While outlook’s bright, FY20/21e EPS down 4% due to auto slowdown; TP cut to Rs 610.
After weak growth in H1FY19, MLL had hinted at a comeback in H2FY19. Management has kept its word given the uptick of 14% y-o-y each in sales and PAT in Q4FY19. Overall, FY19 marks a rapid ramp-up in the non-M&M business with warehousing particularly growing well (up 30% y-o-y). While we remain convinced about 3PL sector’s growth potential over the next few years, the recent slowdown in the Indian auto sector implies uncertainty in the medium term given MLL’s 65–70% exposure thereof. We are factoring in these risks and trimming EPS for FY20e and FY21e by 4% each. Consequently, we are cutting DCF-based TP to Rs 610 (from Rs 640). We remain bullish on MLL’s 3PL competencies and retain Buy.
Delivers on H2FY19 guidance; a good steady year overall: Q4FY19 sales and PAT each grew about 14% y-o-y led by a 33% y-o-y uptick in warehousing (10% of sales) and 15% y-o-y in M&M. For FY19, MLL has delivered 13% sales growth with Ebitda/PAT growing 26%/34% y-o-y. FY19 marks growth in MLL’s traditional business and a ramp-up in warehousing sales.
3PL potential intact, but client sectors facing challenges: The recent slowdown in the Indian auto sector may drag MLL’s auto-dependent growth. Hence, we estimate MLL would clock M&M segment growth in mid-single digit in FY20. The rapidly expanding non-M&M segment, particularly warehousing, should offset this weakness. On balance, FY20e top-line growth should come in at a high single digit in our view. Notably, as the warehousing mix rises in sales, margins can expand by 50bps and thus Ebitda growth would stay at 15–20% for the next two years in our view. Overall, we estimate sales/Ebitda growth of 9%/19% for FY20e.
Outlook: Growth momentum to be sustained— Given the sharp slowdown in auto sector and MLL’s high dependence thereof, we are trimming FY20/21e EPS by 4% each. Our DCF-based TP in turn decreases to Rs 610. Our DCF methodology is based on WACC of 13% and terminal growth of 6%. The stock is trading at 31x one year forward PE.