Mahindra Logistics IPO Review: Emerging 3rd Party Logistics Player

Mahindra Logistics IPO
IPO of Mahindra Logistics Limited, the subsidiary of the diversified conglomerate Mahindra is slated to open on October 31 at the price band at Rs 425-429 per share. Mahindra Logistics IPO consists entirely of Offer for sales (OFS) by M&M and PE investor Kedaara Capital Investment Managers who will each offload 13.5 per cent of their holding in the offer for sale. Post the Mahindra Logistics IPO issue M&M will hold 60 per cent stake  and Kedaara Capital Investment Managers stake shall stand at 9.5 per cent.

Mahindra Logistics IPO Details:
Issue Period Tuesday, Oct 31, 2017 – Thursday, Nov 2, 2017
Issue Size (No. of Shares) OFS up to 1,93,32,346 Equity shares 
Issue Size ( Rs.)  828.83 Cr
Employee Reservation 125,000 Equity Shares
Price Band Rs.425 – 429
Bid Lot 34 Equity Shares and multiple thereof
Employee Discount Rs.42/-per Equity Share
Issue Structure :  
QIB 50% of the Net offer- upto 96,03,672 Equity Shares– 412.00 Cr)
NIB 15% of the Net offer- upto 28,81,102 Equity Shares-123.60 Cr
Retail 35% of the Net offer-upto 67,22,572 Equity Shares– 288.40 Cr
Applications for 1x Retail Subscription 1,97,722
BRLMs Axis Capital, Kotak Mahindra Capital
Registrar Link Intime India Pvt. Ltd.
About Mahindra Logistics
  • Mahindra Logistics is part of Mahindra Group (M&M), one of India’s leading corporate groups
  • Incorporated in 2008, Mahindra Logistics operates in 2 distinct business segments of Supply Chain Management (“SCM”) and People Transport Solutions(“PTS”). SCM accounts for a major share of its business.
  • Under Supply Chain Management (“SCM”) business, Mahindra Logistics offers customized and end-to-end Logistics Solutions and Services including Transportation and Distribution, Warehousing, In-factory logistics and Value added services to their clients. The company operates their SCM business through a pan-India network comprising 24 city offices and over 350 client and operating locations as at May 31, 2017. This also includes  a large network of over 1,000 business partners providing vehicles, warehouses and the other assets and services for their SCM business.Certain key clients for its  SCM business include Volkswagen India Private Limited, Vodafone India Limited,
    Thermax Limited, JSW Steel Limited, Ashok Leyland Limited, Siemens Limited, Bosch Limited, BMW India Private Limited, 3M India Limited, and Mercedes-Benz India Private Limited.
  • Under PTS (People Transport Solutions) Business, Mahindra Logistics provides technology-enabled people transportation solutions and services across India to over 100 domestic and multinational companies operating in the IT, ITeS, Business Process Outsourcing, Financial Services, Consulting and Manufacturing industries. They offers their services through a fleet of vehicles provided by a large network of over 500 business partners. Mahindra Logistics provides technology-enabled people transportation solutions and services across India to over 100 domestic and multinational companies operating in the IT, ITeS, business process outsourcing, financial services, consulting and manufacturing industries. The services are offered through a fleet of vehicles provided by a large network of over 500 business partners. As at August 31, 2017, Mahindra Logistics operated its  PTS business in 12 cities and over 120 client and operating locations across India. Key clients of its  PTS business include Tech Mahindra Limited, AXISCADES Engineering Technologies Limited and ANZ Support Services India Private Limited.
  • Company’s  subsidiary, 2X2 Logistics, provides logistics and transportation services to OEMs to carry finished automobiles from the manufacturing locations to stockyards or directly to the distributors through specially
    designed vehicles. Its other subsidiary, Lords, provides international freight forwarding services for exports and imports, customs brokerage operations, project cargo services and charters.
