Ftwz Business Model

Secular trends

India Logistics Ravindra Deshpande [email protected] +91 22 4062 6805

10 August 2012 Elara Securities (India) Private Limited

 

 

Notes

Elara Securities (India) Private Limited

10 August 2012

India | Logistics

Initiating Coverage 

 

 

India Logistics Secular trends

Inefficient nature of domestic industry 100

(%)

Trends of India’s container traffic are showing definitive strength and direction aided by strong EXIM traffic. EXIM trade in value terms has registered growth of 21.9% over the last five years. The increased port capacities have driven the 10.4% CAGR in tonnage terms and 7.0% growth in Twenty Foot Equivalent Unit (TEU) terms. Evidence shows that India’s EXIM trade is insulated from the gyrations in currency and we expect the same trend to continue going forward.

10

80

31

18 9

25

60

25

24

15

40

9

20

35

49

50

China

USA

0 India Transportation Inventory

Warehousing Others (including losses)

Improving logistics infrastructure & structural drivers

Source: Cygnus, Elara Securities Research

India traditionally has lacked logistics infrastructure. Logistics cost as a per cent of GDP in India is around 13%-14% as compared to 7%- 9% in the developed countries. However, there have been winds of change off late with the government’s thrust upon infrastructure investments and increased presence of organized players. Tax sops, Free Trade Warehousing Zones (FTWZs) and the long-awaited GST once implemented would provide impetus for organized logistics players with national presence.

Rising EXIM traffic despite GDP variations (%) 40 30 20 10 0

Companies beyond Capex; high FCF visibility

EXIM Trade growth

Interestingly, companies in our coverage (Gateway Distriparks, and Allcargo) will leave behind a period of huge capex and will look to monetise their assets. The business models have now become integrated and attained a credible size. These businesses have a significant lag and have an entry barrier to some extent. For an economy of India’s size, these companies look to be structural beneficiaries. Arshiya, although is into the capex, its unique business model and first mover advantage promise a strong cash generation once the project attains the operationalisation stage. The leverage on Arshiya’s balance sheet is likely to recede once the cash inflows start with the phase wise commissioning of its Panvel and Khurja warehouses.

FY11

FY09

FY07

FY05

FY03

FY01

FY99

FY97

FY95

FY93

FY91

(10)

GDP Growth

Source: Industry, IPA, Elara Capital Research

Container traffic is on the rise as well (TEUs) 9,000 8,000 7,000 6,000 5,000 4,000 3,000 FY08 JNPT

FY09

Chennai

FY10

Tuticorin

FY11

Kolkatta

FY12

Cochin

Others

Source: IPA, Elara Capital Research

Valuation We are optimistic on the stability of Gateway Distriparks operations and see its high cash generation and payout policy as reasons to own the stock. Allcargo has robust growth outlook and a balance sheet to support its price. Arshiya International is a high-risk high return play which is fighting the bogey of debt and incident concerns on its business model. We would urge investors to keep it in their radars, as we expect the concept of FTWZs gain credence progressively. We have a Buy on all the three companies.

Price performance 140 120 100 80

Sensex Allcargo Source: Bloomberg 

Aug-12

Jul-12

Jun-12

May-12

Apr-12

Mar-12

Feb-12

Jan-12

Dec-11

Nov-11

Oct-11

Sep-11

60 Aug-11

(Rebased to 100)

Global Markets Research

Consistent rise in container traffic

Gateway Distriparks Arshiya International

Key Financials CMP Market Cap Target Upside/ (INR) (INR mn) price (INR) (Downside) (%)

 

P/E (x)

EV/EBITDA (x)

Price/ Book(x) Dividend Yield (%)

FY13E FY14E

FY13E FY14E

FY13E FY14E

FY13E

ROE (%)

FY14E FY13E FY14E

Gateway Distriparks

136

14,732

180

32.3

9.0

8.1

4.7

4.0

1.2

1.2

5.5

6.2

14.2

14.9

Allcargo

143

17,872

180

26.3

7.5

5.8

4.3

3.3

1.1

0.9

1.1

1.2

15.8

17.8

Arshiya

126

7,413

170

34.9

4.4

3.0

8.8

6.3

0.7

0.6

1.0

1.0

18.1

21.6

Source: Company, Elara Securities Estimate 

Ravindra Deshpande • [email protected] • +91 22 4062 6805

 

Elara Securities (India) Private Limited

India Logistics

Table of Content  Executive Summary………………………………………………………………………………………………………………

3

Secular trends………………………………………………………………………………………………………………………..

5

Consistent rise in container traffic………………………………………………………………………………………

8

Intensifying thrust on infrastructure…………………………………………………………………………………..

9

Government policies: Encouraging investment……………………………………………………………….

11

Valuation & Recommendation……………………………………………………………………………………………

13

Company Section Gateway Distriparks A safe bet……………………………………………………………………………………………………………………………….

15

Investment rationale…………………………………………………………………………………………………………….

18

Valuation & Recommendation……………………………………………………………………………………………

22

Allcargo Global Logistics Growth on wheels……………………………………………………………………………………………………………….

25

Investment rationale…………………………………………………………………………………………………………….

28

Valuation & Recommendation……………………………………………………………………………………………

31

Arshiya International Banking on warehousing……………………………………………………………………………………………………

35

Investment rationale…………………………………………………………………………………………………………….

38

Valuation & Recommendation……………………………………………………………………………………………

42

 

 

2

 

Elara Securities (India) Private Limited

India Logistics

Picking up momentum Everything is falling in place The Indian logistics industry is set to reap the benefits of the macro economic factors which are conducive for the growth of organised players in the market. Although the domestic logistics is ~USD90bn + industry, it suffers due to fragmented nature as well as lack of technological as also manpower investments. Hence, the logistics cost as a percentage of GDP stands nearly double (at 13%) as compared to the developed world. Therefore, we believe, companies investing in the right areas or having a proven track record are likely to benefit due to growth in the domestic logistics sector. Growth continues despite tepid GDP and rupee The Indian logistic industry is characterised by lower containerisation (~20% vis a vis 75% in developed world) which underscores inefficient nature of the industry. However, the EXIM transport has been witnessing higher containerisation in the past decade or so. The container traffic has registered growth despite slowdown in the GDP growth rates or the volatility in the rupee. Similarly, the country is witnessing higher EXIM traffic in value terms as well. In the last decade, EXIM trade in the country has registered strong growth of 23.7% CAGR in value terms. The growth has been unabated throughout the decade notwithstanding rupee depreciation and slowdown in the GDP. Hence we believe higher containerisation as well as consistent rise in the EXIM trade is likely to provide opportunities for domestic logistic players. Companies having presence near Mumbai and Chennai ports (which handle ~75% of EXIM traffic) are likely to be direct beneficiaries of this growth. Impetus of government on infrastructure A common theme emerging from the last few 5-year plans of the central government is increasing thrust on the uplift of infrastructure in the country. Although at the execution level, targets have been missed, the general direction of infrastructure in the country has been forward. We maintain improvement in infrastructure will lead to overall efficiencies in the sector thereby attracting higher investments. Government policies: Incentivizing investments The Indian government has been providing support for investments in the logistics sector. There are several tax benefits available for companies investing in this sector including 80IA and 80IB (tax holiday for 10 years out of first 15 years of operations). Similarly the government has also implemented several schemes such as SEZ and FTWZ, which provide incentives for companies to invest

 

Elara Securities (India) Private Limited 

near ports. Except in rails the government has even allowed 100% FDI in the sector. FDI investments are increasingly visible via the PE route. Clearly, things are finally falling in place for the Indian logistics sector. The market size remains huge and scope for market share gains remains strong given the highly fragmented setup. The improving state of infrastructure in the country is likely to lead to firming up of margins widening the scope for technological investments in the sector. Better infrastructure is also likely to project India as a favorable destination for transshipment cargo in the long term. The government’s tax policies as well as several other schemes, underscore the government’s willingness to incentivise investments in the sector. With increasing volumes and improvement in the overall state of the industry, we believe players in the sector with presence at strategic locations (e.g. CFS at Mumbai, Chennai ports) and track record of growth in the logistics space will be clear winners. We have identified three players in the logistics space viz Gateway Distriparks, Allcargo Logistics and Arshiya International that are likely to witness strong growth in the near future and are likely to present an attractive investment opportunity.

Logistics

Executive Summary

Gateway Distriparks: Beyond capex, towards huge cash flow generation Gateway Distriparks is one of the largest private players in the rail business, and also has Container Freight Station (CFS) operations at key locations. It also operates the only organised cold chain logistics business in the country. It has shown a consistent track record of growth in all segments. The PE investment in the rail business has turned around the segment, which was loss making. It has successfully delivered a positive PAT over the past six quarters. The company generates strong operating cash flows and doesn’t have any sizable capex lined up as of now. While the rail and CFS businesses are likely to provide growth, free cash generation is also likely to remain strong. Management has a dividend payout policy that envisages high payouts, at the CMP; the yield works out to a handsome 5%. We are bullish on the stock and recommend BUY with a target price of INR180. Allcargo Logistics: On a firm footing Allcargo Logistics (AGLL) has a proven track record in the Less than Container Load (LCL) segment. It is one of the largest players in the segment globally with the acquisition of ECULine business. Due to the nature of the business, it is relatively unscathed in a lukewarm global economic environment. The leadership position in the segment also allows AGLL to command better margins. It operates CFS at key locations of Mumbai and Chennai. The company is expanding its Mumbai CFS capacity which is likely to propel growth in the segment. AGLL continues to maintain a strong financial position with no 3

India Logistics burden on the balance sheet and strong return as well as growth ratios. We recommend BUY on the stock with a target price of INR180. Arshiya International: High risk with higher returns Arshiya International (ARST) is the only sizable player having operational FTWZ. ARST also has a strong presence in the rail business and is likely to expand by leasing additional rakes over the next two years. We expect the FTWZ business to be highly profitable given that the rents are usually double that of CFS and

relatively no differentiation in costs from CFS. However, the FTWZ business currently is in investment phase with ongoing projects at Khurja (near Delhi) and Panvel (near JNPT, Mumbai). The capital intensity of these projects has stretched balance sheet of ARST which currently has a net debt to equity ratio of ~2.5. We believe, going ahead, the debt burden is likely to reduce, due to strong profitability of the FTWZ business. Hence, we expect ARST to witness higher growth as well as superior returns vis-à-vis peers. We recommend BUY on the stock with a target price of INR170.

