Mahindra Logistics Ltd Price band

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1 IPO Review Rating matrix Rating : Subscribe (Apply) Issue Details Issue Opens 31-Oct-17 Issue Closes 2-Nov-17 Issue Size ( Crore) crore Price Band ( ) No of Shares on Offer (cr) 1.93 QIB (%) 50 Non-Institutional (%) 15 Retail (%) 35 Employee reservation shares 34 shares and in Minimum lot size multiples of thereof Composition & Objects of issue ( crore) Number of shares offered Mahindra & Mahindra Limited 9,666,173 Normandy 9,271,180 Kedaara AIF 394,993 Total 19,332,346 The offer comprises an offer for sale of 1.93 crore equity shares (~ /share). The offer is entirely through an offer for sale and the Company will not receive Shareholding Pattern Pre-Issue Post-Issue Promoter & promoter group 74.6% 61.1% Public & Others 25.4% 39.0% Valuation Summary (at 429 ;upper price band) FY14 FY15 FY16 FY17 P/E Adjusted P/E* EV/EBITDA P/B ROCE ROE Adjusted RoE* Research Analyst Bharat Chhoda bharat.chhoda@icicisecurities.com Ankit Panchmatia ankit.panchmatia@icicisecurities.com Thriving on 3PL requirements October 30, 2017 Mahindra Logistics Ltd Price band Promoted by Mahindra & Mahindra, Mahindra Logistics (MLL), incorporated in 2007, undertook the business of providing logistics solutions, warehousing, freight forwarding and supply chain services. Since then, MLL has now established itself as one of India s largest (in terms of revenue) third-party logistics (3PL) solutions provider. A pan- India network of 24 offices and warehousing capacity of 10 million sq ft enables MLL to provide customised integrated supply chain and people transport solutions to companies across multiple industries. Mahindra group companies, being the anchor client contributes 56% of the total revenues. MLL operates across two business segments namely supply chain management SCM and People transport solutions PTS. SCM s business provides logistics solution across automotive, engineering, consumer, bulk, e-commerce, and pharma sector. PTS business derives contractual revenues from large companies by catering to their daily employee transportation (i.e. pick-up and drop-off) requirements. MLL revenue, EBITDA and adjusted PAT in FY13-17 grew at a CAGR of 15%, 28% and 25%, respectively. For Q1FY18 revenues, EBITDA and adjusted PAT were at crore, 30.4 crore and 17.6 crore, respectively. Key business aspects Asset-light strategy Key to flexibility MLL operates on an asset-light business model pursuant to which it outsources a portion of operations to independent contractors for specific services. Subsequently, majority of the assets (vehicle & warehouse) are provided by a large network of business partners and not owned by MLL. This strategy offers considerable benefits of improved scalability and flexibility of offerings to suit varied sectors and customers. At the same time, asset-light strategy reduces MLL capital expenditure requirements thereby generating higher return ratios. Integrated solutions Preferred 3PL player MLL operates as one-stop shop solutions provider for a variety of logistical requirement of its clients. MLL offers a variety of services across transportation, distribution, warehousing, in-factory logistics, out-bound logistics, international freight forwarding, people transportation and other value added services. Moreover, MLL also undertakes last-mile distribution service, transportation services for large appliances and management of e-fulfilment centres for e-commerce players. These capabilities have led MLL to serve a wider spectrum of clientele across various industry verticals. Concerns Significant dependence on automotive industry (61% of total revenues) Promoter group contributing significant portion (54% of total revenues) Client concentration i.e. 71% of the revenues from top-20 clients Increased receivables ( 412 crore in FY17 vs. 199 crore in FY15) Priced at 51x (on higher band) on adjusted PAT, recommend SUBSCRIBE At the IPO price band of , the stock is available at a valuation of 51x P/E multiple (@ higher price band) of an adjusted FY17 EPS of 8.4. Post listing, MLL would be the second largest listed player in the surface logistics space. The macro theme around GST benefiting the logistics players would progress well with MLL revenues and margin profile. Given the benefits to be accrued over phases, investors with longer gestation period should SUBSCRIBE to the issue.

