Mahindra Logistics attributes big slump in Q4 profit to Rivigo acquisition, slowdown in e-commerce biz

Mahindra Logistics blames big slump in Q4 profit on Rivigo acquisition, slowdown in e-commerce biz

A slowdown in network expansion in the e-commerce and consumer markets along with acquisition costs relating to the buyout of B2B Express delivery company Rivigo affected the company’s financial performance during the March quarter, said Mahindra Logistics Ltd (MLL) in a conference call with analysts on April 25.

The company also added that the poor quarterly performance was largely on account of the transition impact (of the Rivigo acquisition) and seasonal adjustments based on specific demand patterns from customers in North India.

Talking about the demand scenario, the company said the auto sector—which accounts for the lion’s share of third-party logistics (3PL) sales in India—is seeing robust traction given the improved availability of semiconductor chips, led by the passenger vehicle segment. However, sectors such as e-commerce have stayed soft after the festive season. Despite a slowdown in some end markets, MLL’s core 3PL business has shown positive momentum in terms of order intake and margin expansion, the company management said during the call.

During the quarter ended March, the 3PL company reported a 97 percent year-on-year decline in consolidated net profit at Rs 0.2 crore even as revenue rose 17 percent to Rs 1,272.51 crore. MLL is one of the leading 3PL companies in India with around 50 percent of business coming from its parent company Mahindra & Mahindra (M&M). Reacting to the big slump in profit, shares of the logistics player witnessed some selling pressure on April 25. However, the scrip settled at Rs 369, up 1 percent on the BSE on April 26.

Rivigo acquisition cost mars Q4 show

In recent times, MLL has made a host of acquisitions in different verticals, which is transforming its 3PL-focused business model into an integrated logistics solutions provider. MLL acquired Rivigo Express--one of India’s largest B2B shipment business--last year. The company aims to leverage Rivigo’s existing network to bolster its own 3PL services.

At the time of the acquisition, MLL had said that the Rivigo deal will help the company nearly triple its own express delivery business to more than Rs 500 crore value in a year.

Higher depreciation and interest costs related to recent acquisitions have marred the company’s overall performance, several analysts believe. Even as raw material costs for the company have gone down, its expenditure—operating expenses, employee benefits expenses, finance cost, depreciation and amortisation expenses, among others—has increased. Interest and depreciation increased 85 percent and 41 percent on an annualised basis, respectively, with capacity expansion and acquisitions.

However, losses incurred by the Rivigo business are seen decreasing in the near future as the integration of the new business with MLL operations gathers momentum and it achieves greater scale, according to Motilal Oswal Financial Services. The brokerage firm has lowered its FY25 profit after tax estimate for the company by 18 percent to factor in higher-than-expected depreciation costs related to recent acquisitions. Motilal Oswal Financial Services has retained its ‘neutral’ rating on the stock with a target price of Rs 350.

The acquisitions also triggered PhillipCapital to cut its earnings estimate by 1 percent and 5 percent for FY24 and FY25, respectively.

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The express business has been slow at the industry level and the Rivigo business was also adversely impacted. However, the outlook continues to remain promising, the company said in the conference call.

Express biz turnaround a key monitorable

Ex-Rivigo, MLL’s performance appears satisfactory, which is why the turnaround of the express business is a key variable hereon, according to analysts.

“MLL reported a net loss at a group level, along expected lines, as Q4FY23 was the first full quarter (after the) Rivigo consolidation. Revenue growth, excluding Rivigo, was also subpar, falling more than 5 percent QoQ (quarter-on-quarter),” said Nuvama Wealth Management analysts in a note. “While we anticipated this, the 9 percent QoQ dip in revenue ex-Rivigo is concerning too,” the brokerage firm pointed out.

The company said in the conference call that it is targeting to scale up its network services and expedite the integration of recent acquisitions. With the acquisition of Rivigo, MLL will try to gain higher market share in the B2B express logistics business and increase the share of non-M&M to overall revenue.

Meanwhile, the company’s operating margin improved to 5.01 percent during the quarter under review compared to 4.73 percent in the year-ago quarter.

Nuvama Wealth Management believes MLL’s profitability journey for FY24 and FY25 “is likely to be turbulence-ridden”. Even as revenue scales up, margin challenges may keep the stock range-bound. It has retained its ‘hold’ rating on the stock with an unchanged target price of Rs 414.

MLL is transitioning from a pure-play 3PL player to a more integrated business model that focuses particularly on freight forwarding, B2B express and last-mile delivery.

While the scalability prospects are superior in these areas, over the medium term, these would challenge MLL’s group margins, according to Nuvama Wealth Management. For instance, Rivigo’s Express B2B business should take another year to be in the black while its Network business needs a certain threshold utilisation to turn profitable, and MLL’s journey, especially for its margins, over the next two years can be turbulent, the brokerage firm said. “Hence, even as revenue scales up, margin challenges may keep the stock range-bound.”

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PhillipCapital sees a turnaround in the express delivery business, improving profitability mainly in FY25, which has prompted the brokerage firm to maintain stock valuation at 35 times its FY25 earnings per share but trim its target price by 5.5 percent to Rs 501.

At the current market price, ICICI Securities is of the view that the stock adequately captures the adverse revenue impact from one of the contracts not yielding the desired benefits and risks pertaining to the Rivigo integration. Going ahead, the brokerage firm believes margins have turned the corner and are likely to improve on the back of improvement in Rivigo’s profitability, and has upgraded its rating on the company’s stock to ‘add’ from ‘hold’ with an 18 percent cut in its price target to Rs 390.

“Going ahead, we believe margin has bottomed out and may improve as high-margin express business ramps up,” said ICICI Securities.

Guidance

MLL has guided for an 18 percent return on equity by FY26 considering the Rivigo turnaround, margin expansion and leveraging synergies between its core business and acquisitions.

The company also aims to achieve a revenue of Rs 10,000 crore by FY26 by capitalising on increasing corporate focus on achieving logistics efficiency.

It expects EBITDA (earnings before interest, taxes, depreciation and amortisation) break even by Q3FY24 and breakeven in profit after tax by the end of FY24. Once the Rivigo business stabilises, the profitability of the consolidated business is expected to witness strong improvement.