VS Fernando a veteran IPO analyst has come out with his view on VRL Logistics IPO. "Sound track, buoyant prospects and credible dividends merit attention", says the expert.
VS Fernando's view on VRL Logistics IPO
|OFFER AT A GLANCE|
|Name||VRL Logistics Ltd|
|Public Offer||Fresh issue of 57.1 lakh to 60 lakh shares and offer for sale of 171.16 lakh shares of Rs 10|
|Offer % on Total Equity||25.01 to 25.25% on Rs 91.24 to 91.54 cr|
|Post-IPO Promoter Stake||69.35 to 69.57%|
|Offer Price||Between Rs 195 and Rs 205|
|Offer Amount||Rs 451 cr to Rs 468 cr|
|Application Quantity||65 & Multiples of 65|
|Listing||BSE and NSE|
|Book Running Lead Managers||ICICI Securities & HSBC|
The present offer consists of a fresh issue of Rs 117 cr from the company and an offer for sale of 171.16 lakh shares from New Silk Route (FII) and two promoter-directors. The offer, amounting to a little over 25% of the post-issue equity of more than Rs 91 cr, is being made with a price band of Rs 195-205. The promoters would be holding more than 69% of the enlarged capital. Investors should apply for a minimum of 65 shares and multiples of 65 thereafter. Investment bankers ICICI Securities and HSBC Securities have been appointed as book running lead manager to the offer.
Of the fresh issue amount of Rs 117 cr, the company intends to utilize Rs 67.42 cr for purchase of goods transportation vehicles and Rs 28 cr is earmarked for repayment/pre-payment of borrowings. However, the funding requirements and proposed deployment have not been independently appraised by any external agency.
The company has not sought rating for its IPO
The 1994 vintage VRL Logistics Ltd (VLL) has been promoted by Vijay Sankeshwar (64 years) who holds a bachelor’s degree in commerce and an honorary doctorate from the Karnataka University. Sankeshwar is a former Member of Parliament (affiliated to BJP) and was elected from the Dharwad (North) constituency in the 11th, 12th and 13th Lok Sabha elections and was a nominated member of the Legislature of the State of Karnataka. Sankeshwar reportedly commenced the goods transportation business through a proprietary firm in 1976. The assets and liabilities of the proprietary firm were subsequently acquired by a closely-held company, Vijayanand Roadlines (P) Ltd in 1983. The Company became a deemed public limited company in 1994. The name of the Company was changed to VRL Logistics Ltd (VLL) in 2006.
VLL is claimed to be one of the leading pan-India surface logistics and parcel delivery service providers. According to Limca Book of Records, 2013, VLL owned and operated the largest fleet of commercial vehicles in the private sector in India in May 2012. VLL provides general parcel and priority parcel delivery (less than truckload services, "LTL"), courier and full-truckload ("FTL") services through a widespread transportation network in 28 states and four Union Territories across the country.
The company’s operational infrastructure for the goods transportation business comprised 624 branches (604 leased and 20 owned) and 346 agencies. VLL serves a broad range of industries, including the fast moving consumer goods (FMCG), food, textiles, apparel, furniture, appliances, pharmaceutical products, rubber, plastics, metal and metal products, wood, glass, automotive parts and machinery. VLL reportedly operates through a `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. The company’s extensive network provides "last mile" connectivity to even remote areas in India.
At the end of December 31, 2014, the company had a transportation fleet of 3,546 vehicles, most of which is owned by the company. This reportedly enables VLL to reduce dependence on hired vehicles thereby retaining control of the value chain and service quality. The variety of vehicles enables VLL to serve a diverse mix of consignments. The company’s in-house vehicle body designing facility develops customized configurations to ensure higher payload capacity.
The company also provides luxury bus services across the States of Karnataka, Maharashtra, Goa, Andhra Pradesh, Telengana, Tamil Nadu, Gujarat and Rajasthan. The bus operations are focused on high density urban commuter cities such as Bengaluru, Mumbai, Pune, Hyderabad and Panjim, and also connect tier-2 and tier-3 cities. As of December 31, 2014, the company owned and operated 455 buses (including 53 staff buses). VLL also have minor presence in wind power, air charter services and hospitality.
