Rationale

The rating takes into account the strong parentage of Mahindra Logistics Limited (MLL) as a subsidiary of Mahindra & Mahindra Limited (M&M, rated [ICRA]AAA (Stable) / [ICRA]A1+). It also considers MLL's established presence in the supply chain management (SCM) segment with M&M being a key customer, the increasing client diversification in its SCM business, and the respectable position it enjoys in the people logistics (enterprise mobility or EM) business. Despite a 9.8% YoY decline in revenues and 90 bps dip in operating profit margin (OPM) in FY2020 due to the slowdown in the domestic automotive industry and the disruptions caused by the Covid-19 pandemic, the company's financial risk profile remains strong as characterised by its healthy capital structure of 0.1 time as on March 31, 2020 and debt coverage indicators (total debt / operating profit before depreciation interest and tax or TD / OPBDITA of 0.3 times as on March 31, 2020) as well as a strong liquidity position. MLL continues to primarily follow an asset-light business model (assetlight model on a standalone basis, while its subsidiary company, 2X2 Logistics Private Limited has an asset-heavy model), which is positive, especially in a declining business environment. MLL is positioned as a key intermediary in M&M's automotive and farm equipment business by providing end-to-end supply chain solutions. The strong business linkage with the Mahindra Group, particularly M&M, in the SCM segment, provides MLL with the requisite experience, volume and a stable business avenue. MLL's SCM business has a large contribution from the automotive segment, in line with its large share of business from the parent entity. While MLL has also developed a strong client base outside the Group in other segments such as e-commerce, consumer and pharmaceutical verticals, its current dependence on the Group remains high at ~51% of the total revenues in FY2020 (~56% in FY2019). MLL has a high concentration of revenues on the automotive industry (~65% of its total SCM revenues in FY2020), exposing it to high industry cyclicality. The impact of the same was reflected during FY2020, when MLL's automotive segment revenues witnessed 16.8%1 YoY de-growth due to the overall slowdown in the domestic automotive industry coupled with the negative impact of the pandemic during Q4 FY2020. During Q4 FY2020, MLL reported 20.0%1 YoY degrowth in its revenues due to 20.4%1 YoY de-growth in its SCM business revenues and 16.5%1 YoY de-growth in its EM business. Due to the under-absorption of fixed costs due to lower revenues, MLL's OPM declined to 3.0% in FY2020 from 3.9% in FY2019. MLL's business also remains vulnerable to stiff competition from many unorganised players and technology driven start-ups. ICRA notes that MLL's performance in Q1 FY2021 has been impacted by the ongoing pandemic. While its automotive business under SCM and EM business have been impacted, the non-automotive SCM business is witnessing scale up, which will partly compensate for the overall decline in revenues in FY2021, However, its OPM is likely to witness a decline in FY2021. The Stable outlook reflects ICRA's expectations that MLL will continue to enjoy strong financial flexibility as part of the Mahindra Group and its strong linkages with the Group. ICRA believes that MLL will maintain its current comfortable capital structure and liquidity profile despite the de-growth in revenues and the decline in OPM expected in FY2021.