Mahindra Logistics - Resilient in challenging times - ICICI Securities

Mahindra logistics' (MLL) Q1FY21 performance was a tale of two halves. While H1 witnessed cross industry disruption, MLL bounced back strongly in H2 of Q1 driven by quicker normalisation of the warehousing pie, cross border logistics opportunities delivering growth in freight-forwarding segment and some interesting customer wins. Maintaining gross margins despite higher warehousing mix is a representation of i) higher fixed overheads leading to a squeeze in transportation margins and ii) lower utilisations and higher Covid-19 related costs. Going forward, the biggest margin tailwind will be utilisation, tempered by normalisation of warehousing mix. MLL highlighted the strategic vision of reaching Rs100bn of revenues by FY26, implying FY20-26 CAGR of 19%. Maintain HOLD with a revised target price of Rs294/share (Rs275/share earlier).

- Where are the opportunities? Auto and farm will see a delayed recovery, and is trailing historical demand patterns. Rural is seeing faster recovery and so are tier 2/3 cities. Supply-side constraints of auto should be debottlenecked in coming months. Farm sector is currently being helped by monsoon, credit and rural demand as well as government initiatives. Manufacturing was returning to normalcy by June, '20. E-commerce has seen a strong tailwind and last mile distribution and express logistics along with sort centres, fulfillment centres will see revived demand. Interest for omni-channel supply chain solutions is on the upmove. PPE products have seen significant increase in distribution, and has been capitalised through MLL's freight-forwarding subsidiary. Digital channels redesigning will lead to higher opportunities, as per management. Interestingly, opening remark didn't have much mention on enterprise mobility, a contrast to elaborate plans in the annual report.

- Customer acquisition was strong in second half of Q1FY21. Order acquisition in H2Q1FY21 mirrored past years. MLL secured distribution and inbound transportation contract with a leading steel company as well as country's largest decorative and automotive glass manufacturer. MLL has also won fulfillment and logistics services, grocery and heavy bulk distribution contracts in H2Q1FY21. It continues to expand both existing and new customers in FMCG and personal care. Expanding on solutions is the key lever for MLL. Strong growth is seen in flexible short-term solutions (processing facility for managing variable demand) and Q2/Q3 will add several such centres. Also, MLL wants to expand on cross border solution base. Interesting to note, freight-forwarding revenues have increased YoY in Q1FY21.

- Financial highlights. By June, '20 revenues reached ~70% of pre-Covid levels. Margins were helped by increasing warehousing in the mix, tempered by lower utilisation, Covid-costs and lower margins in transportation. Net cash reached Rs1.88bn by Q1FY21-end mainly through ~Rs1bn of release in working capital.

- New launches suggest a strong pipeline. Several customers start accessing service of MLL including one of the largest independent engine manufacturers wherein MLL will help in BS-VI engine distribution and BMI operations. Services have also commenced for inbound and outbound solution for international elevator OEM and fuel systems manufacture in western India. MLL has launched several goods transportation contract in Q1FY21. The company also continues to expand Build to Suit multiuser facilities; three of them were delayed but should be launched by Q2/Q3 of FY21& will add 1mn sq ft of area which has been largely leased out.

Shares of Mahindra Logistics Ltd was last trading in BSE at Rs.300.7 as compared to the previous close of Rs. 297.75. The total number of shares traded during the day was 2116 in over 187 trades.

The stock hit an intraday high of Rs. 309.8 and intraday low of 295. The net turnover during the day was Rs. 638949.

Source : Equity Bulls

Keywords