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Equity Research July 3, 2016
BSE Sensex: 27145
Transportation
VRL Logistics (ADD)
Price chart
175
225
275
325
375
425
475
525
Ap
r-15
Jul-
15
Sep
-15
No
v-1
5
Jan
-16
Ap
r-16
Jun
-16
(Rs)
Listed on : 29-Apr-2015
Transportation and Logistics
India road freight trends and GST opportunity Sector Thematic
Research Analysts:
Sandeep Mathew sandeep.mathew@icicisecurities.com
+91 22 6637 7188
Chart 1: Tonnage kms growth declined in FY16 post the recovery in FY15
1%
10%
1%
-8%
5%4%4%
5%
0%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
FY14 FY15 FY16
VRL TCI GATI
Source: Company data, I-Sec research
Analysis of core road freight segment revenues of publicly listed road operators (VRL, TCI, and GATI) suggests that FY16 tonnage kilometres growth declined in FY16 (average peer group growth of ~2% versus ~6% in FY15). Decline in tonnage km growth was reflective of the weak underlying economy in FY16 (rural economy impacted by drought, IIP growth averaged ~2.4%, etc). Road freight segment accounts for more than 70% of revenues for VRL, TCI and GATI. Freight rates which have historically moved in-line with diesel prices albeit with a lag, decoupled in FY16 as road operators largely maintained or marginally increased freight rates despite fuel prices being lower (by ~12% YoY). Despite the decrease in fuel prices, which is a key cost element (>25% of sales for transport operators like VRL), segment EBIT margins remained under pressure due to continued increase in other costs (employees, toll charges, etc). With hopes of GST reviving and anticipated domestic recovery in FY17, the sector (comprising VRL, TCI and GATI) is anticipated to witness a volume recovery. Segment EBIT margins also remain well below prior cyclical peaks. Current sector valuations (~19x FY17E PE) are in-line with historical through-cycle averages for the road freight sector. We prefer VRL Logistics which has the highest RoCE, a strong balance sheet, and consistent FCF generation track record among the road freight plays.
Core road transportation revenues tepid: FY16 road transportation revenues comprising VRL’s goods transport segment, GATI’s KWE segment, and TCI’s Freight, XPS and Supply Chain Solutions divisions averaged 3% YoY growth as tonnage kms growth remained muted due to weak domestic demand and freight rates remained under pressure due to lower fuel prices (a key input cost). Segment margins which had begun to reflate in FY15 remained under pressure despite lower fuel price. Working capital situation witnessed a marginal improvement in FY16.
Structural GST beneficiaries; VRL well positioned: Among the listed domestic logistic peers, road transport operators are likely to see the highest positive impact from GST implementation (improved efficiency, shift in freight traffic from unorganized to organized, more outsourcing of in-house logistics, etc). Potential for both multiple and earnings expansion remain with benefit of higher volumes, and cost efficiencies. We maintain ADD rating on VRL Logistics and target price of Rs332 based on 18x FY18E EPS.