Exhibit 1: Peer analysis Logistics comparables Company Name

CMP

M Cap

EV

Revenues

EBITDA

Adj. PAT

EPS

ROE

EV/EBITDA

P/E

CY12/ CY13/ CY12/ CY13/ CY12/ CY13/ CY12/ CY13/ CY12/ CY13/ CY12/ CY13/ CY12/ CY13/ USD USD mn USD mn FY13 FY14 FY13 FY14 FY13 FY14 FY13 FY14 FY13 FY14 FY13 FY14 FY13 FY14 Expeditors Intl

36.4

7,668

6,310

6,226

6,853

628

724

364

421

1.7

2.0

17.8

18.9

10.0

8.7

21.3

18.4

Uti Worldwide Inc

13.8

1,429

1,528

4,941

5,016

209

216

81

90

0.8

0.9

9.2

9.1

7.3

7.1

17.2

15.7

Qube Logistics

1.6

1,446

1,510

805

1,034

118

173

62

82

0.1

0.1

7.5

8.3

12.3

8.4

20.7

17.2

Dalian Port (PDA)

0.2

1,823

3,280

664

725

299

327

125

142

0.0

0.0

6.1

6.4

10.9

9.9

7.8

6.8

Sinotrans

0.1

575

809

7,764

8,402

287

376

117

142

0.0

0.0

6.8

7.8

2.8

2.2

5.0

4.0

Average

9.5

10.1

8.7

6.6

14.4

12.4

Warehousing comparables Company Name

CMP

M Cap

EV

Revenues

EBITDA

Adj. PAT

EPS

ROE

EV/EBITDA

CY12/ CY13/ CY12/ CY13/ CY12/ CY13/ CY12/ CY13/ CY12/ CY13/ USD USD mn USD mn FY13 FY14 FY13 FY14 FY13 FY14 FY13 FY14 FY13 FY14 Cosco Pacific

3,826

5,806

723

804

421

471

375

425

0.1

0.2

10.1

10.7

13.8

12.3

9.9

8.8 8.9

Shenzhen Chiwan

1.2

903

1,179

267

291

154

171

81

93

0.1

0.1

14.3

14.7

7.6

6.9

9.8

Agility

1.4

1,482

1,267

4,987

5,294

223

346

98

178

0.1

0.2

-

-

5.7

3.7

13.2

8.0

53.9

8,767

8,527 11,340 12,405

769

857

455

505

2.8

3.2

34.5

35.0

11.1

9.9

19.2

17.1

Gulf Warehousing 11.2

446

598

133

164

37

47

19

25

0.5

0.6

9.9

13.0

16.2

12.7

23.6

17.7

Royal Wolf

2.2

221

296

161

170

46

49

20

22

0.2

0.2

12.9

13.7

6.5

6.0

11.3

9.9

Zhangjiagang Freetrade

1.8

383

354

68

77

40

46

24

28

0.1

0.1

23.5

21.3

9.0

7.9

15.3

13.4

Average

17.5

18.1

10.0

8.5

14.6

12.0

C.H. Robinson

 

1.4

P/E

CY12/ CY13/ CY12/ CY13/ FY13 FY14 FY13 FY14

Indian comparables (INR mn)

CMP (INR)

M Cap

EV

Revenues

EBITDA

PAT

EPS (INR)

FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY14E

ROE (%)

EV/EBITDA (x)

P/E (x)

FY13E FY14E FY13E FY14E FY13E FY14E

Gateway Distriparks

136 14,732 13,935

8,832 10,150

2,991

3,308

1,631

1,822

15.1

16.8

14.2

14.9

4.7

4.0

9.0

8.1

Allcargo

143 17,872 19,384 36,813 42,772

4,662

5,483

2,387

3,107

19.0

24.8

15.8

17.8

4.3

3.3

7.5

5.8

Arshiya

126

3,837

6,083

1,690

2,449

28.7

41.6

18.1

21.6

8.8

6.3

4.4

3.0

7,413 33,955 13,094 17,331

Source: Bloomberg, Elara Securities Research

4

 

Elara Securities (India) Private Limited

India Logistics India Logistics Secular trends ‰ Consistent rise in container traffic, unfazed by currency or economic activities ‰ Improving logistics infrastructure & structural drivers ‰ Government policies indicate rising dawn for the sector ‰ Strategic presence and growth: Key criteria for selection

Exhibit 3: Higher losses vis-à-vis peers 100 80

The logistics industry in India accounts for more than ~USD90bn of turnover and has shown consistent growth in the recent past. The industry is currently in evolution stage with inefficiencies and unorganized players characterising space on one side and efficient and organized players investing in expansion to ensure efficient logistics for clients. Bulk of the logistic costs is spent on transportation and warehousing of the cargo which put together account for 44% of the total logistics costs in India. Exhibit 2: Cost of logistics in India Others (including losses) 31%

Inventory 25%

Transportation 35%

Warehousing 9%

Source: Cygnus, Elara Securities Research

The logistic costs account for 12% –14% of GDP in India as compared to 7%-9% in the developed world. But the logistic cost as a percentage of total product cost (~20% of product cost) in India is 4 -5 times higher as compared to that in developed countries. Majority of logistics cost in India is attributed to ancillary costs (~31% of total), which are attributable to losses of various types and costs incurred by the unorganized as well as inefficient players involved in the movement and storage of goods. As compared to 31%, other ancillary costs in India, the same percentage is 10% in United States of America (USA) and 18% in China.

 

Elara Securities (India) Private Limited 

(%)

Present state of the industry

31

60

25

40

9

20

35

18

10

9

25

24

15

49

50

0 India

China

Transportation Inventory

USA

Warehousing Others (including losses)

Logistics

India logistics: Unorganized and inefficient

Source: Cygnus, Elara Securities Research

We have analysed the logistics industry in two parts viz: transportation and warehousing and have discussed the nature of the industry as well as key concerns and investment opportunities in each of them. Transportation sector: Problems a plenty The cargo movement in India is dominated by road transport (less preferred route for long haul bulk traffic) which accounts for ~62% of cargo movement, followed by rails - 29% and the rest by airways, pipelines and inland waterways. On the other hand road transport accounts for 37% of cargo movement in USA and 22% in China, which are countries having a huge landmass similar to India. The poor network of railways (route kilometer has only increased at 3% CAGR since independence while the passenger and freight traffic has grown at 54% CAGR). Lack of last mile connectivity and higher costs involved have resulted in higher dependence on road transport. The rail freights in India are ~4x of the comparables in the USA and even without accounting the truck overloading in India. Besides, longer transit times (freight traffic being subordinated to passenger traffic) as well as lack of last mile connectivity has also contributed to the decreasing percentage of cargo traffic by rails.

 

5

India Logistics

Exhibit 4: Share of transportation in India Transportation modes

Market segment

Haulage

Operators

Operations

Transactions

Large fleet (More than 20 trucks)

XPS

Medium fleet (6–10 trucks)

LTL

Contract

Small fleet (1- 5 trucks)

FTL

Spot

Transportation Passenger

Cargo

Long (More than 800 km)

Pipeline

4%

5%

Coastal

<1%

Airways

Medium (350 to 800 kms) Short (50 to 350 kms)

Roadways

62%

Last mile <50 miles

Railways

29%

Source: KPMG, Elara Securities Research

idle time due to severe congestion. Besides, the road route of transportation is also plagued by poor quality of roads as well as multiple check points.

Rate in USD cents

Exhibit 5: Freight rates compensating passengers 2.5 2.0 1.5 1.0 0.5 2009-10

2008-09

2007-08

2006-07

2005-06

2004-05

2003-04

2002-03

2001-02

2000-01

1990-91

0.0

 

Average rate per passanger km

Although majority of the cargo movement is done by way of road transport, the industry still remains heavily fragmented. More than 74% of truck operators in India own a fleet size of less than 5 trucks. Higher fragmentation in the industry with relatively non-existent entry barrier make the space highly competitive with slim operating margins. Exhibit 7: Fragmented truck ownership

Average rate per ton km

Medium fleet operator (620 trucks) 15%

Source: Deloitte, Elara Securities Research

Exhibit 6: Muted route additions

(Kilometers)

100,000 80,000

Large fleet operator (more than 20 trucks) 11%

Small fleet operator (15 trucks) 74%

60,000 40,000 20,000

Route kilometers

2009-10

2005-06

2000-01

1990-91

1980-81

1970-71

1960-61

1950-51

0

Track kilometers

Source: Deloitte, Elara Securities Research

While nearly two thirds of the cargo is transported by roads in India, the industry has its own set of problems. The highway network in India remains inadequate for hassle free cargo movement. The national highways constitute only 2% of the total road network in India but handle ~40% of the total cargo traffic denoting longer 6

 

Source: KPMG, Elara Securities Research

Opportunity exists in 3PL transportation Although, there are little barriers to entry in the 3rd party logistics (3PL) space, there are opportunities on offer for existing players. 3PL operators having relationships with customers, specific industry solutions and efficiency in operations are benefitting mainly due to the lopsided nature of the Indian logistics industry. The same is visible from increased investment activities in the 3PL segment in India. Global majors such as DHL, TNT have already Elara Securities (India) Private Limited

India Logistics large state-controlled players. But lack of technology and basic infrastructure has been missing in the overall warehousing segment. Nearly 80%– 85% of warehouses in the country are of a size less than 10,000 sq ft most of which lack basic infrastructure such as leak profiting, adequate security as well as tracking systems. The same is visible from the warehousing losses in the country.

invested in the space and Indian operators such as Gati and Allcargo are also not far behind. We believe this segment of the overall inland transportation sector is ripe for growth as well as investments. Exhibit 8: Opportunities for 3PL operators Share of 3PL in overall logistics

India

13.0

Less than 10%

China

18.0

Less than 10%

9.9

34%

Europe

10.0

54%

Japan

11.4

80%

USA

As compared to global competitors, Indian warehousing lags in terms of value added services, provision of technology as well as level of outsourcing. High pilferage losses and poor infrastructure are also constant features of the segment. Winds of change in the warehousing sector

Source: Deloitte, Elara Securities Research

We believe warehousing in India offers several opportunities for private players. With land being one of the foremost barriers to entry, operators who have

Warehousing: Moving towards sophistication Warehousing in India has traditionally been fragmented between several unorganised players and one or two Exhibit 9: Structure of the Indian Warehousing Industry 85%

367 mn sq. ft. Domestic

8%

Godown-like and run by small C&F agents

Organized

433 mn sq. ft.

ƒ High Quality ƒ Private sector owned

Indian Warehousing Industry 15%

36 mn sq. ft.

66 mn sq. ft.

Logistics

Logistics cost as a % of GDP

27%

107 mn sq. ft.

Unaccounted supply 92%

EXIM

398 mn sq. ft.

29%

Unorganized

117 mn sq. ft. Public sector

44%

ƒ Medium to low quality

173 mn sq. ft.

In-house warehousing

Source: KPMG, Elara Securities Research

Exhibit 10: Comparative analysis of warehousing Parameters

India

China

USA

Market Maturity (Fragmentation by contribution of key players to the total industry cost)

ƒ Unorganized, fragmented warehousing industry

ƒ Highly fragmented, top 20 companies contribute to 7% of revenue

Warehouse Infrastructure: ƒ Size ƒ Centralisation of warehouses ƒ Infrastructure

ƒ Godowns with approximate ƒ Market is fragmented in size of <10,000 sq.ft terms of operator's geographical presence ƒ Multiple warehouses, one in every state ƒ Average level of infrastructure with small ƒ Poor infrastructure godowns ƒ High pilferage and loss

ƒ Warehousing companies operate a single facility of 200,000 sq ft ƒ Excellent infrastructure

ƒ Labour available but with poor training

ƒ Highly skilled trained labour

ƒ 20 largest companies control less than 30 percent of the market

Value Added Services Level of outsourcing Skilled Labour

ƒ Labour available but with poor training

Technology used Consolidation: Level of usage of Large scale logistics parks and Free Trade & Warehousing Zones Source: KPMG, Elara Securities Research

 

Very poor

Elara Securities (India) Private Limited 

Neutral

Excellent

Poor

Good

7

India Logistics

Clearly, there are several areas of improvements where private companies can play a bigger role in the sector. While the logistic costs are increasing in India on the back of rising fuel prices as well as increasing travel time due to congestion, 3rd Party logistics (3PL) operators as well as state of the art warehousing can save costs for customers. We have discussed the key trigger points for the Indian logistic sector as well as the opportunity for private players in the following pages.

Consistent rise in container traffic Unfazed by the economy or the currency

 

The EXIM traffic in India is handled through 13 major ports and several smaller ports along the 7,000 km long coast line of India. However, out of the 13 major ports, only 2 (JNPT & Chennai) account for more than ~75% of the total containerised EXIM traffic in the country. The country has been witnessing rapid rise in the EXIM trade in the last two decades. The Indian EXIM trade which stood at USD37.8bn in FY90 has exploded to USD791bn+ by FY12. The same has registered 21.6% CAGR in the last twenty years and 21.9% CAGR over the last five years. The continuous rise in the EXIM trade provides a lucrative opportunity for the Indian logistic sector. Exhibit 11: EXIM growth buoyant despite GDP variations (%) 40 35 30 25 20 15 10 5 0 (5)

40 30 20 10 0 (10) (20)

EXIM Trade growth

Currency Movement

Source: Industry, IPA, Elara Capital Research

Consistent increase in container traffic The container traffic at major ports has grown at 13.5% CAGR over the last twenty years in terms of tonnage and 11.7% CAGR over twenty years in TEU terms. The same has grown at 10.4% CAGR in tonnage terms and 7% CAGR in TEU terms over the past five years. Exhibit 13: Rising container traffic at Indian ports (000 tonnes) 140,000 120,000 100,000 80,000 60,000 40,000 20,000 FY08 JNPT

Chennai

FY09 Tuticorin

FY10

FY11

FY12

Kolkatta

Cochin

Others

Source: IPA, Elara Capital Research

Exhibit 14: Container traffic at Indian ports (TEUs) 9,000

7,000 6,000 5,000

FY91 FY92 FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12

4,000

GDP Growth

Source: Industry, IPA, Elara Capital Research

EXIM data for the past few years confirms that the EXIM trade has continued to grow despite the global and/or domestic economic slowdown as well as fluctuations in the currency.

