Mahindra Logistics hopes Rivigo can deliver a swift turnaround

Mahindra Logistics once ran a small B2B express business of its own before it snapped up Rivigo’s B2B express business in November 2022.
Mahindra Logistics once ran a small B2B express business of its own before it snapped up Rivigo’s B2B express business in November 2022.

Summary

  • Uncertainty around the B2B express business’ path to profitability has clouded the company's medium-term outlook and continues to be a drag on overall profitability.

Mahindra Logistics Ltd, an integrated third-party logistics (3PL) provider, reported healthy numbers during the March quarter (Q4FY24), delivering a pleasant surprise on revenue growth and sequential margin recovery. Consolidated revenue grew 14% year-on-year (yoy) to 1,451 crore in the quarter. Ebitda margin came in at 3.9%, down more than 100 basis points yoy but up 20 basis points sequentially.

However, uncertainty around the path to profitability for its B2B express business has clouded the company’s medium-term outlook and continues to be a drag on overall profitability. The B2B express business, which it acquired from logistics startup Rivigo in 2022, contributed 7% of overall sales in Q4. Revenue from the segment was down about 8% yoy at 97 crore in the quarter.

Mahindra Logistics once ran a small B2B express business of its own before it snapped up Rivigo’s B2B express business in November 2022. The company faced integration challenges after the acquisition, resulting in lower-than-expected volume growth and subsequent losses, said Ankita Shah, vice president of institutional equities research at Elara Securities (India). "Rivigo's turnaround is crucial for Mahindra Logistics to fare better," Shah added.

Also read: Mahindra to acquire logistics unicorn Rivigo's B2B express biz for 225 crore

“The road ahead in terms of margin improvement will be tougher as utilisation in the negative-gross-margin Express business has already reached 85% levels," cautioned Kotak Institutional Equities in a report dated 23 April. Even so, Mahindra Logistics expects a further pick-up in utilisation levels as its networks have been redesigned.

Breakeven efforts

Management now aims to achieve Ebitda-breakeven for the express business by the end of Q2FY25. Previously, it aimed to achieve this by the end of FY24. Rivigo’s losses are expected to shrink as volumes improve. If Mahindra Logistics manages to accelerate revenue growth in its express business it could achieve Ebitda-breakeven sooner, but Nuvama Institutional Equities believes this could take until FY26.

“For the express business, the management is going for cost optimisation to achieve Ebitda breakeven in the B2B segment by the end of Q2FY25, and volume growth would grow in a range-bound manner in the near term," said Harshal Mehta, an analyst at Prabhudas Lilladher. He explained that cost optimisation will come from better pickup and delivery services, increased truck utilisations, and operational adjustments at the site level.

During the earnings call, management warned that the express segment could face challenges in the first half of FY25 because of sluggish activity on the ground. Analysts believe that the ongoing general elections could keep demand subdued, possibly delaying breakeven.

Shah said she anticipates subdued volumes in the first half of FY25 and a return to normalcy in the second half. “With near-term focus more on cost optimisation than volume growth and weak commentary on end markets we expect pick-up in profitability and traction in end markets from FY26," she added.

The stock’s re-rating largely depends on when Mahindra Logistics’s express business breaks even. The stock currently trades at 29 times estimated FY26 earnings.

Also read: Delhivery may hit a roadblock before delivering big success

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