Mahindra Logistics IPO: Is it worth subscribing?

Mahindra Logistics Limited (MLL) has launched it's initial public offering (IPO).

The issue is available till November 02, 2017, for subscription. Price band has been fixed at lower end of Rs 425 per piece and upper end of Rs 429 per piece. 

At 1346 hours, the IPO was subscribed 24%. 

A day before the issue, the company allotted 57.62 lakh equity shares at upper price band to 15 anchor investors aggregating upto Rs 248.2 crore. 

Promoters are selling nearly 14% of their stake in Mahindra Logistics in order to raise between Rs 821 crore to Rs 829 crore. 

At the higher end of the price band of Rs 429, the issue is priced at P/E of 66.9x (post dilution) on FY17 basis, which appears to be expensive given the low financial performance. 

MLL's consolidated revenue in FY17, FY16, FY15 came in at Rs 2,676.25 crore, Rs 2,077.12 crore and Rs 1,939.55 crore, respectively.  Supply chain management  (SCM) and People transportation solutions (PTS) segments contribute 89% and 11%, respectively towards the total revenue. 

Meantime, profit after tax for FY17, FY16, FY15 were Rs  46.06 crore, Rs 35.96 crore and Rs  38.52 crore, respectively. The company's PAT has grown at a CAGR (compounded annual growth rate) of 22.26% for FY15-17. 

EPS in FY15 was Rs 6.64 which rose to Rs 6.7 in FY17. PAT margin has been in the range of 1-2% for the past five years which is very low.

Also there are no listed peers for the company, thus the issue price cannot be compared. 

Mrinalini Chetty and Siddhartha Khemka Research Analysts at Centrum Wealth Research said, "As already mentioned, the issue is at an expensive valuation. Clubbing that with the lackluster performance of other M&M group companies – it becomes difficult to logically recommend subscribing to the issue."

Three risk factors are mentioned by Centrum which needs to be considered while subscribing the IPO. They are - 1) Business activity could be impacted with fluctuations in India’s economic activity, 2) Client concentration risk as entities within the Mahindra Group constitute MLL’s largest clients (~54% of FY17 revenue), 3) Disruption or failure in technology system could impact business operations.

The duo further added, "Even if money raised at such valuations was flowing into the company, it would have ultimately belonged to shareholders. But in this case 100% of the money raised is going to the selling shareholders and not into the company."

However, the analysts further believe, it is quite possible that despite expensive valuations - the listing of MLL can be at a premium given that the company would be the 1st IPO in the niche

SCM logistics segment, which in the current GST environment has good growth opportunities, parental support in the business and current euphoria in the IPO market. 

Market capitalisation of MLL post issue is considered between Rs 3,024 crore to Rs 3,052 crore.