Mahindra Logistics Limited (MAHLOG) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the Mahindra Logistics Limited Q2 FY '27 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Manan Chavan. Thank you, and over to you, sir.

Thank you, [indiscernible]. Good evening, everyone, and thank you for joining us for Mahindra Logistics Limited Q2 and H1 FY '27 Earnings Conference Call. We are pleased to have with us today Mr. Hemant Sikka, our Managing Director and CEO; Ms. Isha Dalal, CFO; along with a member of the senior management team. I hope everyone had a chance to view our financial results and investor presentation which were recently posted on the company's website and stock exchanges. We will begin the call with opening remarks from management, followed by an open forum for question and answer. Before we begin, I would like to point out that some of the statements made during today's call may be forward-looking. A disclaimer to that effect was included in the earnings presentation. I would like to invite Mr. Sikka to share his remarks.

Thank you, Mandar. Good afternoon, everyone, and thank you for joining us. Over the past year, we have been deliberate in reshaping Mahindra Logistics into a more efficient, disciplined and profitable enterprise. We have sharpened our operating model, improved unit economics address structural inefficiency and embedded greater accountability across the organization. Today, the impact of these actions is clearly visible in our performance. The business is now moving from turnaround to acceleration from [indiscernible] in the past to building the future. Our focus is increasingly on the quality of growth that we deliver. The depth of customer relationships we built, the length we go to satisfy our customers and our ability to consistently convert growth into sustainable shareholder value. Q2 reflects a business that is growing with greater quality, discipline and profitability. PAT has increased to INR 2 crore compared to a loss of INR 10 crores a year ago and INR 25 crores in the previous quarter, while revenue grew 24% Y-o-Y. Our focus on profitable growth is also reflected in improving capital efficiency. ROCE increased to 12.9% in H1 of FY '27 from 1.7% in H1 of FY '26, demonstrating stronger capital productivity and our commitment to creating long-term stakeholder value. More importantly, these results demonstrate that we can grow faster while improving profitability and operating discipline. This is exactly the outcome we have been working towards profitable growth, stronger cash generation and sustainable value creation. The teams have defined this quarter. First of all, our Express business [indiscernible] has crossed an important milestone. [indiscernible] turned EBITDA positive during the quarter and for H1 FY '27 as a whole also, demonstrating that the business has reached a critical inflection point and is beginning to realize the benefits of scale, operating leverage and disciplined execution. Second, contract logistics continue to strengthen its leadership position. Growth was driven by new customer additions, deeper wallet share with existing customers and a relentless focus on profitability and execution. [indiscernible] reduction, you would recall has been an issue in the past few quarters. And we had committed in quarter 1 of last year, that we would reduce our white space that time of 1.6 million by 95%. I'm happy to share that this has progressed in line with our commitments. We have achieved our target reduction that we've committed in quarter 1 of last year. Having solved the white space problem, we will not be calling this out from now onwards as it is business as usual now. Third, operational excellence is increasingly becoming a competitive differentiator. Better service levels, higher asset productivity and consistently positive customer feedback reflects the execution discipline we have built across the organization and provide a strong foundation for sustained growth. Let me now take you through the business update. Let me start with MSPS, which is our B2B Express Logistics business. MSPL or [indiscernible] has turned a corner. The business delivered its first ever EBITDA positive quarter and achieved EBITDA positivity for H1 FY '27, making a significant milestone in our transformation journey. Actually, this momentum is visible in the numbers. Q2 revenue grew 69% Y-o-Y while EBITDA improved from a loss of INR 9.1 crores in quarter 1 of last year to a profit of INR 2.3 crores in quarter 2 of this year. Higher volumes, improved yields and