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Mahindra Logistics
Asset light model
CM RATING47/100
Incorporated in 2008, part of Mahindra Group (Mahindra & Mahindra), Mahindra Logistics (ML) is an end-to-end logistics solution and service provider. The logistics solution of the company includes transportation and distribution; warehousing, in-factory logistics and value added customised services to its clients. ML is one of India's largest Third-Party Logistics (3PL) Solutions Providers in the Indian Logistics Industry which was estimated at Rs.6.40 trillion in Fiscal 2017, according to the CRISIL Report.

Pursuant to a business transfer agreement on September 11, 2008 between the M&M group and the company, the entire Logistics Business was transferred to ML. Subsequently, the logistics business has since then been undertaken by ML and its subsidiaries.

ML 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, ML 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 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 India Private Limited, 3M India Limited, and Mercedes-Benz India Private Limited.

ML provides PTS 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.

The experience that ML gained in working with the Mahindra Group clients operating across different industry verticals has enabled them to understand the requirements and preferences of their non-Mahindra Group clients. It has also helped them design, operate, scale up and improve the quality of their service to their other clients. Over the years, Mahindra Logistics has capitalized on their expertise and experience and has expanded their operations to add non-Mahindra Group clients. This has contributed in reducing their dependence on business from the Mahindra Group clients. The revenue that ML derived from non-Mahindra Group clients stood at around 46% of total revenues and that from Mahindra group stands at 54% of total revenues for FY 2017

The 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.

The company's other subsidiary, Lords, provides international freight forwarding services for exports and imports, customs brokerage operations, project cargo services and charters.

The Offer and the Objects

The offer comprises of offer for sale of 193.32 lakh shares by selling shareholders, which at lower price band of Rs 425 per share, works out to Rs 821.61 crore and at higher price band of Rs 429, the issue size works out to Rs 829.34 crore.

The selling shareholders comprises of the promoter M&M (96.66 lakh shares) and institutional investors such as Normandy Holdings (92.71 lakh shares) and Kedaara Capital Alternative investment fund ( (3.95 lakh shares).

The minimum bid lot is 34 equity shares and in multiples of 34 equity shares. The issue is made through the book-building process and will open on 31st October and will close on 2nd November, with anchor investor bidding date of 30th October 2017.

The objects of the issue is to achieve the benefits of listing the equity shares on the BSE and the NSE and to enhance its visibility and brand image and provide liquidity to its existing shareholders.

Strengths

The Mahindra brand and support from the Mahindra Group.

ML operates on an 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. This allows for scalability of services as well as the flexibility to develop and offer customized logistics solutions across a diverse set of industries.

An asset-light business model also helps ML 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.

Services are customized, technology-driven and integrated. End-to-end logistics services and solutions are under one roof. A diverse service portfolio and customised logistics solutions allows the company to meet the needs of their existing and potential clients across multiple industry verticals.

Company's multi-user warehouses are designed and built to cater to the needs of multiple users from different industry verticals. This allows the company to offer the benefit of scalability and flexibility depending on volumes.

The company operates on a variable cost model with a fixed minimum price for their services, which provides them with the flexibility of scaling up or down operations based on demand.

The revenue that ML derived from non-Mahindra Group clients has increased to 46.04% of the total revenue from operations in FY 2017 from 29.86% in FY 2015, representing a 112.93% growth in this period and thus has reduced the dependency on the Mahindra Group.

Over the years, ML has expanded their relationship by providing services in new geographies, and by adding services such as in-factory logistics. Between FY 2017 and FY 2015, the client retention rate for the top 25 non-Mahindra Group clients in the SCM business remained at 92%.

One of the key business strategies is to diversify company's presence across industry verticals such as e-commerce, consumer goods, engineering and pharmaceuticals. According to the CRISIL report, the size of the 3PL market in India for the e-commerce, consumer goods, engineering and pharmaceuticals industries are expected to grow at rates of approximately 30-32%, 24-26%, 20-22% and 8-10%, respectively, between FY 2017 and FY 2020.