2 Company Background Mahindra Logistics (MLL), which earlier used to majorly provide logistics solutions, warehousing, freight forwarding and supply chain services to promoter Mahindra & Mahindra (M&M) was separately incorporated on August 24, Subsequently, the entire logistics business and operations of M&M were transferred MLL. Exhibit 1: Key awards & achievements MLL provides customised integrated third party supply chain and people transport solutions to companies across multiple industries. The company claims to be one of India s largest (based on annual revenues) third party logistics (3PL) solutions providers in the Indian logistics market. It operates in two distinct business segments: Supply Chain Management (SCM) As part of SCM business, MLL offers customised and end-to-end logistics solutions and services to their clients. The key tasks include consulting with and design supply chain solutions for their clients that ranges from transportation, warehousing, in-factory logistics, international freight forwarding and certain value added services. SCM business is executed through a pan-india network comprising 24 city offices and over 350 client and operating locations. Exhibit 2: Integrated end to end service offerings to customer Exhibit 3: Revenue/Margin trend of SCM business crore % % % FY15 FY16 FY17 Q1FY18 SCM business EBITDA 6.0% 6.8% 6.6% 6.4% 6.2% 6.0% 5.8% 5.6% 5.4% 5.2% 5.0% Key services in SCM: MLL transportation services are primarily categorized as: In-bound solutions - Transportation of goods, raw materials or semifinished inventory to a client s factory, manufacturing or processing facility; Outbound solutions - Transportation and distribution of finished products originating from a client s facility; Primary and secondary distribution - Movement of finished products from the factory to stocking locations; Secondary distribution - Movement of goods from stocking locations to the market; and Network based distribution - Managing a dedicated business-tobusiness surface distribution network. Key clients for the SCM business include major automotive players like Volkswagen, Ashok Leyland, Bosch, BMW, Mercedes-Benz and other industry players like Vodafone, Thermax, JSW Steel, Siemens, 3M India, etc. Page 2

3 People Transport Solutions (PTS) Exhibit 4: Revenue/Margin trend of PTS business crore % % % 10.0% 86.2 FY15 FY16 FY17 Q1FY18 SCM business EBITDA 10.2% 10.0% 9.8% 9.6% 9.4% 9.2% 9.0% 8.8% 8.6% 8.4% As a part of PTS, MLL offers people transportation solutions and services across India. PTS serves over 100 domestic and multinational companies operating across business verticals like information technology, business process outsourcing (BPOs), financial services, consulting and manufacturing industries. PTS offer services through a fleet of vehicles provided by a large network of over 500 business partners. PTS covers 12 cities and a clientele of over 120 clients and operating locations in certain major cities in India, including Delhi, Gurugram and Noida in the NCR, Jaipur, Patna, Lucknow, Kanpur, Ahmedabad, Mumbai, Pune, Goa, Kolkata, Hyderabad, Bengaluru, Chennai, Kochi, Trivandrum and Coimbatore. Certain key clients in India for PTS business include Tech Mahindra Limited, Axiscades Engineering Technologies and ANZ Support Services India Pvt Ltd. Key subsidiaries: 2*2 Logistics Pvt Ltd: The subsidiary 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. These vehicles include dedicated car carriers, two-wheeler carriers, commercial vehicle carriers and flatbed trailers. Lords Freight (India) Pvt Ltd: Lords specialises in international freight forwarding and has offices in nine cities in India. Lords service offerings include air freight and sea freight forwarding operations for exports and imports, customs brokerage operations, project cargo services, and charters. Exhibit 5: Details of subsidiaries Name of the Subsidiary Lords Freight (India) Private Limited 2*2 Logistics Private Limited Mahindra Logistics - Key Subsidiaries Principal Activity Freight Forwarding via sea and air Transportation services FY17 % stake Revenues FY17 Profit/(Loss) FY Page 3

4 Key financials: Story in charts Exhibit 6: Revenues increase at CAGR of 15% in FY13-17 Exhibit 7: Revenue bifurcation segment-wise crore People transport solutions, 11% FY13 FY14 FY15 FY16 FY17 Q1FY18 Supply Chain Management, 89% Exhibit 8: Revenue bifurcation service wise crore FY15 FY16 FY17 Q1FY18 Transportation Warehousing & other related activities People Logistics Other business Exhibit 9: Promoter share in revenues at 55% in Q1FY18 % of revenue 100% 90% 30% 80% 37% 46% 45% 70% 60% 50% 40% 70% 30% 63% 54% 55% 20% 10% 0% FY15 FY16 FY17 Q1FY18 Mahindra Group Non-Mahindra Group Exhibit 10: EBITDA growth of 28% in FY13-17 Exhibit 11: Return ratio trend crore FY13 FY14 FY15 FY16 FY17 Q1FY % Return ratios FY13 FY14 FY15 FY16 FY EBITDA EBITDA Margins (%) RoCE RoE Page 4

