Mahindra Logistics - Inditrade

IPO NOTE

Buy

Mahindra Logistics

Snapshot DATE OFFER PERIOD PRICE BAND SECTOR ISSUE SIZE MIN. QUANTITY NO. OF SHARES FACE VALUE BOOK VALUE P E RATIO Post Issue SHARE CAPITAL MARKET CAP

OCT 31, 2017 OCT 31-NOV 2 Rs. 425-429 LOGISTICS Rs. 830 Cr 34 Shares 1,93,32,346 Rs.10 Rs.51 66

Rs.70.3 Cr Rs.3,016 Cr

Shareholding Promoters PE Investors Public

61.78% 10.85% 27.37%

Financial Information For FY Ended 31st Gross Sales Total Income Total Expenditure PBIDT PBIT PBT PAT Key Ratios Debt to Equity(x) Current Ratio(x) ROCE (%) RONW (%) PBIDTM (%) PATM (%)

1

Rs. Crores Mar-17 2666.59 2676.25 2590.34 85.91 71.31 67.82 46.07

0.10 1.69 20.03 15.20 3.22 1.73

`

Neutral

Background Mahindra Logistics is one of the largest 3PL solutions providers in the domestic logistics industry, estimated at ₹6.40 trillion in Fiscal 2017, according to a CRISIL Report. It offers customized and end-to-end logistics solutions and services including transportation and distribution, warehousing, in-factory logistics and value added services. It has a panIndia network comprising 24 city offices, over 350 client & operating locations, 1,000 business partners and over 10 million Sq Ft of warehousing space. The company also provides people transportation solutions to over 100 domestic and MNC operating in the IT, ITeS, BPO, financial services, consulting and manufacturing industries. 3PL Logistics services contribute to ~90% of revenues in FY2017 and that from Group Companies contributed 64%. Investment Rationale According to CRISIL Report, the 3PL market in India stands at ₹325-335 billion in Fiscal 2017, which is expected to grow at a CAGR of 19-21% to reach ₹570-580 billion by Fiscal 2020. The size of the 3PL market in India for the e-commerce, consumer, engineering and pharmaceuticals industries are expected to grow at ~30-32%, 24-26%, 20-22% and 8-10%, respectively, between Fiscals 2017 and 2020. In automobiles, the 3PL market still has a sizeable opportunity to increase its share in outbound and in-factory logistics. Mahindra Logistics has got prestigious clients in the business and has also won several awards (See Note 1, Page 2). The implementation of GST is another GAME CHANGER for the sector (See Note 2, Page 2) In contrast to “asset-heavy” model followed by majority of 3PL logistics providers in India, Mahindra Logistics follows an “asset-light” model pursuant to which vehicles and warehouses are owned or provided by a large network of business partners, which allows for scalability of services as well as the flexibility to develop and offer customized logistics solutions across a diverse set of industries. Mahindra logistics has focused more on technology and has developed two transport management systems. Its “asset-light” business model along with its solutions design capabilities enables it to serve over 200 domestic and MNC operating in automobile, engineering, consumer goods, pharmaceuticals, e-commerce and bulk. Valuation At the upper end, the issue is expensively priced at 66XFY2017 EPS. There is also client and sector concentration risk for the company. Established players like TCI and VRL trade at much cheaper valuation, though business model is not strictly comparable. Key positives include; Part of Mahindra Group and scalability in the business.

Note 1:

BHARATMALA Project – To lower logistics costs to 6% from 18% now Union cabinet recently announced an outlay of 6.92 trillion for building 83,677 km of road network over next 5 years. This includes rs.5.35 trillion to construct 34,800 km of roads under the BHARATMALA Project. 28 ring roads around big cities, 45 bypasses, 34 projects of expanding lanes and flyovers will be taken up in the next 18 months to provide hassle free movement. This could considerably increase the average distance a truck covers daily in the country. According to Transport Minister Nitin Gadkari, roads built under Bharatmala programme will increase vehicle travelling speed by around 20-25%, thereby helping reduce logistics costs. This in turn would help reduce India’s supply chain cost from the present levels of 18%. India has been grappling with high logistics costs of 16-18%, which make its exports uncompetitive vis-à-vis China, which has lower logistics costs of 8-10%.

