ValuePickr Forum

Mahindra Logistics

Hi All,

Here is a newly listed company from a great corporate house. They are into the logistics space.

Mahindra Logistics Limited is one of India’s largest Third Party Logistics (3PL) solutions provider in the Indian logistics industry which was estimated at 6,40,000 crores in Fiscal 2017, according to a report titled “Report of supply chain and 3PL potential in India, freight forwarding and corporate people transportation services” dated 31 July 2017, prepared by CRISIL Research. The competitive advantage is their “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. Their 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. They operate in two distinct business segments, Supply Chain Management (“SCM”) and People Transport Solutions (“PTS”).

SCM

They offer customized and end-to-end logistics solutions and services including transportation and distribution, warehousing, in-factory logistics and value-added services to clients. They operate through a pan-India network comprising 25 city offices and over 350 client and operating locations. Mahindra Logistics have a large network of over 1,000 business partners providing vehicles, warehouses and other assets and services. They manage over 13.0 million square feet of warehousing space spread across our pan-India network of multi-user warehouses, built-to-suit warehouses, stockyards, network hubs and cross-docks and operate in-factory stores and line-feed at over 35 manufacturing locations. The “asset-light” business model along with solutions design capabilities enables 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. They have sourced or developed customized technology systems to provide innovative and cost-efficient solutions to improve transparency and visibility for their clients.

PTS

Mahindra Logistics provides technology-enabled people transportation solutions and services across India to over 100 domestic and multinational companies operating in the information technology (“IT”), information technology-enabled services (“ITeS”), business process outsourcing, financial services, consulting and manufacturing industries. Services are through a fleet of vehicles provided by a large network of over 500 business partners.

As per CRISIL, Logistics as a percentage of GDP is 13-14%. The Indian logistics industry comprising segments such as road freight, rail freight, coastal freight, warehousing, cold chain and container freight stations and inland container depots (“CFS/ICD”) is estimated at
6,40,000 crores in Fiscal 2017. This is expected to grow at a CAGR of approximately 13.0% to 9,20,000 crores by Fiscal 2020.

Further the report has estimated the 3PL market in India at 32,500-33,500 crores in Fiscal 2017, which is expected to grow at a CAGR of 19-21% to reach ` 57,000-58,000 crores
by Fiscal 2020. It is to be noted that Mahindra Logistics does ~4,000cr in revenues so they are a significant player in the 3PL market.

2 Noteworthy subsidiaries of theirs:

Lords Freight (India) Private Limited,provides international freight forwarding services for exports and imports, customs brokerage operations, project cargo services and charters.

2X2 Logistics Private Limited, 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.

Now one of the highlights is of course that the majority of the company’s revenue comes from the Mahindra group itself. In 16-17 it was ~54% and in 17-18 ~54.5%. And the bulk of the revenues come from the automotive sector in 16-17 it was ~61% & in 17-18 it was ~62%.

It is not a bad thing that bulk of the revenues come from the automotive industry. There is always an opportunity in the auto space whether it is ICE, EV, Bikes, Cars etc:. The company however is looking to diversify its sector dependence.

Their asset-light model provides them with lots of flexibility in the case of a lull in a certain industry/scaling down/scaling up operations. Due the asset-light nature the impact on the company should such a scenario occur can be decreased in my view.

The business however does operate on slim margins.

Mahindra logistics comes across as more of a logistics technology company. An aggregator on the supply side and a tech company on the operations side.

They intend to continue to develop technology systems to increase transparency, improve operating efficiencies, and strengthen the competitive position. IGoing forward, the plan is to focus on the areas set out below:
• Enhancements to transportation management systems
including last mile route and load optimization capabilities
• Digitization of internal processes (e.g. implementation
of an advanced human resources management system,
accounts receivable/payable management systems)
• Implementation of advanced warehouse management
systems (e.g. Oracle Log Fire) at our warehouses
• Implementation of “internet of things (IoT)” projects in
certain operations
• Work with startups to develop a cloud based platform for
handling end to end transport desk outsourcing operations
for the PTS business
• Analytics to improve operating efficiencies
They may develop these technologies themselves or outsource development to third party vendors. They are actively assessing opportunities to work with logistics technology start-ups, either by incubating them, or partnering with them. They will consider acquiring technologies to help achieve their digitization objectives.

