Since our last ‘buy’ call on Mahindra Logistics in August 2020, the stock has moved up by almost 95 per cent to ₹571. The sales of the company were aided by stable business from Mahindra & Mahindra (M&M) which has seen a healthy demand for farm equipment from the rural segment, and growth in e-commerce and consumer segments.

However, the rise in share price of Mahindra Logistics, so far, has not been supported by earnings growth. The earnings per share (EPS) of the company in FY21 fell by 46 per cent to ₹4.19 per share, when compared to the previous year.

The higher valuation could be either due to the exuberance being witnessed in the stock market lately or due to higher growth expectations, aided by prospects for freight forwarding business and end-to-end logistics services.

Nevertheless, the current stock price seems to have fully priced-in the positives. Based on trailing twelve month (TTM) earnings, the stock now trades at about 136 times as against an average of 78 times in the last three years. It could be argued that the high valuation is largely due to the weak earnings in the first half of FY21. Even on the forward earnings estimates for the current fiscal (as per Bloomberg estimates), the stock trades at 55 times (estimates factor a fully functioning economy and is not depressed by one-offs) versus an average of 49 times.

Investors with low-risk appetite can consider booking profits at these levels.

Growth prospects

Mahindra Logistics, an asset-light business, operates in two segments — supply chain management (SCM — almost 96 per cent of FY21 revenues) and public transportation system (transport services provided by corporates to its employees — 4 per cent of revenues). Share of revenue from mobility services fell from 10 per cent in FY20 as companies are now following the work from home policy in the wake of COVID-19.

Mahindra group and non-Mahindra clients contributes 50 per cent each to SCM revenues in FY20. M&M’s share in revenues was much higher in FY19 at 65 per cent and 55 per cent in FY20, before the onset of auto slowdown and growth in e-commerce business (part of non-M&M segment).

Mahindra Logistics provides almost the entire logistics requirements of Mahindra group’s agri and farm division.

Going ahead, the demand for farm equipment (tractors) from the rural economy needs to be watched out for. As per a report from Indian Rating, demand from rural India could be muted despite expected normal monsoon,for the following reasons – spread of Covid 2.0 to rural India; slowdown in non-agricultural activities and decline in rural wages. However, another recent report from ICRA points that the tractor dealers remain optimistic about H2FY22 demand.

At the same time company’s focus on steadily building its presence in the e-commerce, freight forwarding, pharma and consumer segments, may give a leg-up to the earnings .

It offers supply chain solutions to diverse industry verticals such as engineering, consumer goods, pharmaceuticals, telecom, commodities and e-commerce.

Recently, the company entered into a partnership with Bajaj electricals for entire logistics services. The total contract value of the deal will be in excess of ₹1,000 crore over the next five years.

During the last quarter, the company also announced partnership with Flipkart to accelerate deployment of EVs for last mile delivery.

Also, the business from the e-commerce segment is expected to be higher with increasing penetration of online transactions within tier II and III cities as well.

The SCM segment, which includes warehousing as well comes under a value added service. Generally, margins from warehousing and other value- added services are higher than that from transportation.

The company during last fiscal added more than 1 million square feet of space, close to their guidance on adding 1.5 million - 2 million square feet warehousing space in a year. At the end of FY20, the company managed over 16 million square feet of warehousing space.

Fall in margins

Mahindra Logistics was severely impacted during the first lockdown, catering only to the logistics requirements of essential products. The demand from discretionary items such as durables and apparels was bleak.

In the first half of FY21, the company’s revenues fell by 29 per cent y-o-y, and it reported a net loss of ₹1.9 crore as against a net profit of ₹ 29.7 crore a year ago.

Operating performance in the second half gave a leg-up to the earnings turning losses into a net profit for the fiscal FY21 to about ₹ 29 crore, despite being lower by 48 per cent vs. FY20.

The overall gross margins have dropped to 9.8 per cent in the said fiscal from 10.1 per cent in FY20.