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Mahindra logistics has focused more on technology and has developed two distinct transport management systems. One is the Mahindra Integrated Logistics Execution System (“MILES”), exclusively for transportation of finished automobiles. Another is “MyCargo360”, which is a flexible and scalable TMS and is deployed across all industry verticals. Some of its key clients in the SCM business include Volkswagen India Private Limited, Vodafone India Limited, Thermax Limited, JSW Steel Limited, Ashok Leyland Limited, Siemens Limited, Bosch Limited, BMW India Private Limited, 3M India Limited, and Mercedes-Benz India Private Limited. In Fiscals 2017 and 2016, its SCM business won several prestigious awards including the “3PL Achiever of the Year 2017” award by Global Logistics Excellence Awards, the “CII Supply Chain and Logistics Excellence (SCALE) Award 2017” and the “3PL Company of the Year 2016” award by Logistics Asia Awards.

Note 2: The GST regime is expected to significantly change the Indian logistics industry and the manner in which it conducts business. In the PRE-GST Era, tax efficiency was a company’s primary concern while setting up its distribution network, instead of logistics costs or customer service. The result was the creation of multiple inefficient stocking and distribution locations in each state. GST enables companies to aggregate state-based warehouses into one large, regional warehouse that would offer cost and operational efficiency in large markets. So, the implementation of GST will now result in business decisions being focused on supply chain efficiency and not on state-wise tax benefits. This in turn, will lead to an increase in business opportunities for organized service providers operating large sized warehouses in key geographies. The sector may also witness emergence of other warehousing hubs which will prove effective for pan-India logistic service providers. The GST regime is expected to benefit the inter-state movement of goods. Furthermore, efficiencies achieved through the use of organized logistics partners will lead to lower freight costs and timely delivery of goods. A complete removal of check posts is likely to speed up transportation. According to the CRISIL Report, as logistical inefficiency and primary transport costs decline, the hub-and-spoke model is expected to proliferate and service levels will improve.

Key Financial Highlights (Rs. Crores) For FY Ended 31st Gross Sales Total Income Total Expenditure PBIDT PBIT PBT PAT

Mar-17 2666.59 2676.25 2590.34 85.91 71.31 67.82 46.07

Mar-16 2083.89 2097.38 2032.47 64.91 56.50 55.32 35.87

Mar-15 1964.41 1972.57 1906.16 66.41 60.44 60.22 39.22

Mar-14 1,750.34 1,756.61 1,699.05 57.56 54.4 54.34 36.64

Mar-13 1,532.02 1,535.49 1,495.56 39.93 36.88 36.18 24.44

Equity Paid Up Net Worth Total Debt Capital Employed

68.00 345.19 34.32 381.98

59.82 260.89 28.16 329.94

59.82 224.45 4.02 269.35

59.06 124.39 0 124.39

57.7 85.95 0 85.95

Gross Block Investments Cash and Bank balance Cash Flow from Operations Cash Flow from Investing activities

102.00 58.06 50.17 -29.31 53.41

86.78 68.04 91.63 -47.89 19.01

55.79 110.15 102.10 26.79 -114.78

29.47 0.02 87.11 48.61 -3.94

21.31 0.02 32.28 48.44 -1.79

0.10 1.69 20.03 15.20 3.22 1.73

0.09 2.05 18.86 14.78 3.11 1.72

0.02 1.99 22.44 17.47 3.38 2.00

0 1.42 51.73 34.84 3.29 2.09

0 1.4 48.16 33.14 2.61 1.6

Key Ratios Debt to Equity(x) Current Ratio(x) ROCE (%) RONW (%) PBIDTM (%) PATM (%) Peer Comparison

There are no strictly comparable peers in the logistics sector as most of the leading players follow an “asset heavy” business model unlike the “asset light” model followed by Mahindra Logistics. Rs. Crores Company FY Sales OPM NP ROCE ROE DIV% CMP M.CAP B V EPS(Rs) TTMPE(x) Mahindra Logistics Transport Corp. VRL Logistics

3

201703

2588.69

2.62

44.78

20.82

14.64

-

429.00

3015.87

134.00

6.50

66.00

201703

1804.25

8.71

70.26

12.72

12.83

55.00

281.00

2131.53

78.16

9.51

29.28

201703

1803.09

11.97

70.47

17.30

13.36

40.00

355.00

3201.73

63.01

8.79

39.93

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