VRL Logistics Ltd (VRL) – IPO :: HDFC Sec note

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Background & Operations: VRL Logistics Ltd (VRL) own and operates the largest fleet of commercial vehicles in the private sector in India (as of May 2012) and is one of the leading pan-India surface logistics and parcel delivery service providers. It provides general parcel and priority parcel delivery (less than truckload services, “LTL”), courier and full-truckload (“FTL”) services through its widespread transportation network in 28 States and four Union Territories across India. Its operational infrastructure for the goods transportation business as of December 31, 2014 comprised 624 branches (comprising 604 leased branches and 20 owned branches) and 346 agencies across India, and of such 624 branches, 48 (41 leased branches and seven owned branches) served as strategic transshipment hubs for its operations. VRL’s goods transportation service business serves a broad range of industries, including the fast moving consumer goods (FMCG) sector as well as other industries including food, textiles, apparel, furniture, appliances, pharmaceutical products, rubber, plastics, metal and metal products, wood, glass, automotive parts and machinery. VRL operates through a hub-and-spoke operating model which enables it to transport various parcel sizes and provide customers with access to multiple destinations for booking and delivery of goods. Its extensive network enables it to provide “last mile” connectivity to even remote areas in India. This offers its customers a compelling value proposition. Large fleet, most of which is o enables it to serve a diverse mix of consignments. VRL’s centralized information technology network connects all its branches, agencies, transshipment hubs and other offices enabling seamless real time monitoring of its operations and consignment bookings and delivery status. Its centralised accounting systems also enable it to implement stringent financial controls. It also provides luxury bus services across the States of Karnataka, Maharashtra, Goa, Andhra Pradesh, Telengana, Tamil Nadu, Gujarat and Rajasthan. Its bus operations are focused on high density urban commuter cities such as Bengaluru, Mumbai, Pune, Hyderabad and Panjim, and also connect tier-2 and tier-3 cities. The wide range of passenger buses in fleet enables VRL to better serve the transportation requirements of various customer segments. It also operates car carrier vehicles for transportation of cars, vehicles for liquid transportation, as well as a courier service business across the State of Karnataka. VRL also has minor business interests in wind power, air charter services and hospitality. services and hospitality. Objects of Issue: The objects of the Issue are The Issue comprises of the Fresh Issue by the Company and an Offer for Sale by the Selling Shareholder. The Company will not receive any proceeds from the Offer for Sale by the Selling Shareholder and the proceeds received from the Offer for Sale will not form part of the Net Proceeds. VRL proposes to utilise the funds which are being raised through the Fresh Issue, after deducting the Issue related expenses to the extent payable by it towards funding the following objects:- Requirement of funds and Utilisation of Net Proceeds Rs in Million Sr No Objects of the Fresh Issue Amount 1 Purchase of goods transportation vehicles 674.15 2 Repayment/pre-payment, in full or part, of certain borrowings availed by Company 280.00

Competitive Strengths: Pan-India surface logistics services provider and one of the largest distribution networks in India: VRL is a pan-India surface logistics services provider and is one of the leaders in parcel delivery services across India. Its differentiated service offerings, large integrated huband-spoke transportation network and extensive operational infrastructure, including advanced technology systems, has enabled it to establish a leadership position in the surface logistics industry with a strong brand across India Pan-India distribution network enables VRL to cater to a diverse mix of customers including corporate, small and medium enterprises (“SMEs”), distributors and traders. Its large geographic coverage and operational network also ensures that consignments are spread across various locations, and consequently any loss or damage to any consignment due to theft, fire, accidents, burglary or other such factors are relatively low. Integrated hub-and-spoke operating model ensuring efficient consignment distribution: Integrated and widespread hub-and-spoke network of VRL enables effective consolidation and distribution of consignments of various sizes, supported by wide geographical presence across India through branches and agencies. Its hub-and-spoke operating model enables it to transport various parcel sizes and provide customers with access to multiple destinations for booking and delivery of goods, and provide “last