disciplined execution are translating into stronger financial performance. Since June of this year, Ankur Bansal has taken over as the CEO of MSPL. Under his passionate and hands on leadership, the business has accentuated a relentless focus on improving business economics, execution discipline and profitability. The progress is not visible in both operating and financial format. Very happy to state that the leadership team of MSPS is aligned to these targets and these challenges. The mandate is clear, our MSPL team to convert EBITDA momentum into achieving PAT positivity with improving orating leverage and growing business momentum we are increasingly confident about the PAT and work excitedly to grow this business. Let me come to other business contract logistics, which continues to compound strongly. Quarter 2 revenue grew 28% Y-o-Y, while gross margins grew 20% Y-o-Y demonstrating that the growth and profitability are improving together. Vice reduction, as I called out, has been successfully executed with vacant space now reduced to just 5% of the June 2025 levels, in line with our commitment. E-commerce and e-commerce businesses continue to be important growth engines, benefiting from favorable market tailwinds and our strong execution capabilities. We continue to win the right businesses. New customer additions across sectors reflect the strength of our solutions, service delivery, service delivery excellence and trusted customer relationships. In our Mobility business, we continue to deliver profitable growth. Q2 revenue grew 33% Y-o-Y with gross margin showing 19% Y-o-Y growth, underscoring the strength of our operating model. Our focus remains on quality over volume, expanding our customer base while ensuring that growth translates into sustainable profitability. In our Last-Mile Delivery business, LMD as we call it, the focus remains firmly on profitable growth. Revenue stood at INR 68 crores in quarter 2 of FY '27 as we continue to prioritize business quality and margins over low value volume. The benefits are clearly visible in our profitability metrics for this business. Gross margins improved 18.8%, supported by a superior customer base, pricing discipline, excellent execution and a very tight control on all the costs. [Dick's] excellent performance has given us the confidence that our last mile business is now ready to pivot towards growth from our early articulated and no-loss strategy. If you would recollect that in the previous communication, I had said that our target for our strategy for LMT business is while we continue to grow the business, but the main focus is no loss strategy. We are now pivoting this business from a no-loss strategy to a pivot towards growth, and we are feeling more excited and more confident about this business. In our freight forwarding business, we are rebuilding momentum. Revenue for quarter 2 FY'27 stood at INR 50.6 crores, growing 12% Q-on-Q. Our standard leadership team is driving sharper market engagement broader commercial coverage and a healthier pipeline, positioning the business for stronger growth while maintaining high service levels and operational discipline. So to conclude, quarter 2 FY '27 was a quarter of execution and outcomes. We delivered a sharp improvement in profitability. MESPL Rivigo achieved EBITDA positivity by space in contract logistics reduced to our committed and targeted levels by September of this year. And each of our businesses remain firmly focused on profitable growth. Most importantly, these improvements are broad-based and structural. The turnaround journey we started is now evolving into a sustainable growth story. Importantly, the benefits are now visible across multiple businesses. giving us confidence in the durability of this performance. Looking at our [indiscernible] is clear. Our focus remains on 3 priorities: drive consistent growth in revenue, profitability and cash generation. continuously raise the bar on operational excellence and productivity and deepen our customer relationship by delivering differentiated value and superior service quality. [Our video] of becoming India's #1 integrated logistic solution provider remains firmly intact. We have centered our foundation, build the right team and created strong momentum across the business. We are confident that these trials position us well to deliver sustainable growth, stronger earnings and long-term value creation in the quarters ahead. With that, I will turn over to our CFO who will take you through the financial performance in greater detail. Over to you, Isha.

