VRL has reported a very strong H1FY18 and we expect the trend to continue in future quarters as well.
VRL has reported a very strong H1FY18 and we expect the trend to continue in future quarters as well. We estimate volume trend to improve for VRL in the logistics segment with shift of volumes from the unorganized segment post GST implementation. While the bus segment is set to expand and grow under the Amended Motor vehicle Act, outlook also remains strong with factors like: 1) Government initiatives to improve road infra; 2) Effective management of fuel cost; 3) Effective internal control systems; 4) A strong Management team and 5) Healthy estimated GDP growth. We are introducing FY20 numbers and “Maintain BUY” with an increased TP of Rs 500 valued at 25x FY20E earnings. With implementation of GST, we could see manufacturers completely outsourcing the supply chain logistics to large fleet operators, who could manage large scale operations for them along with proper paper work for input tax credit. We believe GST will lead to a shift of cargo movement to tax-compliant large-fleet operators. Unorganized players would not be able to provide the required logistics network and maintain technology and paper work demanded by the big manufacturers.
Here we may see, significant amount of businesses getting shifted to organized players like VRL which have already made significant investments in hub-and-spoke network, owned truck base and created a huge driver base of 7,000 drivers on the pay-rolls of the company. Management of VRL here indicated that the company has already started receiving inquiries from bigger clients for logistical support post GST implementation for bigger warehouses and bigger trucks and VRL is gearing up accordingly for the same.
In our recent interaction, the management indicated that, post removal of interstate check-post, the company has experienced improvement in utility of trucks and lower turn-around time of trucks. Management did not quantify the same, but indicated that there is further room for improvement to lower the turnaround time for trucks, which would aid the margins of the company going forward. Improvement in turn-around time also lowers the capex requirement of the company in the trucking segment with improved utilisation of current fleet.