VRL Logistics: Making the logical move

Representative Image

Jitendra Kumar Gupta Moneycontrol Research

More analysts have turned bullish on the prospects of VRL Logistics in recent months. At present, seven out of the nine analysts tracking the stock have a ‘buy’ or ‘outperformer’ rating on the stock, compared to four out of six analysts tracking the stock in January this year.

VRL Logistics is largely into parcel delivery services operating through a fleet of 3967 owned goods transport vehicles

The management too appears bullish on the business, looking at its decision to buy back shares at a price not exceeding Rs 460, against the current market price of Rs 387. The decision to buyback around 1 percent of its equity, instead of paying dividend reflects the management’s confidence. Besides this should help lower the equity base and improve return ratios.

What is leading the optimism?  

Since its listing at Rs 288 in April 2015, VRL Logistics had a difficult time. The stock fell to a low of Rs 225 in July 2016 that year after the company indicated its intention to start a regional airline. Shareholders feared misallocation of capital, and finally the management was forced to backtrack. Post that, the share price has recovered to around Rs 380 but is still below the high of Rs 450 seen in November 2015.

The company had recently announced its September quarter earnings where volumes were hit because of GST, and also by higher fuel cost. Revenues of its major segment, goods transport, declined 4.5 percent quarter-on-quarter and 0.5 percent year-on-year to Rs 358.17 crore.

GST to drive higher growth

While GST did cause some initial hiccups, things are beginning to look up now. "GST will help VRL to increase its market share in goods transport business,” said Deepak Agarwal who is tracking the company at Phillip Capital.

“We expect a shift in demand to organised players and believe VRL would be a major beneficiary of GST and economic recovery, resulting in volume recovery and margin improvement," he said.

Besides growth, GST has also brought in higher efficiencies with an average 4-5 percent reduction in transit time on an average. This has led to better utilisation of owned vehicles and reduced the external vehicle hiring charges. Moreover, the  second half is expected to better. The market is expecting about 5 percent volume growth this year, and another 8-10 percent growth next year.

 Premium valuation

Higher volumes, better realisations and lower costs, due to operating efficiencies, will drive earnings growth. Consensus estimates suggest earnings growth of 40 percent over the next two years. Growth in earnings, improvement in the return ratios will also mean company commanding better valuations. "VRL commands premium valuations considering it being one of the largest organised players with the largest base of drivers on rolls (8000), strong balance sheet & cash flow generation," said Keyur Pandya, Analyst, Prabhudas Lilladher. Currently, the stock is trading at 25 times its FY19 consensus estimated earnings.

Follow @jitendra1929

For more research articles, visit our Moneycontrol Research Page.