HDFC Bank Investment Advisory Group

VRL Logistics Ltd. – IPO Note

15th April, 2015 Subscribe at cutoff

Key Details Post Issue Shareholding pattern

IPO price band (Rs) (FV-Rs.10) 195-205 Promoter & Promoter Group* 74.7%
Issue Size (Rs. Bn) 4.5-4.7 Public & Others 25.3%
th th
Issue Opens - Close 15 – 17 April *including PE funds
PE (FY15 Annualized) 18.6 – 19.3x

Issue Background
• Fresh Public Issue of 6,000,000 – 5,707,317 (at lower and upper bands respectively)
Equity Shares of Rs.10 each for cash at a price to be decided through a 100% book-
building process. There is also an offer for sale of 1,17,16,000 shares by the promoters
and the PE funds.
• The bid/issue is to open on 15th April, 2015 and close on 17th April, 2015.
• The IPO price band is fixed at Rs.195 – Rs.205 per share. The size of the issue will be
Rs.4.5 Bn at the lower end and Rs.4.7 Bn at the upper end of the band.
• The objects of the issue are 1) Purchase of goods transportation vehicles; 2)
Repayment/pre-payment, in full or part, of certain borrowings availed by the Company;
and 3) General Corporate Purposes.

Company Background
• VRL Logistics Ltd (VRL) is one of the leading pan-India surface logistics and parcel
delivery service provider promoted by Dr Vijay Sankeshwar and Mr. Anand Snakeshwar..
• The Company was incorporated as Vijayanand Roadlines Private Limited on March 31,
1983 and later changed its name to VRL Logistics Ltd on August 25, 2006
• It owns and operates the largest fleet of commercial vehicles in the private sector in
India.
• VRL provides general parcel and priority parcel delivery, courier and full-truckload
services through its widespread transportation network in 28 States and four Union
Territories across India.
• Company’s operational infrastructure for the goods transportation business as of
December 31, 2014 comprised 624 branches (comprising 604 leased branches and 20
owned branches) and 346 agencies across India.
• VRL's goods transportation service business serves a broad range of industries,
including the fast moving consumer goods (FMCG) sector as well as other industries
including food, textiles, apparel, furniture, appliances, pharmaceutical products, rubber,
plastics, metal and metal products, wood, glass, automotive parts and machinery.
Key Financials:
Rs mn FY10 FY11 FY12 FY13 FY14 9MFY15
Sales 7146 8929 11,352 13,353 15,037 12,793
% YoY 25.0% 27.1% 17.6% 12.6%
EBITDA 1411 1700 1968 2050 2166 2195
EBITDA Margin (%) 19.7% 19.0% 17.3% 15.4% 14.4% 17.2%
PAT 287 516 767 457 572 717
EPS (Rs.) (Post issue) 3.1 5.6 8.4 5.0 6.2 7.8
RoE* (%) 40.9% 15.8% 18.6% 21.3%
*Pre Issue Basis, Source: RHP
Key Investment rationale:

Road Freight Industry expected to grow steadily for the next 5 years: Over the next five
years, we expect road freight (in Billion Tonnes KM terms) to grow at 8 to 9% CAGR, outpacing
growth in overall primary traffic at 7 to 9% CAGR (compounded annual growth rate). A strong
growth in non-bulk transport by road and capacity constraints faced by the Railways will enable
road freight traffic to grow faster.

Pan-India surface logistics services provider with an established brand and one of the
largest distribution networks in India: VRL is a pan-India surface logistics services provider
and is one of the leaders in parcel delivery services across India. The Company is an established
brand name in the transportation industry in India with over 38 years of operations. The
Company’s differentiated service offerings, large integrated hub-and-spoke transportation
network and extensive operational infrastructure, including advanced technology systems, has
enabled it to establish a leadership position in the surface logistics industry with a strong brand
across India.

Large fleet of owned vehicles ensuring reliable, quality services: As of December 31, 2014,
VRL’s goods transportation fleet included 3,546 owned vehicles, of which 1,166 vehicles were
less than five years old, 2,375 were debt free and 1,235 were fully depreciated. Also the
Company owned and operated 455 buses (including 53 staff buses), of which 399 were less than
five years old, 87 were debt free and six were fully depreciated. Operating its owned vehicles
enables the Company to significantly reduce hiring and operational costs. In addition, availability
of third-party vehicles may be uncertain during periods of high demand. Its large fleet of owned
vehicles therefore allows VRL to cover a large number of routes, reduce dependence on third
party hired vehicles, improve the service quality and maintain reputation for reliable and timely
delivery of consignments.

Diversified customer base and revenue sources: VRL has a large and diverse base of
customers in its goods transportation business, developed around its hub-and-spoke operating
model, and they serve a diverse mix of end consumers in various industry verticals. In its goods
transportation business, it serves a number of customers in the FMCG, food, textiles, apparel,
furniture, appliances, pharmaceutical products, rubber, plastics, metal and metal products, wood,
glass, automotive parts and machinery. In addition small and medium enterprises, distributors
and traders, represent a significant majority of their goods transportation revenues. Since the
Company caters to a diverse customer base, it has historically been able to pass a significant
portion of increases in operating costs such as fuel prices, toll charges and other operating
expenses through periodic freight rate hikes.

Strong track record of operational performance: VRL has been able to increase its revenue
and net profit at a CAGR of 20.44% and 18.75% respectively over FY2010-14. The Company has
steady return ratios with RoE of 18.65% and RoCE of 12.4% for FY2014. The Company’s debt to
equity stands at 1.6x. VRL’s strong balance sheet and steady operating cash flows enables the
Company to fund its strategic initiatives, pursue opportunities for growth and better manage
unanticipated cash flow variations.

Key Concerns:
• The Company and its Promoters are involved in a number of legal proceedings, including
certain criminal and tax proceedings, which if finally determined against it or its
promoters, as the case may be, could adversely affect the business and financial
condition.
• Inability to pass on any increase in operating expenses, particularly fuel costs, to
customers may adversely affect the Company’s business.
• Rising competition which can lead pressure operating margins and overall operations.
Outlook and View:
VRL has been able to deliver strong growth in revenues and operating profits. We think
that the Company could continue to deliver strong growth given the huge opportunity size
and the ability of the Company to ramp up its fleet size. With a strong brand and well
diversified customer base the Company looks well poised to remain a key player in the
organized logistics sector. The Company’s strong margin profile and steady return ratios
further adds to our positive outlook for the IPO. We therefore recommend Subscribe on
the stock with listing gains perspective.

Company FY15 EPS* CMP PE

VRL Logistics Ltd (Lower Band) 10.44 195 18.6
VRL Logistics Ltd (Upper Band) 10.44 205 19.3
*Annualized based on 9MFY15 financials, Post Issue EPS at lower band.

Relative Valuations:

Transport Corp of India GATI Ltd VRL Logistics Ltd.

P/E FY15E (x) 24.5 48.29 19.3*
P/BV (x) (FY14) 4.3 3.3 5.7
Note: P/E and P/B is calculated on the higher band. *FY15 Annualized EPS.
Source: Bloomberg, Capitaline, RHP
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