 

50

8,000

EXIM Trade growth

8

Exhibit 12: EXIM Trade unaffected by currency (%)

FY91 FY92 FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12

acquired land in the proximity of logistic hubs (such as key ports) stand to gain in the coming years. Container Freight Stations (CFS)/ Inland Container Depots (ICDs) continue to be an attractive investment as the existing CFS/ICDs are proving to be inadequate for the EXIM traffic in the country. Also, favourable government policies (discussed later in the report) encourage setting up CFS/ICDs FTWZs in the country.

3,000 FY08 JNPT

Chennai

FY09 Tuticorin

FY10 Kolkatta

FY11 Cochin

FY12 Others

Source: IPA, Elara Capital Research

However, the container traffic in India remains limited for the EXIM cargo. India lags significantly in terms of containerisation in the cargo movement as only ~20% of the domestic cargo is handled by way of containers as compared to ~75% in the developed world. Currently more than 90% of the container traffic is meant for EXIM Elara Securities (India) Private Limited

India Logistics

Hence, the low penetration of containerisation, consistently rising EXIM trade and increased participation of organized players in the industry underscore a huge opportunity for logistics players in the space.

Intensifying thrust on infrastructure One of the critical impediments in the efficient functioning of the logistics sector in the country is the lack of adequate and state of the art infrastructure. However, the situation is likely to change with increased thrust of the government upon infrastructure development in the country. Development of golden quadrilateral, building of express highways, ports etc are some of the key infrastructure projects undertaken by the government. Investments in ports as well as highways remain key triggers for the Indian logistics sector. The impetus of the Indian government on development of roads is clearly visible with award of ~5,000 kms of roads under the NHDP scheme. Although planned targets have not been achieved for the infrastructure investments in the five year plans, the data for completion of projects has been showing a strong track record over the past few years after a lull in FY06-07. Exhibit 15: Improvements in road completions (in Kms) 3,000

Besides, the projects awarded during FY12 exceeded the expectations of the street with award of 58 projects totaling a length of 7,400kms as against the expectation of 7,300 kms. The WIP for roads currently stands at more than 19,000 kms suggesting a superior highway infrastructure on offer for the Indian logistics sector. Similarly, the ports sector in India has also been attracting investment flows in the last decade or so. With more than 7,000 kms of coastline and 13 major and 200+ minor ports, India has a huge potential to develop as a major hub for transshipment of ocean cargo. The National Maritime Development Program (NMDP) initiated by the government focuses on all-round development of Indian maritime sector. Increasing participation of private sector in the ports sector has also been an encouraging sign. Exhibit 16: Private participation in ports Company

Port

Adani

Mundra

Maersk

Pipavav

Navyuga Engineering Co. Ltd

Krishnapatnam

DVS Raju Group

Gangavaram

JSW Group

Jaigarh

Marg Group

Karaikal

Logistics

routes while the remaining – a paltry 10% carries goods domestically.

Source: NHAI, Elara Capital Research

With improvement in the logistics related infrastructure, efficiency of the logistics sector is bound to improve. We expect, more and more corporate resorting to outsource their logistics and supply management requirements to specialised organised players in the sector.

 

2,500 2,000 1,500 1,000 500 FY12

FY11

FY10

FY09

FY08

FY07

FY06

FY05

FY04

FY03

FY02

FY01

Before 2000

0

Source: NHAI, Elara Capital Research

 

Elara Securities (India) Private Limited 

9

India Logistics

 

Exhibit 17: Impetus on road development (projects awarded in FY12) S.No. Stretch

State Name

NH No Total Length NHDP Phase (In kms) Category

LOA Date Concessionaire

1

Etawah -Chakeri (Kanpur)

Uttar Pradesh

2

160 NHDP Phase V Nov-11

Oriental Structural Engineers Ltd.

2

Agra-Etawah Bypass

Uttar Pradesh

2

125 NHDP Phase V Nov-11

Ramky Infrastructure Ltd.

3

Six Laninig of Kishangarh – Udaipur-Ahmedabad

Rajasthan[434.5]/ Gujrat[121]

79A, 79 , 76 & 8

556 NHDP Phase V Sep-11

GMR Infrastructure Ltd.

4

Six-laning of Barwa AddaPanagarh

Jharkhand[43]/ W est Bengal[79.88]

2

123 NHDP Phase V May-11

DSC Ltd.

5

Ahmedabad to Vadodara Section

Gujarat

8

102 NHDP Phase V Apr-11

IRB Infrastructure Ltd.

6

Panikholi-Rimoli (Approved Length Orissa 106 Km)

215

163 NHDP Phase III Aug-11

Gayatri Projects Ltd.

7

Vijayawada-Gundugolanu Section Andhra Pradesh

5

104 NHDP Phase V Feb-12

Gammon Infrastructure Projects Ltd.

8

4-Laning of Solapur -Maharashtra/ Maharashtra Karnatka Section

9

100 NHDP Phase III Dec-11

Coastal-SREI Consortium

9

Four laning of Jabalpur-KatniRewa Section

Madhya Pradesh

7

226 NHDP Phase IV Aug-11

SOMA Tollways Pvt. Ltd.

10

Rampur -Kathgodam

Uttaranchal

87

93 NHDP Phase III Nov-11

11

4-Laning of Angul -Sambalpur

Orissa

42

153 NHDP Phase IV Nov-11

Abhijit Roads Ltd.

12

4-Laning of Cuttak -Angul

Orissa

42

112 NHDP Phase III Nov-11

Ashoka Buildcon

13

Four laning of Orissa/Chattisgarh Boarder -Aurang section

Chattisgarh

6

150 NHDP Phase IV Aug-11

BSCPL Infrastructure Limited

14

4-Laning of Raipur -Bilaspur

Chattisgarh

200

127 NHDP Phase IV Nov-11

IVRCL Assets Holding Ltd.

15

Four laning of Gwalior-Shivpuri

Madhya Pradesh

3

125 NHDP Phase IV Sep-11

Essel Infraprojects Ltd.

16

4-Laning of Rohtak-Jind (Approved Haryana Length 45 Km)

71

49 NHDP Phase III Dec-11

Vijai Infrastructure Ltd.

17

Jabalpur to Lakhanadone

Madhya Pradesh

7

81 NHDP Phase IV Jul-11

Gannon Dunkerley & Co. Ltd.

18

Hospet -Chitradurga

Karnataka

13

120 NHDP Phase III Nov-11

Ramkey Infrasructure Ltd

19

MH/ KNT Border Sangareddy

Karnataka

9

145 NHDP Phase III Nov-11

L&T Infrasructure Developement Projects Ltd

20

4-Laning of Hospet-Bellary-K k /AP Karnataka B dKarnataka/AP Border

63

95 NHDP Phase IV Oct-11

PNC Infratech Ltd.-BF U ili L d C i LUtility Ltd. ConsortiumL

ERA Infra Engineering Ltd.-OJSC-SIBMOST (JV)

21

Four laning of Shivpuri-Dewas

Madhya Pradesh

3

330 NHDP Phase IV Sep-11

22

Kota -Jhalawar

Rajasthan

12

88 NHDP Phase III Apr-11

GVK Transportations Network Ltd.

23

Beawar-Pali-Pindwara (Approved Length -246 Km)

Rajasthan

14

244 NHDP Phase III May-11

24

Vijayawada-Machhlipatnam

Andhra Pradesh

9

65 NHDP Phase III Nov-11

25

4 Laning of Obedullaganj-Betul S iSection

Madhya Pradesh y

69

125 NHDP Phase III Feb-12

26

Four Laning of Kiratpur-Ner Chowk Section

Himanchal Pradesh

21

84 NHDP Phase III Feb-12

27

4-Laning of Mahulia to Behragora to Kharagpur

West Bengal[30]/ Jhark hand[97]

33 & 6

127 NHDP Phase IV Dec-11

Simplex Infrastructure Projects Ltd.

28

2-Laning with paved sholder of Muzaffarpur -Barauni

Bihar

28

108 NHDP Phase IV Oct-11

KNR

29

4-Laning of Lucknow -Sultanpur

Uttar Pradesh

56

126 NHDP Phase IV Oct-11

ESSAR -Atlanta (JV)

30

Four laning of Meerut Bulandshahar

Uttar Pradesh

235

66 NHDP Phase IV Sep-11

31

Patna -Buxar

Bihar

30 & 84

125 NHDP Phase III Nov-11

32

Nagpur-Wainganga Bridge (Approved Length -60 Km)

Maharashtra

6

45 NHDP Phase III May-11

JMC Projects India Ltd.

33

Lucknow -Raebareli

Uttar Pradesh

24B

70 NHDP Phase IV Nov-11

Essel Infraprojects Ltd.

34

2-Laning of Krishnagiri-Tindivanam Tamil Nadu (Approved Length 170 Km.)

66

177 NHDP Phase III May-11

Keti Constructions Ltd. L&T Infrastructure Development Projects Ltd. Madhucon Projects Ltd. Transstroy (India) Ltd. y ( ) IL & FS Transportation Networks Ltd.

C & C Constructions Limited G I f Gammon Infrastructure Projects Ltd

Transstroy (I) Ltd. -Corporation Transstroy OJSC Consortium

Source: NHAI

10

   

Elara Securities (India) Private Limited

India Logistics

The government of India has been taking steps to simplify the existing tax structure. One such initiative is the implementation of Goods and Service Tax (GST). Similarly, several tax concessions have been provided for the companies investing in the logistics sector. We have outlined some of the key areas that would directly benefit the logistics players over here. Implementation simplification

of

GST:

A

move

towards

The GoI is planning to introduce Goods and Services Tax (GST) to simplify the existing structure of state level taxes. At present due to multiple and differential state level taxes; Indian companies are forced to operate warehouses in various states. This has been a major impediment for the globally adopted hub and spoke model in the logistics sector. With the implementation of GST, the Indian companies would also be encouraged to operate the hub and spoke model for warehousing solutions thereby saving cost as well as inventory days. Similarly, several exemptions from the income tax have been awarded to the logistic players in the country. Players investing in the warehousing are granted 80IA and 80IB benefits enabling them not to pay income taxes for ten out of first fifteen years of operations. Accordingly, there are enough incentives for the companies who are willing to invest in the logistics space in the country.

Strategic presence & growth on offer: Key criteria for selection The logistics sector can be divided into three main categories viz.: transportation, storage and services. Although, the transportation segment has not seen drastic changes in the recent past, the warehousing as

well as the services side have witnessed a sea change, particularly over the last decade. The transportation sector still remains highly unorganised and relatively inefficient as compared to the rest of the world. The warehousing and the services sector have been witnessing some major developments, thanks to the implementation of technology and foray of organised players. In the services space, the 3rd party logistics (3PL) as well as 4th party logistics (4PL) players have been the new buzzwords. We have analysed the three segments in terms of growth, profitability and competitive intensity which is summarised in exhibit on the next page. Accordingly, in the transportation segment, we like companies with long and proven track records. As the segment has little or no barriers to entry, the companies that are in existence for a longer period of time, with no heavy capex requirements and established customer base are likely to be winners. Gateway Distriparks is our pick in this segment of the Indian logistics space. In the storage based plays (CFS, ICD & FTWZ), the relatively high barriers to entry (land remains the key barrier) ensure that players with presence at key cargo traffic hubs will be clear winners. Amongst the several business models that exist in the space, we like Arshiya’s FTWZ model, as it offers increased flexibility for importers as well as exporters and ensures savings in the working capital cost for customers. However, due to the initial capex requirements and longer gestation period, the risks attached to these companies is also higher. The services space is likely to witness highest growth in the logistics space with more and more companies resorting to outsource their logistics solutions to the 3PL and 4PL operators. The players in the space are likely to also witness cyclicality if the consumer industries go through a lean patch. We like Allcargo Logistics in this space.

