Verdict: Trailing well

IPO Snapshot:

Ritco Logistics is entering the SME primary market on Monday 28^th January 2019 to raise Rs. 48 crore via fresh issue of 50 lakh equity shares and offer for sale (OFS) of 16 lakh shares (total 66 lakh shares) in the price band of Rs. 71 to Rs. 73 per share. Representing 27% of the post issue paid-up share, issue closes on Wednesday 30^th January and listing is likely on 7^th February.

Company Background:

Ritco Logistics is a Delhi based integrated logistics company with a fleet of 350+ owned vehicles (mostly <3 year old vehicles), 9 warehouses (1.5 lakh sq.ft space), ~1,200+ hired vehicles (through third-party logistics or 3PL) covering 300+ destinations in India. It provides contract logistics, less-than truck load (LTL) and warehousing services and counts corporates such as RIL, ONGC, BHEL, Apollo Tyres, HUL, Berger Paints, Exide Industries among its clients.

Sizeable own fleet added in FY18

Since FY18, company became aggressive in adopting the asset-heavy model and added 125 new truck (medium-to-heavy) to gain better control over costs and timely execution of services. This vastly contributed to EBITDA margin improving from 4.4% in FY17 to 8.4% in FY18.

Objects of Issue and shareholding

Fresh issue proceeds of Rs. 37 crore will mainly be used for funding working capital needs of the company to the tune of Rs. 25 crore, while Rs. 4 crore will be allocated for warehouse development. Rs. 3.5 crore will be used for technology and fleet center upgradation, with balance meeting general corporate needs. 

2 promoters hold 100% in the company. Post Rs. 12 crore OFS, their shareholding will decline to 73%. 

Financials

India’s GDP growth, aided by growth in manufacturing, retail and e-commerce, supported the growth in logistics sector. This helped company report 8% revenue CAGR and 29% EBITDA CAGR during FY14-18. Due to low base, net profit posted 60% CAGR during this four year period, to Rs. 10.3 crore. FY18 revenue and EBITDA stood at Rs.343 crore and Rs. 29 crore respectively, with EBITDA margin surging to 8.4% as explained above. Other operating efficiencies (freight discount and adoption to digital) improved EBITDA margin further to 11.9% in H1FY19, when Rs 25 crore EBITDA was garnered on Rs. 208 crore revenue. PAT for H1FY19 was reported at Rs. 6.2 crore leading to EPS of Rs. 3.19, on equity of Rs. 19.47 crore. FY18 net margins improved to 3% from FY17’s 1.2%, although it remained stagnant at 3% in H1FY19 on account of higher interest outgo and depreciation on owned fleet. FY18 RoE of 21% as jumped to 23% (H1FY19 annualised).   

As of 30-9-18, networth stood at Rs. 54 crore (BVPS Rs. 28) while net debt was high at Rs. 87 crore. Post equity expansion on account of OFS, net debt to equity ratio will still remain high at 1:1, although will contract from 1.6:1 (30-9-18).

Valuation:

Although an SME listing, company has healthy clientele, robust operational systems and improving margins. At Rs. 73, company’s market cap will be Rs. 179 crore and EV Rs. 266 crore, which discounts H1FY19 annualised earnings by a PE multiple of 11.4x and EV/EBITDA multiple of 5.4x. Historic multiples based on FY18 financials are 14x and 9x respectively.

On the main board, company can be compared to VRL Logistics, as it is focused on own fleet unlike many peers operating on asset-light model (like Mahindra Logistics). On annual revenue of Rs. 2,100 crore, VRL has 12.8% EBITDA margin and 4.8% net margin, with share currently ruling at PE multiple of 27x, with RoE in mid-teens. VRL premium is justified by its higher scale of operations and healthier margins. However, on comparison to an SME peer AVG Logistics, which have similar size and financial matrix, the valuation multiple appear in line. On FY18 revenue of Rs. 224 crore, AVG Logistics reported EBITDA margin 10.7%, PAT margin 3.4%, with current market cap of Rs. 76 crore. Company came with an SME IPO in April 2018 at Rs. 107 per share, which has now corrected to Rs. 71, with PE multiple of now of 10x, on historic earnings.

Conclusion:

Company’s fundaments are sound and prospects appear bright, with valuation also not being too aggressive. Logistics Industry, although fragmented with low barriers to entry, is growing at a healthy pace. In the above scenario, one may consider applying to the issue only with a long term horizon (due to limited liquidity on SME exchanges and low coverage of listed stocks therein).

Grey Market Premium (GMP) of Ritco Logistics: Grey Market Premium of Ritco Logistics is an unofficial figure, against guidelines of SEBI. We strongly recommend investors against following the grey market premium. To know more about grey market premium and how it operates, read our article on ‘grey market premium’ in Pathshala column.

Disclosure: No interest.