Here are a few articles:

VCCircle – 30 Aug 18

Mahindra Logistics picks up stake in transport management startup ShipX

Kedaara Capital-backed third-party logistics (3PL) solution provider Mahindra Logistics Ltd has invested Rs 7 crore (about $1

@businessline

Mahindra Logistics awaits nod to use drones in warehouses

Move to improve accuracy of stock, lower labour cost

Coming to the valuations there are a few questions I would like consider:

  1. Is the business growing fast? can we get 20% cagr for sometime (3-5 years)?
  2. Can the business sustain its high ROCE for a long time (5 years plus) ?
  3. Is the business in an innovator and a leader in its sector?
  4. Can the business scale?
  5. What is the reason for clients to choose them?/ competitive advantage?
  6. Valuations?

A1) By the looks of things the business is growing fast and should be able to continue doing so for the next few years.

A2) It seems like the business can maintain a high ROCE going forward. They have decent working capital and debtor days as per screener data.

A3) It definately does look like it. They seem to be focussed on innovation and applying technology. Further they do have a certain know-how and scale to lead the sector.

A4) Yes. They can scale faster than a traditional logistics player can. They can also do so more cost effectively.

A5) The space and the business is not at all an easy business to operate. Let alone doing so cost effectively, all while operating on a slim margin. Doing it at scale is not something that just anybody can do. Further being asset light and aggregating hundreds of suppliers is a challenge for a new entrant. Many providers will be rather comfortable working with the Mahindra group as opposed to another 3PL player or even approaching a client directly as they may only fullfill a small portion of the clients logistics requirements. Such clients will also prefer to deal with a single experienced vendor for an end-end service. This leads to some stickiness as well. Further Mahindra Logistics offers customised solutions which could be a mix of various forms of logistics services/supply chain solutions that may involve multiple partners and co-ordinating the same. It is much easier for a corporation to outsource end-to-end work to one reputed company. It saves them operational costs and inefficiencies as well.

A6) Two ways to look at it

  1. The business can grow fast and scale quickly. The industry is growing fast as well. You are getting a leader in a fast growing industry with the potential to scale & a high quality corporate house backing it. The company generates a high ROCE as well. The 40x multiple seems expensive but the growth is there.
  2. You are getting a high quality Mahindra group company that is growing at 3500cr market cap.

I would love to have the views of our members on the same.

Financial data can be found here: https://www.screener.in/company/MAHLOG/consolidated/

Sources: Screener & Company AR.

Disclosure: Thinking about taking a small tracking position.

7 Likes

High growth potential with excellent balance sheet. But at this present price of Rs.488 it seems costly. Intrinsic value as per future cash flow is less than Rs.120. May be market is paying extra price for it’s assest light business model and future earning potential. Valuation wise Allcargo is quoting attractive right now. I have started a tiny position on ALL CARGO and Mahindra Logistics is in my watch list.

Hi Sir,

If we use a DCF with future cash flows almost all good business will be at least 50% if not more than 50% overvalued.

If you assume ITC grows FCF at 12% for the next 10 years and apply a fairly generous discount rate of 10% ITC would be worth around 50% of its current market cap as per that. The same with nestle but assuming a 15% FCF growth for a decade and applying a generous 10% discount rate Nestle would again be 50% overvalued. Begin to increase the discounting rate to 12% that is usually the fair discounting rate for most equity investments you will begin to see that these companies are more than 50% overvalued. I dont think DCF is the right way to value a company in the world that we live in today. There are other valuation models to arrive at a more informed valuation range. There are some great investors on the forum to give a better explanation on this sir :slight_smile:

I do agree that it is expensive however!

