VRL Logistics
By Geetanjali Kedia
VRL Logistics is entering the primary market on Wednesday 15th April 2015, through a fresh issue of Rs. 117 crore and an offer for sale of 1.71 crore equity shares of Rs.10 each, both priced in the band of Rs. 195 to Rs. 205 per share. The issue aims to raise Rs 451 crore and Rs. 468 crore at the lower and upper end respectively, of which, Rs. 351 crore is the offer for sale portion. Hence, issue is being undertaken primarily to provide significant exit to PE investor New Silk Route (NSR) as it accounts for 85% of offer for sale portion or ~63% of total issue size. Issue represents 25.25% and 25%, of the post issue paid-up capital, at the lower and upper price band, respectively, and will close on Friday 17th April.
VRL Logistics is a pan-India surface logistics company, having 624 branches and owning and operating 3,546 goods transportation vehicles, which accounts for approximately 75% of revenue. It also provides luxury passenger bus service across 8 states through a fleet of 455 buses (including 53 staff buses), as of 31st December 2014, which accounts for nearly 21% of its revenue. Given the regulatory dynamics and fluctuating operating results, bus business has been on a consolidation mode, as fleet size has reduced by 13% in just 9 months, from 522 buses as of 31st March 2014. Courier, air charter and wind farm operations account for balance portion of the company revenues.
For FY14, company clocked revenue of Rs. 1,504 crore and EBITDA of Rs.217 crore, resulting in EBITDA margin of 14.43%. However, profit before tax & exceptional items (PBT) has declined marginally from Rs. 71.1 crore in FY11 to Rs. 70.0 crore in FY14, which stood at Rs. 64 crore in FY13 and at Rs. 62 crore in FY12. Declining profitability is not a good financial indicator. This is despite topline rising from Rs.893 crore in FY 11 to Rs.1,504 crore in FY14, showing an aggregate growth of over 68% in these 4 years. This implies falling PBT margins for all these years from 7.95% in FY 11 to 5.46% in FY12 to 4.79% in FY 13 and to 4.66% in FY14. An area of big concern reflecting continuous pressure on its margins! It earned net profit of Rs. 57 crore for FY14, translating into low net margin of 3.8% and an EPS of Rs. 6.68.
Many-a-times, companies, with an eye on the ensuring IPO, present a rosy picture of financials for the immediately preceding period, which is seen here as well, with sharp rise in its financial performance during 9mFY15, which appears very ‘instant’. During first nine months of FY15, revenue grew to Rs. 1,278 crore, while EBITDA jumped to Rs.175 crore, expanding margin to 13.6%. However, diesel cost as a percentage of total operating expenses remains on a northward trajectory. While it accounted for 22.2% of revenues in FY11, it rose to 27.1% in FY14 and continues to remain high at 27.2% during 9MFY15, indicating that stress of fuel cost will take a toll, as benefits of controlled rates of diesel which have been enjoyed by such companies will not be available now and a perpetual brunt of de-regulation of diesel will now be seen in its results ahead.
Company’s net worth stood at Rs. 337 crore, as of 31st December 2014, indicating BVPS of Rs. 39.40, on equity of Rs. 85.54 crore. Since business is asset-heavy, as company owns the fleet, its net debt is also high at Rs.459 crore (including current maturities of long term debt). This debt is an area of high concern, as depleting assets, being vehicles and plant & equipments stood at Rs.495 crore, out of total net fixed assets of Rs.694 crore, as at 31-12-14.
From the fresh issue proceeds of Rs. 117 crore, company plans to utilize Rs. 67 crore for expanding its fleet by 248 trucks. This capex of Rs. 67 crore, should have been met largely from annual depreciation burden of Rs. 92 crore (as 9mFY15 depreciation stood at Rs. 69 crore), being a non-cash expense. Hence, the IPO is largely structured to facilitate PE exit. Rs. 28 crore to be used to partially retire debt while remaining Rs. 22 crore for general corporate purposes are also not assuring. Current promoter holding of 77.21% will decline to little less than 70%, while NSR’s current holding of 22.51% will shrink to 5.2%, post IPO.
As per a sale deed dated 21 Jan 2015, company is selling freehold land at Rs.35 crore, having book value of Rs. 31.28 crore, with a paltry gain of Rs.3.72 crore only. While date of acquisition and size details are not available, company must have acquired this land in the year FY12 or earlier, as there are no new additions to gross block of freehold land of this value post FY12. Hence, this land at Bangalore, which has been held for a minimum period of 3 years, is being sold at less than 12% profit! We do not wish to comment on the normal practices in land deals in India! Appreciating assets are seen moving out from the company, ahead of IPO. Not leaving good taste in the mouth.
Since company owns majority fleet vis-à-vis peers which have a larger share of leased vehicles, its EBITDA margins are higher (as interest and depreciation eats away about 67% of its EBITDA). Hence, an EV/EBITDA comparison is not fair. At the upper and lower end of the price band, shares are being issued at PE multiples of 17.4x and 18.3x times based on FY15 earnings. This is expensive in relation to peer Allcargo, having an annual topline of Rs. 5,600 crore and net margin of 4.40%, with 70% earnings growth in FY15, ruling at a PE multiple of just 18 times. Besides its bigger size, Allcargo has lower debt of less than Rs.600 crore with net worth of over Rs. 1,850 crore, both on consolidated basis, with debt equity ratio of 0.3:1, in relation to VRL’s current debt equity ratio of 1.4:1, which will still remain at 1:1, post IPO.
Over the weekend, I was invited by the company to visit their Hubli site (in Karnataka), as their guest. In my professional career spanning 8 years now, I have never received such unruly and inhospitable treatment. Despite an advance itinerary, neither the site visit was planned nor any officials available for interaction. Obviously, not even a glass of water was offered, since I boarded the aircraft from Mumbai, in a span of about 4 hours. The above may seem a deviation from the analysis, but I wish to put forth the corporate ‘culture’ being practiced at so-called ‘India’s largest private commercial vehicle owner’. Will this be acceptable to FIIs, HNIs and institutional investors? This gives an indication on the future actions of the promoters, which were seen in case of similar kind of promoters, prime objective being just to collect money from the public. Remember, pharma companies receiving 483 from US FDA for not having good sanitation facilities for workmen, child labour, shabby uniform and poor sanitation etc. Scene at the place was also that of a typical transporter, where I was made to sit with operating staff, with water being offered from bottle lying there. Leave respect and warmth towards a woman professional media analyst, basic courtesy was also seen missing. This apprehends an analyst on the treatment to be given to the working people, staff, executives and prospective shareholders, as this has not seen to have been imbibed in the organization.
Few decades ago, owning trucks was very lucrative for the carriers or so called transport or roadways companies then, as the trucks always gave capital appreciation, due to rising prices and long waiting for delivery. However, today it is onerous due to high interest and depreciation. Experience of old stalwarts like Sandhu & Co, Sawani, ETO, Okara Trade, LMT, Delhi Assam and many others are in front of us. Few others went public but are not seen now, except Patel Integrated Logistic, having market cap of about Rs. 200 crore, with annual income of Rs. 600 crore. A classic case is SER Industries, listed on BSE and ruling at Rs. 62, but having no turnover at all; ruling high only due to the frenzy of being a logistic company. This is an associate of South Eastern Roadways, still a leading transporter (sorry, call them logistics company).
Past financial track record and present corporate structure of the company are not proven on the current parameters and valuations. High operating costs leading to pressure on bottomline, uncertainties surrounding bus service business and hugely expensive valuations are not seen in favour of the issue. Hence, the issue can be given a miss!
Disclosure: Not applying in the IPO.