IPO - Aqua Logistics Analysis

Investors can consider giving the initial public offering of Aqua Logistics, an integrated logistics solutions provider, a miss. At the upper price band of Rs 220-230, the offer is priced at about 26 times the company's likely FY-10 per share earnings on a post-offer equity base. Though the high valuations, to a great extent, are a function of the 32 per cent dilution in equity base that this offer would result in, it still appears a tad pricey compared with some of the listed companies in this space.

The company's persisting negative cash flow from operations and its relatively poor margin performance are concerns. Investors looking for logistics sector exposure may be better off investing in existing listed companies, many of which enjoy stronger operations and business models.

Growth prospects

Having started as a freight forwarding company, Aqua Logistics has been attempting to evolve into a full-fledged 3PL logistics service provider. Though there's no denying the high-growth potential in this business, the company's ability to weather competition and gain a share in this business is as yet unproven. One indication is this: Though the company has broadened its service offerings to include contract logistics and projects, it still derives a chunk of its overall revenues (91 per cent in FY-09) from freight services only.

While the nascent demand for end-to-end logistics services could partly explain the high revenue dependence on freight services, this also suggests that the company's headway in the high-margin value-add services are likely to be slow.

Despite growing its revenues at enviable rates over the last three years, the company's performance at the operating and net profit margin levels somehow has not been as outstanding. Operating margin hovered at around 11 per cent levels, while net profit margins contracted from 6.5 per cent in FY-07 to 4.6 per cent in FY-09, suggesting a high dependence on volumes and little pricing power.

Given this background, the shift in focus towards contract logistics and projects would help improve margins. Even so, the extent of improvement may be capped given its relatively less-established brand presence in 3PL.

The company may have to price its services competitively to establish market presence especially since the 3PL market is relatively organised and has many established players such as AFL, Kuehne and Nagel and Reliance Logistics. But to its credit, it has over the years managed to get repeat orders from companies such as Ranbaxy, HCL Infosystems, ABB and BHEL.

The company also utilises the services of its associate and group companies for supply-chain consulting, last mile project execution, specialised transport and supply-chain IT. Its asset light model (peers own assets such as warehouses, trucks or rakes), while affording better flexibility in the selection of vendors, may, however, also restrict its ability to control costs.

Cash flows

Though Aqua has scaled double-digit growth rates in revenues and profits (on a low base), its cash flows from operations have continued to remain in the negative. In the last two financial years, the company's receivables position has shown strain. The significantly higher debtor days (about 102 days in FY09) as against creditor days (14 days) may also explain Aqua's strained cash flows.

However, given that the two years gone by had seen the worst of the credit crisis, improvement on this score with better trade undercurrents can be expected. Besides, the company's plan to infuse Rs 45 crore from the offer proceeds towards funding its working-capital requirements might also help.

Despite the testing business dynamics in the last two years, many of its listed peers (helped by PE funding, strong revenue model or relatively higher pricing power) did manage to keep cash flows positive.

IPO Proceeds

The company plans to raise Rs 150 crore at the top end of the price band. The company is also offering Rs 5 per share discount to retail investors on allotment.

Enam, Subhkam Ventures and HT Media hold equity stakes in the company.

via BL