Aqua Logistics IPO Review

Asset light, but working capital heavy

Due to large and rising debtors and loans & advances, the company has not seen positive operating cash flow in the last five fiscals

Aqua Logistics (AL), promoted by Gopalkrishana Uchil, Rajesh G Uchil, Harish G Uchil and M S Sayad, is a full scope third party logistics service provider offering end to end solutions in the logistics and supply chain domain.

Started in 1999 as a freight forwarding company, AL has consistently increased its capabilities and scope of services. Turning itself into a multimodal transport operator in January 2001, it bagged its first project logistics order from ABB in 2003. It has acquired Rajesh G Uchil & Co, the partnership firm of Rajesh G Uchil, the promoter.

The scope of services now includes multimodal transportation, contract logistics, regulatory compliance, warehousing, value added services and project logistics. The revenue stream of the company comprises income from freight logistics, contract logistics and project logistics. Of the three, about 91.6% of the revenue came from freight forwarding/logistics in the fiscal ended March 2009 (FY 2009) with contract logistics (2.9%) and project logistics (5.5%) accounting for the balance. The company over the years has build up capabilities in meeting special logistics needs of industry verticals such as power, heavy engineering, pharmaceutical, telecom, retail, sports and events. The company has wide presence across the country covering all the major cities of the country such as Mumbai, Chennai, Delhi, Bangalore, Ludhiana, Baroda, Cochin and Pune. International operations are supported by third-party logistics (3PL) partners and vendors. They enable servicing clients in India and abroad.

The object of the issue is to raise funds to finance its future plans of 1) purchase of specialized equipment for project logistics business (Rs 30.52 crore); 2) expansion/ establishment of offices (Rs 17.11 crore); 3) inorganic expansion/ acquisitions (Rs 35 crore); and 4) additional working capital requirements (Rs 45 crore). The balance is for general corporate purposes as well as public issue expenses.

Strengths

Backed by experienced management team, the company is consistently moving up the value chain and has been building capabilities across the logistics value chain. Strong relationship with international as well as domestic logistic players will help the company to tap the growing logistics market in the country with lower investments. The Indian logistics sector, though impacted by slowdown, has shown strong resilience, especially the domestic cargo segment, unlike exim cargo. With the industrial sector bouncing back, logistic demand too is growing strongly.

The company services multiple industry verticals namely power, heavy engineering, pharmaceutical, telecom, retail, sports and events. Moreover, the top five clients of the company contributed just 30% and the top 10 clients account for about 37.7% of the revenue of the company. Hence, any downturn in any one of the verticals or loss of a clientele will not impact the operation of the company much.

On December 22, 2009, the company entered into a Memorandum of Understanding (MoU) with Enkorr Powergen to provide end to end project logistics service comprising the entire range of advisory consultancy and execution for the 3X4000 MW UMPP coal based thermal power plant one each in Tamil Nadu, Andhra Pradesh and Gujarat. The conclusion of the firm contract will provide strong traction to revenue as well as profitability given the high margin nature of the logistic business compared to freight forwarding business.

Weaknesses

The company follows asset light model and does not have its own fleet of equipment or any other logistics infrastructure. A tender driven business such as project logistics warrants owning of certain critical equipments as one of prequalification criteria and not owning equipment fleet will be a hurdle in expanding the project logistics business.

Aqua Specialized Transport, a promoter group company, is currently in the business of transportation, loading of goods, materials or other things in any form. Moreover, some of the promoter group companies, i.e., Aqua Management Consulting Group, Lefworld Private and Aqua PCW have objects similar to the business of the company. As of now these group companies are not competing against the company but helping the company in offering end to end logistics service. While the Aqua Management Consulting Group offers supply chain consultations, the Aqua Specialized Transport offers last mile project execution and specialized transport. This might lead to clash of interest and may affect the profitability of the company. Moreover, the company does not have any non-compete agreements/ arrangement with any of the promoter group entities as of now. This gives freedom to promoter group companies to carry out business on their own and compete against AL.

The logistic industry is highly fragmented with lot of unorganized players as well as organized players especially in transportation and freight forwarding. This is likely to result in aggressive pricing, especially in a downturn, for a slice of business affecting the profitability of the company.

The company has not seen positive operating cash flow in the last five fiscals. For FY 2009, the company had negative cash flow from operating activities amounting Rs 23.84 crore on account of increase in debtors as well as loans and advances. While the sundry debtors have spiked by 82% to Rs 59.73 crore, loans and advances surged by 224% to Rs 23.97 crore during this period.

Valuation

Sales of the company increased by 96% to Rs 213.40 crore for the fiscal ended March 2009 and net profit was higher by 75% to Rs 9.84 crore. At the offer price band of Rs 220-230, the post issue equity capital of the company works out to 20.44 crore at the lower price band and Rs 20.15 crore at the upper price band. Consequently, the EPS at the lower price band was Rs 5.2 and at the upper price band it was Rs 5.3 for FY 2009. Resultantly, the P/E works out to 42.3-43.4 times on the offer price band of Rs 220-230. Comparatively, Arshiya International and Gateway Distripark are available at a PE of 18 times and 19.1 times their FY 2009 consolidated earning. Even on first-half annualized EPS of Rs 9.1-9.2 on post-IPO equity, AL's P/E works out to 24.2-25.