 

 

Elara Securities (India) Private Limited 

Logistics

Government policies: Encouraging investment

 

11

India Logistics

Exhibit 18: Attractiveness of key logistic sub-segments Current Market Size

Sub-segment

Growth Potential

Profitability

Competitive Intensity

Innovation Potential

Overall Attractiveness

Transportation

Container Rail Transportation Road Transportation (FTL) Express Logistics (LTL) Coastal Shipping

     

Cold Chain Project Logistics Modern Warehousing

Storage

Logistics Parks Inland Container Depots Container Freight Stations Ports

Services

Freight Forwarding 3PL / 4PL Courier Services

Key:

High

Medium

Low

Source:

 

 

 

12

 

Elara Securities (India) Private Limited

India Logistics

Valuation & Recommendation ‰ Presence at strategic areas a key ‰ Proven track record in the transport sector is a big plus ‰ Valuations remain cheap for Indian players, providing lucrative opportunity

Organised players to witness high growth phase With strong growth prospects for the Indian logistics sector, listed companies in the space are likely to be direct beneficiaries. We expect companies in the sector to register better growth in FY13 as well as FY14. We prefer companies with proven track records in the transport space, wider geographic network in the services space and who have negotiated land acquisition as also warehousing acquisition. Also, presence in the right business areas remains a key for the sector in general. As compared to global peers, Indian companies are trading at a discount despite having better growth prospects as well as healthier return ratios. Hence, we find the Indian logistic space very attractive and expect stronger stock performance going forward. In our coverage universe, Gateway and Allcargo boast a proven track record in the respective businesses while Arshiya is crafting a niche for itself in the FTWZ space. Both, GDPL and AGLL have strong balance sheets and are expected to register strong free cash flows with more than double digit growth in the EBITDA in FY13 as well

as FY14. GDPL’s dividend yield remains strong. The company is not expected to invest heavily due to completion of key capex. Both these companies are expected to earn close to 20% RoCE which remains attractive enough as compared to their global counterparts. Arshiya’s balance sheet is loaded with debt due to the ongoing capex program. However, once the company starts commissioning its warehouses in the FTWZ space, we expect debt levels to continue to drop steadily. ARST is expected to witness the highest revenues as well as EBITDA growth in our coverage universe backed by expansion of warehouses at Mumbai as well as Khurja. Debt levels, given the economic scenario might prove to be a concern for the stock. However, we believe that once the company starts generating stronger operating cash flows, these concerns should recede. Although, the stock remains expensive in terms of EV/EBITDA as compared to peers due to higher debt levels, we expect significant upside on the stock. We believe the current market price does not fully capture the potential of FTWZ earnings of the company and the edge it holds over peers who plan to enter in this profitable business space. We initiate coverage on Arshiya with a BUY rating and a target price of INR 170.

Logistics

Picking up momentum

 

 

Elara Securities (India) Private Limited 

13

India Logistics

 

Notes

14

 

Elara Securities (India) Private Limited

10 August 2012

India | Logistics

Initiating Coverage 

 

 

A safe bet

Rating : Buy

Consistent free cash generation

Target Price : INR180 Upside : 33% CMP : INR136 (as on 9 August 2012)

Gateway Distriparks (GDPL) is an established player in the CFS/ICD space and is also the largest private operator in the rail logistics space. GDPL has deployed and successfully completed its major capex program and is now in a position to reap the benefits. We expect the company to generate cash consistently as it has an established presence in all its segments with low capex requirements. Besides, the management has adopted a strong dividend payout policy and we expect dividend yields to be marginally higher than 5% at the current market price. Strong presence across business segments GDPL operates in three broader segments viz. CFS/ICDs, rail and cold storage segments. It has a strong presence across all three segments with operational CFSs at all major ports across the country. It is also the largest private rail operator. The CFS business of the company remains the cash cow contributing more than 2/3rd of the EBITDA for FY13E as well as FY14E.GDPL has expanded its CFS capacities at Mumbai, Cochin and is exploring expansion at Chennai. In the rail segment as well, it is exploring options to expand its fleet by either leasing or buying out additional rakes. The expansions in the CFS as well as additional rakes are likely to provide growth in the respective segments in FY13E as well as FY14E. Strong balance sheet with firm return ratios GDPL continues to remain a net cash company and with limited capex plans going forward, its balance sheet in FY13 and FY14 should look very good. Strong EBITDA margin business with better capital management has ensured firm return ratios for GDPL with RoCE exceeding 23% and RoE in excess of 18%. We expect return ratios to improve further as GDPL reaps the benefits of its capacity additions in the CFS as well as the rail business.

Key data Bloomberg /Reuters Code Current /Dil. Shares O/S (mn) Mkt Cap (INRbn/US$mn) Daily Vol. (3M NSE Avg.) Face Value (INR)

Source: Bloomberg ; * As on  9 August 2012

Price & Volume 160

3

150

2

140 1

130 120 Aug-11

Dec-11

0 Aug-12

Apr-12

Vol. in mn (RHS)

Gateway Distriparks (LHS)

Source: Bloomberg

Share holding (%)

Q2FY12 Q3FY12 Q3FY12 Q1FY13

Promoter

40.5

40.5

40.4

40.4

Institutional Investors

41.8

43.2

44.8

44.2

Other Investors

10.0

8.7

7.3

7.8

General Public

7.7

7.7

7.5

7.6

Source: BSE

Price performance (%)

3M

6M

12M 4.2

Sensex

6.6

(1.5)

Gateway Distriparks

(9.4)

(1.0)

6.7

Allcargo Logistics

20.6

(0.8)

(10.8)

(17.6)

(25.1)

(2.8)

Arshiya International

Valuation

GDPL IN/GATE.BO 108/108 15/266 74,985 10

1 US$= INR55.3

Source: Bloomberg

Price performance 130 120 110 100 90 Jul-12

Aug-12

Jun-12

Apr-12

May-12

Mar-12

Jan-12

Sensex Source: Bloomberg 

Feb-12

Dec-11

Nov-11

Sep-11

Oct-11

80 Aug-11

GDL is trading at a discount to its global peers despite having better stability in business as well as growth prospects. Since the company is expected to generate strong free cash flows, the management of GDL has decided to payout more than half of its profits as dividend. Considering the steady growth from all the three segments and the current valuations, the stock has potential for upside from the current levels. Besides, the dividend yield is likely to provide a downside support for the stocks. We recommend a BUY on the company with a target price of INR 180.

(Rebased to 100)

Global Markets Research

Gateway Distriparks

Gateway Distriparks

Key Financials Y/E Mar (INR mn) FY10 FY11 FY12 FY13E FY14E

Rev 5,166 5,991 8,215 8,832 10,150

YoY (%) 14.6 16.0 37.1 7.5 14.9

EBITDA 1,249 1,597 2,484 2,991 3,308

EBITDA (%) 24.2 26.7 30.2 33.9 32.6

Adj PAT 791 968 1,320 1,631 1,822

YoY (%) (0.5) 22.2 36.5 23.5 11.7

RoE (%) 11.2 10.9 12.3 14.2 14.9

RoCE (%) 10.1 11.7 16.8 19.7 20.7

P/E (x) 18.6 15.2 11.2 9.0 8.1

EV/EBITDA (x) 12.8 9.0 5.7 4.7 4.0

Source: Company, Elara Securities Estimate 

 

Ravindra Deshpande • [email protected] • +91 22 4062 6805

 

Elara Securities (India) Private Limited

Gateway Distriparks  Valuation trigger

Investment summary

  Dividend announcements

Operationalisation of Mumbai CFS

180

3 2

160

1

ƒ

Established presence operative segments

ƒ

Free cash flow generation

ƒ

Dividend yield stock

in

all

140

Valuation trigger

120

1. Operationalisation of Mumbai CFS

100

2. Dividend announcements

the

Key risks Aug-13

Jun-13

Apr-13

Feb-13

Oct-12

Dec-12

Aug-12

Jun-12

Apr-12

Feb-12

Dec-11

Oct-11

Jun-11

Aug-11

Apr-11

Feb-11

Dec-10

Oct-10

Aug-10

80

Source: Bloomberg, Elara Securities Estimates

ƒ

Slowdown in the container traffic

ƒ

Change in dividend policy

Our assumptions

Valuation overview P/E Based valuation

FY13E

FY14E

Earnings per share

INR/share

15.1

16.8

P/E Multiple used

(x)

12.0

12.0

Target Price

INR/Share

180

202

Current Mkt Price

INR/Share

136

136

Upside /(Downside)

(%)

32.8

48.4

ƒ

Dividend payout of 50%

Source: Elara Securities Research

Peer analysis Logistics comparables Company Name

CMP

M Cap

EV

Revenues

EBITDA

Adj. PAT

EPS

ROE

EV/EBITDA

P/E

USD USD mn USD mn

CY12/ CY13/ CY12/ CY13/ CY12/ CY13/ CY12/ CY13/ CY12/ CY13/ CY12/ CY13/ CY12/ CY13/ FY13 FY14 FY13 FY14 FY13 FY14 FY13 FY14 FY13 FY14 FY13 FY14 FY13 FY14

Expeditors Intl

36.4

7,668

6,310

6,226

6,853

628

724

364

421

1.7

2.0

17.8

18.9

10.0

8.7

21.3

18.4

Uti Worldwide Inc

13.8

1,429

1,528

4,941

5,016

209

216

81

90

0.8

0.9

9.2

9.1

7.3

7.1

17.2

15.7

Qube Logistics

1.6

1,446

1,510

805

1,034

118

173

62

82

0.1

0.1

7.5

8.3

12.3

8.4

20.7

17.2

Dalian Port (PDA)

0.2

1,823

3,280

664

725

299

327

125

142

0.0

0.0

6.1

6.4

10.9

9.9

7.8

6.8

Sinotrans

0.1

575

809

7,764

8,402

287

376

117

142

0.0

0.0

6.8

7.8

2.8

2.2

5.0

4.0

Average

9.5

10.1

8.7

6.6

14.4

12.4

Warehousing comparables Company Name

CMP

M Cap

EV

USD USD mn USD mn

Revenues

EBITDA

Adj. PAT

EPS

ROE

EV/EBITDA

P/E

CY12/ CY13/ CY12/ CY13/ CY12/ CY13/ CY12/ CY13/ CY12/ CY13/ CY12/ CY13/ CY12/ CY13/ FY13 FY14 FY13 FY14 FY13 FY14 FY13 FY14 FY13 FY14 FY13 FY14 FY13 FY14

Cosco Pacific

1.4

3,826

5,806

723

804

421

471

375

425

0.1

0.2

10.1

10.7

13.8

12.3

9.9

8.8

Shenzhen Chiwan

1.2

903

1,179

267

291

154

171

81

93

0.1

0.1

14.3

14.7

7.6

6.9

9.8

8.9

Agility

1.4

1,482

1,267

4,987

5,294

223

346

98

178

0.1

0.2

-

-

5.7

3.7

13.2

8.0

53.9

8,767

8,527 11,340 12,405

769

857

455

505

2.8

3.2

34.5

35.0

11.1

9.9

19.2

17.1

Gulf Warehousing 11.2

446

598

133

164

37

47

19

25

0.5

0.6

9.9

13.0

16.2

12.7

23.6

17.7

Royal Wolf Zhangjiagang Freetrade

2.2

221

296

161

170

46

49

20

22

0.2

0.2

12.9

13.7

6.5

6.0

11.3

9.9

1.8

383

354

68

77

40

46

24

28

0.1

0.1

23.5

21.3

9.0

7.9

15.3

13.4

Average

17.5

18.1

10.0

8.5

14.6

12.0

C.H. Robinson

Indian comparables (INR mn)