Sir,
Any idea why the OPMs are below 5%?

The business operates on thin margins Sir. They are 3PL providers (third party logistic providers) and as a result operate on a thinner margin. There could be some scope for margin expansion closer to 5.5-6% as Tiger logistics a similar company (much smaller) is managing to show that much as per screener data lets see…

Expensive because it’s good and Mahindra tag

Hi,
Asset light model means vehicles are provided by the partners.
Need to check Financials during higher crude prices.
Also, a comparison with VRL logistics can be worthwhile (at least to understand dynamics of partners of Mahindra logistics).
Majority of the revenue coming from Mahindra can be a good thing. It is like Bajaj Finance providing loans for two wheelers manufactured by Bajaj Auto.
Personally, I felt lot of tech related stuff in literature about the company. Good story though.
Would wait and see how much it falls in a bad market.

1 Like

Hi Yogeshji,

My views on your points.

Higher crude prices will have an impact to whatever extent across the industry. Who bears this impact is the question. Whether the 3PL provider takes it, the logistics partner or is it passed on to the customer? My view is that the person with highest bargaining power in this scenario would be the 3PL provider. As for complex logistics solutions, a company may not want to risk switching the provider and they cannot deal with multiple providers as that will increase their risk in a complex process as well increase their operational expenses to look after the part service providers. Coming to the service proivders/partners, they cannot approach the client directly as they may only fullfill one aspect of the supply chain. And in the case where there is a complex process they will not have the operational excellence to become a 3PL player even partly. So this leaves some leverage with the 3PL player to pass on costs on both ends. The logistics partner can indeed have some leverage over the 3PL player as well. Since if they to take care of a large portion of the 3PL players supply chain they can look to pass on the hike. But at the same time they wouldnt want to lose the 3PL player due to volume of business. Crude I think should not be an issue. They can temporary spikes but in the long run crude will fall and it will be used lesser and lesser in logistics so to speak.

When it comes to this sort of a model, everything is on operational efficiency. It is a tough business and operates on a slim margin. Optmising operations through automation not only decreases human error but also decreases overall costs. So an efficient 3PL player will have a big edge due to operational innovation. There are too many moving parts in a normal logistics solution itself. Imagine a complex one with multiple aspects of the supply chain.

In my view their value as a problem solver in the industry is derived from operational excellence that is not easy in their industry. Further they come from a strong corporate house meaning that they pretty much have access to the top resources available in all aspects of business.

Yes the price is something I would agree with you on! at 23x ev/ebitda it may not be on the reasonable side. I think buying such companies at a reasonable price is what we can hope for. Getting them at a bargain would most likely mean that the entire market is in turmoil in which case better opportunities might actually be available haha!

2 Likes

Oil prices are pass through and this is a standard agreement in the sector. This was discussed multiple times in concalls, you can go through the transcripts available in company website.

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Poor Results from the company.
In the attached presentation the company states that the slowdown in the Auto sector has had an impact. Another perhaps bigger aspect to the hit in numbers is due to the decrease/loss of business from a large bulk customer.

However, growth from ecommerce, pharma & consumer stayed strong.

This highlights the risks of the business very well.

  1. Dependance on Auto Sector
  2. Client Concentration.

The good news is that the company is taking active steps to solve the above two issues. Mahindra group dependence is a good thing and a bad thing so nothing to say about that.

As time goes the other verticals will grow and the Sectorial dependence shall also decrease going forward.

Overall the 3PL industry is growing fast and Mahindra Logisitcs is among the leaders in this space with TVS Logistics (unlisted). (GST, unorg to org, infra status etc: are well known tailwinds).

Let us see how the company does over this slowdown. Perhaps it will show us a base for earnings.

https://www.mahindralogistics.com/investor/financial-information
(can navigate to the presentation)

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According to a media release, Mahindra Logistics will be handling the regional distribution centre measuring one lakh square feet at Dankuni in West Bengal and the first leg of distribution from this facility. The services will be backed up by technologies for transport and warehouse management.