mile” connectivity to even remote locations in India. VRL’s ability to accommodate a wide range of parcel sizes, weights and types of freight, and transport multiple types of freight over multiple destinations, enable it to meet all of its customers’ transportation needs and differentiate from competitors. In-house software technology capabilities: VRL has invested significant manpower resources in its in-house software technology capabilities and has developed scalable in-house technology systems and software. All its offices, transshipment hubs, branches and agencies are connected to its central information technology network through an ERP system facilitating real time monitoring of operations and tracking of consignment. In addition, it has introduced customized software alerts to track vehicle maintenance and optimize load planning. Its inhouse technology capabilities enable it to increase operating efficiencies, improve service quality and maintain stringent operational and fiscal controls over branch and franchisee operations Large fleet of owned vehicles ensuring reliable, quality services: As of December 31, 2014, VRL’s goods transportation fleet included 3,546 owned vehicles, of which 1,166 vehicles were less than five years, 2,375 were debt free and 1,235 were fully depreciated. As of December 31, 2014, it owned and operated 455 buses (including 53 staff buses), of which 399 were less than five years, 87 were debt free and six were fully depreciated. The variety of goods transportation vehicles in its fleet enable to serve a diverse mix of consignments while its range of passenger buses enable it to serve the transportation requirements of different customer segments. Its regular and periodic preventive maintenance measures ensure longer vehicle life and provide a higher degree of performance reliability. In the passenger transportation segment, this also enables it to develop a reputation as a passenger bus operator that provides a safe, on-time, modern and comfortable travel experience Dedicated in-house maintenance facilities and availability of spare parts and fuel: VRL has developed a comprehensive preventive in-house maintenance program designed to increase the life of its vehicles. Servicing and maintenance operations are undertaken at its workshop facility in Hubballi, Karnataka with several dedicated satellite workshops in strategic locations across India, including in Delhi, Ahmedabad, Mumbai, Pune, Sholapur, Bengaluru, Salem, Perundurai, Chennai, Madurai, Mangalore, Kolkata, Vijayawada and Hyderabad. VRL has also entered into spare parts supply arrangements with Ashok Leyland Limited and VE Commercial Vehicles Limited who have set up dedicated outlets at its Hubballi facility which allows it to source spare parts at competitive rates and reduce procurement timelines. It also operates two consumer diesel pumps located at Varur and Chitradurga in the State of Karnataka to ensure quality fuel supply and reduced fuel costs. It also deploys staff at these designated pumps to supervise the refuelling procedure and this arrangement also enables to ensure enroute compliances of its vehicles. Dedicated in-house vehicle body design facilities VRL has also developed an in-house vehicle body designing facility at Hubballi, Karnataka which is equipped to fabricate vehicles with lighter and longer bodies to carry higher payload, resulting in increased margins per vehicle. Vehicle manufacturers supply chassis based on specifications provided by it and fabricate the bodies for vehicles specific to its requirements using its in-house designing facility. VRL thereby reduce the overall weight of the vehicles, which enables to carry higher tonnage on the vehicle without violating permissible payload limits. Diversified customer base and revenue sources: VRL serves a diverse mix of end markets across several industry sectors. In its goods transportation business, it serves a number of customers in the FMCG industry as well as in general commodities such as food, textiles, apparel, furniture, appliances, pharmaceutical products, rubber, plastics, metal and metal products, wood, glass, automotive parts and machinery. It has a large and diverse base of customers in its goods transportation business, developed around its hub-and spoke operating model, and serve a diverse mix of end consumers in various industry verticals. In addition, its “paid” and “to pay” customers, primarily small and medium enterprises, distributors and traders, represent a significant majority of its goods transportation revenues. Since it cater to a diverse customer base, VRL has historically been able to pass a significant portion of increases in operating costs such as fuel prices, toll charges and other operating expenses through periodic review and increase its base freight rates. Ability to recruit and retain experienced and qualified drivers: VRL’s ability to recruit and retain experienced and qualified drivers is critical to