Thank you, Hemant. Let me now take a brief on the consolidated financial performance for quarter 2 FY'27. Our revenue for the quarter has increased by 24% on a year-on-year basis to INR 2,095 crores, largely driven by momentum in the M&M business as well as momentum in MESPL. Consolidated gross margin stands at 10.1% in Q2 FY'27, sequentially up by 40 bps versus Q1 of 27, reflecting our ongoing commitment to improving operating performance. Year-on-year, our gross margin remains flat in percentage terms, that is at 10.1% and has improved by INR 41 crores in line with revenue growth. EBITDA for the quarter stands at INR 124 crores, up from INR 85 crores in Q2 FY'26. EBITDA margin has grown from 5% to 5.9%, which is an increase of 90 bps year-on-year. Our discipline on overhead cost and focus on judicious spending is reflected in this year-on-year operating leverage. This is also visible in our adjusted EBITDA, which is EBITDA after removing the accounting impact of [IndAS] 116, which has increased by 110 bps year-on-year from 1.8% to 2.9% in quarter 2 FY'27. We continue to have low leverage. Our stand-alone balance sheet has been debt-free since September 2025. At a consolidated level, we have INR 55 crores of debt, largely comprising of loans for vehicles purchased as part of our asset-right strategy. Overall, we have a consolidated cash balance of INR 363 crores and therefore, net cash of INR 308 crores. Hemant spoke about Q2 FY'27 in the quarter of both execution and outcomes. The outcome of improving profitability, our asset-right model and working capital discipline have together culminated in a steadily improving return profile. We generated free cash flow of INR 52 crores during H1 FY'27 versus a free cash flow of minus INR 210 crores in in H1 FY '26. ROCE for H1 stands at 2.9% versus 1.7% during the same period last year. Our ROE has improved from minus 5.3% in to positive 8.7% in H1 FY'27. Before I move on to segment performance, there is one callout that I'd like to make regarding the stand-alone financials. We have declared a dividend of INR 15 crores in one of our wholly owned subsidiaries, which is reflected in the other income line in the MLLs stand-alone financials. This is a onetime dividend only and gets knocked off in the consolidated performance of MLL. Moving on to segment performance. Our contract logistics revenue for Q2 FY'27 is at INR 1,688 crores as compared to INR 1,317 crores in Q2 FY'26, which is up by 28%. EBITDA has grown in line with revenue INR 215 crores in as compared to INR 89 crores in Q2 FY'26. In the Last-Mile Delivery business, our revenue for Q2 is INR 68 crores compared to INR 88 crores in Q2 F 26 down by 23% as part of our conscious choice to move towards a more profitable portfolio. EBITDA has improved from INR 4 million in Q1 FY'26 -- to in Q2 FY'26 to INR 1.6 crores in Q2 FY'27. You may all recall that our strategic portfolio recalibration was largely done during Q3 of FY'26. We expect that as we enter the quarter 3 of this financial year, we will once again be a year-on-year growth in the last mile delivery business. Our [same] forwarding revenue has grown by 12% quarter-on-quarter from INR 45 crores to INR 51 crores in Q2. Year-on-year, this business has declined by 44%, reflecting the impact of external disruptions and customer attrition during the recent leadership transition period. As Hemant already mentioned, the new team is engaged in building a strong pipeline. Despite the top line decline, EBITDA is at INR 1.7 crores in Q2 FY'27, which is only a decline of INR 50 last year-on-year. This is a consequence of operating discipline and margin focus even in the adverse environment. We have spoken in detail about the Express business, which has grown by 69% year-on-year to a revenue of INR 169 crores in Q2 FY'27. We are pleased to declare an EBITDA positive quarter for this business for the first time since acquisition. EBITDA for this quarter is INR 2.3 crores compared to minus INR 9 crores in Q2 of 2027. You will remember that we achieved gross margin breakeven for this business in the quarter 2 of last year and have now achieved this significant milestone as the business accelerates its turnaround journey. Mobility revenue was INR 119 crores as compared to INR 90 crores in Q2 FY'26 up by 33%. EBITDA Is also up INR 3.4 crores compared to INR 2.1 crores in Q2 last year. This brings me to the end of the commentary on segment performance. Let me now open the floor for question and answer.

[Operator Instructions] The first question is from the line of Jinesh Joshi from Prabhudas Lilladher Capital.