The GST regime is expected to significantly change the Indian logistics industry and the manner in which it is conducted, as the focus will shift towards logistical efficiencies rather than tax efficiencies. This augurs well for the company.

Weaknesses

There is significant dependency on the automotive sector. Around 63.3%, 60.8% and 67.9% of the total revenues of the company for the June 2017 quarter, FY 2017 and FY 2016, respectively, came from the automotive sector. Apart from general economic conditions, any technology driven disruption may change the way the automotive industry operates and could adversely affect ML.

 The company operates in a highly fragmented and competitive industry and is highly commoditized with low entry barrier.  

The company's contract with its business partners or clients, typically are for one-three years. It may not be able to pass on any short term increase in charges or expenses.

 Valuation 

In FY 2017, net sales were up 29% to Rs 2666.59 crore. The OPM stood at 2.9% and increased by 40 bps, resulting in OP growth of 46% to Rs 76.25 crore. Other income stood at Rs 9.67 crore, down by 27%. Interest cost was up 165% to Rs 3.49 crore, while depreciation was up by 77% to Rs 14.61 crore. Thus, the PBT growth was restricted to 21% to Rs 67.82 crore. After providing total tax of Rs 21.75 crore up by 9% and MI of Rs 0.50 crore, consolidated PAT for March 2017 stood at Rs 45.59 crore, up by 25%.

 For the June 17 quarter, net sales stood at Rs 852.47 crore with the OPM of 3.1%, resulting in an OP of Rs 26.54 crore. Other income stood at Rs 1.99 crore. Interest cost was at Rs 0.89 crore and depreciation stood at Rs 4.17 crore. After providing for total tax of Rs 8.34 crore and MI of Rs 0.3 crore, consolidated PAT for the June 2017 quarter stood at Rs 14.82 crore.

 Due to seasonality of business, the June 2017 quarter results are not annualised.

 The diluted equity share capital of the company stands at Rs 71.14 crore of face value of Rs 10. EPS for FY 2017 works out at Rs 6.4. At the higher price band of Rs 429, The P/E on FY 2017 diluted EPS works out to 66.9. There is no comparable listed player.

Mahindra Logistics : Issue highlights

Offer for sale (in Rs crore)
- On lower price band829.34
- On upper price band821.61
Total Issue size for offer for sale ( in no of shares in lakh)193.32
Price band (Rs)425-429
Minimum Bid Lot ( in number of shares)34
Post issue share capital (Rs crore) 71.14
Post-issue Promoter & Group shareholding (%)61.1%
Issue open date31-10-2017
Issue closed date02-11-2017
ListingBSE, NSE
Rating 47/100

 Mahindra Logistics: Consolidated Financials

1503(12)1603(12)1703(12)1706(03)
Revenue from operations1930.902063.932666.59852.47
OPM (%)3.0%2.5%2.9%3.1%
OP56.9752.3476.2526.54
Other in. 8.6613.199.671.99
PBDIT65.6365.5385.9228.53
Interest0.371.323.490.89
PBDT65.2764.2182.4327.64
Dep.6.048.2614.614.17
PBT 59.2355.9567.8223.47
EO 0.000.000.000.00
PBT after EO59.2355.9567.8223.47
Tax (including Deferred Tax)20.7119.9821.758.34
PAT38.5235.9746.0715.13
MI-0.7-0.60.50.3
PAT after MI39.2636.5545.5914.82
EPS5.55.16.4#
*EPS is on post issue equity capital of Rs 71.14 crore of face value of Rs 10 each
# EPS not annualised due to seasonality of business
EO: Extraordinary items, EPS is calculated after excluding EO and relevant tax
All the above financials and result are as per New Ind AS
Figures in crore
Source: Capitaline Database

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 Rating Reckoner
Rating range Risk-return profile Recommendation
51 or above Low risk, moderate to High return Must subscribe
45-50 Low risk low return or Moderate risk, moderate/high return May subscribe
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