VRL Logistics - value unlocking due to promoter actions

Stock Opportunities
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VRL Logistics promoters recently announced foray in regional aviation business in their personal capacity, which the shareholders haven’t taken positively.

As per company disclosure to the exchange, the Company has claimed that:

  • The Company is not contemplating entry in aviation space
  • Promoters are promoting a new company in individual capacity (current promoter holding 69.57%)
  • This only expression of intent and the promoters continue to hold majority share

Despite these assurances, the shares of the Company have tanked 30% and traded at CMP 275.

Let’s look at VRL logistics business and numbers:
VRL is essentially into transportation, with 18.44% being passenger transportation and 78.7% being goods. Within goods transport, 68.45% of the turnover comes from parcel delivery and the rest through industrial transport.

The Company has pan India presence with 733 branches and 291 agencies. Total owned vehicles number at 4253 out of which 381 are buses. Also important to note, 69% & 65% vehicles are debt free and 35% and 63% are less than 5 years old in goods and passenger transport segment respectively.

Coming over to financials:
FY 2016 was a lull year after some good performance since 2011. The Company launched IPO in April 2015 at listing price of 203.

Key ratios:
Market cap: 2870 cr
5 year sales growth: 18.63%
ROCE: 17% (Mar '16)
EPS: 11.96 (Mar '16)

Cash flow position:
Cash generating company raising 200cr+ from operations, most of which is used in repayment of loan and dividend payment over the last 2 years.

More details can be found in investor presentation here.

There is no doubt about the quality of business but due to promoter comments, the stock is available at a PE of 23 against industry PE of 32 and stock’s own PE of 33 before the fall. Considering the positive scenario for logistics industry and factoring in the special situation, the stock can offer significant gains from CMP.

Pros:

  • Company has a strong market presence and sales growth. Sales have doubled while OPM margins have remained in the range of 14-18%.
  • Debt has been decreasing during the same period. Current interest coverage at 8.9x.
  • GST can be a boost to logistic business and open more routes for development
  • Other than promoter, Dr. Vijay Sankeshwar and his son, the current COO and CTO have been with the Company with a very long time, with the COO being associated since 1984 (inception). Most other operational heads from 1994-95.
  • If the aviation business takes off (pun intended!), it will be a huge boost for VRL and will open up new routes for cargo transport

Risks:

  • Biggest risk remains of a Kingfisher like situation where VRL is used to guarantee aviation loans. All this is assuming the promoter does go ahead with the aviation company. Even so, the situation will take atleast 2-4 years to arise.
  • Promoter dilution will be there but how much? The promoter holding was 77.21 as on March 15 and is 69.57% as on March 16.
    The promoters in BSE filing have claimed that they will start with 1400 cr of investment, out of which 400 cr will come from equity and 1000 cr from debt.
    Even if we assume that the promoters will fund the entire 400 cr themselves through their stake in VRL and that they will sell enough stake at current CMP, it works about to ~17%. The promoters will end up with 52% stake.
  • Q4 FY16 and FY16 full year has seen lower sales and profits.

Views invited.

Disc. - Not invested, tracking

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I am invested from ipo.And from the way the promoter said to news channel about not caring about shareholders it look like its better to dump the stock.

But after reading some articles from here and there like this http://alphaideas.in/2016/05/25/defence-vrl-chairman/
I feel like its better for the dust to settle.
Its just one of the ideas going around.

Also hearing from some boarders that like DHL and Blue dart the aviation foray can not be that bad bet.

But still i guess one needs to wait for some more numbers to come in coming quarter.

As told by CFO in news channel that within next 6 months no dilution will happen hence its better to wait to dump it up.

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Business owned by a politician… not comfortable investing hard earned money.

Disc :- Not invested

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The way I see is, the promoters have built the business from the ground up. The promoters are highly efficient and cost conscious. So they will do the due diligence before venturing.
Looks like the promoter still need to figure out how to address the media and answer to some provocative questions. I do not think he meant literally that he doesn’t care for share holders. It was more of his way of expressing that he has all the rights as promoter to exercise his business ambitions.
He clearly said he wants to hold majority stake and would dilute only partially to fund his next venture which is very logical in any sense for the promoters to do. VRL has been built over last 30 years and being from Bangalore, I have seen how the company has wethered the storms over the years to become the best in the industry. We cannot simply paint everyone in same picture as Vijay Mallya…

Disc: Invested. Took a small position for tracking purpose.

