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Mahindra Logistics

Does an asset-light business with steep valuations make for a good buy? Read our information analysis to find out

Mahindra Logistics

Mahindra LogisticsMahindra Logistics is an integrated logistics solution provider providing transportation, warehousing, storage and people transport services. It was hived off as a separate company from Mahindra and Mahindra Limited (M&M Limited) in 2008. From a simple transporter, it has grown into a full fledged logistics player having two segments - supply chain Management (SCM) and people transport system (PTS). The company functions on an asset-light business model whereby it obtains vehicles on lease from business partners and deploy them wherever demands exist. This model provides it with flexibility and scalability to adjust according to demand without much additional capital infusion.

Pros
Its revenue has grown at a CAGR of 14% over the past 5 years, while net income has grown robustly at 33% CAGR during the same period. The growth in top line can be attributed to its generous credit policy while growth in profits is due to its asset-light model, since additional revenues are generated without incremental costs. This also helps to earn higher return on the capital invested as shown in its ROCE and ROE. Its average ROCE and ROE for past 5 years are 32% and 23% respectively.

Cons
It still depends on Mahindra Group companies for bulk of its revenues. For 2017, they contributed 54% of the total revenues of Mahindra Logistics (70% in 2015). The company is also dependent on auto companies as they contributed 61% to its revenues for 2017 (74% in 2015). The company has a complex working capital management. Its debtors as percentage of revenue has increased consistently from 8% in 2012 to 15% in 2017, indicating credit given to its customers to grow business. The same averages 13% for its peers. The company's cash conversion cycle (difference in days taken to receive cash from customers and days taken to pay suppliers) stands at 36 days, while average for its peers is just 25 days. The company generally pays its business partners in advance or on completion of services, while it collects money from its customers in 45 days, which creates need for working capital.

Mahindra Logistics

Who's selling?
Its an offer for sale (no fresh issue) with 50% of the IPO proceeds going to Mahindra and Mahindra Limited (promoter). Normandy Holdings Limited and Kedaara Capitals are both selling 59% of their stake gathering 48% and 2% of the IPO Proceeds respectively.

Size of the issue
About Rs 829 crores at the higher end of the price band.

Company / Business

  1. Are the company's earnings before tax more than Rs 50 cr in the last twelve months?
    Yes, the company's earnings before tax were 68 Crores in FY 2017.
  2. Will the company be able to scale up its business?
    Yes.The company would grow as a logistics solution provider as more and more companies outsource their logistics operations due to cost effectiveness and efficiency over operations. The successful implementation of government projects like Bharat Mala & logistics park would create growing opportunities for Mahindra Logistics. Post GST,Companies are restructuring and optimizing their supply chain function through the help of integrated logistics player like Mahindra logistics, thus creating long term business relationships.
  3. Does the company have recognizable brand/s, truly valued by its customers?
    Yes. The Company is part of the Mahindra Group which has significant brand value associated with it. It operates under the name of "Mahindra Logistics" and has a royalty free agreement with M&M Limited for the use of "Mahindra" brand.
  4. Does the company have high repeat customer usage?
    Yes. The company develops logistics solution specific to its customers needs. This not only enhances its specialization but also insures that a customer is retained for a longer duration. Its Retention rate for top 25 non-Mahindra clients was 92% for 2017 for SCM Business, indicating the repeat customer usage pattern.
  5. Does the company have a credible moat?
    No. Logistics industry is an unorganised sector with high level of competition. A competitor providing innovative solution with competitive prices would take business away from Mahindra Logistics.
  6. Is the company sufficiently robust to major regulatory or geopolitical risks?
    No. As a logistics player, the company is impacted by regulations (like GST) related to movement of goods. Any significant change in such laws can affects its operations. The business partners of the company can get affected by changes in laws related to emissions and oil price deregulation.
  7. Is the business immune to easy replication by new players?
    No. The company uses its in-house software to aggregate and provide logistics services. Any company with better technology or better customer service can take business away from Mahindra Logistics.
  8. Is the company's product able to withstand being easily substituted or outdated?
    Yes. The company provides logistics services ranging from transportation to warehousing. The need to transport and store goods is unlikely to be easily substituted or go out of date.
  9. Are the customers of the company devoid of significant bargaining power?
    No.The company faces intense competition from private unorganised players as well as integrated multinational companies giving its customers plenty of choice.
  10. Are the suppliers of the company devoid of significant bargaining power?
    No. The company relies on truck owners for completion of its operations. If they find rates provided by Mahindra logistics unattractive, they will deploy their vehicle elsewhere exercising the bargaining power.
  11. Is the level of competition the company faces relatively low?
    No. The logistics industry comprises numerous unorganized private players as well as international companies, all competing among themselves.

