Mahindra Logistics (MLL) is one of India’s largest third party logistics (3PL)/ supply chain management (SCM) companies in India, but it accounts for only 6-7% of India’s SCM industry. As we expect major business to shift to organized players under GST, we believe MLL has a long growth runway given: Unlike peers (dominating in automotive sector), MLL has diversified pan-India presence across high-growth non-automotive verticals like e-comm, engineering, FMCG, pharma etc (together accounting for 40% of SCM revenue; 59% in FY20E). Strong relations with business partners (1,000+ across transport/ warehousing) help operate on an asset-light model. This coupled with technology integration enables it to offer customized solutions. Focus on non-automotive and reducing dependence on M&M group business should aid margin; however, we do not factor in any improvement as we expect MLL to reinvest for revenue growth. Expect premium valuations to sustain as MLL’s strong positioning backed by credible management offers growth longevity, and potential to generate 25%+ RoCE/ free cash flows. Initiate coverage with BUY and TP of Rs 525.
MLL has successfully replicated its success in Automotive SCM solutions to non-Automotive verticals like e-commerce, FMCG, pharma, engineering, etc. Focus on large revenue generating clients aided 73% revenue CAGR over FY15-17. This was driven by >4x rise in revenues from e-commerce, while other verticals boosted ~63% CAGR over the same time frame. Top 20 clients contributed ~71% to non-M&M SCM revenues in FY17 better client mining and new client additions to drive growth.We believe higher business from exiting clientele and addition of new clients across non-Automotive verticals, will help MLL record 40% CAGR in non-Automotive business over FY17-20.