Motilal Oswal has upgraded its rating on VRL Logistics (VRLL) to Buy, setting a target price of INR660, representing a 25% upside from the current market price. The upgrade is primarily based on expectations of a resurgence in volume growth driven by branch expansion and margin improvement fueled by a recent price hike.
Key takeaways from the report:
- Price Hike: VRLL implemented a 10% price hike in June 2024 to offset rising input costs, potentially boosting margins to 14-15%.
- Branch Expansion: VRLL plans to aggressively expand its branch network, targeting 100 new branches in FY25, particularly in eastern and northeastern India.
- Volume Growth: Management anticipates volume growth of 10% in FY25 and 12-14% in FY26, driven by network expansion and a recovering economy.
- Market Share Gains: VRLL is expected to gain market share from the unorganized sector due to increased compliance requirements.
- Strong Earnings Growth: Motilal Oswal projects a CAGR of 11%/14%/18%/52% in volume/revenue/EBITDA/PAT over FY24-26.
VRLL is poised for growth on multiple fronts. The recent price hike, the first in several quarters, should help alleviate margin pressure stemming from increased toll charges and labor costs. This, coupled with easing driver shortages and a pickup in demand for agricultural and textile commodities, is expected to boost profitability in the coming quarters.
Furthermore, VRLL's aggressive branch expansion strategy is likely to drive robust volume growth, particularly as it expands into underserved regions. This expansion, coupled with the company's extensive in-house repair and maintenance infrastructure, positions VRLL to capitalize on the growing logistics market in India.
However, potential risks remain. While the monsoon has been favorable so far, any significant deviation could impact agricultural output and subsequently freight volumes. Additionally, competition from other organized players and the continued presence of a large unorganized sector could limit market share gains.
Looking ahead, Motilal Oswal expects VRLL to deliver strong earnings growth over the next few years. The analyst's projections are based on a 28x multiple of FY26E earnings, highlighting the company's growth potential.
Despite the inherent risks in the logistics sector, VRLL's strategic initiatives, coupled with a favorable macroeconomic backdrop, support Motilal Oswal's bullish outlook. The company's focus on expanding its network, improving operational efficiency, and gaining market share positions it well to capitalize on the growth opportunities in the Indian logistics market.
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