5 Investment Rationale Asset light business model - Flexibility and scalability For its SCM business, MLL adopts an asset-light business strategy. The company utilises a large network of business partners, which provides vehicles, warehouses and the other assets and services. MLL s transportation network include intra-city and inter-city transportation and dedicated daily vehicles movement between certain key metro cities across network hubs at 15 locations serving postal codes. Exhibit 12: Operating unique hub & spoke model Es SLL manages over 10 million square feet network of multi-user warehouses, built-to-suit warehouses, stockyards, network hubs and cross-docks on a pan India basis. As on August 31, 2017, it operated infactory stores and line-feed at over 35 manufacturing locations. Exhibit 13: Infrastructure capabilities Asset light strategy along with solutions design capabilities enables MLL to serve over 200 domestic and multinational companies operating in several industry verticals in India, including automobile, engineering, consumer goods, pharmaceuticals, e-commerce and bulk. Page 5

6 Exhibit 14: Technology workforce forms 3% of overall workforce Number of Function % of total employees Key management personnel 9 0.2% Control tower, solutions design academy and Others % Sales and marketing % Human resources and administration % Finance, accounts, commercial, tax % Technology % Operations % Total % Technology embedded on asset-light strategy MLL s technology enabled, asset-light business model allows faster scalability of services as well as the flexibility to develop and offers customised logistics solutions across a diverse set of industries. Over the decade, MLL has developed a dedicated technology enabled business-tobusiness express delivery network with a track and trace and proactive notification abilities. In addition to the sourced technology, MLL has also developed its customised technology systems in order to provide innovative and cost-efficient solutions and improve transparency and visibility for its clients. All hubs, offices and operating locations are connected to its control tower that facilitates real time monitoring of its operations and consignment deliveries. Exhibit 15: Key differentiator - Technology and control tower Activities of control tower: End to end truck track and trace: Time management Minimise idle time Maximise truck utilisation Dispatch planning: Optimise truck planning Capacity and cost optimisation Value added services: SMS & service updates Source: Company presentation, ICICIdirect.com Research GST A major driver for future growth According to a research report, the Indian logistics industry is highly fragmented with people (truckers) who own less than five trucks that constitutes 80% of the population of trucks. The GST regime is expected to bring in tectonic changes in the manner Indian logistics industry operates. Seamless inter-state movement of goods is expected to overhaul and compress the entire transportation set-up. Businesses across several industries in India are expected to make their storage and transportation decisions based on logistical efficiencies instead of their tax efficiency, which is likely to result in significant business opportunities for large, integrated logistics solutions providers who could gain larger volumes and nationwide contracts from clients. Faster movement of goods and efficiencies achieved due to pan India reach by organised logistics partners would lead to lower freight costs and timely delivery of goods. As the logistical inefficiencies and primary transport costs decline, the hub-and-spoke model is expected to proliferate. At the same time, unorganised operators would be unable to provide the required services. This may result in consolidation of the Indian logistics industry. We believe that MLL being one of the largest player in the Indian logistics market would benefit from this consolidation wave. Page 6