    Management

  12. Do any of the founders of the company still hold at least a 5% stake in the company? Or do promoters totally hold more than 25% stake in the company?
    Yes. M&M Limited along with Partners Enterprise (promoters) held 75% of the company as on March 31, 2017. Post issue, their holding would come down to 62%.
  13. Do the top three managers have more than 15 years of combined leadership at the company?
    Yes. The top three managers have more than 15 years of combined leadership.
  14. Is the management trustworthy? Is it transparent in its disclosures, which are consistent with Sebi guidelines?
    Yes, we have no significant reason to believe otherwise.
  15. Is the company free of litigation in court or with the regulator that casts doubts on the intention of the management?
    Yes, we have no significant reason to believe otherwise.
  16. 16. Is the company's accounting policy stable?
    Yes, we have no significant reason to believe otherwise.

  17. Is the company free of promoter pledging of its shares?
    Yes. No promoter holding is pledged.

    Financial
  18. Did the company generate current and five-year average return on equity of more than 15 per cent and return on capital of more than 18 per cent?
    Yes, the company's average five year ROE and ROCE were 23% and 32% respectively. Current ROE and ROCE stand at 14% and 20% respectively.
  19. Was the company's operating cash-flow positive during the previous year and at least four out of the last five years?
    No. The company's operating cash flow were negative in the past two years primarily due to increase in credit sales. It were positive in three out of last five years.
  20. Did the company increase its revenue by 10 per cent CAGR in the last five years?
    Yes. the company's revenue increased at a CAGR of 14% in last five years.
  21. Is the company's net debt-to-equity ratio less than 1 or is its interest coverage ratio more than 2?
    Yes. The net debt-to-equity is (0.06)x as on March 31, 2017 meaning the company has excess cash over and above its borrowings. Interest coverage ratio stands at 20.44x for 2017.
  22. Is the company free from reliance on huge working capital for day to day affairs?
    No. The company pays in advance or at completion of services to its business partners (vehicle owners). However, it collects money from its customers in around 45 days. This mismatch between payment to its vendors and receipt from customers calls for higher working capital requirement.
  23. Can the company run its business without relying on external funding in the next three years?
    No. The company regularly procures funds to run its operations and it would continue doing so in future as well. Company also plans to set up warehouses going forward which will further require it to raise funds.
  24. Have the company's short term borrowings remain stable or declined (not increased by greater than 15%)?
    No, the company is increasingly procuring additional working capital loans. As of March 31, 2017 Mahindra Logistics had working capital loans of Rs 8.2 crores in comparison to Rs 3.5 crores on Mar 31, 2016, an increase of 137%.

    The Stock/Valuation
  25. Does the stock offer operating earnings yield of more than 8% on its enterprise value?
    No.The post-IPO operating earnings yield of the company will stand at about 2.40% at its current price band.
  26. Is the stock's price to earnings less than its peers' median level?
    No. The average PE of its peers is 25, while PE of Mahindra Logistics is around 65 at its current band.
  27. Is the stock's price to book value less than its peers' average level?
    No. The average PB of its peers is 3.4 while PB of Mahindra Logistics is around 8.2 at its current band.