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Allcargo Global Logistics 1QFY2010 performance highlights and result update

Contributed by Angel Broking

By Angel Broking

Allcargo Global Logistics’ (AGL) consolidated 2QCY2011 results were marginally above our expectations owing to strong performance by ECU Line. Management expects ECU Line’s performance to sustain and double capacity at JNPT CFS by CY2011 end and enhance profitability. There was strong volume growth across segments with improvement in Exim visibility. The stock has underperformed in the last one year on account of subdued performance in ECU Line and is currently available at reasonable valuations. We upgrade the stock to Accumulate.

ECU Line drives profitability: AGL reported a 22.2% yoy and 9.2% qoq jump in revenues to Rs639cr due to strong pick-up in volumes across segments. ECU Line reported 15.6% yoy and 65.6% yoy growth in revenues and profit respectively in 2QCY2010. OPM came in at 10.4%, down by 150bp yoy on lower ground rent in the CFS segment and the Indian MTO segment registered higher depreciation charges coupled with only the absolute hike in freight rates getting passed on. Reported PAT fell 18.7% yoy, but higher by 11.3% qoq to Rs38cr in 2QCY2010 as the company booked other income of Rs18cr on sale of investments in GDL in 2QCY2009. AGL also continued to claim MAT entitlement, which resulted in lower tax rate of 17.6% (20.4%) for 2QCY2010.

Outlook and Valuation: We believe that AGL is well positioned in the container industry, through its MTO and CFS segments. We have revised upwards our CY2011 earnings estimate by 5% and expect AGL to register 22.9% CAGR in profit over CY2009-11E. At Rs171, the stock is trading at 11.3x CY2011E EPS. We upgrade the stock to Accumulate on improved performance by ECU Line with a Target Price of Rs195, valuing the stock at 13x CY2011E EPS.

Improvement in ECU Line volumes; sustainability holds key

CFS volumes grew by 35.4% yoy (down 1.0% qoq) led by strong performance across the three CFS segments on a low base and improving Exim visibility. However, EBIT margins in CFS fell by 775bp yoy and 359bp qoq due to reduction in the dwell time. Standalone MTO volumes grew by 7.5% yoy (down 9.7% qoq) to 6,302 TEU. ECU Line volumes grew 27.1% yoy and 12.5% qoq to 54,000 TEU. Management has indicated sustainability of ECU Line performance in ensuing quarters. Further, ECU Line OPM increased by 176bp qoq to 5.4% as the company was able to pass through the rise in freight rates.

Equipment leasing and project cargo continue to report strong numbers

AGL reported 46.5% yoy growth in equipment leasing (TFSPL) revenues on account of addition of new cranes. However, there was a dip in EBIT margins by 392bp on account of higher depreciation charges. AGL reported 75.0% yoy growth in project cargo revenues thereby boosting MTO segment. We expect both these highmargin segments to contribute 10% to consolidated revenues from current levels of 5% in CY2011

Investment Arguments

High infra spend to boost project cargo, equipment hire businesses

The Eleventh Five-Year Plan has earmarked a substantial US $500bn for the infrastructure sector, which will lend a boost to the logistics segment in particular the project cargo and cranes business. We believe that AGL's high-margin project cargo and equipment hire divisions are well placed to capitalise on the emerging opportunities and post 30% CAGR in revenues over CY2009-11E taking its share in consolidated revenues to 10.0% in CY2011E from current levels of 5.2%.

Steady performance from MTO and CFS/ICD segments to continue

AGL is the leader in the MTO segment offering services of full container load (FCL) and less than container load (LCL). It has three operational CFS near the vital ports of JNPT, Chennai and Mumbai, and an ICD at Indore (Pithampur). We expect container traffic to register 15% CAGR over the next five years following addition of new container terminals and improvement in Exim visibility. Management has indicated doubling of capacity at its JNPT CFS by the end of CY2011E, which will enhance profitability in the longer term. Recently, AGL commissioned its first road-linked ICD at Pithampur with annual capacity of 30,000 TEU. Additionally, it also acquired land at Nagpur, Hyderabad, Hosur and Goa for further expansion. The company has also entered into a joint venture (JV) with Hind Terminal for setting up, commissioning, operating and managing the CFS’s and ICDs at Indore, Hyderabad, Nagpur and Bangalore. With this JV, we expect AGL to garner Hind Terminal’s captive volumes (10 rakes are operating and have plans to add another 10-12 rakes over the next two years) at its respective ICD/CFS. AGL has also entered into a JV with Concor to share its ICD at Dadri, which is expected to get operational by end CY2010E. AGL on account of having a pan-India presence is well-placed to benefit from the growing container traffic.

Performance of ECU Line holds key for stock performance

The stock has grossly underperformed since the last one year on account of subdued performance in ECU Line. Post the ECU Line acquisition, AGL targeted to improve its OPM by 100bp every year. However, while it managed to register a cumulative 150bp improvement in OPMs, net margins have languished over the last three years. This can be attributed to the slowdown in the global economy, which has delayed the integration of ECU with AGL. We expect 100bp improvement in ECU Line each year over the next two years following improvement in the global economy and increasing outsourcing to India.

Outlook and Valuation

We believe that AGL is well positioned in the container segment through its MTO and CFS segments. Moreover, with the ECU Line acquisition, AGL has the opportunity to scale up its operations globally as well as enhance profit. We believe that going ahead the stock’s performance will depend on improvement in the ECU Line’s operational efficiency. We have revised upwards our CY2011 earnings estimates by 5% and expect the company to register 22.9% CAGR in profit over CY2009-11E. At Rs171, the stock is trading at attractive valuations of 11.3x CY2011E EPS of Rs15.0. We upgrade the stock from Neutral to Accumulate, with a Target Price of Rs195, valuing the stock at 13x CY2011E EPS.