CMP (INR)

M Cap

EV

Revenues

EBITDA

PAT

EPS (INR)

FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY14E

ROE (%)

EV/EBITDA (x)

P/E (x)

FY13E FY14E FY13E FY14E FY13E FY14E

Gateway Distriparks

136 14,732 13,935

8,832 10,150

2,991

3,308

1,631

1,822

15.1

16.8

14.2

14.9

4.7

4.0

9.0

8.1

Allcargo

143 17,872 19,384 36,813 42,772

4,662

5,483

2,387

3,107

19.0

24.8

15.8

17.8

4.3

3.3

7.5

5.8

Arshiya

126

3,837

6,083

1,690

2,449

28.7

41.6

18.1

21.6

8.8

6.3

4.4

3.0

7,413 33,955 13,094 17,331

Source: Bloomberg, Elara Securities Research

16

  

Elara Securities (India) Private Limited

Gateway Distriparks

Financials (Y/E Mar)

Cash Flow Statement (INR mn) Cash profit adjusted for non cash items Add/Less : Working Capital Changes Operating Cash Flow Less:- Capex Free Cash Flow Financing Cash Flow Investing Cash Flow Net change in Cash Ratio Analysis Income Statement Ratios (%) Revenue Growth EBITDA Growth PAT Growth EBITDA Margin Net Margin Return & Liquidity Ratios Net Debt/Equity (x) ROE ROCE Per Share data & Valuation Ratios Diluted EPS (INR/Share) EPS Growth (%) DPS (INR/Share) P/E Ratio (x) EV/EBITDA (x) EV/Sales (x) Dividend Yield (%)

10,150 3,308 146 3,454 710 2,744 109 2,635 764 1,871 (50) 1,822 1,871

FY11

FY12

FY13E

FY14E

1,080 5,799 1,154 3,568 140 11,741 11,540 2,210 9,329 496 280 1,636 0 11,741

1,083 6,395 1,037 3,621 140 12,276 12,199 2,838 9,361 500 754 1,662 0 12,276

1,083 7,076 1,037 3,665 140 13,002 13,349 3,506 9,843 200 1,123 1,835 0 13,002

1,083 7,838 1,037 3,715 140 13,813 14,199 4,216 9,983 200 1,202 2,427 0 13,813

FY11

FY12

FY13E

FY14E

1,277 (369) 908 (1,482) (574) (1,677) 2,963 711

1,638 (81) 1,557 (663) 894 (868) 130 156

2,343 (370) 1,973 (850) 1,123 (949) 173

2,581 (79) 2,502 (850) 1,652 (1,060) 592

FY11

FY12

FY13E

FY14E

Revenue & margins growth trend 40

15,000 33.9 10,000

32.6

35

30.2

30

26.7 5,000

(%)

FY14E

8,832 2,991 145 3,136 667 2,468 109 2,359 684 1,675 (44) 1,631 1,675

(INR mn)

FY13E

25

0

20 FY11

FY12

Net Revenues (LHS)

FY13E

FY14E

EBITDA Margin (RHS)

Source: Company, Elara Securities Estimates

  Adjusted profits growth trend 36.5

2,000 1,500

40 30

23.5

22.2

1,000

20

11.7

500

Logistics

Share Capital Reserves Borrowings Minority Interest Deferred Tax (Net) Total Liabilities Gross Block Less:- Accumulated Depreciation Net Block Add:- Capital work in progress Investments Net Working Capital excluding Cash Cash & Cash Equivalents Other Assets Total Assets

FY12 8,215 2,484 144 2,628 628 2,000 135 1,864 508 1,356 (36) 1,320 1,356

(%)

Balance Sheet (INR mn)

FY11 5,991 1,597 129 1,726 502 1,223 182 1,041 44 997 (30) 968 997

(INR mn)

Net Revenues EBITDA Add:- Non operating Income OPBIDTA Less :- Depreciation & Amortization EBIT Less:- Interest Expenses PBT Less :- Taxes Adjusted PAT Add/(Less): Minorities Attributable Adjusted PAT Add/Less: - Extra-ordinaries Reported PAT

10

0

0 FY11

FY12

Adjusted PAT (LHS)

FY13E

FY14E

PAT Growth (RHS)

Source: Company, Elara Securities Estimates

  Return ratios 25

15

20.7

14.2

14.9

FY13E

FY14E

11.7

10 5

19.7 16.8

20 (%)

Income Statement (INR mn)

10.9

12.3

0 FY11

FY12 ROE

ROCE

Source: Company, Elara Securities Estimates

16.0 27.8 22.2 26.7 16.2

37.1 55.6 36.5 30.2 16.1

7.5 20.4 23.5 33.9 18.5

14.9 10.6 11.7 32.6 17.9

(0.03) 10.9 11.7

(0.06) 12.3 16.8

(0.07) 14.2 19.7

(0.11) 14.9 20.7

8.9 22.2 6.0 15.2 9.0 2.4 4.4

12.2 36.5 6.0 11.2 5.7 1.7 4.4

15.1 23.5 7.5 9.0 4.7 1.6 5.5

16.8 11.7 8.4 8.1 4.0 1.3 6.2

   

Established business model to ensure impressive earnings growth

Dividend yield to ensure downside protection

Source: Company, Elara Securities Estimates

 

  Elara Securities (India) Private Limited 

17

Gateway Distriparks   Gateway Distriparks

Investment rationale ‰ Consistent free cash generation ‰ Strong presence across business segments ‰ Strong balance sheet with firm return ratios

Company background

Exhibit 2: CFS presence at key ports

GDPL operates in three major segments, CFS, rail and cold chain business. The rail segment is operated through a subsidiary, Gateway Rail Freight Limited (GRFL) in which GDPL holds ~98% (voting power) stake. Snowman Logistics is a 52.2% subsidiary of GDPL which operates the cold chain logistics business.

Faridabad, Haryana ICD To be operational by July-12

Ludhiana, Punjab ICD Garhi, Gurgaon ICD

GDPL continues to maintain a leadership position in the CFS as well as rail business. It remains the only organised player in the cold chain logistics business. We have discussed each segment in detail in the following paragraphs.

Kandla

Kolkata

Mundra Pipav

Haldia

Nhava Sheva, Mumbai (2 CFS ) 300,000 TEUs/year

Paradip

JNPT Mumbai

Vizag CFS 50,000 TEUs/year (12 Km from port)

Navi Mumbai ICD

CFS

Mormugao

CFS –GDPL’s cash cow

Chennai CFS 90,000 TEUs/year (14 Km from port)

New Mangalore

GDPL is an established player in the Indian CFS space with operations at all the major ports in India viz: Mumbai, Chennai and Vishakhapattanam. It operates two Container Freight Stations at Mumbai, one each at Chennai and Vishakhapattanam. It has recently completed a CFS facility at Cochin and is expected to start operations by September 2012. With presence across the major ports in the country, GDPL remains the second largest CFS operator behind Container Corporation of India. GDPL has presence at key ports of India which handle more than 75% of the containerised cargo traffic in the country. The huge landmass of India coupled with growing containerisation of EXIM cargo in the country offer a huge opportunity for the CFS business in India.

Kochi CFS 50,000 TEUs/year (500 meters from Vallarpadam port) operational in May-12

ICD Upcoming/New Major Ports

Tuticorin, TN

Other Ports

Source: Company

GDPL currently has capacity of 0.5mn TEUs which is likely to expand to 0.6mn TEUs in FY13E. GDPL is expected to fully start its operations at Cochin CFS by the end of Q2FY13 and is also expected to restart the Punjab Conware CFS (Mumbai) by November of this year. Hence, the CFS segment is likely to witness steady volume growth in the coming years.

 

Exhibit 1: Organisation structure Gateway Distriparks Limited

Gateway Rail Freight Limited 97.5%

Snowman Logistics Limited 52.2%

Blackstone group invested INR 3.0bn to acquire between 37.3% to 49.9% stake; valuing the rail business between INR 6 to INR 8bn.

International Finance Corporation (IFC) and Mitsubishi Group have invested in the Snowman Logistics business

Gateway Distriparks (South) Private Limited 100%

Gateway Distriparks (Kerala) Limited 60%

Gateway East India Private Limited 100%

Source: Company; Elara Securities Research

18

 

Elara Securities (India) Private Limited

Gateway Distriparks Exhibit 3: Growth despite falling Mumbai volumes (TEUs) 400,000 350,000 300,000

The cash generation in the CFS business remains strong with very rich operating margins and little capex going ahead. We expect the company to generate cash consistently over FY13E and FY14.

200,000 150,000 FY09

FY10

FY11

FY12

FY13E

FY14E

Source: Company; Elara Securities Estimates

Significant contributor in the consol picture CFS remains the flagship business of GDPL, contributing ~37% of revenues (FY13E) and more than 70% of operating profits. The segment contributes nearly 4/5th of the attributable PAT for the shareholders of GDPL. Exhibit 4:Strong revenues & EBITDA growth (INR mn)

Rail business: Creating a stronghold GDPL operates its rail segment through its subsidiary Gateway Rail. It is the largest private player in the rail business with 21 owned rakes operational. It has operational ICDs at Kalamboli (Mumbai), GarhiHarsu (Gurgaon) and Ludhiana. The strategically located ICDs have enabled the company to create a niche in the north west bound EXIM traffic in the country. Exhibit 6: Strong revenue growth & improving profitability (INR mn)

5,000

6,000

4,000

5,000

3,000

4,000

Logistics

250,000

3,000

2,000

2,000

1,000

1,000 0

0 FY09

FY10

FY11

Revenues

FY12

FY13E

FY09

FY14E

FY10

EBITDA

FY11

FY12

Revenues

Source: Company; Elara Securities Estimates

FY13E

FY14E

EBITDA

Source: Company; Elara Securities Estimates

CFS business due to its nature is a high margin business with higher return ratios due to relatively lower capital intensity. However, the proximity to port, relationship with shipping lines and the turnaround time remain key for success. GDPL has succeeded on all these counts and hence has a thriving CFS business. It enjoys EBITDA margins of more than 54% in the CFS business on a blended basis and the PAT margins in the segment remain above 33%.

Blackstone Private Equity has invested ~INR3.0bn in the rail subsidiary by way of convertible bonds. Prior to the equity infusion, the rail business was making losses due to higher debt burden. The equity infusion has enabled it to reduce interest expense and thereby turn profitable. The rail subsidiary has consistently posted positive PAT for the past six quarters. Exhibit 7: Successful turnaround in rail profits (INR mn) 200

Exhibit 5: Strong profitability margins (%)

150

60

100

50

50

40

(50)

30

(100)

Source: Company; Elara Securities Research

Elara Securities (India) Private Limited 

PAT Margin

EBITDA

Dec-11

Sep-11

Jun-11

Mar-11

Dec-10

Sep-10

Q3FY12

Q2FY12

Q1FY12

Q4FY11

Q3FY11

Q2FY11

Q1FY11

Q4FY10

EBITDA Margin

Jun-10

0

20

 

With presence across all major ports in the country, we expect CFS division to continue to do well in the coming years. The capacity expansions at Cochin and debottlenecking of capacity at the Mumbai CFS are likely to provide volume growth for the company.

PAT

Source: Company; Elara Securities Research

Gateway Rail is currently operating at ~90% utilisation at present and hence the management has decided to 19

Gateway Distriparks  expand the rake capacity. The management is targeting to reach 28 rakes (addition of 7 rakes) over the next five quarters and is exploring options between purchasing or leasing the same. It is also investing in developing additional ICD at Faridabad which is expected to be operational soon. With additional rake capacity as well as ICD networks, the rail segment is expected to post strong volume growth over the next two years. With a strong balance sheet and increased volume growth, we expect the rail segment to post strong operating profits growth over FY13 and as FY14.

