Viewpoint

Mahindra Logistics Limited

Challenging business outlook for the medium term

Mahindra Logistics Limited (MLL) continued to be affected by a slowdown

Sector: Logistics in the auto industry during Q3FY2020. The consolidated net revenues
Result Update declined 7.5% y-o-y led by 18% y-o-y decline in Mahindra group SCM
revenue (47% of net revenues). Non-Mahindra SCM revenue grew by 8%
Change y-o-y driven by consumer, pharma & e-commerce (up 25% y-o-y). PTS
revenue declined 9% y-o-y affected by contraction in business from two
View: Neutral  of its large south based clients. OPM (adjusted for IND-AS 116) shrunk by
51 bps due to rise in overheads, higher technology spends and digitisation
CMP: Rs. 400
along with overall drop in net revenue. Weak operational show and rise in
Upside potential: 3-5% á depreciation and interest costs dragged down net earnings. Going ahead,
the management expects a gradual recovery in the automotive segment.
á Upgrade  No change â Downgrade The 3PL industry has slowed down as auto remains the major part of all
3PL players both domestic and overseas. The focus of the management
would be on increasing share of its non-M&M business in both auto &
Company details non-auto sub-segments. Considering the weak outlook over the near term
and expecting gradual recovery thereby, we have trimmed our earnings
Market cap: Rs. 2,862 cr estimates for FY2020-FY2021. We also introduce FY2022E earnings in this
note. The stock is currently trading at a P/E of 27.1x its FY2022E earnings,
52-week high/low: Rs. 575/325 which provides an unfavorable risk-reward to investors considering the
medium term challenges. Hence, we have retained our Neutral view on the
NSE volume: (No of stock with 3-5% upside potential.
0.5 lakh
shares)
Key positives
BSE code: 540768 ŠŠ Consumer, e-commerce and pharma verticals maintained healthy growth
trend of 25% y-o-y..
NSE code: MAHLOG
ŠŠ Gross margins (Pre IND-AS 116) improved by 48 bps y-o-y led by higher
contribution from warehousing.
Sharekhan code: MAHLOG
Key negatives
Free float: (No of ŠŠ Steep 17.9% y-o-y decline in Mahindra group SCM revenue.
3.0 cr
shares)
ŠŠ OPM (pre-IND AS 116) shrunk by 51 bps y-o-y led by increased overheads
and revenue shrinkage
Shareholding (%) Our Call
Valuation - Retain Neutral rating: The stock has underperformed since early
Promoters 58.5 FY2020 on account of a deepening slowdown in the auto industry. We build
in a gradual recovery in automotive segment while 3PL industry witnesses
FII 17.2 growth slowdown owing to a major contribution coming from the automotive
sector. The loss of bulk client in non-Mahindra SCM business and contraction
DII 11.6 in business from two major clients in PTS is expected to dent net earnings
growth for FY2020. Considering the weak outlook over the near term and
Others 12.7 expecting gradual recovery thereby, we have trimmed our earnings estimates
for FY2020-21. We have also introduced FY2022E earnings in this note.
The stock is currently trading at a P/E of 27.1x its FY2022E earnings, which
provides an unfavourable risk-reward to investors considering medium term
Price chart challenges. Hence, we have retained our Neutral view on the stock with 3-5%
600 upside potential.
540
480 Key Risks
420 Revival in auto industry outlook is a key upside risk to our call.
360
300 Valuation (Consolidated) Rs cr
Particulars FY19 FY20E FY21E FY22E
Feb-19