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When a promoter, that too on a national television says “I’m not bothered about shareholders”… it should be a big NO for the retail investors. Also when a politician runs a company… it becomes cyclical linked to the political fortunes of the party he/she belongs too.

Disc: Not invested.

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Two things I would like to mention here:

  1. The comments on the promoter in the interview were media managed and marketed. I’d take that with a pinch of salt and rather consider the Company’s and the promoter’s BSE filings to be more reliable. In any case, the promoter wants to invest into aviation in his own capacity by floating a completely new Company. He even promised that VRL won’t be guaranteeing loans. How does that impact VRL’s fundamentals?

  2. Regarding political activities of the promoter, VRL was founded in 1984 while the first political foray of Mr. Sankeshwar was in 1993 which ended in 2000. Besides, how does political connection in Karnataka alone impact nation wide business performance? BJP has not been in power in Karnataka since 2013 and yet the business has grown. I think we’re applying generic hatred for Indian politicians in this case.

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Promoter Interview with CNBC:

When asked about resistance from other shareholders over the plan, Sankeshwar said:

“Whether my shareholders are liking or not liking, I am not bothered. I am very clear about that”

Read more at: http://www.moneycontrol.com/news/business/vrl-boss-unfazed-by-shareholder-fury-says-will-pursue-aviation-passion_6731501.html?utm_source=ref_article

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If you’re quoting the interview, let’s quote the entire text ad verbatim

Ekta: Your shareholders
are concerned, you have a listed equity stock that you are dealing with
as well and the markets are not liking this.

A: I am holding 69 percent, I will be holding majority stake. I may
reduce over a period of 4 years to the extent of 10 percent.

Anuj: Rs 300-400 crore would be somewhere around 10 percent of your
stake. I know you will be still holding majority stake but the markets
fear is genuine that why do you need to dilute stake in a listed company
to fund your passion. It is understood that you have a passion for
aviation but why use the other vehicle?

A: All entrepreneurs and promoters have lot of passions. Other big
promoters are doing hundreds of business, why I should not do one or two
businesses?

Ekta: Would you take your plan back in terms of equity dilution or
aviation, if in case your shareholders don’t like it, which they clearly
don’t? Would you go back on your plans?

A: Either my shareholders are liking or don’t liking I am not bothered.
See I have a passion, I have to do lot of things and lot of business. It
is nothing to be the somebody’s business to ask.

I’m not saying the promoter was real polite and maybe he should have sugar-coated his words or atleast “managed” his interview better. Look at the progression of questions and answers. The same question was asked thrice and twice he answered in a tone which would have been acceptable to the stakeholders. When pressed on, he said something that’s brute honest and blunt.

As a shareholder, my worry should be that the promoters aren’t bothered about the business. But that’s not the case.

Q1 he confirmed he has no plans to divest his majority stake
Q2 he confirmed its an industry norm for a promoter to explore new ventures
Q3 he confirmed that its his will to chase a passion in personal capacity and why should he need shareholders’ approval for that? He has already confirmed that he will protect shareholder interest in VRL.

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promoter is reasonably well-versed in the English language. he also knows
how the media operates. For many years he owned a newspaper called Vijay
Karnataka with an English sister paper called Vijay Times. Need to take his
disclaimers with a pinch of salt.

no holdings in VRL

  • sk
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The fact is VRL is in road transport in passenger as well as freight. As an expansion for freight, air freight is very much aligned with the business and passenger airlines is also not totally out of context considering they are successful passenger transport segment. The promoters know about the transportation and it is very much in context. The promoter should have stuck to saying as a business,with current low oil prices we would like to explore the opportunities of entering air freight and air passenger business. I think the market would have taken this in a much better aspect. Too much of stressing on passion, personal ambition doesn’t go well in current conditions.
Still, I think, the promoters are genuine and they have better acumen. He has sensed, in last 10 years, Indigo returned more money that what VRL business has returned in 25 years.Future is about airlines be it for passenger or freight.

Disc: Holding a small tracking position.

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The promoters in BSE filing have claimed that they will start with 1400 cr of investment, out of which 400 cr will come from equity and 1000 cr from debt.
Even if we assume that the promoters will fund the entire 400 cr themselves through their stake in VRL and that they will sell enough stake at current CMP, it works about to ~17%. The promoters will end up with 52% stake.

