Reblog: Mahindra Logistics IPO review

Mahindra Logistics Ltd. (MLL) – a Mahindra group company is one of India’s largest 3PL solutions providers in the Indian logistics industry which was estimated at Rs. 6.40 trillion in fiscal 2017 according to CRISIL report. MLL’s competitive advantage is its “asset-light” business model pursuant to which assets necessary for operations such as vehicles and warehouses are owned or provided by a large network of business partners. Technology enabled, “asset-light” business model allows for scalability of services as well as the flexibility to develop and offer customized logistics solutions across a diverse set of industries. The company operates in two distinct business segments, supply chain management (“SCM”) and corporate people transport solutions (“PTS”).

Under SCM business it offers customized and end-to-end logistics solutions and services including transportation and distribution, warehousing, in-factory logistics and value-added services to clients through a pan-India network comprising 24 city offices and over 350 client and operating locations as at August 31, 2017. It has a large network of over 1,000 business partners providing vehicles, warehouses and other assets and services for SCM business. As at August 31, 2017, MLL managed over 10.0 million square feet of warehousing space spread across pan-India network of multi-user warehouses, built-to-suit warehouses, stockyards, network hubs and cross-docks. As at August 31, 2017, it operated in-factory stores and line-feed at over 35 manufacturing locations. Such model of its operations enables the company to serve over 200 domestic and multinational companies operating in several industry verticals in India, including automotive, engineering, consumer goods, pharmaceuticals, e-commerce and bulk. Its client list includes Volkswagen India Private Limited, Vodafone India Limited, Thermax Limited, JSW Steel Limited, Ashok Leyland Limited, Siemens Limited, Bosch Limited, BMW IndiaPrivate Limited, 3M India Limited, and Mercedes-Benz India Private Limited.

MLL provides technology-enabled people transportation solutions and services across India to over 100 domestic and multinational companies operating in the IT, ITeS, business process outsourcing, financial services, consulting and manufacturing industries. As at August 31, 2017, it operated PTS business in 12 cities and over 120 client and operating locations across India. Certain key clients in India for PTS business include Tech Mahindra Limited, AXISCADES Engineering Technologies Limited and ANZ Support Services India Private Limited. Company’s subsidiary, 2X2 Logistics, provides logistics and transportation services to OEMs to carry finished automobiles from the manufacturing locations to stockyards or directly to the distributors through specially designed vehicles. MLL’s other subsidiary, Lords, provides international freight forwarding services for exports and imports, customs brokerage operations, project cargo services and charters.

An “asset-light” business model helps MLL to reduce capital expenditure requirements, mitigate the effects of operational risks relating to direct fuel costs, maintenance costs and depreciation in addition to reducing the effect of any risks emanating from changes in laws and regulations. This also enables it to deploy and utilize capital more efficiently, as reflected in company’s adjusted ROE (excluding Surplus Funds) which was 29.26%, 33.77%, 39.95% and 89.55% in the three month period ended June 30, 2017 and in Fiscals 2017, 2016 and 2015, respectively.

For providing an exit route to P/Es and listing gains, MLL is coming out with a maiden IPO of 19332346 equity shares of Rs. 10 each via book building route with a price band of Rs. 425 – Rs. 429 to mobilize Rs. 821.62 to Rs. 829.36 core (based on lower and upper price bands. This being secondary offers (i.e. Offer for Sale), no money is coming to company and post issue paid-up equity capital remains same at Rs. 71.14 crore. The issue opens for subscription on 31.10.17 and will close on 02.11.17. Minimum application is to be made for 34 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. MLL has reserved 125000 equity shares for eligible employees and is offering a discount of Rs. 42 per share to them. BRLMs to this offer are Kotak Mahindra Capital Co. Ltd., Axis Capital Ltd. and registrar to the issue is Link Intime India Pvt. Ltd. Having issued initial equity at par between Sept. 2007 and March 2011, it raised further equity in the price range of Rs. 13.90 to Rs. 122.29 per share from February 2014 to August 2017. The average cost of acquisition of Equity Shares by Promoter is Rs. 10 per equity share and by Investor Selling Shareholders is Rs. 122.29 per equity share. Issue constitutes 27.17% of post issue paid up equity capital of the company. Mahindra & Mahindra Group Company Mahindra Logistics Ltd.’s IPO will be the first public offering from the USD 19 bn Group after a decade.

On the performance front, MLL has (on a consolidated basis) reported revenue/net profits of Rs. 1939.56 cr. / Rs. 38.52 cr. (FY15), Rs. 2077.13 cr. / Rs. 35.97 cr. (FY16), Rs. 2676.25 cr. / Rs. 46.07 cr. (FY17). For Q1 of current fiscal, it has posted a net profit of Rs. 15.13 crore on total revenue of Rs. 854.46 crore. Thus it has shown a constant surge in top and bottom lines. It has reported average EPS of Rs. 6.18 and average RoNW of 13.07% for last three fiscals on an equity base of Rs. 68 crore. It has no listed peers to compare with. If we annualize latest earnings and attribute on fully diluted post issue equity then asking price is at a P/E of around 29.6 and at P/BV of 4.8 plus. Howeve, since this company is having an asset-light model of operation and has provided onetime expenses for multi years, on restated basis its net profit has been at Rs. 40.17 cr., Rs. 39.93 cr. and Rs. 60.04 cr. for FY 15, FY16 and FY17. For first quarter of current fiscal too its net profit stands at Rs. 17.63 crore. Restated profits results in restated adjusted RoE as shown in 4th Para last two lines here above. If we annualize these and attribute to post issue equity, then asking price is at a P/E of 25.4 plus. From fiscal 15 to fiscal 17 its non-Mahindra group clients grew at a CAGR of 64.45% and adjusted PAT grew at a CAGR of 22.26%.

On BRLM’s front, the two merchant bankers associated with the offer have handled 42 public issues in the past three financial years out of which 11 issues closed below the issue price on listing date.

Conclusion: An investment opportunity in MLL from Mahindra group after a decade with asset-light business model may be considered for medium to long term. (Subscribe).