Feb-20
Jun-19

Oct-19

Revenue 3,851.3 3,677.1 3,933.4 4,406.3

OPM (%) 3.9 4.7 5.0 5.1
Adjusted PAT 85.9 68.7 85.5 105.5
Price performance
% YoY growth 34.2 (20.1) 24.5 23.5
(%) 1m 3m 6m 12m Adjusted EPS (Rs.) 12.0 9.6 12.0 14.8
P/E (x) 33.3 41.7 33.5 27.1
Absolute -5.2 6.8 2.0 -16.7 P/B (x) 5.0 4.5 4.0 3.4
EV/EBITDA (x) 18.3 16.0 14.2 12.2
Relative to
-1.5 7.6 -5.3 -24.7 RoNW (%) 18.7 12.9 14.0 15.0
Sensex
RoCE (%) 18.1 14.3 15.2 16.0
Sharekhan Research, Bloomberg
Source: Company Data; Sharekhan estimates

February 05, 2020 35

 Viewpoint
Weak auto industry, OPM pressure (Pre IND AS 116) continue to dent net earnings: Consolidated net
revenue declined 7.5% y-o-y to Rs. 908 crore on account of 7.3% y-o-y decline in Supply Chain Management
(SCM) revenue and 8.9% y-o-y decline in People Transport Solutions (PTS). The SCM revenue of Mahindra
group declined by 17.9% y-o-y on account of continued weakness in the automobile sector during the quarter.
The revenue from non-Mahindra group SCM grew by 7.7% y-o-y led by sustained growth in consumer, pharma
and e-commerce verticals. PTS revenue was affected as two large clients saw a contraction in business.
Due to the application of IND-AS 116 pertaining to lease accounting, lease expenses are now moved from
direct costs and are bifurcated between amortization and finance costs. Hence, reported OPM expanded by
101 bps y-o-y to 4.7% leading to 18.2% y-o-y growth in operating profit to Rs. 42.4 crore. However, adjusting
for the same, OPM contracted by 51 bps y-o-y to 3.1% (adjusted operating profit dropped by 20% y-o-y). The
lower adjusted OPM is attributed to an increase in overheads (including ESOP charges), higher expenditure
in technology and digitization along with overall shrinkage in net revenues. Weak operational performance
percolated to net profits, which declined by 19% y-o-y to Rs. 15.5 crore (partly offset due to lower ETR).

Focus on increasing capacity, non-auto business, freight forwarding: MLL added 1.2msf square feet of
warehousing capacity during 9MFY2020 (versus 1.3msf in FY2019) taking its total warehouse space under
management to 16.5 msf. It incurred a capex of Rs. 45 crore during 9MFY2020. Apart from increasing
warehousing capacities, it will also be liooking to grow its non-auto business (FMCG, consumer electronics,
pharma, e-commerce, etc). The high-margin freight forwarding business (which grew 16-17% y-o-y) would also
be accelerated by increasing import volumes, higher air & sea transportation and by integration with the
existing SCM business.
Key result highlights from earnings call
ŠŠ Key Focus areas: The management reiterated its three core focus areas going ahead are 1) an increase in
non-auto non-M&M business in both auto and non-auto sub-segments 2) Continue to follow its asset light
model through business partners and 3) Investment in technological upgradation
ŠŠ Auto segment recovery: The record decline in auto sector across all segments had affected its revenue.
The passenger vehicle segment in auto witnessed some optimism from BS-V pre-buying and BS-VI pre-
sales although on-ground headwinds are still present. Commercial Vehicles continue to face challenges.
ŠŠ Non-auto segment performance: The consumer industry witnessed some slow down but consolidation in
supply chain continued. During Q3FY20, consumer business and e-commerce verticals saw a 25% y-o-y
growth. However, the non-M&M SCM business was affected by auto slowdown and loss of large customer
in bulk segment at the start of the fiscal year.
ŠŠ New warehouse in North: The company opened 2200 pellets capacity warehouse in Northern region
which would be catering to Pharma sector. The warehouse is for one of the large pharma companies for
local distribution which will give higher margins on integrated level.
ŠŠ Business addition: During the quarter, the company added two large auto component manufacturers
based in Southern region, two clients in retail sector and increased the share from existing Pharma clients.
ŠŠ Top 20 customers: The top 20 customers provide 63% of its revenues where MLL is at number one or
two. None of the top 20 customer clients have moved out but volume have declined due to slowdown in
business. Its top 20 clients saw addition of 3-4 new logos from consumer space.
ŠŠ 3PL Industry: The 3PL industry growth rate has slowed down although express industry continued to do
well. Auto being a large part of all 3PL players both domestically and internationally has affected the
industry alike. The warehousing segment continued to see good growth.
ŠŠ Capex: The company incurred Rs. 45 crores capex for 9MFY2020 and has added 1.4msf warehousing
space. It targets to add 1.5 to 2msf warehousing capacity each year.