From his reaction in his interview it seems he is very convinced about his future move. If this and the funding plan is true. It would mean say 17% dilution for 400cr. equity. But if they indeed go in for 1000cr debt, could it also mean some 42.5% (may be more) being pledged at some point of time? It seems likely he is willing to put his entire equity in VRL at stake to pursue his passion and doing other businesses (like other promoters doing hundreds of businesses).

Doesn’t inspire much confidence to be honest. Better avoided in my opinion.

Disc: No holdings.

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If promoters bring 400cr equity, then they need not pledge complete VRL stake for the remaining 1000cr. He can always raise debt based on the assets of the new company and there will be others who will be willing to invest.

Also, no businessman in right mind would want to sell their stake after stock corrects by 35%. He has to stabilize the VRL if he wants any money from this company. His plan is, over the next 3~4 years raise 400cr from VRL which isn’t much if VRL continues to grow at 15%~18% CAGR. CFO’s have to educate the promoters in these aspects when to sell stakes.

But yes, it has to be watched like how far these promoters go and kill their golden goose to pursue passion

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A good read by Business Standard on this debate A promoter’s rule

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First part isn’t correct. Even at CMP 250, promoter will have to dilute a max of 10% even if we assume he has no money on person and get the entire 400 cr from VRL stock sale.

Second part is an assumption and remains a key risk although the promoter has declared that he will not use VRL as a guarantor in airline debt. Yet it remains a risk for stakeholders.

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This could potentially be a smart play of words by the promoter. VRL as a company will not guarantee debt. His words would remain true, however he can still pledge his personal stake. He is already edgy when anyone questions him on his promoter holding. It obviously is not in his best interest for his intentions to be known, but of course he cannot outright lie also.

Unfortunately there is no sure way to figure out if this key risk may materialize. However if it does, it would already be too late to exit as we have seen in case of companies like Tree house.

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People from North Karnataka are basically are rough in their language and Sankeshwars story
is Rags to Riches story… don’t forget their past successful ventures like Kannada Daily(Vijaya Karnataka(not listed) which was sold to Times group… some times misappropriate words use
might hurt investors in big way but untold success story of Sankeshwars is always appreciated in business arena… sorry to say if any one of you have invested in VRL just by looking into Blue Channels and not doing Due diligence i think you will have to be cautious on all the news running the Business news paper and Blue Channel…

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Promoter actions are supposed to unlock value ! But this one is unlocking value in ways that are unique !
While one can try and defend the promoters with reasons of their lack of language skills, the following points are true

  1. there is intent to enter into Aviation
  2. there is intent to sell stake in VRL
  3. They HAVE sold off a newspaper which I presume was as dear to their heart as VRL is today and as much as VAL ( Vijayanand Aviation Lines!) will be in future. They could sell of VRL tomorrow too.
  4. VRL could possibly guarantee debt of VAL; none of their statements have precluded this possibility.

Stepping out of the Botheration episode, let look at their business. Ashish has already covered the business numbers quite well in the very first post, which includes good return rations, good growth, until recently, etc, all favorable at first analysis.

The one point I wish to add is the linearity of Vehicles versus Revenues, i.e. more vehicles, more revenues. Their advantages of hub-and-spoke model are already factored in by the Return numbers, so any further improvements will have to come from something else.

The chart below plots the ratio of Revenues/Vehicle, starting from 2011. Revenues seem to be flattening out at 0.4Crores/vehicle/year. This does not take into account the higher cost of vehicle YOY. It is possible that revenues could be increasing to keep pace with cost price, but trend seems to be flattening out. Hence it may enter into a model of more-vehicles-more revenues. The spike in 2015 needs deeper analysis. I have not taken any split between passenger, LCV, or HCV - just final vehicle number. Its upto management to buy vehicles that increase returns.

Disc: Tracking seriously till Botheraton, now amusedly.

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Spike in 2015 could be because of window dressing. Generally close to IPOs companies are involved in such malpractices. Quite difficult for VRL to make a comeback now. Only hope is GsT

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Problem situation will arise when promoter pledge the shares n these shares will be sold in the market

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Srikanth, that’s a key risk but not a certainty. Besides we are just assuming that the promoter will fail in his new venture, the same promoter who has successfully built 3 business in 2 different verticals.