Buy VRL Logistics; target of Rs 660: Motilal Oswal

Motilal Oswal's research report on VRL Logistics

VRLL initiated a price hike of 10% in Jun’24 (blended hike of 6% implemented after negotiations). This would help to offset the cost increases caused by toll, labor charges, etc. The management expects margins to come back to 14-15% because of the price hike. While VRLL faced growth challenges in the recent past due to elections and driver shortages, volume growth could improve going forward. Volumes picked up in Jul’24, thanks to good monsoons and easing labor shortage. The pickup in agricultural and textile commodities, which make up to 40% of total volumes, should boost volumes further. Good monsoon and a pickup in the rural economy would support volume growth in 2HFY25. VRLL plans to focus aggressively on branch expansion, with net 36 branches added in 1QFY25. It aims to add at least 100 branches in FY25, with a focus on eastern/northeastern markets. The management plans to incur a capex of INR1.5b in FY25, which could increase if tonnage growth exceeds expection. Driven by branch network expansion, the management expects volume growth of 10% in FY25 and 12-14% in FY26 (vs. 6-8% currently). We expect FY25 volume growth of 9%.

Outlook

Organized pan-India players like VRLL should gain market share and new customers from the unorganized sector owing to heightened compliance. With good monsoons and a price hike, the management expects tonnage growth and margins to improve in the coming quarters. We expect VRLL to clock a CAGR of 11%/14%/18%/52% in volume/revenue/EBITDA/PAT over FY24-26. We reiterate our BUY rating with a TP of INR660 (based on 28x FY26E EPS).