Congratulations on a good set of number. My first question is on our B2B Express business, which has achieved an EBITDA breakeven in this quarter. And I believe that the network optimization and the repricing exercise is more or less over. And given the business is now on path to profitability, how should we think about the steady steel EBITDA margin in the business, given one of your peers is operating at about 10%, 12% margin. I'm not asking about the explicit guidance. But if you can just maybe highlight how the margins will evolve from here on, given the fact that you also choose to invest in the network expansion. So some color on that will definitely help.

Thank you, Jinesh. So let me just broadly share without doing any forward-looking guidance. See, as Ichalsaid, we had gross margin positive quarter, a few quarters back. And this quarter, we have done the EBITDA positive. In the last quarter, we had said we are very close to EBITDA positive number. Now I can tell you that from here, we are -- our next mile store is obviously to be pad positive. I think we have all the elements and actions in place to achieve that number. We have to execute for next few months and quarter, and we should be able to achieve a PAT positive. So we have a full visibility and full control on achieving that number. On the side, we are kicking off a very ambitious project on our new tech platform development for MESPL and MLL as a whole. I think that is a very strong ingredient and an input for us to scale this business up. As you know, for the last 3 years, while the business was making considerable losses, we were running the business in terms of our tech stack as kind of lights on board. But now having achieved this milestone and a clear line of sight to add positivity, we will now want to start investing back into the business. Overall, at a strategic level, we think of Hemisphere as the big story that will play out for us in the next few years. It will improve the performance every quarter, but this is not a thing which will play out fully in the next 6 months or 1 year. This is a kind of a, I would say, a decade story. All the people who are our competition have built this business over several years, we have taken now 3 years to reach the 5 store. We will continue to invest into this business. And we believe that this business will be a very healthy business and will be a very strong differentiator for MLLs. And also for our customers because we want to be a full logistics player while we will continue to serve our FCL customers and all our warehousing customers, it's very important that we give them a full light of services that includes our PDL network business with Rivigo and our freight forwarding business. So this is where we stand. I would like you to think about this business as a multiyear growth story and not like achieving some milestone, which would happen in the next 3, 4 quarters. This is a business that will require a huge amount of hard work, huge amount of passion and commitment from our leadership team and also investments. As we achieve PAT profit, we will continue to put money back into the business. and make sure that our network grows. Right now, we are not seeing all the pin codes that customer -- our competition is serving. We need to grow this business, go to areas where we currently don't serve. Please, Jinesh, and others think about this business that this is a growth driver for MLL, and it will require a few more years of work, and we clearly understand it's a very profitable business. Every network business, if run well, is very profitable. Think of this like an airline business. Our airline is highly profitable. Airline poorly run is not profitable at all. Severally, this business is same well-networkbusiness, which is well run, is very profitable. Otherwise, it can really sink the ship. So we want to run this business in a very mature and in a very competent way. While we will build our teams, we will build our capabilities, we'll build our network, we'll build our technology we want to keep a very strong focus on profitability and customer satisfaction. Sorry, Jinesh, it has a long answer because there is no short answer to your question.

No, sir, I understood pretty well explained. Sir, one last question from my side and that pertains to gross margin performance in the contract logistics business. if I recollect properly, in the previous quarter, the margin was at about 10.2% and it was impacted by certain entry factors like the start-up costs that we had incurred with respect to the rapid site additions. And I think there were some manpower shortages as well. Apart from that, from wage revisions as well as fuel cost challenge. But if I think from this quarter's perspective, we must have seen some kind of customer onboarding that must have happened. And also the pass-through clauses must have been activated. So given this scenario, ideally, our gross margin improvement on a sequential basis should be higher than 30 bps that we have reported. So maybe if you can just talk a bit about that.

