CRISIL Equities has assigned a CRISIL IPO grade of “3/5” to the proposed initial public offer (IPO) of VRL Logistics Ltd. (VRL) indicating that the fundamentals of the IPO are average relative to other listed equity securities in India. However, the grade reflects VRL’s position as one of the leading players in the domestic freight transportation business and the robust outlook for the logistics sector.CRISIL Research expects the industry to grow at 11 per cent CAGR in 2013-14. A strong network of 859 self-owned and franchise branches, 44 trans-shipment hubs and a fleet of 2,573 trucks enables VRL to offer logistics solutions to a diversified base of customers across India and also focus on the high-margin less than truck load (LTL) business.
VRL primarily caters to small and mid-sized companies, which reduces the business concentration risk. During the six months ended September 30, 2010, no single customer contributed more than two per cent of revenues and the 10 largest customers accounted for only 5.08 per cent of revenues. VRL has also established a strong presence in passenger transportation services in Karnataka, Maharashtra and Goa, and plans to enter other high-growth metropolitan and Tier-2 cities in western, central and northern India. The grade is further supported by a strong second line of management.
The CRISIL grade is moderated by VRL’s historically aggressive debt-funded expansion program which resulted in high gearing and strained its financials. Taken into account is the inherent cyclicality of the transportation industry where VRL operates an asset-heavy business model. This makes it difficult for the company to adjust its capacity to recession-led reduced freight availability. Further, the company’s management information system has scope for improvement.
VRL will utilise the IPO proceeds to buy vehicles for the passenger and goods transportation business (Rs. 1.4 billion), prepay certain loans availed of by the company (Rs. 1.1 billion) and for general corporate purpose.
VRL is one of the leading providers of transportation and logistics service for goods and passenger transportation services in India. Its promoter, Mr. Vijay Sankeshwar, set up the transportation business in 1976 with one truck. Vijayanand Roadlines Private Ltd. was incorporated in 1983. It was rechristened VRL Logistics Ltd. in 2006. Today it is the largest private sector owner of commercial vehicles with a fleet of 2,573 trucks and 256 buses.
VRL operates goods transportation services across 534 cities in 20 States and six Union Territories in India, supported by a strong network of 436 self-owned branches and 423 exclusive franchise offices. It has established 44 transshipment hubs which facilitate the hub and spoke model, and offer flexibility to transport a broad range of goods and services to multiple destinations.
The company launched passenger transportation services in 1996 and currently offers these services in 93 cities of Karnataka, Maharashtra and Goa, along 188 routes. In 2006, it ventured into the wind energy business and has an installed capacity of 42.5 MW at Kappatgudda in Gadag district of North Karnataka.
VRL has adopted a differentiated consignee-driven business model with its focus on the high-margin LTL business. It primarily caters to the requirement of small and mid-sized customers who are not serviced by large players. VRL’s widespread network of collection and delivery points enables it to service a larger number of customers across different geographies. This reduces its reliance on a few large customers and thereby the business concentration risk.
Within the LTL cargo business, VRL is focusing on expanding its presence in the high-margin express cargo services. At present, the company offers express cargo services to its clients across India. The business accounted for 10.8 per cent of the goods transportation business revenues in FY10. The strategy to expand its express cargo service is positive since these services are priced at a premium compared with general LTL and FTL services.
Further, the company has developed strong indigenous capabilities and has achieved a high level of integration in its operations which support optimum capacity utilisation and increased profitability. It orders customised vehicles with higher horse power and has an in-house body-building facility where it builds lighter vehicles with longer bodies. All this enables it to carry higher payload per vehicle and support increased profitability.
VRL has established a large repair and maintenance facility and six satellite workshops in India to support its operations. It has an arrangement with Ashok Leyland which has set up a dedicated outlet for supply of spare parts at its facility at Varur in Hubli that ensures availability of genuine parts at lower rates and eliminates inventory cost.
VRL is now planning to expand its passenger transport services to high density metropolitan and Tier-2 cities in western, southern and central India which are not adequately serviced by other private transporters. The idea is to leverage the brand name and network in freight transport business to support its passenger transportation business. This business offers significant opportunities given increasing urbanisation and under-penetration of quality and reliable services across the country. Further, passenger transportation is a high-margin business on a cash basis and will strengthen the company’s operational performance.
Experienced top management
VRL’s management is highly experienced in the logistics and transportation sector. The promoter has played an active role in establishing the company as a leading pan-India player in the domestic transportation business. The Managing Director, Mr. Anand Sankeshwar, has over 19 years experience in the transportation business and looks after VRL’s strategic and marketing activities.
VRL has a strong and experienced second line of management in place, with most of them associated with the company since long. Other functional heads have good domain expertise and are well aware of the business opportunities, their strengths and weaknesses. The second line of management is capable and has been given the adequate autonomy to take decisions independently.
In the past, the promoters had invested in the media business which led to tight cash flow position and consequently the company delayed payments to its bankers. Post the divestment of the media business, the company, in order to get tax incentives, also ventured into the wind power business using borrowed funds, resulting in high gearing.However, the management is now keen to focus only on the transportation business and will not venture into unrelated diversification. It plans to enter the media business in the future, but that will be through a separate company which will have no relation with VRL’s operations.