Exhibit 9: Strong consolidated margins (%) 40 35 30 25 20 15 10 FY09

FY10

FY11

FY12

EBITDA Margins

Cold chain business: A niche player GDPL remains the only player in the organised sector to operate in the cold chain logistics business. The company operates through its 52% subsidiary Snowman Logistics Limited. It has a pan India network and offers warehousing as well as logistics services. Due to its niche place, it has registered consistent double digit growth in revenues. The segment has strong EBITDA margins (~20%) and we expect it to continue to register strong growth in revenues as well as operating profits.

FY13E

FY14E

PAT Margins

Source: Company; Elara Securities Estimates

Financial snapshot

GDPL’s balance sheet continues to remain debt free with a net cash position of INR5.8/share at the end of FY12. With strong free cash flow and limited capex plans going forward, its balance sheet in FY13 and FY14 should look very good. GDPL has been following a policy of high dividend payouts consistently and is currently trading at a dividend yield of 5%. Besides a strong dividend yield, the higher payout in the coming years riding on higher profitability is also likely to act as a strong support for the market price.

Strong balance sheet with attractive return ratios

Exhibit 10: Declining net debt & high payouts 90 80 70 60 50 40 30 20 10 0

1,500 1,000 (INR mn)

500 0 (500) (1,000) (1,500) (2,000) FY09

FY10

FY11

FY12 FY13E FY14E

Net Debt (LHS)

Exhibit 8: Impressive growth on the cards (INR mn)

(%)

GDPL due to its presence across the logistics segments has consistently posted strong double digit revenue growth. With expansion in the all three segments, we expect GDPL to continue posting strong revenue growth over the next two years. The company has an established presence in all the three business segments and hence has fairly strong EBITDA margins on a consolidated level. We expect GDPL to marginally improve its EBITDA margins in the coming years with capacity expansions in the businesses.

Dividend Payout (RHS)

Source: Company; Elara Securities Estimates

12,000 10,000 8,000 6,000 4,000 2,000 0 FY09

FY10

FY11 Revenues

FY12 EBITDA

FY13E

FY14E

Due to the nature of the business (lesser capital intensity) and the established position of GDPL in all the three operating segments, GDPL continues to enjoy firm return ratios. The RoCE of the business at the consolidated level is above 23% and is expected to improve further. Similarly, the company enjoys strong RoE in excess of 18%. A strong dividend payout ensures that the cash generated is not deployed in the lesser yielding options than the business of the company.

 

Source: Company; Elara Securities Estimates

20

 

Elara Securities (India) Private Limited

Gateway Distriparks Exhibit 11: Strong and improving return ratios (%) 25 20 15 10 5 FY10

FY11

FY12

RoCE Source: Company; Elara Securities Estimates

 

Elara Securities (India) Private Limited 

FY13E

FY14E

RoE

Logistics

FY09

21

Gateway Distriparks 

Valuation & Recommendation ‰ Relatively cheaper valuations as compared to global peers ‰ Dividend yield to provide strong downside support ‰ Upside prevails with highly favorable risk reward ratio At the current valuations, GDPL is trading at 9.0x P/E and 4.7x EV/EBITDA for FY13E earnings. We believe the current valuations do not factor in the strong growth in earnings as well as the steady free cash flow generation that is on offer over the next two years. The current valuations are at a discount to global peers who register lower return ratios than GDPL and have lower expectations of growth. We believe the stock has potential to fare better in the coming years. Besides, current valuations are at a discount to historical valuations. Also, the stock offers a fairly strong dividend yield of ~5% at current valuations and the same might well act as a support for the market price.

We have valued GDPL at 12.0x P/E FY13E and arrive at target valuation of INR180. The same implies a target EV/EBITDA multiple of 6.2x FY13E. The target price offers upside of ~33% from the current market price. We initiate coverage on GDPL with a target price of INR180 and BUY recommendation. Exhibit 12: Valuation summary P/E Based valuation

FY13E

FY14E

Earnings per share

INR/share

15.1

16.8

P/E Multiple used

(x)

12.0

12.0

Target Price

INR/Share

180

202

Current Mkt Price

INR/Share

136

136

Upside /(Downside)

(%)

32.8

48.4

Source: Elara Securities Research

 

22

 

Elara Securities (India) Private Limited

Gateway Distriparks

Company Description

Board of Directors & Management Gopinath Pillai, Chairman Gopinath Pillai is the Executive Chairman of Savant Infocomm Pte Ltd. He has extensive experience in areas of Finance, Industry and Trading. He has worked as the Chairman of the largest supermarket chain in Singapore for over ten years, as General Manager of a Singapore Government Trading Company, Intraco Limited and as Chairman of its Warehousing Subsidary. He is currently serving as a Non-Resident Ambassador of Singapore to Iran. Prem Kishan Gupta, Deputy Chairman & Managing Director Prem Kishan Gupta is the Chairman & Managing Director of Gateway Rail, and Deputy Chairman & MD of Gateway Distriparks Ltd. He also runs his newsprint business - Newsprint Trading & Sales Corporation since 1978 and represents internationally reputed newsprint manufacturers from USA, Canada and Europe with strong tie ups in South-East Asia in India. He controls his investments through the NBFC Prism International Ltd. He is also a member of the Parents Leadership Council of Boston University. Sat Pal Khattar, Director Sat Pal Khattar serves as senior partner in the firm of solicitors, Khattar, Wong and Partners, Singapore. He is a director of a number of public companies in Singapore, Hong Kong and U.K. He has substantial business interests in India and is on the Board of several leading companies. His investments in India include real estate, commercial development, I.T and I.T education. Shabbir Hassanbhai, Director Shabbir Hassanbhai is a member of Association of Certified & Corporate Accountants, UK. He has a business experience of more than 35 years in international trade. He has been the immediate past President of the Singapore Indian Chamber of Commerce & Industry, Treasurer of the Singapore Indian

 

Elara Securities (India) Private Limited 

Development Association. He has worked at senior level positions and was the Managing Director with Veneer Products Limited, Oregon, USA. K.J.M Shetty, Director K.J.M Shetty has served the Indian Government and State Government in various capacities. He was the Joint Secretary for the Ministry of steel, The Financial Advisor, to the Minsitry of Civil Aviation and Tourism and the Vigilance Commissioner to the Government of TamilNadu.

Logistics

Gateway Distriparks Limited (GDPL) is the only logistics facilitator with three verticals which are synergetic and capable of being interlinked – Container Freight Stations (CFS), Inland Container Depots (ICD) with rail movement of containers to major maritime ports, and Cold Chain Storage and Logistics. The CFSs offer transportation & storage, general and bonded warehousing, empty handling and several value added services. GDL's rail operations are handled by a subsidiary, Gateway Rail Freight Limited (Gateway Rail) in which The Blackstone Group has made a PE investment. Gateway Rail provides inter-modal logistics and operates its own Inland Container Depots/Dry Ports. The third vertical consists of cold chain logistics solutions out of 19 locations in India through the subsidiary, Snowman Logistics Limited in which Mitsubishi, Nicherei and IFC (World Bank) are investors.

Brig.Kirpa Ram Vij, Non-Executive Director Mr. Vij has served in the Singapore Administrative serve Defense staff of the Singapore Armed forces. He has worked as an Ambassador of Singapore to Egypt and Yugoslavia. Subsequently, he has worked with Neptune Orient Lines, leading container shipping company. He has also worked as Chairman of Orient Container and Warehousing Services Pte Ltd (Singapore) where he oversaw one of the largest Container Depots with warehousing and container repair facilities. Arun Agarwal, Director Arun Agarwal is a Mechanical Engineer. He has more than 28 years of experience in business. M.P. Pinto, Director M.P. Pinto has held several eminent posts in career including the post of Chairman of Jawaharlal Nehru port Trust and secretary to Ministry of Shipping, Government of India. He is the only Indian to be elected as the ViceChairman to the Council of International Maritime Organization Saroosh Dinshaw, Independent Director Saroosh Dinshaw, a commerce and law graduate, has a Master's degree in Business Administration. He has 13 years of experience in similar business as the Company. He is an Independent Director and a member of the Audit Committee as well as the Investor Relations Committee of the Company. 23

Gateway Distriparks

Coverage History 160

140 1 120

100

Not Covered

Date 1

Rating

09-Aug-2012 Buy

Target Price

Closing Price

INR180

INR136

Aug-12

Jul-12

Jun-12

May-12

Apr-12

Mar-12

Feb-12

Jan-12

Dec-11

Nov-11

Oct-11

Sep-11

Aug-11

Jul-11

Jun-11

May-11

Apr-11

Mar-11

Feb-11

Jan-11

Dec-10

Nov-10

Oct-10

Sep-10

Aug-10

80

Covered

 

Guide to Research Rating

24

BUY

Absolute Return >+20%

ACCUMULATE

Absolute Return +5% to +20%

REDUCE

Absolute Return -5% to +5%

SELL

Absolute Return < -5%

 

Elara Securities (India) Private Limited

10 August 2012

India | Logistics

Initiating Coverage 

 

 

Growth on wheels

Rating : Buy

Strong presence in the LCL transport

Target Price : INR180 Upside : 26% CMP : INR143 (as on 9 August 2012)

Allcargo Logistics (AGLL) has wide geographical reach with a global network. It is one of the largest LCL transporters and has created a niche for itself in the segment. The acquisition of ECU line business in 2006 has enabled AGLL to expand globally and has also provided impetus for the CFS segment. We expect volume growth in the multi modal transport segment to sustain in the coming years as well and estimate the segment to contribute more than 40% of the operating profits over the next couple of years.

Key data Bloomberg /Reuters Code Current /Dil. Shares O/S (mn) Mkt Cap (INRbn/US$mn) Daily Vol. (3M NSE Avg.) Face Value (INR)

AGLL IN/ACLL.BO 131/131 19/335 32,679 2

1 US$= INR55.3

Flourishing prospects in other segments

Source: Bloomberg ; * As on 9 August 2012

AGLL operates three CFSs in JNPT, Chennai and Mundra. The inherent nature of the business ensures that the segment generates significant cash for AGLL with strong margins as well as return ratios. It is expanding its capacity by ~70% at the JNPT CFS which is likely to contribute volume growth post-FY13. Although the utilisation at the JNPT CFS has been sluggish, capacity expansion is likely to offer better volume growth in the coming years. The project engineering business is also a high margin business and is likely to continue doing well in the coming two years with the proposed thrust on infrastructure.

Price & Volume 180

1,200 1,000

160

800

140

600 400

120

200

100 Aug-11

Dec-11

0 Aug-12

Apr-12

Vol. in '000s (RHS)

Improving financial position with surging return ratios

Allcargo (LHS)

Source: Bloomberg

AGLL is expected to register strong revenues as well as EBITDA growth post FY13 thanks to volume growth in the CFS business. AGLL is expected to strengthen its financial position on the back of strong profitability. We expect AGLL to turn net cash positive in FY13 and continue to remain so in the coming two years. AGLL has strong return ratios due to its low capital intensive businesses, and enjoys RoCE in excess of 15% and RoE in excess of 19%.

Share holding (%)

Q2FY12 Q3FY12 Q4FY12 Q1FY13

Promoter

69.8

69.8

69.8

69.8

Institutional Investors

12.0

12.0

11.9

11.9

Other Investors

16.1

16.1

16.0

16.1

General Public

2.1

2.1

2.2

2.2

Source: BSE

Price performance (%)

3M

6M

6.6

(1.5)

4.2

20.6

(0.8)

(10.8)

Sensex Allcargo Logistics

12M

Gateway Distriparks

(9.4)

(1.0)

6.7

Arshiya International

(17.6)

(25.1)

(2.8)

Source: Bloomberg

Price performance

Jul-12

Aug-12

Jun-12

Apr-12

Sensex

May-12

Mar-12

Jan-12

Feb-12

Dec-11

Oct-11

Nov-11

120 110 100 90 80 70 60 Sep-11

AGLL has created a niche for itself in the LCL mode which is likely to provide a steady stream of cash flows. The capacity expansion in the CFS business is likely to provide volume growth in the coming two years. With all its capacity expansion plans at completion stage, we expect AGLL to be a net free cash flow positive company in the coming two years. Also, with improving financial position, the return ratios are likely to improve consistently. We believe with strong growth prospects in FY13 as well as FY14, the current valuations leave room for considerable upside. We recommend a BUY on the stock with a target price of INR 180.