7 Key risks and concerns Business concentration risk The parentage of Mahindra & Mahindra (M&M) has allowed MLL to develop expertise around automobile and engineering industry verticals. Subsequently several original equipment manufacturers (OEMs) in the automotive industry (OEMs) has become MLL s clients. Approximately 60.8% of MLL s revenues are contributed from the automotive industry. Following the high industry exposure, MLL is also exposed to client concentration risk. For FY17, MLL s top 20 non-mahindra Group clients contributes 70.6% ( 860 crore) of total revenues derived from non- Mahindra Group clients ( 1228 crore). Any change in any MLL clients supply chain strategies or a reduction in their outsourcing of logistics operations may significantly affect the future revenues of the company. Apart from clientele/sectoral risk, 54% of the overall MLL s revenues is contributed by promoter (M&M), its subsidiaries, joint ventures and other consolidated entities. M&M has been an anchor client for MLL, however the same strategy if not continued would materially affect the potential revenues and profitability. Increased competition from start-ups; gush with funds... Data from research firm Tracxn reveals that H1CY17 funding from private equity funds in 3PL e-commerce logistics was at $147.6 million as compared to $124.4 million in H1CY16. In addition to the same, pure-play truck operators like Rivigo, black buck, etc. are also aggressively approaching the sector opportunity. According to VCCEdge, Rivigo has raised ~$122 million, till date, is creating a flotilla of services (truck, IT infrastructure) to be offered to its clients. Logistics as an industry with many segments highly commoditised and low barriers to entry or exit, operates on a high degree of fragmentation. Increased competition and helicopter money in the industry could potentially lead to a reduction in MLL market share resulting lower revenues, reduced profit margins. Stringent labour laws and unionisation of employees As on FY17, MLL directly employees ~4700 people. The unskilled and semi-skilled employees are currently represented by a recognised collective bargaining agreement. Subsequently, MLL employees could attempt to unionise in the future seeking higher wages and enhanced employee benefits. In addition to the same MLL, being an asset-light business works with independent contractors for specific services. Applicable labor laws in India regulate engagement of such labour and MLL would be held responsible in the event of any default by the independent contractor in making payment of wages or providing benefits such as payment of, or contribution to, provident fund. Time bound and termination provisions of the contracts MLL undertakes contracts agreement with majority of its clients. Typically, the tenure ranges from one to three years. However, most of the contracts could be terminated with or without cause, by giving short notice. The termination would be without compensation following which MLL earning could be adversely affected. Moreover, increase in fuel costs and warehousing rental expense, if they are unable to pass it on, could impact the future profitability of the company. Page 7

8 [ Financial summary Profit and loss statement Crore (Year-end March) FY13 FY14 FY15 FY16 FY17 Revenue 1, , , , ,666.6 Growth (%) Freight Inward & Transport charges 1, , , , ,094.0 Employee Cost Other Operaitng Expense Total Expenditure 1, , , , ,569.8 EBITDA Growth (%) Depreciation EBIT Interest Other Income Exceptional Items (Consulting fees) PBT Tax Reported PAT Growth (%) Adjusted PAT Cash flow statement Crore (Year-end March) FY13 FY14 FY15 FY16 FY17 Profit Before Tax Add: Depreciation Cash Profit Other changes Increase/(Decrease) in CL (Increase)/Decrease in CA CF from Operating Activities Purchase of Fixed Assets Others CF from Investing Activities Inc/(Dec) in Loan Funds Proceeds from issue of shares Others CF from financing activities Net cash/cashflow Cl. Cash and cash Eq Balance sheet Crore (Year-end March) FY13 FY14 FY15 FY16 FY17 Source of Funds Equity Capital Reserves & Surplus Shareholder's Fund Minority Interest Long Term Borrowing Long Term Provisions Other non current liabilities Deferred Tax Liabilities Current Liabilities Short Term Borrowing Trade Payables Other current liabilities Short term provisions Source of Funds Application of Funds Net Block (Incl Intangibles) Capital WIP Total Fixed Assets Goodwill Non-current investments Long Term loans & advances Other non-current assets Deferred Tax Assets Current Assets Inventories Trade Recievables Cash & Bank Balances Current Investments Short Term Loans & Advances Other Current Assets Application of Funds Key ratios (Year-end March) FY13 FY14 FY15 FY16 FY17 Per share data ( ) Book Value Cash per share EPS Cash EPS Profitability & Operating Ratios EBITDA Margin (%) PAT Margin (%) Inventory Turnover (Days) Debtor (Days) Creditor (Days) Return Ratios (%) RoE RoCE Valuation Ratios 429 PE Price to Book Value EV/EBITDA EV/Sales Leverage & Solvency Ratios Debt to equity (x) Interest Coverage (x) Debt to EBITDA (x) Current Ratio Source: Page 8

9 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Subscribe: Apply for the IPO Avoid: Do not apply for the IPO Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai research@icicidirect.com Page 9

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