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VRL Logistics IPO: Lower P/E Than Peers, Worth Applying For

There’s another IPO out: VRL Logistics . Many of you have asked in the Google group about this IPO, and here’s the specifics:

The Details

VRL is actually Vijayanand Roadlines, and is a company close to where I live (Bangalore). I’ve been a long time user of their buses, travelling between Bangalore and Mangalore during my college days on their bus service. So please colour me biased to that extent.

Vijay and Anand Sankeshwar are the promoters – Vijay’s the dad, Anand’s the son. The company is based in Dharwad and Hubli in Karnataka. Vijay Sankeshwar is also a politician and a publisher. Vijay Times (Eng) and Vijaya Karnataka (Kannada) – not part of VRL Logistics – was owned by him, and sold to the Times Group in 2007, and five years later, he launched the Kannada paper, Vijay Vani. Vijay was also the BJP Member of Parliament from Dharwad from 1996-2004.

New Silk Route (NSR) are investors in the company and will exit most of their stake in the IPO.

The IPO of this company is:

  • From 15th to 17th April 2015
  • Rs. 195 to Rs. 205
  • 117 cr. raised by the company (Around 58 lakh shares)
  • 1.71 cr. shares from selling shareholders (NSR and promoters) – gives them about 340 cr.
  • Of which, NSR offers 1.45 cr shares (290 cr. or so) and 12.8 lakh cr. shares each by Anand and Vijay Sankeshwar (25 cr. each)
  • Makes this a Rs. 500 cr. IPO
  • Promoters currently own 77% of the company, will fall to 70%
  • NSR will own 5% of the post IPO company, the public will own 25%.

The Company

VRL Logistics is about goods and people transportation, by road, inter-city.

VRL has 455 buses and 3546 goods vehicles. They have an in house body shop and maintenance facilities, which should reduce the lifetime cost of these vehicles. (They buy from Ashok Leyland and have made their Hubli facility an effective authorized service center of AL) They even operate diesel pumps to ensure quality and reliability of fuel. 75% of revenue comes from the goods industry – where they run parcel and courier transportation for industries like FMCG, pharma, appliances, apparel etc. They use a hub-and-spoke model rather than direct, which increases efficiency at the cost of having to load/unload at hubs.

Their bus services have an online booking module, plus they farm out seats to the likes of RedBus and MakeMyTrip.

Financials

  • 9m revenue till Dec 2014 is 1279 cr. (FY2014 was 1504 cr.)
  • Net profit in 9 months was 72 cr. versus FY2014, 12 months, of 57.1 cr. (This is good, but 5 year CAGR till FY2014 is just 18%)
  • Debt has reduced: Long Term debt as of Dec 2014 is 367 cr. Short Term debt is up but not by quite that much.
  • 8.55 cr. shares currently outstanding
  • Puts 9 moths EPS at around Rs. 8.4 and in effect 12 month EPS will go to Rs. 11 or more.
  • That would make this company at less than 20 P/E (around 18.6 P/E at a price of 205)
  • They have some other businesses like courier, air transport and power generation which are small in comparison.

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Prospects:

  • Fall in diesel prices should benefit them a lot but they will have to pass on a substantial amount to their customers
  • They will use 67 cr. to buy trucks, and 28 cr. to prepay part of their debt. They’ll buy 248 more vehicles, increasing their fleet by about 8%. In general 8% isn’t all that great but reducing leverage will give them scope to take on more debt as interest rates fall, later.
  • They will do well as the road network expands
  • GST will be brilliant for commercial road traffic as currently every state has its own concepts for taxes and trucks typically have to take long routes to avoid certain states.
  • Rail is a serious threat, as is shipping (a Gujarat to Chennai trip might be cheaper by ship). But both are a while away, with Railways the more immediate five year threat.
  • Peers: Gati has a P/E of 46, TCI has a P/E of 28. This makes it a relatively cheaper buy, but it’s smaller in size.
  • No major related party transaction concerns. (Amounts are small, promoter salaries are around 3 cr. each)

Our View

We think this is a good buy. At a fairly low relative P/E it’s a decent shot, and while listing gains may be subdued, just the lack of enough shares (only 25% is public and of that, much will be gobbled by mutual funds) Even at 205 this seems a decent bet.

The promoters are politically connected to one party (BJP) which could hurt their changes in case of political upheaval. Also remember that the Karnataka Government is of the Congress (and this is where they are headquartered). However, in the near term this is a positive as the central government is expected to help the logistics industry. And, recovery is a little bit easier.

Risks are a slowing economy, a hit to government finances where they can’t push for more roads, or a move to rail traffic. Apart from these macro factors, there’s the thing that the company will only use enough funds to increase fleet by 8%, while we would like to see a trigger that pushes its capacity up by 30% to 40% easily. This may come when interest rates fall, and if demand continues, the company can finance its way out. Current debt to equity ratios are 1.4 or so, which will come down immediately to 1, due to the 117 cr. infusion, and reduction in debt by 28 cr.

Overall, this could be a good buy in a sector that has seen a lot of interest. They have no real plans for e-commerce (other than selling bus tickets online) and they are probably not the choice of transportation since air travel is far easier. However with more smaller towns (which don’t have airports) coming the e-commerce way, road transport companies like VRL could benefit from intra-state transport, if they hike up their technology to provide for real time updates on their network.

But remember, this is a bull market. Everything goes up, and while it’s peers have a high P/E that may just be because of the “bullish” sentiment.

Today, only 25% of the shares for retail investors (81 lakh shares) have been bid for. But we expect that to go up to at least 2x, since there are too many buy calls on this IPO.

It’s best to bid through ASBA (Application Supported by Blocked Amount) which gives you the flexibility to have your money in your account while applying for the IPO.

Disclosure: We cannot apply to this IPO due to scary SEBI regulations. But we’ll track it anyhow, as if we had bought it. Please consider us biased to that extent.