its operations. It has followed a strategy of recruiting drivers as full time employees with a defined salary structure, associated benefits and attractive incentive schemes. Although it faces significant competition in recruiting drivers, it has historically been successful in attracting and retaining a large pool of experienced and trained drivers. Track record of growth and robust financial position: VRL strive to maintain a robust financial position with emphasis on having a strong balance sheet and increased profitability. Its total revenue increased at a CAGR of 20.44% from Rs 7,146.13 million in fiscal 2010 to Rs 15,037.77 million in fiscal 2014, while its profit after taxation, as restated, increased at a CAGR of 18.75% from Rs 287.54 million in fiscal 2010 to Rs 571.76 million in fiscal 2014 As of December 31, 2014, its long term debt equity ratio was 1.09 times. Its fleet size for goods and passenger transport business grew from 2,730 as of March 31, 2010 to 3,874 as of March 31, 2014: Strong balance sheet and positive operating cash flows enables VRL to fund its strategic initiatives, pursue opportunities for growth and better manage unanticipated cash flow variations. Experienced and motivated management team VRL has been successful in attracting an experienced senior management team with operational and technical capabilities, sales and marketing experience, and financial management skills. The industry experience of its senior management team has enabled it to develop its large network of offices, branches, transshipment hubs and agencies, pan-India coverage, and strong relationship with its drivers and other employees, as well as its agencies. Senior management team is sufficiently empowered in order to decentralize operational decision making processes and address its business requirements. Business Strategy: Increase goods transportation network and fleet size: VRL continues to expand its pan-India network of branches and agencies for its goods transportation business. It intends to add a significant number of branches in northern, central and eastern regions of India as well as increase the depth of its existing network in key States. As part of its expansion strategy, VRL also intend to further expand its fleet of trucks. Increase the proportion of owned transshipment hubs at strategic locations and expand transshipment hub Capacities: VRL intends to expand its existing transshipment hub operations through significant addition of logistics and storage capacities. It also intends to increase the proportion of owned transshipment hubs at strategic locations across India to ensure stability of its future operational network and superior operational control. The availability of owned transshipment hubs will enable VRL to better plan future expansion of its operating facilities and network. Continue to improve operating efficiencies through technology enhancements: VRL continue to further develop its technology systems to increase asset productivity, operating efficiencies and strengthen competitive position. VRL has invested significant resources, and intend to further invest in its in-house technology capabilities to develop customized systems and processes to ensure effective management control. VRL continues to focus on further strengthening its operational and fiscal controls and linking its operational processes to centralized ERP system. It also continue to introduce integrated GPS tracking systems, introduce cost efficiencies through reduction of fuel pilferage, and developing safety and value added services for its customers and intend to introduce preventive and predictive maintenance software linked to its vehicles. Focus on higher margin parcel delivery services: VRL continue to focus on further growing parcel delivery (comprising general parcel and priority parcel delivery) business, complemented by FTL freight services. Parcel delivery services ensure a diversified customer base, higher rates per load, and incremental revenues with superior margins. VRL continues to increase its market share of the parcel delivery business in India through pan-India integrated network, providing wider geographic coverage, faster delivery schedules and reliable services at competitive prices Consolidate bus operations business: VRL intends to consolidate its bus operations business and focus on increased margins through optimal route planning and maximising occupancy levels through increased direct marketing efforts as well as through its commission agents. The proposed Transport Bill, which proposes a unified vehicle registration system and a simplified system of vehicular and transport permits, will significantly improve operating efficiencies and reduce operational costs for its passenger transportation business by reducing various operational hurdles relating to inter-State transportation of passengers, and simplifying the regulatory framework around vehicle permits and driver licenses.