INDIA
Transportation and Logistics, July 3, 2016 ICICI Securities
2
Key Focus Charts
Chart 2: Tonnage kms growth has been muted in FY16 for most road transport players
Chart 3: Freight rates decoupled from fuel prices in FY16
1%
10%
1%
-8%
5%4%4% 5%
0%
-10%
-5%
0%
5%
10%
15%
FY14 FY15 FY16
VRL TCI GATI
8%13%
13% 5%0%
7%12%
17%
4%
-12%-20%
-10%
0%
10%
20%
FY12 FY13 FY14 FY15 FY16
Freight rate growth (%) Fuel price growth (%)
Source: Company data, I-Sec research Source: Company data, I-Sec research
Chart 4: Segment EBIT margins have been weak Chart 5: Working capital cycles have improved
11%13%
11%
5% 5% 5%
10% 10%9%
0%
5%
10%
15%
FY14 FY15 FY16
VRL TCI GATI
-
10
20
30
40
50
60
FY14 FY15 FY16
VRL TCI GATI
Source: Company data, I-Sec research
Source: Company data, I-Sec research
Chart 6: Trucking industry remains highly fragmented and could see consolidation with GST
Chart 7: Segment EBIT margins are well below cyclical peaks and can reflate with cost efficiencies
9885
77 74
213
1715
2 6 11
1978-79 1993-94 2002-03 2008-09
SFOs (operators own upto 5 trucks) MFOs (operators own 6 to 20 trucks)
LFOs (operators own more than 20 trucks)
0%
5%
10%
15%
20%
25%
FY12 FY13 FY14 FY15 FY16
VRL TCI GATI
Source: Company data, I-Sec research
Source: Company data, I-Sec research
Chart 8: VRL has the most attractive RoCEs Chart 9: Valuations near through-cycle averages
0%
10%
20%
30%
40%
FY12 FY13 FY14 FY15 FY16
VRL TCI GATI
-
20.0
40.0
60.0
80.0
100.0
Jul-
05
Jan
-06
Jul-
06
Jan
-07
Aug
-07
Feb-0
8
Aug
-08
Feb-0
9
Sep
-09
Mar-
10
Sep
-10
Ap
r-11
Oct-
11
Ap
r-12
Oct-
12
May-1
3
No
v-1
3
May-1
4
No
v-1
4
Jun
-15
Dec-1
5
Jun
-16
P/E
(x)
TCI GATI VRL
Current 1-yr Fwd P/E
Source: Company data, I-Sec research Source: Company data, I-Sec research
Transportation and Logistics, July 3, 2016 ICICI Securities
3
TABLE OF CONTENTS
Road freight transportation segment analysis ............................................................. 4
VRL, TCI and GATI derive >70% of revenues from road freight business ..................... 4
Top-line growth has been tepid in FY16 ......................................................................... 4
Freight rates decoupled from fuel prices ......................................................................... 5
Tonnage km growth deteriorated – VRL was most impacted ......................................... 5
Segment margins impacted by non-fuel cost pressures ................................................. 6
Working capital cycle has improved ................................................................................ 7
GST implementation likely to be beneficial for road freight players .......................... 8
Multiple expansion is likely to sustain for domestic transportation focused businesses 9
Road freight operator valuations remain in-line with through-cycle averages .............. 10
We prefer VRL in the sector .......................................................................................... 11
Transportation and Logistics, July 3, 2016 ICICI Securities
4
Road freight transportation segment analysis
VRL, TCI and GATI derive >70% of revenues from road freight business
The listed surface transportation space comprises full-truck load, less-than-truckload
and express delivery players including VRL Logistics, TCI, and GATI.
Road freight segment revenues contribute >70% to total consolidated revenues for
VRL, TCI and GATI.
FY16 road freight revenues comprise VRL’s goods transport segment, GATI’s KWE
segment, and TCI’s Freight, XPS and Supply Chain Solutions divisions.
Chart 10: >70% of revenues derived from road freight for three biggest transportation players in India
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
VRL TCI GATI
Goods transportation Others
Source: Company data, I-Sec research
Top-line growth has been tepid in FY16
FY16 road freight revenue growth for VRL, TCI and GATI averaged 3% YoY due to
weak freight rates and weak tonnage km growth.
In the case of VRL which focuses on the less-than-truckload segment, the entire
growth can be largely attributed to freight increase of nearly 4% since its tonnage km
growth remained flat.
In the case of TCI and GATI whose businesses are more institutional driven, the top-
line growth was primarily tonnage km growth driven.
Table 1: Key road freight segment revenues
(Rs mn)
FY14 FY15 YoY FY16 YoY
VRL (GT segment) 11,281 12,908 14% 13,563 5% TCI (Freight, XPS, SCS segment) 21,307 23,323 9% 24,157 4% GATI (KWE) * 10,448 11,424 9% 11,420 0%
Source: Company data, I-Sec research; * FY14 segment revenue of GATI has been annualized for comparison
Transportation and Logistics, July 3, 2016 ICICI Securities
5
Freight rates decoupled from fuel prices
Freight rates have historically been highly correlated to diesel price movement in India
since fuel is a key cost component (more than 25% of revenues).
Freight rates decoupled from fuel prices in FY16 as road transport operators tried to
maintain rates despite a significant drop in fuel prices.