February 05, 2020 36

 Viewpoint
Financials (Consolidated) Rs cr
Particulars Q3FY2020 Q3FY2019 y-o-y% Q2FY2020 q-o-q%
Net sales 907.9 981.1 -7.5% 852.4 6.5%
other income 2.0 1.6 29.7% 1.9 8.6%
Total income 909.9 982.7 -7.4% 854.3 6.5%
Total expenses* 867.5 945.2 -8.2% 814.6 6.5%
Operating profit* 42.4 35.9 18.2% 37.8 12.3%
Depreciation* 18.8 5.7 229.6% 17.7 6.3%
Interest* 4.3 0.9 390.8% 4.2 2.9%
Exceptional items
Profit Before Tax 21.3 30.9 -30.9% 17.8 20.1%
Taxes 5.7 11.5 -50.8% 6.5 -12.4%
Minority Interest 15.7 19.3 -19.0% 11.3 38.7%
PAT 0.1 0.2 -33.3% 0.1 20.0%
Adjusted PAT 15.5 19.2 -18.8% 11.2 38.8%
EPS (Rs.) 2.2 2.7 -18.8% 1.6 38.8%
OPM (%)* 4.7% 3.7% 101 bps 4.4% 24 bps
NPM (%) 1.7% 2.0% -24 bps 1.3% 40 bps
Tax rate (%) 26.6% 37.4% -1078 bps 36.4% -984 bps
Source: Company Data, Sharekhan Research * As reported, unadjusted for IND AS 116

February 05, 2020 37

 Viewpoint
Outlook
Medium-term challenges to persist: Although the automobile industry is expected to improve sequentially,
the same is still expected to post lower growth y-o-y over the next couple of quarters. Further, sectors like
consumer, pharma and e-commerce are expected to fare well, but would not materially contribute to overall
revenue, leading to a minimal positive effect on MLL’s overall revenue growth. The management would focus
on non-Mahindra and non-auto verticals and will be reaching out to new bulk customers to strive through a
challenging period for the auto sector. Measures such as new customer additions and warehousing capacity
addition is expected to start contributing gradually, while increased overheads and contraction in revenue is
expected to put pressure on OPM in the medium term.
Valuation
Valuation - Retain Neutral rating: The stock has underperformed since early FY2020 on account of a
deepening slowdown in the auto industry. We build in a gradual recovery in automotive segment while 3PL
industry witnesses growth slowdown owing to major contribution coming from the automotive sector. The
loss of bulk client in non-Mahindra SCM business and contraction in business from two major clients in PTS
is expected to dent net earnings growth for FY2020. Considering the weak outlook over the near term and
expecting gradual recovery thereby, we have trimmed our earnings estimates for FY2020-FY2021. We also
introduce FY2022E earnings in this note. The stock is currently trading at a P/E of 27.1x its FY2022E earnings,
which provides an unfavourable risk-reward to investors considering the medium term challenges. Hence, we
have retained our Neutral view on the stock with 3-5% upside potential.