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On Logistics industry.

Not a good quarter… revenue down 8.6 % YoY, PAT down 40.9% YoY (some impact from deferred tax).

PTS holding on to levels, its SCM business thats degrown. I guess this is largely expected at one level due to the Auto sector slowdown. Need to see if Non-Auto revenue is trending up or not.

Disc : Invested.

Future supply chain solutions posted comparatively good growth. With Nippon express picking stake - will it do better in future? I hold Mahindra logistics due to high quality… but Logistics is based on cost - can Mahindra make big?

Mahindra logistics showed meaningful growth in warehousing, VAS (value added services)and non auto revenue. Along with some growth in non mahindra revenue.

It has been hit by the auto slowdown. Since it does cater to related logistics and most importantly derives alot of its revenues from mahindra itself.

Mahindra logistics is a business that was built on the parent and now as the company has reached a certain level it has been able to expand itself beyond the parent’s business as a much larger logistics player. Leveraging the parent and the name as well will help it grow and stay stable while growing. Not many companies of its size have this assured revenue stream due to a gigantic parent company.

The other businesses have shown growth and these will slowly derisk the business from the auto industry and further decrease its reliance on the parent’s business (which anyway is not such a bad thing). Another aspect that needs dersiking is its client concentration and over time this too can be done. The business is a scalable platform but today, it is not immune to the auto industry and big clients that form fair chunks of the revenue.

They lost a big client and that impacted last quarters numbers. I’m sure it has had an effect on this quarter’s numbers too. The company should recover as it expands and auto risk should also slowly decrease.

I feel like these risks are not priced in today, however one can make the argument that this business can scale and capture the fast growing 3PL and logistics market in India. The company is expensive if it grows slowly in my view so to speak… (which at the moment it is as it seems to be getting hit by the auto space)

I think we need to keep an eye on how the other businesses are growing (apart from auto & and to an extent the parent’s). Further we need to constantly see the ability of the company to keep costs low by leveraging newer logistics technologies and processes (this they seem to be doing this so far at least).

They have all the ingredients in place to scale and capture the market better than most of their competitors. Let us not forget the 3PL market itself is growing at some 20% cagr. The market should be be worth close to 60,000cr soon and mahindra currently does ~4000cr in top line. The only other meaningful competitor I think is TVS Logistics (they are a private company please verify) There is ample opportunity for them to become much bigger than they are today.

3 Likes

https://www.dsij.in/productattachment/BrokerRecommendation/BUY_Mahindra_Logistics_EDEL_6.11.2019.pdf

The report matches with your assessment too…

1 Like

Latest update

Growth focus intact: New CEO Rampraveen emphasized

(a) focus to diversify customer base across sectors like FMCG, E-com, Pharma and bulk, reducing dependence on auto sector,

(b) asset light model to help in customized logistics solutions and
© focus on warehousing (driven by capacity addition; 1.1 mn sq ft in H1) and distribution logistics (sticky business) augurs well
for gradual margin expansion (click here).

 Focus remains on scaling up non-M&M SCM revenue led by consumer, FMCG, e-com and pharma, given the huge scope for organized players; Auto SCM growth to be in sync with industry revival – greater focus on ancillaries.

 M&M auto revenue (52% in H1) to see some recovery in H2 as (a) BS-VI volume movement to pick up from Q4FY20 and (b) non-farm
segment to see volume addition (healthy Rabi season).

 Operating margin to improve gradually on (a) favorable business mix – higher growth in non-auto vs. auto and warehousing/ distribution logistics vs. transportation and (b) operating leverage benefits, as revenue contribution from new clients picks up.

 People Transport Solutions’ (PTS) performance has been subdued given (a) delays in client ramp-up and (b) initial costs for new client additions. Management expects client ramp-up in next few months, aiding recovery in revenue and margin (back-ended).

 Capex to remain at Rs 0.4-0.5 bn in FY20 (H1 capex stood at Rs 0.3 bn – largely for handling equipment/ interiors for earehousing space additions) to increase on warehouse capacity addition.