Chart 11: Freight rates have decoupled from diesel prices in FY16
8%
13%
13%5%
0%7%
12%
17%
4%
-12%-15%
-10%
-5%
0%
5%
10%
15%
20%
FY12 FY13 FY14 FY15 FY16
Freight rate growth (%) Fuel price growth (%)
Source: Company data, Industry sources, I-Sec research
Tonnage km growth deteriorated – VRL was most impacted
FY16 tonnage kilometres growth declined in FY16 (average peer group growth of ~2%
versus ~6% in FY15). Tonnage km growth has been derived by subtracting average
industry freight growth from total revenue growth.
Decline in tonnage km growth was reflective of the weak underlying economy in FY16
(rural economy impacted by drought, IIP growth averaged ~2.4%, etc).
Tonnage km growth deteriorated for all three players with VRL being more affected
due to its higher dependence on rural economy and small and medium enterprises.
Transportation and Logistics, July 3, 2016 ICICI Securities
6
Chart 12: Tonnage kms growth declined in FY16 post the recovery in FY15
1%
10%
1%
-8%
5%4%4%
5%
0%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
FY14 FY15 FY16
VRL TCI GATI
Source: Company data, I-Sec research
Segment margins impacted by non-fuel cost pressures
Segment EBIT margins remained under pressure in FY16 despite a decrease in fuel
costs due to continued increase in other costs (employees, toll charges, etc).
In the case of VRL, the company had effected ~20% across the board pay hike for its
employees in July 2015, which offset the gains from lower diesel prices. Going
forward, VRL management indicated that key costs (employee, etc) are likely to move
in-line with inflation.
Chart 13: EBIT margins declined for VRL and GATI in FY16
11%
13%
11%
5% 5% 5%
10% 10%
9%
0%
2%
4%
6%
8%
10%
12%
14%
FY14 FY15 FY16
VRL TCI GATI
Source: Company data, I-Sec research
Transportation and Logistics, July 3, 2016 ICICI Securities
7
Working capital cycle has improved
Working capital is an important operational metric for a road transport operator, and
the net working capital cycle has improved over the last two years for operators.
VRL enjoys the most favourable working capital cycle due to its significantly lower
receivable days (15 days as opposed to 65 days and 63 days for TCI and GATI
respectively).
VRL’s efficient working capital cycle is due to its low concentration of institutional
customers and high dependence on the less-than-truckload business where
customers typically make payments upon receipt of goods.
Chart 14: VRL enjoys a superior working capital cycle due to lower receivable days
-
10
20
30
40
50
60
FY14 FY15 FY16
VRL TCI GATI
Source: Company data, I-Sec research
Transportation and Logistics, July 3, 2016 ICICI Securities
8
GST implementation likely to be beneficial for road freight players
GST is anticipated to be introduced in the Upper House (Rajya Sabha) for passage in
the forthcoming Monsoon session (from July 18). GST implementation is anticipated to
be beneficial for the road freight sector with improved efficiency, shift in freight traffic
from unorganized to organized, more outsourcing of in-house logistics, etc.
Scope for consolidation in a highly fragmented market
Freight transporters are broadly classified as small fleet operators (SFOs), medium
fleet operators (MFOs) and large fleet operators (LFOs) on the basis of number of
trucks they own or control.
Typically, a LFO owns more than 20 trucks, while SFO owns less than 5 trucks. VRL is
one of the largest LFOs in India with a fleet of 3,649 trucks.
Road freight transportation is highly fragmented, with SFOs cornering a high market
share of approximately 77%, as per CRISIL. Low entry barriers have led to a
proliferation of small truck operators, resulting in fragmentation of the segment.
Chart 15: LFOs gain share, but SFOs still dominate
9885
77 74
213
1715
2 6 11
1978-79 1993-94 2002-03 2008-09
SFOs (operators own upto 5 trucks) MFOs (operators own 6 to 20 trucks)
LFOs (operators own more than 20 trucks)
Source: Company data, CRISIL,I-Sec research
The GST regime is expected to benefit the logistics sector, particularly inter-state
movement of goods. GST implementation can be a key driver as we anticipate freight
volumes to gradually shift from the unorganised to organised sector, and larger
established players to build more scale.