So just to completely align with you that our fuel pass-through has happened in total, whatever was the fuel stress in the previous quarter that has been completely passed on. So there is nothing and you can see that effect coming in the 30 bps improvement that we have seen. Apart from that, there was a big issue last quarter on the manpower cost, which is still playing out. That has not been passed out fully. If certain ideas we could pass, but new things have come in. For example, I'm sure you are aware of the new rule that the government has brought in, in terms of provident fund, the slab has been changed from INR 15,000 crore to INR 25,000, and there are a few more changes happening some minimum wages are still under pressure. So manpower, I would still say is the manpower cost is still not fully passed through. And it's difficult to pass through that because -- there are no written contracts on both sides, except that name wages get passed on. So like in fuel, there are clear contracts that if beyond a certain percentage here and there, it gets passed through. and the fuel cost was a very high increase of INR 8 crores. So that was not a very difficult thing. Manpower, while we are working on improving the productivity of our manpower, but I think manpower will take a little bit longer to pass through. And that is what is playing out in our gross margin improvement. However, as Esa called out in the previous minds in the last quarter and the quarter before that. we are looking overall for 100 bps improvement in our gross margin, and we stay committed to that.

The next question is from the line of Krupashankar NJ from Spark.

Good evening, and thank you for the opportunity. First of all, congrats on achieving the a bit of profitability in MESPL, Express business. Just wanted to get some sense around the Q2 growth momentum that you've seen in this business, right? It's been double digits. Qualitative -- I'm not looking for exact numbers, but qualitatively, can you just share what would have been led by realization and volumes? Or if you can just -- what was the bigger driver among the two. And is it fair to assume that given that [indiscernible] is delayed this year, this would result in a better growth in the -- or there will be a spillover of volumes through the third quarter, which will continue to drive operating leverage? That's my first question.

Two comments to that. So the improvement quarter-on-quarter in MESPL is driven by a mix of both volume and yield. I would say that for this current quarter, it is more yield than it is volume because we have taken selective calibration actions in line with our strategy to improve unit economics. And hence, like I said, it is more based towards yield [indiscernible] towards volume. As far as the STM momentum goes in this slower into Q3, I'm not going to sort of guide on it specifically for quarter 3, but I can tell you that given the size of our business and all the actions that we are seeing in this business, we are continually seeing an improving trend in volumes, and we hope that, that will continue through the next few quarters as well. So we will continue to work on all these levers as we move towards our PAT profitability.

Very clear. The second question is on the Contract Logistics business. And just wanted to follow-up on previous one of the questions asked. Was there any capacity buildup for the festive period, especially towards the e-commerce restive sale, which has been a drag at the same amount or there's no specific impact of that. And just taking that one thing forward, you did mention -- Hemant mentioned about the tech platform development and how you're going to make investments towards both the businesses, right? So when you quantify and probably speak a little bit more about these businesses, how it will benefit both the segments like your contract logistics?

So let me answer the first question first. We have built up scale especially to target the peak. That's the nature of the industry, and we play quite aggressively in that so we have come up with quite a few of flex sites on our e-commerce and Last-Mile Delivery business. These always come at higher cost because we need to hire people, train people and then they are put to use. And this time, again, peak season got a little bit here and there. We don't get much visibility till the season is actually on our heads. [indiscernible] before we have to prepare. And so we take calls on our side of manpower to bring the [indiscernible] train them. So those cost copper are still there, which play out in every quarter 3 in the still will play out again this year. This is the nature of the industry. And if you are a play a serious player there and since we need to keep our customers happy. We'll take such calls, and we have to play the scale. So that is still playing out this year. Your second question was?

So more on tech platform, yes.

I can just say, in fact, our CapEx spend has got approved today in the Board meeting. So I will just leave it there and say that we are not setting this as a tech platform. We are treating this as a business transformation project won't like to share any numbers because we believe that we have come up with a solution which is very frugal and don't want to share in the public forum what we will invest in this but I can say that this will be a very good, very simple to use and very frugal tech transformation that we are trying to achieve. And we are just trying to work on a few things in terms of time lines. But we believe that this will add significant value to our contract logistics business, especially initially on the transportation side because we are doing the programming phases. And then MESPL will later on the warehousing side. This will completely change the company's way of working, simplify the company, automate our processes, reduce our cost and improve our customer satisfaction. The customers will get full end-to-end visibility on their loads, and we will be able to use quite a few of AI use cases so that there's a lot of manual intervention that we currently do that can be done by engines. So we have conceived the project in a lot of detail. However, I would like to share more details once we start the execution of the project. That will still be somewhere around like quarter 4 of this year.