Aug-11

Valuation

(Rebased to 100)

Global Markets Research

Allcargo Logistics

Allcargo

Source: Bloomberg 

Key Financials Y/E Mar (INR mn) CY10 CY11 FY12* FY13E FY14E

 

Rev

YoY (%)

EBITDA

EBITDA (%)

Adj PAT

YoY (%)

Fully DEPS

RoE (%)

RoCE (%)

P/E (x)

EV/EBITDA (x)

20,609 28,613 42,712 36,813 42,772

(10.9) 38.8 49.3 (13.8) 16.2

2,191 2,698 5,202 4,662 5,483

10.6 9.4 12.2 12.7 12.8

1,332 1,656 2,385 2,387 3,107

6.2 24.3 44.0 0.1 30.2

10.6 13.2 19.0 19.0 24.8

16.5 15.0 18.0 15.8 17.8

17.8 17.5 25.9 19.8 22.2

13.4 10.8 7.5 7.5 5.8

8.7 7.5 4.0 4.3 3.3

Source: Company, Elara Securities Estimate; Note: *15 months period as financial Y/E changed from Dec to Mar

Ravindra Deshpande • [email protected] • +91 22 4062 6805

 

Elara Securities (India) Private Limited

Allcargo Logistics Valuation trigger

Investment summary

  Attaining net cash position

Capacity addition at Mumbai CFS

ƒ

Steady growth in the LCL business

ƒ

Addition of capacity to provide growth at Mumbai CFS

ƒ

Strong balance sheet with healthy cash flow generation

200 180

3 2

160

1

140

Valuation trigger

120

1. Capacity addition at Mumbai CFS

100

2. Attaining net cash position

80

Key risks

Aug-13

Jun-13

Apr-13

Feb-13

Oct-12

Dec-12

Aug-12

Jun-12

Apr-12

Feb-12

Dec-11

Oct-11

Jun-11

Aug-11

Apr-11

Feb-11

Dec-10

Oct-10

Aug-10

60

Source: Bloomberg, Elara Securities Estimates

Valuation overview

ƒ

Volume declines in the Mumbai CFS

ƒ

Realizations decrease in the business

Our assumptions

SOTP Valuation for Allcargo

FY13E Multiple 5.0 6.0 4.5

INR Mn 1,912 1,406 1,344

Multi Modal Transport CFS Project Enginnering TOTAL Target EV Net Debt Target Market Cap No. of shares outstanding Target Price Current market Price Potential Upside/(downside) (%)

Completion of CFS expansion in FY14

ƒ

INR MN 9,561 8,437 6,049 24,047 1,512 22,534 125 180 143 26.1

Source: Elara Securities Estimates

Peer analysis Logistics comparables Company Name

CMP

M Cap

EV

Expeditors Intl

36.4

7,668

Revenues EBITDA Adj. PAT EPS ROE EV/EBITDA P/E CY12/ CY13/ CY12/ CY13/ CY12/ CY13/ CY12/ CY13/ CY12/ CY13/ CY12/ CY13/ CY12/ CY13/ FY13 FY14 FY13 FY14 FY13 FY14 FY13 FY14 FY13 FY14 FY13 FY14 FY13 FY14 6,310 6,226 6,853 628 724 364 421 1.7 2.0 17.8 18.9 10.0 8.7 21.3 18.4

Uti Worldwide Inc

13.8

1,429

1,528

4,941

5,016

209

216

81

90

0.8

0.9

9.2

9.1

7.3

7.1

17.2

15.7

Qube Logistics

1.6

1,446

1,510

805

1,034

118

173

62

82

0.1

0.1

7.5

8.3

12.3

8.4

20.7

17.2

Dalian Port (PDA)

0.2

1,823

3,280

664

725

299

327

125

142

0.0

0.0

6.1

6.4

10.9

9.9

7.8

6.8

Sinotrans

0.1

575

809

7,764

8,402

287

376

117

142

0.0

0.0

6.8

7.8

2.8

2.2

5.0

4.0

Average

9.5

10.1

8.7

6.6

14.4

12.4

USD USD mn USD mn

Warehousing comparables Company Name

CMP

M Cap

EV

Revenues EBITDA Adj. PAT EPS ROE EV/EBITDA P/E CY12/ CY13/ CY12/ CY13/ CY12/ CY13/ CY12/ CY13/ CY12/ CY13/ CY12/ CY13/ CY12/ CY13/ FY13 FY14 FY13 FY14 FY13 FY14 FY13 FY14 FY13 FY14 FY13 FY14 FY13 FY14 5,806 723 804 421 471 375 425 0.1 0.2 10.1 10.7 13.8 12.3 9.9 8.8

USD USD mn USD mn Cosco Pacific

1.4

Shenzhen Chiwan

1.2

903

1,179

267

291

154

171

81

93

0.1

0.1

14.3

14.7

7.6

6.9

9.8

Agility

1.4

1,482

1,267

4,987

5,294

223

346

98

178

0.1

0.2

-

-

5.7

3.7

13.2

8.0

53.9

8,767

8,527 11,340 12,405

769

857

455

505

2.8

3.2

34.5

35.0

11.1

9.9

19.2

17.1

Gulf Warehousing 11.2

446

598

133

164

37

47

19

25

0.5

0.6

9.9

13.0

16.2

12.7

23.6

17.7

Royal Wolf Zhangjiagang Freetrade

2.2

221

296

161

170

46

49

20

22

0.2

0.2

12.9

13.7

6.5

6.0

11.3

9.9

1.8

383

354

68

77

40

46

24

28

0.1

0.1

23.5

21.3

9.0

7.9

15.3

13.4

Average

17.5

18.1

10.0

8.5

14.6

12.0

C.H. Robinson

3,826

8.9

Indian comparables (INR mn)

26

CMP (INR)

M Cap

EV

Revenues

EBITDA

PAT

EPS (INR)

FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY14E

ROE (%)

EV/EBITDA (x)

P/E (x)

FY13E FY14E FY13E FY14E FY13E FY14E

Gateway Distriparks

136 14,732 13,935

8,832 10,150

2,991

3,308

1,631

1,822

15.1

16.8

14.2

14.9

4.7

4.0

9.0

8.1

Allcargo

143 17,872 19,384 36,813 42,772

4,662

5,483

2,387

3,107

19.0

24.8

15.8

17.8

4.3

3.3

7.5

5.8

Arshiya

126

3,837

6,083

1,690

2,449

28.7

41.6

18.1

21.6

8.8

6.3

4.4

3.0

7,413 33,955 13,094 17,331

Source: Bloomberg, Elara Securities Research  

 

Elara Securities (India) Private Limited

Allcargo Logistics

Financials (Y/E Mar)

Balance Sheet (INR mn) Share Capital Reserves Borrowings Minority Interest Deferred Tax (Net) Total Liabilities Gross Block Less:- Accumulated Depreciation Net Block Add:- Capital work in progress Investments Net Working Capital excluding Cash Cash & Cash Equivalents Other Assets Total Assets Cash Flow Statement (INR mn) Cash profit adjusted for non cash items Add/Less : Working Capital Changes Operating Cash Flow Less:- Capex Free Cash Flow Financing Cash Flow Investing Cash Flow Net change in Cash Ratio Analysis

CY10

FY12*

FY13E

FY14E

28,613 2,698 286 2,984 550 2,434 194 2,240 484 1,756 (100) 1,656 3 1,659

42,712 5,202 534 5,735 1,337 4,398 683 3,715 1,189 2,526 (141) 2,385 (4) 2,381

36,813 4,662 4,662 967 3,696 476 3,219 676 2,543 (156) 2,387 2,387

42,772 5,483 5,483 1,053 4,430 240 4,190 880 3,310 (203) 3,107 3,107

CY10

FY12

FY13E

FY14E

261 11,551 3,778 262 408 16,260 13,871 2,388 11,483 543 1,319 1,486 1,430 0 16,260

261 13,703 3,778 404 408 18,554 17,663 3,725 13,938 750 1,319 1,714 833 0 18,554

251 15,123 3,278 560 408 19,619 19,338 4,692 14,646 775 1,319 1,876 1,003 0 19,619

251 17,989 1,778 763 408 21,188 21,063 5,745 15,318 550 1,319 2,190 1,811 0 21,188

CY10

FY12

FY13E

FY14E

2,152 161 2,312 (4,423) (2,110) 2,275 349 513

3,859 (228) 3,631 (4,000) (369) (228) (597)

3,510 (162) 3,348 (1,700) 1,648 (1,478) 170

4,363 (315) 4,049 (1,500) 2,549 (1,741) 808

CY10

FY12

FY13E

FY14E

38.8 23.1 24.3 9.4 5.8

NM NM NM 12.2 5.6

NM NM NM 12.7 6.5

16.2 17.6 30.2 12.8 7.3

0.13 14.0 15.6

0.16 17.1 19.7

0.10 15.5 19.8

(0.04) 17.0 22.1

13.4 21.9 3.0 10.6 7.5 0.7 2.1

19.3 NM 1.5 7.4 4.0 0.5 1.1

19.5 NM 1.6 7.3 4.2 0.5 1.1

25.3 30.2 1.7 5.6 3.1 0.4 1.2

Income Statement Ratios (%) Revenue Growth EBITDA Growth PAT Growth EBITDA Margin Net Margin Return & Liquidity Ratios Net Debt/Equity (x) ROE ROCE Per Share data & Valuation Ratios Diluted EPS (INR/Share) EPS Growth (%) DPS (INR/Share) P/E Ratio (x) EV/EBITDA (x) EV/Sales (x) Dividend Yield (%)

Return ratios 25

22.1 19.7

19.8

20 15.6 15

17.1

17.0 15.5

14.0 10 CY10

FY12 ROE

FY13E

FY14E ROCE

Source: Company, Elara Securities Estimates

Logistics

Net Revenues EBITDA Add:- Non operating Income OPBIDTA Less :- Depreciation & Amortization EBIT Less:- Interest Expenses PBT Less :- Taxes Adjusted PAT Less: Minority Interest Adjusted Attributable PAT Add/Less: - Extra-ordinaries Reported PAT

(%)

Income Statement (INR mn)

   

With strong cash generation, ACGL expected to turn net cash positive

Steady growth in the earnings with expansion of CFS business

Note: *15 months period as financial Y/E changed from Dec to Mar Source: Company, Elara Securities Estimates

 

  Elara Securities (India) Private Limited 

27

Allcargo Logistics Allcargo Logistics

Investment rationale ‰ Strong presence in the LCL transport ‰ Flourishing prospects in other segments ‰ Improving financial position with surging return ratios

Company background

Exhibit 2: Diversified MTO business

Allcargo Logistics (AGLL) is a leading multinational company providing integrated logistics solutions. It offers specialised logistics services across multimodal transport operations, container freight station operations and project & engineering solutions. AGLL is the global leader in the less than container load (LCL) logistics with the acquisition of ECU Line business. Presently, AGLL operates in three operating segments multi modal transport, CFS and project engineering and solutions segment. While, the multi modal transport segment remains the biggest contributor to revenue as well as operating profits, margins in the CFS business remain the strongest. Exhibit 1: Segment contribution to revenues (INR mn) 50,000 40,000 30,000 20,000 10,000 0 CY07

CY08

CY09

CY10

FY12

Multimodal Transport Operations CFS Project & Engineering Solutions Source: Company, Elara Securities Research

Multi modal transport – An attractive niche AGLL is the largest global LCL operator with the acquisition of ECU Line business in 2006. The company now has presence across 65 countries with wide network of agents across the globe. It offers logistic solutions for LCL customers who can’t utilise the services of Full Container Load (FCL) operators. AGLL has pioneered the LCL consolidation in India and remains the leader in the field and has presence across 4,000 nodes all over the globe. Due to the nature of its business, it can also offer transportation of FCL cargo. AGLL has a global reach in the segment and acquisition of ECU Line has diversified its business across geographies thus de-risking the business from turmoil in a particular region.

