MLL’s focus on deepening working relationships with clients and business associates would help it outperform the fast-growing 3PL market. The market is yet to see the benefits of consolidation of warehouses (GST) and formalisation of logistics (e-way bill). These benefits will also reflect in margin improvement and moderation in working capital from FY2019 onwards. We revise our estimates by 0-5% and arrive at a DCF-based target price of Rs 570 (from Rs 545 previously).

Deepening relationships with customers and vendors

MLL is leveraging the e-way bill as an opportunity to integrate with IT systems of its clients. Initially, MLL is linking the billing system for all new customers and would eventually move towards linking the procurement/inventory system with its warehouse/transport management system. IT integration will improve MLL’s offering while also improving client retention. For business associates (BAs), MLL has invested in a cloud-based platform access as part of its lifecycle management programme. This platform will (i) help BAs to track payments, (ii) support them to scale up operations and (iii) educate them on the latest developments in the sector. A common platform will provide MLL a better understanding of BA’s capabilities/ resources to leverage and will provide competitive costing for its transportation contracts. As per MLL, 3PL market continues to grow at 2X the rate of logistics spends.

Several levers to enhance margin; working capital will correct materially from Q1FY19

MLL maintains its guidance of 50 bps margin increase every year over the next three years. Apart from improving revenue mix (non-Mahindra group, warehousing), it shared other drivers of margin expansion in (i) switching to forward-charge mechanism of the GST chain and (ii) MLL considering to drop fringe low-margin accounts as the share of non-captive business has reached a respectable ~50% level. On working capital, MLL expects realisation of large part of tax refunds (and related interest payout) through FY2019. This combined with reduction in unbilled revenues (as e-way bill gets implemented) will materially reduce MLL’s working capital through FY2019.

Revise estimates by 0-5%

We revise our estimates to reflect (i) modest increase in revenues (rail business of JSW steel coming back to MLL) and (ii) 10-30 bps increase in our margin assumption (benefits of forward charge mechanism). This leads to a 0-5% increase in our estimates and a revised target price of Rs 570 (from Rs 545), net of an increase in WACC to 12% (from 11.5%) on higher 10-year G-Sec yield.