Enhance operational controls to ensure timely delivery and quality service: VRL continues to focus on enhancing operational controls and cost efficiencies through optimal freight mix, cost management and increasing asset life through preventive and predictive maintenance initiatives. It also continues to implement various measures aimed at incremental improvement in operational efficiencies, such as deploying multiple drivers across long distances. It continues to implement security measures and timely service in its bus operations including close circuit cameras on some of passenger buses. VRL also continues to adopt industry best practices and training for its employees. Industry: Transport Sector Growth In recent years, the accessibility, door-to-door service and reliability have earned road transportation a higher share of both passenger and freight traffic vis-à-vis other transport modes. As a result, road transportation has emerged as the dominant segment in India’s transportation sector. Both freight and passenger movements by road is expected to rapidly expand in the coming years. In particular, freight movement by road transport is expected to show robust growth over the medium term due to a number of factors, which is, substantial investment in improvement in national highway network which will facilitate speedy reliable, door to door services and rising volumes of exports and imports. The major objective in the Twelfth Five Year Plan would be to augment the capacity of various modes of transport and set up an infrastructure comparable with best in the world. In roads, apart from completing the various phases of national highways development projects (NHDP) which are in progress, substantial progress would be made in development of expressway network to increase the mobility. Standards of maintenance of national highways would be further strengthened and a network of six-lane roads augmented and significantly increased. The Domestic Freight Transportation Industry Domestic freight transportation services involve the movement of goods within India. The modes of surface transport include roadways, railways, coastal and pipelines. Demand for freight transportation services depends upon the size, structure and demographic profile of the economy. Industrial and agricultural production, along with export-import trade primarily drives growth in the freight transportation industry. Among modes, this industry is dominated by roads, followed by rail. Over the years, roadways have captured a very significant share of freight on account of faster service and point-to-point connectivity. During the post reform period (1992-93 to 2004-05) volume of freight carried by road grew at an annual average rate of 6.5% compared with a growth of 3.6% in rail freight. Over the years the modal split in freight movement between rail and road has skewed in favour of road. The share of road transport in freight movement which was around 14% in 1950-51 has increased to around 61% while that of railways has fallen from more than four-fifth to less than two-fifth over the same period. Industry structure and participants In India, freight is transported across the country mainly through roadways, railways, coastal means and pipelines. Demand for domestic freight transport comes from industrial and agricultural goods along with export and import trade. These goods form the primary freight, calculated in terms of billion tonnes per km (BTKM), which are then transported via road, railways, ships or pipelines. Supply side drivers include, on road vehicle capacities, modal infrastructure which includes roads, rail, pipelines and coastal shipping; storage infrastructure and increasing proliferation of the hub-and-spoke model. Another key driver for the supply of freight is the availability of allied infrastructure such as warehousing, container freight stations, inland clearance depots, cold storage etc. Industrial goods and consumer products then form the redistribution freight, which is transported from hubs to spokes in the hub and spoke model. Based on the framework, a relationship between the estimated primary freight movement in the country and growth in industry and agricultural GDP has been econometrically established. In India, bulk of freight is transported through roads, whose share in total traffic is estimated to have risen by 8.5 per cent in the last decade to about 63 per cent in 2013-14. The road freight transport segment is also deregulated and highly fragmented, with small operators having over 65-70 per cent share. High fragmentation in the industry enhances competition, offering customers better bargaining power. The key industry participants include the transport operators which are the trucking companies, and which solicit freight and convey it from one location to another. The transport operators or freight transportation services providers can be broadly classified as small fleet operators (SFOs) owning up to five vehicles, medium fleet operators (MFOs) owning between six to 20 vehicles and large fleet operators (LFOs) owning typically over 20 vehicles. Demand Drivers Share of non-bulk traffic to increase over the next five years. Non-bulk traffic (mostly transported by road), is expected to grow at an 8 to 10 per cent CAGR during 2013-2014 to 2018-2019, as consumption demand improves, especially for consumer durables, pharmaceuticals and automobiles. The share of the non-bulk segment in the overall primary freight traffic is thus expected to increase to 57 to 58 per cent by 2018-2019, from 47 to 48 per cent in 2008-2009.


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