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Earnings call highlights

 Auto production and distribution logistics may see some uptick in Q4FY20
led by channel filling for new BS-VI inventory and expected pre-buying.
However, OEMs are facing supply chain issues for BS-VI models which poses
a risk.
 The slowdown in the PV segment appears to have bottomed out with retail
sales picking up. CV demand, however, is likely to remain tepid. Tractor
demand should improve, but management does not expect high growth in the
segment in the near-to-medium term. For MLL, PV is the largest segment,
followed by farm equipment and CV.
 During the quarter, the decline in revenue from anchor client Mahindra &
Mahindra (MM; –18% YoY) was steeper than MM’s own volume decline
(–6.5% domestic sales). This was due to (1) a fall in inbound logistics as MM
reduced purchases to lower BS-IV inventory, and (2) a drop in lead distance
for outbound transportation, with rail gaining share in long-distance deliveries.
 MLL added several clients during the quarter – two tier-I automotive
component manufacturers with multi-product portfolios, large apparel
brands, and a leading pharma company. It has set up a temperature-controlled
warehouse in North India for the latter.
 Focus verticals within the non-Mahindra, non-auto SCM segment – pharma,
consumer and e-commerce – continued to grow at a fast clip (+25% YoY).
Wallet share gain in existing client accounts contributed to ~50% of this
incremental revenue, while new clients accounted for the rest.
 Leading FMCG players are gradually consolidating their supply chain network,
as per management. The company believes it is well placed to take advantage
of this trend.
 MLL remains a critical service provider to its non-anchor clients. It is one of
the top two service providers for its 20 largest client accounts.
 PTS revenues declined as two large customers scaled down their operations.
The company has added some new customers and expects to bounce back to
growth from Q1FY21 onwards.
 The freight forwarding business (Lords subsidiary) has witnessed healthy
growth as MLL was successful in cross-selling its 3PL and freight forwarding
offerings to some clients.
 Management is targeting the addition of 1.5-2mn sq ft of warehousing space
per year going forward.

2 Likes

We have seen a decline in top-line.

Below are the broad details (all nos are 9m comparison)

  • The two broad verticals, SCM & PTS. PTS is broadly flat and margins have decreased by around 150 bps.

  • SCM: this vertical has seen a fall in revenues from around 2500cr to 2300cr 9m ended at consolidated level but margins have improved by around 150 bps.

The break up of SCM (2300cr)

  • Out of this 2300cr, Mahindra revenue is fallen from around 1500cr to 1300cr and Non-Mahindra revenue is up from around 1000cr to 1040cr (marginal increase)

  • Out of this 2300cr, around 1900cr came from transportation revenue, this was down from around 2200cr

  • Out of this 2300cr Warehousing and VAS revenue was around 450cr up significantly from around 380cr

  • Out of this 2300cr around 1500cr came from auto revenue against around 1800cr last year.

  • Out of this 2300cr around 820cr came from Non auto revenue this was up from around 750cr

Based on the above data below are my inferences

The fall in top line can be clearly attributed to a slowdown in auto revenue alone. Since it forms a large part of the business.

This has been contained with rapid growth in the Warehousing & VAS vertical. Warehousing space under mgmt. has also grown fast from 10m sqft in 2017 to around 16.5m sqft YTD.

It seems like Warehousing & VAS along with Non-Auto revenue have been growing well. As this gains we should see lesser dependence on Auto revenues.

Auto slowdown has clearly impacted the numbers and this show turn as the auto cycle revives.

It is not a bad thing that company deals heavily in the auto sector. It is just a risk as all industries are cyclical and some such as auto are more so than others.

It will be interesting to see how Warehousing & VAS grow along with their non-auto business.

I think the two main things to focus on would be Warehousing & VAS growth along with non-auto growth. I do not see the parent as an anchor client being a big risk. But that would also be a metric to track, the % of other clients vs M&M.

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