One year forward P/E (x) band

60
55
50
45
40
35
30
25
20
Feb-18

Sep-18

Feb-19

Sep-19

Feb-20
Nov-17

Nov-18

Nov-19
Jun-18

Jun-19
May-18

May-19
Dec-17

Dec-18

Dec-19
Mar-18

Mar-19
Oct-18

Oct-19
Aug-18

Aug-19
Apr-18

Apr-19
Jan-18

Jan-19

Jan-20
Jul-18

Jul-19

1yr fwd P/E Peak 1yr fwd P/E Trough 1yr fwd P/E Avg 1yr fwd P/E

Source: Sharekhan Research

Peer Comparison
P/E (x) EV/EBITDA (x) P/BV (x) RoE (%)
Companies
FY20E FY21E FY20E FY21E FY20E FY21E FY20E FY21E
Mahindra Logistics 41.7 33.5 16.0 14.2 4.5 4.0 12.9 14.0
TCI Express* 34.5 30.5 25.1 22.0 9.4 7.6 31.5 28.2
Gateway Distriparks 28.1 23.3 8.0 6.9 1.1 1.1 3.8 4.6
Container Corporation of India #* 32.5 28.0 20.1 17.6 3.4 3.2 10.9 11.7
Blue Dart # 79.5 43.6 21.0 17.1 11.5 10.1 11.9 19.5
Source: Sharekhan Research, *Standalone Estimates, # Bloomberg Estimates

February 05, 2020 38

 Viewpoint
About company
Mahindra Logistics Ltd (MLL) is a portfolio company of Mahindra Partners, the $1 billion private equity division
of the $19-billion Mahindra Group. MLL is an integrated third-party logistics (3PL) service provider, specialising
in supply chain management and people transport solutions. Founded more than a decade ago, MLL serves
over 300 corporate customers across various industries like automobiles, engineering, consumer goods
and e-commerce. The company pursues an asset-light business model under which assets necessary for its
operations such as vehicles and warehouses are owned or provided by a large network of business partners
on lease rentals, while MLL largely invests in logistics technology. The company provides customised and
technology-enabled solutions that span across the supply chain and people transport operations.

Investment theme
India’s logistics sector is expected to remain under pressure in the medium term as the automotive sector is
the largest user and contributor to its revenue. The other verticals like consumer, pharma and e-commerce are
expected to fare well but do not contribute materially to positively drive overall logistics sector. However, third-
party logistics is expected to benefit structurally from favourable policies implemented by the government
such as GST, e-way bill and infrastructure status over the long run. However, medium-term headwinds, leads
us to a Neutral view on the company.

Key Risks
ŠŠ Slowdown in automotive industry can affect financials due to its high dependency.
ŠŠ Changes in supply chain strategy of Mahindra group can negatively affect its financials due to its high
dependency.
ŠŠ The industry is highly competitive and fragmented with low entry barriers.

Additional Data
Key management personnel
Zhooben Bhiwandiwala Chairman, Non-Executive Director
Rampraveen Swaminathan Chief Executive Officer
Yogesh Patel Chief Financial Officer
Brijbala Batwal Company Secretary & Compliance Officer
Source: Company Website

Top 10 shareholders
Sr. No. Holder Name Holding (%)
1 Mahindra & Mahindra Ltd 58.49
2 Reliance Capital Trustee Co Ltd 4.89
3 First State Investments ICVC 3.58
4 Goldman Sachs Group Inc/The 2.85
5 DSP Investment Managers Pvt Ltd 2.37
6 Invesco Asset Management India Pvt 1.51
7 BHANSHALI AKASH 1.38
8 MOTILAL OSWAL FOC EMERG FD 1.26
9 Commonwealth Bank of Australia 0.90
10 Frostrow Capital LLP 0.86
Source: Bloomberg

