The subsidiary of Mahindra & Mahindra, Mahindra Logistics Rs 829 crore IPO opened for subscription today. Mahindra Logistics is a third-party logistics service provider and is aiming to raise around Rs 829.35 crore at the upper end of the price band. The company has set a price band of Rs 425-429 per share for its IPO. The IPO will remain open for three days for subscription starting 31 October to 2 November. Interestingly, public issue of Mahindra Logistics doesn’t contain fresh issue of equity shares. The public offer will be based on 100% share sale through the OFS (offer for sale) route from its existing shareholders totalling 1.93 crore equity shares of face value of Rs 10 each. The book running lead managers to the issue are Kotak Mahindra Capital Company and Axis Capital. Notably, Mahindra Logistics is a part of the Mahindra Partners Division of the Mahindra Group. It operates in two distinct business segments – supply chain management (SCM) and corporate people transport solutions (PTS). We take a look at what brokerages have to say about the issue.
In its research report, HDFC Securities has identified the strengths of the company including an “asset-light” business model which allows flexibility and scalability in operations and high capital efficiency; integrated, end-to-end logistics services and solutions; the Mahindra brand and support from the Mahindra Group; presence across diverse industry verticals with long-standing client relationships; and Experienced management team with strong domain expertise. Pointing to the concerns in the company, HDFC Securities says that Mahindra Logistics is dependant on a limited number of clients, which exposes the company to a high risk of client concentration. Further, it operates in a highly fragmented and competitive industry and increased competition may lead to a reduction in revenues, reduced profit margins or a loss of market share, says HDFC Securities.
“At the upper end of the price band, (Rs 425-429) the issue is priced at 66.2x and 50.8x of its reported and adjusted FY-2017 earnings. Due to its asset light model, there is no exact comparable peer; however, the thumb rule for any investment is growth and returns. Mahindra Logistics has exhibited a CAGR of 15% and 25% in top-line and adjusted bottom-line respectively, which is better than its players i.e. VRL logistics and Transport Corporation of India. In terms of returns, company has shown a better return profile (ROE & ROIC of 17.3% and 40% v/s. peer group avg. – 13% & 14% respectively). Based on its growth story, diversification strategy, strong parent repute and post GST attractiveness of the logistics sector, we assign Subscribe rating to the issue,” the brokerage firm noted in its report.
“In terms of valuation, on the upper price band of Rs 429, the company has been valued at ~65x on FY-17 earnings as against 71x for Blue Dart Express, 34.2x for Gati Ltd and 54x for TCI Express. We believe, valuations look expensive, however, the management expects MLL to receive a tax refund of approximately Rs 540 million, which will result in positive cash flows in the coming period. These cash flows will be utilised in maintaining organic growth trajectory for the company, which could result in strong bottom line growth in the years to come. The company plans to support this growth by focusing on increasing business from Non-Mahindra Group clients, leveraging the changing industry with the implementation of GST regime with greater focus on warehousing, continuing focus on technology enhancements and diversifying into other industry verticals. Thus, we recommend ‘Subscribe’ rating on the issue with long term perspective,” KR Choksey noted in its IPO note.