IPO Snapshot:

Mahindra Logistics has entered the primary market on Tuesday 31^st October 2017 with an offer for sale (OFS) of up to 1.93 crore equity shares of Rs. 10 each, by promoter M&M and PE investor Kedaara Capital, in the price band of Rs.425 to Rs. 429 per share. Representing 27.17% of the post issue paid-up share capital at the upper end, issue will raise Rs. 829 crore and will close on Thursday 2^nd November. Listing is expected on 10^th November.

Company Overview:

Mahindra Logistics, 72.36% subsidiary of tractor maker Mahindra & Mahindra (M&M), offers logistics solutions through 2 business segments - supply chain management and people transport solutions - accounting for 89% and 11% of Rs. 2,667 crore FY17 revenue, respectively. Managing over 10 mn sq ft of warehousing space across India, it follows ‘asset-light’ business model, wherein ownership of fleet / warehouse does not rest with the company. In Q1FY18, 55% of company revenue was generated from Mahindra group companies, which is still very high (down from 63% in FY16), and balance from third parties like Volkswagen, Ashok Leyland, Vodafone, Thermax, JSW Steel, 3M India etc.  

Financials:

Historical financial growth has been healthy with 15% CAGR between FY13-17 on the topline and 17% on the bottomline. However, net margins are very slim, hovering close to 2% vis-à-vis peers operating in high-single digits. Scope for margin improvement is limited, given asset-light nature of business operations. Company’s FY17 consolidated revenue stood at Rs. 2,667 crore, with reported net profit of Rs. 46 crore, leading to net margin of 1.7%. Adjusting for one-time consulting fees, net profit for FY17 stood at Rs. 60 crore, implying net margin of 2.3%.

For Q1FY18, revenue and adjusted net profit were Rs. 852 crore and Rs. 17.6 crore respectively. Reported EPS for June quarter was Rs. 2.14 as against Rs. 6.62 for FY17. As of 31-3-17, consolidated net worth stood at Rs. 363 crore, translating into BVPS of Rs. 53. Company’s aggregate debt is only Rs. 7.5 crore, while cash and equivalents are at Rs. 96 crore, translating into net surplus cash of Rs. 12 per share. RoNW of 13.11% was reported for FY17. 

Shareholding:

Post listing, M&M’s stake in the company will drop to 58.77%, from 72.36%, while PE investor Kedaara’s stake (comprising Normandy and AIF) will decline to 9.40%, from 22.99%. Other shareholders include Mahindra group entity Partners’ Enterprise (2.28%) and employees (2.37%), whose shareholding will remain unchanged, as the IPO is 100% OFS.

Valuation:

At Rs. 429, company’s market cap will be Rs. 3,052 crore, which implies PE multiple of 67x and of 51x based on FY17 reported and adjusted net profit respectively. Company has surplus cash of ~Rs. 100 crore, while other income of Rs. 10 crore is mainly treasury gains, which leads to post tax returns of Rs. 6.5 crore on cash equivalents. This means, of the adjusted FY17 PAT of Rs. 60 crore, 10% earnings accrued from non-operating activities, which can be assigned a PE multiple of not more than 10x, being a non-core actively. Hence, adjusted profits from company’s core business activity is only Rs. 54 crore, which leads to a much higher PE multiple of 56x on FY17 adjusted earnings. On the above lines, PE multiple for current year is 52x, on FY18E earnings, which is very steep, both on absolute and relative basis.

On absolute basis, since logistics is a very competitive space with nil entry barriers, unorganized nature of market, with many sub-segments being highly commoditized. On top of this, company operates on very slim margins.

Below is an extract of financial details of a few logistics companies in India. For simplicity sake, net margins of peers (versus operating margins, to nullify for asset ownership as most peers have ownership) have been tabulated:

^represents quarter ended 30-9-17 for Blue Dart, quarter ended 30-6-17 for others

While the company doesn’t like to compare itself to any logistics player in the Indian listed space, broadly it will be benchmarked with the above, as ultimately they are competing businesses. Players such as Allcargo and Gati are ruling at PE multiples of sub-20x, despite former’s topline being double Mahindra’s. VRL Logistics, with comparable RoNW of 13% for FY17 and market cap of Rs.3,225 crore, operates on owned asset business model, clocks stronger net margins of ~7% and is ruling at PE of 24x. Leading logistics provider TCI with 13% RoNW and 3.5% net margis is quoting at PE of 31x, while TCI Express, operating a pan India door-to-door network (and not just focused on warehousing) is also ruling cheaper at FY18E PE of 45x, despite reporting RoNW of 25% for last fiscal. 75% subsidiary of DHL, Blue Dart Express, is the only peer having a higher PE multiple in relation to Mahindra Logistics. On outstanding equity shares of less than 2.4 crores, Blue Dart has retail float of less than 8%, leading to liquidity premium, coupled with MNC parentage price tag for the stock. Moreover its return ratio and margins are much superior with tremendous improvement seen in Q2FY18 financial performance, which justify its premium valuation. 

On the contrary, Mahindra Logistics faces client concentration risk with Mahindra group still accounting for over 50% of revenue pie, coupled with low margins of business operations, despite higher technological play, in a highly competitive industry. And all this, on a hefty price! Performance of Mahindra group stocks has not been too rewarding either on the bourses, if we were to compare last 1 year returns. BSE Sensex has gained 11% in the last 12 months while Mahindra Lifespaces delivered 4% return, M&M 5% and Tech Mahindra 9%. Only M&MFin, among the larger group companies, gained 18% in the past year. Last IPO from the group, 9 years ago of Mahindra Holidays, has returned an IRR of only 8.2% (bonus adjusted) over this period, as against 12% pa return on BSE Sensex. Thus, if Mahindra group stocks do not carry any baggage, they are neither even among the fancied lot among the investors, in the current day and age.   

Conclusion:

Historic growth and scalability due to asset light business model support the stock. But low margin business, intense competitive pressures, poor show of group companies and high asking price do not leave much for the prospective investors. On lack of compelling proposing, the issue can be given a miss.

Disclosure: No interest.