Regional lockdowns creating choppiness in operations – Mahindra Logistics

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Excerpts of an interview with Mr Rampraveen Swaminathan, MD & CEO, Mahindra Logistics with ET now dated 3^rd August 2020:

• They had expected Q1FY21 to be a very difficult quarter as they saw the full impact of the national lockdown in April and a continuing impact in May and June as well, based on lockdowns in different parts and different states.
• As a B2B business, they have seen very significant cessation of operations for many of their customers both in terms of services and manufacturing.
• Despite that, there were a lot of positives as well for one of their efforts on cost reduction and cost management actually showed a lot of positive results. They were able to get a marginal profit (EBITDA) for the quarter.
• A lot of work on cash flow management and receivables management resulted in strong positive cash flow operations in the quarter.
• It has been three very different months and June was a much stronger month. In fact, June from a revenue and earnings perspective was better than April and May together.
• They ended the quarter with some good momentum and it is something which they are hoping to leverage on in coming quarters.
• The pandemic had two broad sets of challenges for them, the first one was on the supply side with shortage of trucks, drivers and with reverse migration of labour.
• Towards the end of the quarter, they started seeing a very strong recovery at least in their operations but today, they have got 65% plus of their partner fleets back in operations and maybe 80% of their warehouses are now operating.
• There are no significant challenges there but from a demand side which is the other set of challenges, some end markets have been obviously impacted more than others.
• Over the next few months, they are expecting two-three things to rework positively for them. First they have seen a good trajectory or traction in order intake on the segments which are growing – e-commerce, FMCG, pharma and so on. They are hoping to gain some leverage from that.
• The second thing is that they expect the farm sector to be doing better and to continue in the near term. That will play out positively for them.
• The third thing is that they expect volumes in their existing operations to start coming back as customers start creeping up on operations, an automotives and discrete
• There are a series of regional lockdowns which create choppiness in operations and demand and that is something which they have to work.
• Local lockdowns definitely have a very large impact on enterprise mobility business because they are providing services to IT and IT enabled companies and large facilities on providing employee mobility.
• On the transportation side of their business, a large part consists of line-haul which is really movement between states and that got impacted very significantly in the national lockdown. But in local lockdowns, that is not impacted so much.
• The warehousing and value added services especially in terms of the work which they do for the e-commerce company or consumer company where they are providing distribution solutions, they see daily impact of volumes moving up and down because of local lockdowns.
• Through the quarter they have paid all they employees fully as they have paid their third party associates as well through the entire lockdown but they did control a lot of other controllable discretionary expenses and those things at sites and otherwise allowed them to both offset the operating cost increases because of Covid and actually even more because they were able to create the headroom to preserve overall gross margins at a percentage level despite the stop in volumes.
• He expects that some part of those benefits will continue through the rest of this year. There will be some impact as they try to scale up operations and as they launch new sites, but some of the learning and cost reductions will be more perennial and through the rest of this year as well.
• They will have to infuse more working capital. As an asset light company they work closely with the partners and they will obviously have some rise in working capital but they hope to be able to manage and maintain the cash flow management initiatives they have launched in the last quarter.

 Consensus Estimate: (Source: market screener and investing.com websites)

• The closing price of Mahindra Logistics was ₹ 299/- as of 3-August-2020.  It traded at 53x/ 25x/20x the consensus earnings estimate of ₹ 5.6/ 12.2/ 14.8 for FY21E/22E/23E respectively.
• The consensus price target is ₹ 316/- which trades at 21x the earnings estimate for FY23E of ₹8/-

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