AllCargo Logistics

Shareholders with a long-term perspective can retain their exposures to the stock of Allcargo Global Logistics. While there is no denying that the company would also have to face the effects of the global economic slowdown, its unique business model plus presence across major ports in India places it in a better position to tide over the challenge.

Besides, its access to private equity money (Blackstone Group LP) to fund its expansion plans — an option that is no longer easy to come by — may also help it score over its competitors.

The company’s stock price, however, appears to have captured these factors. At the current market price of Rs 650, the stock discounts its CY-09 per share earnings by over 12 times, leaving little room for significant appreciation in the medium term.
Increased opportunities

The ongoing economic slowdown, which has forced most companies worldwide to tighten their belts could well translate into increased business opportunities for Allcargo given its leadership position in the domestic LCL (less-than-container load) segment.

Apart from reaping benefits from the shift of air cargo to ships, Allcargo may also see rekindling of interest in its LCL service offering. Aimed at large and small exporters and importers with cargo not enough to fill an entire container, this service may now find more takers.

Companies looking out for ways to manage costs are likely to switch to LCL freight forwarding as that will not only enable them to hold lesser inventory, but will also help them cut down on their logistics expenses.

Another factor in Allcargo’s favour is its relative insulation from the impact of a sudden plunge in freight rates vis-À-vis shipping companies whose margins suffered when freight rates plunged last year.

Allcargo’s margins are dependent only on its consolidation margins; the freight rates are merely passed through to clients.
CFS business to drive long-term growth

With an extensive presence in 23 cities in India and 120 offices in 65 countries, Allcargo can deliver and receive cargo to and from over 4,000 locations across the world.

The company also has a significant presence in the high-margin CFS segment — in JNPT, Chennai and Mundra ports. Including JNPT, which enjoys the highest volumes in the country, the company’s presence in Mundra also holds potential, what with Gujarat turning into an investment hot spot among Indian industrialists.

Having a presence in Chennai may help it rake in higher volumes once the manufacturing sector picks up. It has already expanded its Chennai CFS capacity from 50,000 TEUs to 84,000 TEUs.

The CFS business, which derives revenues from the rentals for containers stored on its premises, pending customs clearance, had benefited significantly from the increased dwell time last quarter.

From an average of 11 days, the dwell time had increased to 16 days in JNPT and 15 days in Chennai. Attributed mainly to the delayed payments and reluctance of banks to extend line of credit, the increased dwell time of containers had helped Allcargo (other CFS players too) rake in better realisations and margins. While sustaining this may no longer be practical, the company may still continue to enjoy decent margins.

Allcargo also has a presence in the equipment hiring business, by virtue of the merger of Transindia Freight Services with itself. This division undertakes the movement of containers principally from port to CFS and vice-versa and factory-stuffed containers from factories to the port. Presence in the equipment business has helped Allcargo not only broad base its service offerings but also expand its revenue base. The management has expended about Rs 100 crore towards building the equipment bank (cranes) for this division.
Capex funding in place

The company plans to spend Rs 140 crore, spread over the next year and a half, towards establishing CFS (container freight stations) and ICD (inland container depots) in Dadri, Hyderabad, Nagpur and Goa.

These will be funded through a mixture of debt and private equity money (Rs 242 crore) that the company had raised in February last year by selling 10.4 per cent stake to Blackstone Group LP.

While the next round of fund infusion from Blackstone is due only in September 2009, Allcargo may, till then, take the debt route to fill the funding gap. While this temporary preference for debt may not pose any immediate concern for the company (debt-to-equity ratio well below normal), it can become worrisome if the Blackstone PE deal is called off in the interim period; this poses a major risk for the company.
Financials

For the quarter ended September 2008, the company reported sales and earnings growth of over 56 per cent and 150 per cent respectively.

EBITDA margins for the same quarter expanded by a percentage point to 11.3 per cent. On a segmental basis, the company’s MTO business registered a sales growth of 60 per cent. There was, however, a sequential decline in volumes.

As this segment remains the main contributor to revenues (64 per cent in Sep ‘08), its performance in the coming quarters will need to be carefully monitored. The CFS segment, which made up for over 29 per cent of the total revenues, almost doubled its revenues, benefiting from the increased dwell time at ports.

The fledgling equipment division made up for the rest. Profit numbers of ECU Line, the company’s Belgium-based subsidiary, also witnessed a growth of over 160 per cent.

A slew of cost-cutting measures taken by the company last quarter have helped it keep a tab on cost overheads despite increase in revenues.