Goods transportation is VLL’s mainstay and revenue from this segment in fiscal 2012, 2013, 2014 and 9-months ended December 31, 2014 was Rs 859 cr, Rs 988 cr, Rs 1128 cr and Rs 971 cr respectively, representing 76%, 75%, 76% and 76% respectively of VLL’s total revenue. General and priority parcel services represented 92%, 89%, 89% and 86% respectively of its goods transportation revenue during these periods. In fiscal 2012, 2013 and 2014 and 9-months ended December 31, 2014, total revenue amounted to Rs 1135 cr, Rs 1335 cr, Rs 1504 cr and Rs 1279 cr respectively, while profit after tax was Rs 76.72 cr, Rs 45.70 cr, Rs 57.18 cr and Rs 71.69 cr respectively during this period. In other words, total revenue increased at a compound annual growth rate ("CAGR") of 20.4% from fiscal 2010 to 2014 while profit after taxation increased at a CAGR of 18.8% during the same period.
Of late, logistics industry is in an upbeat mood as the government policy has become very conducive for the sector. Taking advantage of the thrust provided by the government, VLL too is expanding its reach. The company intends to add a significant number of branches in northern, central and eastern regions of the country besides increasing the depth of its existing network in key states. As part of the expansion strategy, VLL intends to expand its fleet of trucks. The company has proposed to expand its trans-shipment hub operations through significant addition of logistics and storage capacities.
Features like Pan-India surface logistics services provider with an established brand and one of the largest distribution networks in India; Integrated hub-and-spoke operating model ensuring efficient consignment distribution; In-house software technology capabilities; Large fleet of owned vehicles ensuring reliable, quality services; Dedicated in-house maintenance facilities and availability of spare parts and fuel; Dedicated in-house vehicle body design facilities; Diversified customer base and revenue sources; Ability to recruit and retain experienced and qualified drivers; Track record of growth and robust financial position; experienced management team, etc. make VLL’s growth prospects reasonably secured.
Valuation & Perception
VLL is aiming at a market capitalization of more than Rs 1800 cr by pricing its IPO at a band of Rs 195-205. As compared to the promoters’ cost of holding, which is in fact negative post-offer for sale, and New Silk Route’s conversion cost of Rs 74.46 in September 2013, VLL’s IPO price may look steep. Nevertheless, VLL’s creditable fundamentals and the logistics industry’s current high discounting may make VLL a safe bet in the near term.
Logistics Industry at present is commanding a much higher discounting than the market composite. Whereas the current market composite price-earnings ratio is about 25x, logistics industry P/E is as high as 65x. Though logistics’ operating margin and dividend yield are lower than the market average, the industry enjoys higher discounting in terms of Price-Net Worth, Price-Revenue and Price-Net Block.
Recent main frame logistics IPO, Snowman Logistics, offered at Rs 47 in August 2014, is currently quoting nearly double of its IPO price. Compared to Snowman, VLL is favourably priced in terms of P/E, P/R and P/NB. Moreover, VLL’s current dividend base of 40% offers more than 2% yield.
|How VRL Logistics compares with industry peers|
|INDUSTRY PEERS||MKT CAP||P/E||P/BV||P/R||P/NB||OPM||YLD||Price|
|Blue Dart Express||17,106||141.3||26.6||8.8||72.3||9||0.7||7,209|
|Patel Integrated Log||199||41||2.2||0.3||4.7||3.3||0.4||131|
|VRL Logistics - High Band||1,870||32.7||4.4||1.2||2.5||13.8||2||205|
|- Low Band||1,785||31.2||4.2||1.2||2.4||13.8||2.1||195|
(Source: India Aarthik Research)
Lead Managers’ Track
VLL has hired ICICI Securities and HSBC Securities as book running lead managers to the IPO. Since 2010, ICICI has associated with more than 20 IPOs, half of which is currently languishing below the offer price. While Wonderla, CARE and PTC India have fetched decent returns, A2Z Infra, Shree Ganesh Jewel, Parabolic Drugs, Commercial Engineers, Jaypee Infra, Nitesh Estates and Tara Jewels have inflicted huge losses on investors.
|ICICI SECURITIES-ASSOCIATED IPOs|
|Power Finance Corp||10-May-11||203||285.45||40.6|
|PTC India Financial||16-Mar-11||28||60.75||117|
|Punjab & Sind Bank||13-Dec-10||120||48.9||-59.3|
|Power Grid Corpn||09-Nov-10||90||148.35||64.8|
|Shree Ganesh Jewel||19-Mar-10||260||17.12||-93.4|
HSBC Sec has handled just four IPOs in as many years of which only two are currently quoting above the offer price.
|PERFORMANCE OF HSBC-ASSOCIATED NEW ISSUES|
|ISSUER||ISSUE DATE||OFFER PRICE||CUR. PRICE||GAIN %|
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