  • The SCM and PTS businesses contributed 89.89% and 10.11%, respectively, to its  total revenue from operations in the three month period ended June 30, 2017 and 88.94% and 11.06%, respectively in Fiscal 2017. 
Brief Financials    (Rs. In Cr)
Particulars 3m Jun17 2017 2016 2015
Revenue from Operations 852.4 2,666.50 2,063.90 1930.8
Revenue Growth (%) 29.20% 6.80%
Pre Tax Operating Profit 28.5 85.9 65.5 65.6
Profit Before Tax 23.4 67.8 55.9 59.2
Net Profit 15.1 46 35.9 38.5
Adjusted Profit after Tax# 17.6 60 39.9 40.1
Face Value 10 10    
Share Capital 68 68 59.8 59.8
Reserve 294.7 279.6 241.9 204.8
NAV Per Equity share (Rs.) 53.3 51.1 44.8 45
RoNW (%) 4.0^ 13.10% 12.10% 14.80%
Adjusted ROE  29.20% 33.70% 39.90% 89.50%
EPS (Rs.) 2.1 6.7 5.3 6.6
IPO Price 429      
PE 64.03
Post Issue Equity Capital 71.14 crores
Cagr  Sales (Fy15-17) 11.36%
Cagr NP (Fy15-17) 14.38%      
Market Cap 3052 crores
Market Cap/Sales 1.14
Rationale for Investment
  • Recent government initiatives to develop infrastructure and  move to shift traffic from road to rail and ships through dedicated freight corridors (“DFCs”), inland waterways and the Sagarmala Project, would help in development of  infrastructure in other networks, leading to traffic movement towards more cost-efficient modes. Multi modal transportation mode is likely to benefit Mahindra Logistics. 
  • GST implementation is likely to benefit  organized service providers  in the  logistics sector.
  • Mahindra Logistics Limited is one of India’s largest third-party logistics solutions providers in the Indian logistics industry. 
  • For the period of FY 15-17, Mahindra Logistics operating income and PAT grew at a CAGR of ~17% and ~7% respectively.
  • Mahindra Logistics follows  a asset light  business model enables it to offer a flexible and scalable, solutions and services to the clients.
  • Mahindra Logistics  serves over 200 domestic and multinational companies
    operating in diverse sectors like  automotive, engineering, consumer goods, pharmaceuticals and e-commerce thus reducing operational risks.
  • Mahindra Logistics is a Customized, technology driven logistics solutions – Company which focuses significantly on technologies which enables it to offer cost-efficient and customized logistics solutions to the clients.
  • Mahindra Logistics technology systems enables  to control and command operations, undertake real-time tracking of vehicles, provide end-to-end visibility of operations and make timely corrective interventions.
  • The Company has developed two distinct transport management
    systems, namely Mahindra Integrated Logistics Execution System (MILES) and
    MyCargo360. Integrated, end-to-end logistics services and solutions.
  • In Peoples Transport Solutions(PTS) business, Mahindra Logistics meets the end-to-end people transportation requirements for clients through
    management of their transportation desks. The company has also automated the end-to-end solutions  from route planning and route allocation to operational tracking of trips, safety and emergency response and finally, billing
    and collections. 
  • Mahindra Logistics is emerging as a leading Third party Logistics (3PL) service providers which provides a  One stop shop for logistics end-users.
  • In view of the diversity in geographic conditions, consumer habits, and infrastructure across India,  many companies take service of Third party Logistics (3PL) service providers to enhance the efficiency of their supply chain operations.
  • A Third party Logistics (3PL) service provider like Mahindra Logistics  capable of offering end-to-end services may then become a single vendor for complete outsourcing by companies who choose to focus on their core activities. 
  • The share of 3PL in the overall logistics spend of the many segments is expected to increase from approximately 21% in 2017 to the range of 25% in  2020 as depicted below.