Our checks with supply chain experts also indicate that companies which currently
manage supply chain in-house due to lack of input tax credits and higher cost of
transport are likely to start outsourcing supply chain activities post GST to third-party
vendors. Resultant buildup of scale for operators is likely to help reduce overall
logistics costs.
Transportation and Logistics, July 3, 2016 ICICI Securities
9
Improvement in cost efficiencies
GST is anticipated to reduce, and in some cases eliminate, checkposts at staborders,
which can lead to improved trucking efficiency.
Being a highly cyclical sector, we note that segment EBIT margins still remain below
prior peaks, and could structurally trend higher with benefit from cost efficiencies post
GST implementation.
Chart 16: Segment EBIT margins remain well below peak in a cyclical industry
0%
5%
10%
15%
20%
25%
FY12 FY13 FY14 FY15 FY16
VRL TCI GATI
Source: Company data, I-Sec research
Multiple expansion is likely to sustain for domestic transportation focused businesses
GST implementation is anticipated to positively impact domestic transportation based
companies such as VRL Logistics, TCI, GATI.
In the listed space, Gateway Distriparks, Gujarat Pipavav, Navkar Corporation and
Container Corporation have greater than 80% revenue and EBIT exposure to EXIM
related cargo, and are highly exposed to EXIM prospects.
Transportation and Logistics, July 3, 2016 ICICI Securities
10
Table 2: India Logistics Universe
Segments
Company
Mkt Cap
($ mn)
EV/EBITDA (x) P/E (x) P/B (x) Net D/E
(x) FY16A FY16A FY17E FY18E FY16A FY17E FY18E FY16A FY17E FY18E
Container Rail Freight/CFS/ ICDs
CONCOR 4,232 20.2 19.7 16.5 33.9 30.0 25.4 3.3 3.3 3.1 (0.1)
Gateway Distriparks 503 13.6 12.9 10.4 27.8 25.6 18.6 3.2 2.9 2.7 0.0
Allcargo Logistics 675 8.0 7.5 6.7 14.5 13.9 10.4 1.8 1.9 1.7 0.1
Segment Average
13.9 13.4 11.2 25.4 23.2 18.1 2.8 2.7 2.5
Multimodal/ Road transport/ Express delivery
VRL Logistics 425 10.6 9.9 8.5 27.1 20.2 16.3 5.4 4.9 4.2 0.3
Transport Corp of India
360 12.6 11.5 10.0 24.9 22.3 20.1 3.4 3.1 2.8 0.4
GATI 221 10.6 10.6 10.3 25.9 18.0 14.2 1.7 2.6 2.3 0.5
Blue Dart 2,097 35.1 36.4 26.0 74.5 62.8 51.6 34.7 17.4 22.2 0.2
Segment Average
17.3 17.1 13.7 38.1 30.8 25.5 11.3 7.0 7.9
Ports
Adani Ports 6,291 14.6 12.0 10.6 17.9 15.2 14.2 3.9 2.7 2.3 1.4
Gujarat Pipavav 1,168 22.0 16.4 13.4 36.0 26.2 21.8 4.5 3.7 3.3 (0.2)
Segment Average
18.3 14.2 12.0 27.0 20.7 18.0 4.2 3.2 2.8
Liquid storage logistics
Aegis Logistics 626 20.6 17.7 12.4 33.1 26.5 17.8 7.4 7.0 5.5 0.1
Kesar Terminals 41 11.9 9.5 8.7 13.0 14.9 13.2 3.3 NA NA 1.2
Segment Average
16.2 13.6 10.5 23.1 20.7 15.5 5.4 7.0 5.5
Source: Bloomberg, I-Sec research
Road freight operator valuations remain in-line with through-cycle averages
Freight transport sector valuation multiples in the past 3 years have rerated from
trough levels to average through-cycle levels on the back of volume growth
expectations driven by e-commerce growth potential, expectations on GST, falling
diesel prices (key input cost), and scarcity premium (relatively under-owned sector).
