Aditya Birla Money has recommended investors to "Subscribe" on VRL Logistics IPO for short term and medium term investment, in its research report dated April 13, 2015.
VRL Logistics IPO note by Aditya Birla Money
VRL follows a strategy of operating own vehicles and hire third-party goods transportation vehicles only on certain routes (where there is no assurance of return loads, during periods of high demand and in emergency situations). Ownership of vehicles leads to higher negotiating power and customised vehicles with lighter and longer bodies enabling higher payload capacity which in-turn reduces overall hiring and operational costs.
VRL owns 3,546 vehicles of which 2375(67%) are debt free, 1166 vehicles were less than 5 years and 1235 were fully depreciated as on Dec 31, 2014. VRL owns and operates 455 buses (including 53 staff buses) of which 19% are debt free, 399 buses are less than 5 years & 6 were fully depreciated.
Presence across India; one of the strongest and largest distribution networks: VRL’s goods transportation network spans across 28 States and 4 Union Territories across India. VRL provides goods transportation services over a broad range of distances from Kerala in the south to Jammu in the north, Gujarat in the west to Assam in the east. VRL’s operational infrastructure for the goods transportation business comprised 624 branches (comprising 604 leased branches and 20 owned branches) and 346 agencies across India, and of such 624 branches, 48 (41 leased & 7owned branches) served as strategic trans-shipment hubs for its operations.
Integrated hub-and–spoke model coupled with in-house software technology capabilities= efficient distribution and better margin: VRL follows the hub-and-spoke model which enables it to transport various parcel sizes and provide customers with access to multiple destinations for booking and delivery of goods, and provide “last mile” connectivity to even remote locations in India. VRL has 48(7 owned by VRL) strategically located transhipment hubs across India which further aid the company’s business model.
VRL has invested in-house software technology capabilities and have developed scalable in-house technology systems and software. All its offices, transhipment hubs, branches and agencies are connected to its central information technology network through an ERP system facilitating real time monitoring of operations and tracking of consignments. IT infrastructure is one of the key strengths of VRL.
Outlook and Valuations
"VRL is an established brand name in the transportation industry in India with over 38 years of operations. VRL’s pan India presence, its large fleet ownership, and strong IT infrastructure make it a good investment bet. Emergence of e-commerce business and likely implementation of GST further strengthen the investment case. VRL’s sales have grown at a CAGR of 20.4% to ~Rs 15 bn while PAT has grown by a CAGR of ~19% to ~Rs 0.6 bn respectively during FY10-FY14. Funds from the IPO would be used mainly for a) Purchase of goods transportation vehicles and b) Re-payment/pre-payment of certain borrowings."
"At the higher price band of Rs 205, the stock is valued at ~33x its FY14 diluted EPS of Rs 6.3. Our back of the envelope calculations estimate the stock to be trading at ~16x its FY16 (E) EPS of ~Rs 13 and 7.5x its FY16 (E) EV/EBITDA. Given a) VRL’s pan India presence, b) ownership model and c) return ratios we believe, VRL is under- valued and hence there is a high probability of listing gains. Hence, we recommend “Subscribe” on VRL IPO for short term and medium term investors", says Aditya Birla Money research report.
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