Got it. So what I wanted to actually touch on was that this is more towards existing operations, making it better, enhancing it. rather than this stack as a front-end solution for the clients, right? So that's where probably coming at.

Yes. So this is -- so what we believe is that with our current tech stack. We are scaling up the business, as you can see every quarter, but it is being done with a huge amount of effort. And that cannot -- manual effort cannot continue at this pace. We have to leverage technology, and that is what we are trying to bring that this technology will simplify our processes, help us scale better. And right now, many of our tech packages are working in silos. This will bring everything on one platform. And currently, I suppose you are my customer for [indiscernible] and [indiscernible]. I serve you through two different platforms. Going forward, I will serve you through a single platform. So even if you are giving me a full truckload or a part truckload, one parcel, you can still see end-to-end where your loads are and how we are doing against our commitments. So I think it will be a really good customer experience. It has a very good experience on our own teams to be using this tech platform and executing better.

The next question is from the line of Achal Lohade from Nuvama Institutional Equities.

Sir, I wanted to check first on the contract at [indiscernible]. Given the monsoon challenges we've had in this year, how do you see that impacting in terms of our customers? And if you could call out what is the mix of the track the business and in the entire portfolio if you close call out that? That's my first question, sir.

I mean, we all know the monsoon has been, I think, 14% below the [indiscernible] number as a country as a whole. How it has been not similarly distributed across states. There are some states that have done extremely well and some states have gone extremely bad in terms of receiving the monsoon rains. So it will play out differently in different regions. On any call out on specific industry, you may need to approach those people there. From our side, we can say that whatever [durations] we may have from state-to-state region-to-region product category product category customer to customer at an overall level, we will be in what we have set out coming. So if [indiscernible] start pushing the ad to make sure that we are able to do what we can do to our Board.

The other question I had for the contract logistics, you mentioned that to the gross margins up about 11% in FY '26. We are running at about 10.2% and we have seen in [indiscernible] 9.5%. Is that 100 basis points, what you caught out for that drop margin or the EBITDA margins for the contract [indiscernible]?

We did specify any number. We had specified that we are looking at improving our gross margins by about 100 bps. But we didn't call out 11% or 12% like that.

No, I'm just looking at the reported numbers. So FY '26 was 11%. So that 100 basis points should I look at from the current level of 10.4%, 10.5% or to the full year last year? I was more curious to know that.

We are looking -- actually, you can look at it. We talked about it when we were exiting last year. You can look at it from last year's exit. As Hemant mentioned in the current period, we have had a lot of pressure from a labor cost perspective and other factors, including [indiscernible] build up that caused some ups and downs in gross margin through the year. But directionally, we will continue to look at 100 bps improvement from exit of last year.

That's what gross, let me just to clarify [indiscernible] that.

No, you're right. You're right,.

Understood. Understood. And just if you could talk about the CapEx, what is the CapEx plan for the current year and which all segments we should look at the CapEx spending?

CapEx spending will be -- as per our guidance that we gave, it will be closer to like INR 100 crores kind of a number, plus/minus INR 10 crores here and there. So you can almost take it like crore kind of a number. We are on track. In H1, we have spent almost off the out. So we should be on track to do that. And we have a very strong -- we have established a very strong approval process internally in terms of our CapEx spending and what kind of return metrics we are targeting there. No project is going below that, and we are very -- I mean, judiciously tracking once the project is implemented, how the project is doing as per the business case approvals. So that project process is working very well. So we are looking at good growth coming from CapEx and looking at improving our profitability in that sense from those projects.

Got it. If you could call out which division is largely oriented towards?