Chart 17: TCI historical 1-year forward P/E chart Chart 18: GATI historical 1-year forward P/E chart
0
5
10
15
20
25
30
35
40
45
Ap
r-05
Oct-
05
Ap
r-06
No
v-0
6
May-0
7
Dec-0
7
Jun
-08
Jan
-09
Jul-
09
Jan
-10
Aug
-10
Feb-1
1
Sep
-11
Mar-
12
Oct-
12
Ap
r-13
No
v-1
3
May-1
4
No
v-1
4
Jun
-15
Dec-1
5
Jul-
16
P/E (x) Average STD +1 STD -1
0
20
40
60
80
100
120
Jul-
05
Jan
-06
Jul-
06
Jan
-07
Aug
-07
Feb-0
8
Aug
-08
Feb-0
9
Sep
-09
Mar-
10
Sep
-10
Ap
r-11
Oct-
11
Ap
r-12
Oct-
12
May-1
3
No
v-1
3
May-1
4
No
v-1
4
Jun
-15
Dec-1
5
Jun
-16
P/E (x) Average STD +1 STD -1
Source: I-Sec research, Bloomberg
Transportation and Logistics, July 3, 2016 ICICI Securities
11
Foreign institutional ownership remains low in the sector with highest FII ownership
seen in VRL (~12%), GATI (8%), and TCI (2.5%).
Table 3: Ownership summary as of Mar’16
Company Promoter holding % FII holding % Others%
VRL 69.6 11.9 18.5 GATI 41.0 8.3 50.7 TCI 66.5 2.5 31.0
Source: I-Sec research, Company reports
We prefer VRL in the sector
We prefer VRL Logistics which has the highest RoCE, a strong balance sheet, and
consistent FCF generation track record (FCF positive in five of last six years) aided by
an efficient working capital cycle.
Chart 19: Road freight segment RoCEs are highest for VRL
0%
5%
10%
15%
20%
25%
30%
35%
40%
FY12 FY13 FY14 FY15 FY16
VRL TCI GATI
Source: Company data, I-Sec research
Chart 20: VRL also has the highest consolidated RoCE
-
5
10
15
20
25
30
35
40
Segment Consol Segment Consol
FY15 FY16
(%)
TCI GATI VRL
Source: Company data, I-Sec research
Transportation and Logistics, July 3, 2016 ICICI Securities
12
Chart 21: VRL is expected to trade at a premium over peers due to a superior working capital, and is cheaper when factoring in growth (FY18E)
-
20.0
40.0
60.0
80.0
100.0
Jul-
05
Jan
-06
Jul-
06
Jan
-07
Aug
-07
Feb-0
8
Aug
-08
Feb-0
9
Sep
-09
Mar-
10
Sep
-10
Ap
r-11
Oct-
11
Ap
r-12
Oct-
12
May-1
3
No
v-1
3
May-1
4
No
v-1
4
Jun
-15
Dec-1
5
Jun
-16
P/E
(x)
TCI GATI VRL
Current 1-yr Fwd P/E
Source: I-Sec research, Bloomberg
Table 4: Stock performance across Indian logistics sector
(%) YTD 6 month 12 month 3 years 5 years
CONCOR 4 4 (13) 33 98 Gateway Distriparks (4) (4) (13) 185 144 Allcargo Logistics (11) (11) 12 93 104 VRL Logistics (28) (28) 2 NA NA Transport Corp of India 3 3 30 510 268 GATI (3) (3) (2) 505 168 Blue Dart (12) (12) (2) 137 303 Adani Ports (23) (23) (34) 37 32 Gujarat Pipavav 6 6 (25) 239 147 Aegis Logistics 18 18 53 882 466
Source: Bloomberg, I-Sec research
Transportation and Logistics, July 3, 2016 ICICI Securities
13
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New I-Sec investment ratings (all ratings based on absolute return; All ratings and target price refers to 12-month performance horizon, unless mentioned otherwise)
BUY: >15% return; ADD: 5% to 15% return; HOLD: Negative 5% to Positive 5% return; REDUCE: Negative 5% to Negative 15% return; SELL: < negative 15% return
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category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction.
This report has not been prepared by ICICI Securities, Inc. However, ICICI Securities, Inc. has reviewed the report and, in so far as it includes current or historical
information, it is believed to be reliable, although its accuracy and completeness cannot be guaranteed.
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