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

February 05, 2020 39

 Know more about our products and services

For Private Circulation only

Disclaimer: This document has been prepared by Sharekhan Ltd. (SHAREKHAN) and is intended for use only by the person or entity
to which it is addressed to. This Document may contain confidential and/or privileged material and is not for any type of circulation
and any review, retransmission, or any other use is strictly prohibited. This Document is subject to changes without prior notice.
This document does not constitute an offer to sell or solicitation for the purchase or sale of any financial instrument or as an official
confirmation of any transaction. Though disseminated to all customers who are due to receive the same, not all customers may
receive this report at the same time. SHAREKHAN will not treat recipients as customers by virtue of their receiving this report.
The information contained herein is obtained from publicly available data or other sources believed to be reliable and SHAREKHAN
has not independently verified the accuracy and completeness of the said data and hence it should not be relied upon as such. While
we would endeavour to update the information herein on reasonable basis, SHAREKHAN, its subsidiaries and associated companies,
their directors and employees (“SHAREKHAN and affiliates”) are under no obligation to update or keep the information current. Also,
there may be regulatory, compliance, or other reasons that may prevent SHAREKHAN and affiliates from doing so. This document is
prepared for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. Recipients
of this report should also be aware that past performance is not necessarily a guide to future performance and value of investments
can go down as well. The user assumes the entire risk of any use made of this information. Each recipient of this document should
make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies
referred to in this document (including the merits and risks involved), and should consult its own advisors to determine the merits and
risks of such an investment. The investment discussed or views expressed may not be suitable for all investors. We do not undertake to
advise you as to any change of our views. Affiliates of Sharekhan may have issued other reports that are inconsistent with and reach
different conclusions from the information presented in this report.
This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any
locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation
or which would subject SHAREKHAN and affiliates to any registration or licensing requirement within such jurisdiction. The securities
described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession
this document may come are required to inform themselves of and to observe such restriction.
The analyst certifies that the analyst has not dealt or traded directly or indirectly in securities of the company and that all of the
views expressed in this document accurately reflect his or her personal views about the subject company or companies and its or
their securities and do not necessarily reflect those of SHAREKHAN. The analyst further certifies that neither he or its associates
or his relatives has any direct or indirect financial interest nor have actual or beneficial ownership of 1% or more in the securities of
the company at the end of the month immediately preceding the date of publication of the research report nor have any material
conflict of interest nor has served as officer, director or employee or engaged in market making activity of the company. Further, the
analyst has also not been a part of the team which has managed or co-managed the public offerings of the company and no part
of the analyst’s compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this
document. Sharekhan Limited or its associates or analysts have not received any compensation for investment banking, merchant
banking, brokerage services or any compensation or other benefits from the subject company or from third party in the past twelve
months in connection with the research report.
Either SHAREKHAN or its affiliates or its directors or employees / representatives / clients or their relatives may have position(s), make
market, act as principal or engage in transactions of purchase or sell of securities, from time to time or may be materially interested
in any of the securities or related securities referred to in this report and they may have used the information set forth herein before
publication. SHAREKHAN may from time to time solicit from, or perform investment banking, or other services for, any company
mentioned herein. Without limiting any of the foregoing, in no event shall SHAREKHAN, any of its affiliates or any third party involved
in, or related to, computing or compiling the information have any liability for any damages of any kind.

Compliance Officer: Mr. Joby John Meledan; Tel: 022-61150000; email id: compliance@sharekhan.com;
For any queries or grievances kindly email igc@sharekhan.com or contact: myaccount@sharekhan.com

Registered Office: Sharekhan Limited, 10th Floor, Beta Building, Lodha iThink Techno Campus, Off. JVLR, Opp. Kanjurmarg
Railway Station, Kanjurmarg (East), Mumbai – 400042, Maharashtra. Tel: 022 - 61150000. Sharekhan Ltd.: SEBI Regn. Nos.: BSE
/ NSE / MSEI (CASH / F&O / CD) / MCX - Commodity: INZ000171337; DP: NSDL/CDSL-IN-DP-365-2018; PMS: INP000005786;
Mutual Fund: ARN 20669; Research Analyst: INH000006183;

Disclaimer: Client should read the Risk Disclosure Document issued by SEBI & relevant exchanges and the T&C on www.sharekhan.com;
Investment in securities market are subject to market risks, read all the related documents carefully before investing.