ROE and ROIC also work out to be 17.3% and 40% respectively, far better than its peers.
Outlook and valuation: At the upper end of the price band (Rs. 425-Rs. 429), the issue is priced at 66.2x and 50.8x of its reported and adj. FY2017 earnings. Due to its asset light model, there is no exact comparable peer; however, the thumb rule for any investment is growth and returns. MLL has exhibited CAGR of 15% and 25% in top-line and adj. bottom-line respectively, which is better than its players i.e. VRL logistics and Transport Corporation of India. In terms of returns, company has shown a better return profile (ROE & ROIC of 17.3% and 40% v/s. peer group avg. - 13% & 14% respectively). Based on its growth story, diversification strategy, strong parent repute and post GST attractiveness of the logistics sector, we assign Subscribe rating to the issue.