  • Mahindra Logistics Limited
  • Mahindra Logistics  depends significantly on clients in the automotive industry 
  • Revenues from company’s clients operating in the automotive industry contributed 63.25%, 60.84%, 67.94% and 73.97% to its  total revenue from
    operations in the three month period ended June 30, 2017 and in Fiscals 2017, 2016 and 2015, respectively
  • It is likely that some of the OEMs may also perceive the Mahindra Group as a competitor and may, therefore, not work Mahindra Logistics.
  • Mahindra Logistics business is highly dependent on technology and any disruption or failure of technology systems  may affect its  operations.
  • Its People Transport Solutions (PTS)  business is exposed to a safety risk and loss of reputation  in the event incidences of passenger or driver safety violations occur. 
  • Mahindra Logistics pricing is based on the premise that company will  be able to grow at same or better rate in future,  The company may falter on this count. 
Assessment: Mahindra Logistics IPO
  • India’s logistics cost as a percentage of GDP is 13-14%. The Indian logistics industry comprising segments such as road freight, rail freight, coastal freight, warehousing, cold chain and container freight stations and inland container depots (“CFS/ ICD”) is estimated at ₹6.4 trillion in Fiscal 2017. This is expected to grow at a CAGR of approximately 13.0% to ₹9.2 trillion by Fiscal 2020. The industry is dominated by transportation, which accounts for  approximately 88%, and its share is expected to remain high over the next 3-4 years. 
  • Significant investments by the Indian Government to improve rail and road infrastructure are expected to improve the overall logistics scenario. Stress on Multi modal transportation mode is likely to benefit Mahindra Logistics. 
  • An “asset-light” business model  helps Mahindra Logistics reduce its capital expenditure requirements, mitigate the effects of operational risks relating to direct fuel costs, maintenance costs and depreciation. This enables the company to deploy and utilize capital more efficiently, as reflected in its Adjusted ROE (excluding Surplus Funds) which was 29.26%, 33.77%, 39.95%and 89.55% in the three month period ended June 30, 2017 and in Fiscals 2017, 2016 and 2015, respectively.
  • The company’s e-commerce revenue has  more than quadrupled in two years to Rs 212.7 crore.
  • The Mahindra brand and support from the Mahindra Group. Entities within the Mahindra Group together constituted largest client group and contributed 55.45%, 53.96%, 63.24% and 70.14% to its total revenue from operations in the three month period ended June 30, 2017
  • Mahindra Logistics Continues to grow share of business from non-Mahindra Group clients. he revenue from operations of  SCM business attributable to non-Mahindra Group clients increased by a CAGR of 64.45% to ₹9,527.75 million in Fiscal 2017 from ₹3,523.06 million in Fiscal 2015. 
  • The GST regime is expected to significantly benefit the inter-state movement of goods, bring in logistical  efficiency and likely to result in significant business opportunities for large, integrated logistics solutions providers who could gain larger volumes and nationwide contracts from clients.
  • Mahindra Logistics is seeking a valuation of Rs 3,000 crore, which is 50 times its latest Net profit and thus is not priced cheap by any standards.
  • The company is seeking a P/E of ~64x  (FY17) which is high but  does have a good business model and strong growth potential and its business can be considered as unique. Aided by Government initiatives in transport, infra and GST initiatives, the Logistics sectors is on cusp of significant growth and Mahindra Logistics is well placed to tap these opportunities.
  • On the flip side Mahindra Logistics valuation are steep compared to most Logistics players and its margins so far are not impressive. 
  • I perceive Mahindra Logistics as a niche and emerging Third party Logistics (3PL) service provider and would subscribe to the issue despite a stiff price. 
  • 31/10/17: The  chances of  Mahindra Logistics giving a listing gain are not very  high. The issue appears to be suited  only for those who are looking for gains beyond listing and are ready to invest  for medium term 

Standard disclaimer: I am not a SEBI registered analyst and above analysis is for educational purpose only. I may have vested interest in every stock I discuss and my views may be biased. Please do your own due diligence as stock market investments have high degree of inherent risk.

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