Since our last call to buy on Mahindra Logistics in August 2020, inventory has increased almost 95% to 571. The company’s sales were supported by the stable operations of Mahindra & Mahindra (M&M) which saw strong demand for agricultural equipment from the rural segment and growth in the e-commerce and consumer segments.
However, the rise in Mahindra Logistics’ share price has so far not been supported by earnings growth. The company’s earnings per share (EPS) in FY21 fell 46% to ₹ 4.19 per share, from the previous year.
The higher valuation could be due either to the exuberance seen in the stock market in recent times or to higher growth expectations, aided by the outlook for freight forwarding and end-to-end logistics services.
Nonetheless, the current share price appears to have fully incorporated the positives. Based on the results of the past twelve months (TTM), the stock is now trading around 136 times compared to an average of 78 times over the past three years. It could be argued that the high valuation is largely due to weak earnings in the first half of FY21. Even on forward earnings estimates for the current year (according to Bloomberg estimates), the stock is trading at 55 times (estimates take into account a fully functioning economy and is not depressed by cases exceptional) against an average of 49 times.
Investors with a low appetite for risk may consider making profits at these levels.
Mahindra Logistics, a light asset business, operates in two segments: supply chain management (SCM – almost 96% of FY21 revenue) and public transportation system (transportation services provided by companies to its employees – 4% of revenue). The revenue share of mobility services increased by 10% in FY20 as companies now follow the work-from-home policy in the wake of COVID-19.
The Mahindra Group and non-Mahindra clients each contribute 50% of SCM’s revenue in FY20. M&M’s share of revenue was much higher in FY19 at 65% and 55%. % in FY20, before the auto slowdown and e-commerce business growth (part of the non-M&M segment) began.
Mahindra Logistics supplies almost all of the logistics needs of the Agribusiness and Agriculture division of the Mahindra Group.
In the future, the demand for agricultural equipment (tractors) of the rural economy should be monitored. Demand from rural India could be reduced despite the expected normal monsoon, according to an Indian Rating report, for the following reasons: spread of Covid 2.0 to rural India; slowdown in non-agricultural activities and fall in rural wages. However, another recent report from ICRA indicates that tractor dealers remain optimistic about H2FY22 demand.
At the same time, the company’s focus on constantly strengthening its presence in the e-commerce, freight forwarding, pharmacy and consumer segments, can give profits a head start.
It offers supply chain solutions to various verticals such as engineering, consumer goods, pharmaceuticals, telecommunications, raw materials and e-commerce.
Recently, the company entered into a partnership with Bajaj electrics for all logistics services. The total contract value of the transaction will exceed 1,000 crore over the next five years.
During the last quarter, the company also announced a partnership with Flipkart to accelerate the deployment of electric vehicles for last mile delivery.
In addition, the activity of the e-commerce segment is expected to be higher with increasing penetration of online transactions in Tier II and III cities as well.
The SCM segment, which also includes warehousing, is a value-added service. In general, the margins of warehousing and other value-added services are higher than those of transportation.
In the last fiscal year, the company added more than one million square feet of space, close to its goal of adding 1.5 to 2 million square feet of warehouse space in one year. At the end of FY20, the company managed more than 16 million square feet of warehouse space.
Mahindra Logistics was badly affected during the first lockdown, meeting only the logistics requirements for essential products. Demand for discretionary items such as durable goods and clothing was low.
In the first half of fiscal year 21, the company’s revenue fell 29% year-on-year and recorded a net loss of 1.9 crore yen compared to net profit of 29.7 crore yen a year ago. year.
Second half operating performance put profits ahead of the curve, turning losses into FY21 net profit of around 29 crore, despite a 48% drop from FY20 .
Overall gross margins fell to 9.8 percent in that fiscal year, from 10.1 percent in fiscal year 20.