Africa 9%

America 2%

Europe 31%

Asia Pacific 58%

Source: Company, Elara Securities Research

LCL business provides insulation from volatility AGLL has a dominating presence in the LCL cargo transport. As the nature of business involves transporting less than container loads of cargo, the same is insulated from economic turbulence to an extent. The same is visible from volume growth AGLL has registered in the last five years. The business has registered 16.7% CAGR in volume growth over the last five years and we expect volume growth in the segment to sustain going forward. We have estimated volume growth of 12.5% in FY13E followed by similar volume growth in FY14E as well. CFS business: Sustainable high margins business AGLL operates in the CFS segment through its facilities at JNPT (Mumbai), Chennai, Mundra and Indore thereby ensuring it has presence across the major Indian ports which handle significant container traffic in India. Exhibit 3: Expansion in CFS Capacity (TEUs) 300,000 250,000 200,000 150,000 100,000 50,000 0 CY11

FY12 JNPT

FY13E Chennai

FY14E Mundra

FY15E

Source: Company, Elara Securities Research

  28

 

Elara Securities (India) Private Limited

Allcargo Logistics

Exhibit 4: CFS presence at key ports Nearest Port/Rail Siding Annual Capacity

JNPT – II CFS

Chennai CFS

Mundra CFS

Kheda ICD

Dadri ICD

18 kms

18 kms

7 kms

7 kms

3 kms

0.3 kms

144,000 TEUs

200,000 TEUs

145,000 TEUs

84,000 TEUs

40,000 TEUs

75,000 TEUs

23.5 acres

23 acres

24 acres

16 acres

14 acres

11 acres

Land Area Paved

Yes 2

Warehouse Area

11400 m

Yes 22800 m

2

Yes 14257 m

2

Yes 12210 m

2

Yes 3100 m

2

Yes 5160 m

2

Bonded Warehouse

Yes

Yes

Yes

No

No

No

Weighbridge

Yes

-

Yes

Yes

Yes

Yes

Trailers

130

40

25

45

35

10

Cranes

1 x 70 mt

-

-

1 x 50 mt

-

-

8

2

6

4

1

1

Reach Stackers Forklifts

19

-

22

9

2

2

Reefer Points

32

35

22

15

6

48

-

Yes

Yes

-

-

-

RTGC (rubber tired gantry crane) Source: Company, Elara Securities Research

Consistent Volume growth Although, the JNPT volumes have been sluggish in the recent past, the capacities at other locations have ensured consistent volume growth. While, the JNPT CFS has witnessed volume decline in CY11/or FY12, the Chennai CFS registered strong volume growth of ~20% as also the Mundra CFS which witnessed ~50% growth over the same period. However, with capacity expansion at the Mumbai CFS, we expect AGLL to consistently post volume growth going forward. Sustainable rich margin business CFS business due to its nature and constraints for the new entrants (proximity to port, contiguous land parcel and capital) enables operators to earn rich margins in the business. The operating costs involved in the CFS are relatively low and hence operators can earn operating margins in excess of 50%. AGLL has consistently earned EBITDA margins in excess of 52% over five years. Even going forward, we expect volumes in the business to register high earnings and return ratios.

AGLL operates in the project & engineering solutions segment which acts as a perfect foil for the existing businesses and enables the company to leverage already existing clientele. The segment involves transportation of high value project specific cargo transport. The segment would cater to logistic services for typically heavy capex projects like setting up of power plants, aluminum smelters, steel blast furnaces etc. Being a specialised function, AGLL has limited competition in the business. Apart from logistics, it also involves other ancillary activities like clearance as well as warehousing of imported goods for the project, transporting the same to relevant locations, regulatory compliance etc. AGLL is also into equipment business and has a fleet of 933 specialised equipments as well as vehicles. It has expanded its fleet size consistently over the last few years and accordingly has posted significant revenue growth in the segment. Exhibit 6: Strong fleet size

Exhibit 5: CFS business margins (%) 65 60 55

March-12

March-11

Addition (%)

Trailers

497.0

425.0

16.9

Cranes

148.0

115.0

28.7

Forklifts

57.0

66.0

(13.6)

Reach Stackers

36.0

29.0

24.1

Prime Mover

11.0

4.0

175.0

Hydraulic Axles

50 45 CY08

CY09

CY10

EBITDA Margins Source: Company, Elara Securities Research

 

Project engineering division: Providing diversification edge

Elara Securities (India) Private Limited 

Logistics

JNPT - I CFS

FY12

182.0

52.0

250.0

Barges

1.0

-

-

Girder Bridge

1.0

-

-

933.0

691.0

35.0

Source: Company, Elara Securities Research

  29

Allcargo Logistics Exhibit 7: Diversified sector allocation of cranes Port & CFS 3%

Others 8% Wind Energy 35%

Thermal power 5% Oil & Gas 9%

Besides, the company operates in the asset light MTO operations, rich margin CFS business, which enables the company to earn strong return ratios. Although the return ratios remain low in the project engineering and solutions business due to the capital intensive nature of the business, we expect the same to improve going forward as the company increases its fleet. Exhibit 9: Impressive profitability margins (%) 30

Engineering 19%

Infrastructure 21%

Source: Company, Elara Securities Research

25 20

With well diversified portfolio of clients in the segment, we expect it to continue posting steady revenues as well as operating profits growth going forward.

15 10

Improving financials

CY08

With well diversified but integrated logistic services, AGLL is expected to register strong revenues as well as operating profits growth in the coming two years. We believe capacity expansion in the CFS business coupled with diversified geographic presence in the LCL business and well-diversified operations of the project engineering & solutions business to insulate AGLL from economic turmoil. It enjoys strong margins due to its niche presence in the project engineering as well as Multimodal Transport Operators (MTO) businesses and locational advantage in the CFS business. We believe, these advantages are sustainable in nature and they enable AGLL to earn healthy operating profit margins. Exhibit 8: Strong profitability margins (%) 14 12 10 8 6 4

CY09

CY10

FY12

RoCE

FY12

FY13E FY14E

RoE

Source: Company, Elara Securities Estimates

With major chunk of capex behind, AGLL is expected to earn strong free cash flows going ahead. We expect the company to earn free cash flow per share of INR13.1 in FY13E and INR20.3 in FY14E. We expect the company to be a net cash company with free cash flow generation from FY13 onwards.

Buyback of shares Considering the strong free cash flow generation in the business, AGLL’s board has initiated a buyback of shares. The buyback price has been capped at INR 142.50/share and the maximum consideration to be spent on buyback has been capped at INR750mn. Assuming that the shares are tendered at the highest price, the same would result in reduction of ~5.26mn shares (~4% reduction) in the current outstanding share capital of the company. We have built a case of tendering shares by shareholders at the highest possible price and have accordingly reduced the share capital as well as the cash balance of the company.

2 0 CY08

CY09

CY10

FY12

EBITDA Margin

FY12

FY13E FY14E

PAT Margin

Source: Company, Elara Securities Estimates

30

 

Elara Securities (India) Private Limited

Allcargo Logistics

Valuation & Recommendation ‰ Strong presence in the LCL transport ‰ Flourishing prospects in other segments ‰ Improving financial position with surging return ratios

We believe with strong growth prospects in FY13 as well as FY14, the current valuations leave room for considerable upside. We initiate our coverage on AGLL with a target valuation of INR180 and a BUY recommendation.

Exhibit 10: Valuation summary SOTP Valuation

FY13E INR Mn

Multiple

INR MN

Multi Modal Transport

1,912

5.0

9,561

CFS

1,406

6.0

8,437

Project Enginnering

1,344

4.5

6,049

TOTAL Target EV Net Debt Target Market Cap

24,047 1,512 22,534

No. of shares outstanding

125

Target Price

180

Current market Price

143

Potential Upside/(downside) (%)

26.1

Logistics

We have valued AGLL business on SOTP approach of valuation. Accordingly, we have assigned 5.0x EV/EBITDA for the MTO business, 6.0x EV/EBITDA for the CFS business and 4.5x EV/EBITDA for the project engineering & solutions business. We arrive at our target valuation of INR180, at which price the stock would be trading at ~9.2x its earnings. The target valuation implies an EV/EBITDA ratio of 5.2x its FY13E EBITDA.

Source: Company, Elara Securities Estimates

 

 

Elara Securities (India) Private Limited 

31

Allcargo Logistics

Company Description Allcargo Logistics Limited (AGLL) is a leading multinational company providing integrated logistics solutions. It offers specialized logistics services across Multimodal Transport Operations, Container Freight Station Operations and Project & Engineering Solutions. AGLL currently operates out of 140own offices in 62 countries and also has an even larger network of franchisee offices across the world. AGLL remains a market leader in the segments it operates. In the MTO segment, the company offers services to LCL cargo, and hence has carved a niche position for itself. In the CFS segment, the proximity to the ports has enabled it to create a stronghold in the segment. It remains one of the few organized players in the project engineering and solutions business and hence is likely to post consistent growth going ahead.

Board of Directors& Management Shashi Kiran Shetty, Chairman & Managing Director

Umesh Shetty, Director

Shashi Kiran Shettystarted his career in the Logistics industry in 1978 with Intermodal Transport and Trading Systems Private Limited, Mumbai. Subsequently, he moved to Forbes Gokak, a TATA Group Company where he gained experience in port operations.In 1993 he founded Allcargo Logistics as freight forwarding privately held company. Over the years the company built capabilities in the Non-Vessel Operating Common Carrier (NVOCC) business and Multimodal Transport business. He has been conferred with the E&Y Entrepreneur of the Year Award in services category in the year 2010 and has also won the ‘Face of the year’ award at the 4th Express Logistics and Supply Chain awards (ELSC) organized by the Economic Times & Future Group. He has served on the Board of Mumbai Port Trust and also was the Co-Chairman of the Transport and Logistics Committee of The Indian Merchant Chambers. He was the Vice President of Association of Multimodal Transport Operators of India.

Umesh Shetty, holds a Bachelor of Commerce degree and has a rich experience of more than 20 years in the fields of cargo and logistic business.His current responsibilities include developing and managing the Equipment division of the company. With his strong entrepreneur skills and business acumen in logistic business, the Equipment Division has registered sharp growth. Mr. Shetty is also a Director in ECU Line Companies.

Adarsh Hegde, Executive Director Adarsh Hegde embarked on the role of Executive Director at Allcargo Logistics Ltd. in September 2006. He is a Director on the Board of AGL and spearheads CFS, ICD, and Project Logistics and Warehousing business. He is also the Corporate Marketing Chief for the group and is focused on continuing Allcargo's growth story across the business verticals. He holds a degree in mechanical engineering and started his career as Assistant Maintenance Engineer with Eastern Ceramics Pvt. Ltd. At Allcargo Logistics, he successfully established Container Freight Station facilities at Chennai and Mundra and is in the process of setting up Container Freight Station facilities at other locations in India like Pithampur, Nagpur and Hyderabad.He currently holds the position of the President of CFS Association of India.

32

 

S. Suryanarayanan, Director – Finance S. Suryanarayanan was appointed Group Finance officer in May 2008. As the group financial officer, he is responsible for the group financial plans, strategic planning, and merger and acquisitions of the group. He leads and manages the financial, secretarial and legal functions across the group. He has over 25 years of vast experience in the logistics, chemical & engineering sectors. Prior to joining Allcargo Logistics Ltd., he has worked in large organizations like Reliance and Great Eastern. Capt Ashok Shrivastava, Chief Executive Officer Shipping Services Captain Ashok Shrivastava heads the Ship Owning division. A Master Mariner by profession, he has over 8 years of command experience on foreign flag vessels. He took up shore assignment over 12 years ago and has since been involved with companies like Parekh Group, Hyundai Merchant Marine & Jindal Waterways.

Elara Securities (India) Private Limited

Hrushikesh Joshi, Group Chief Information Officer

Mukundan, Chief Assurance & Risk Executive

Hrushikesh Joshi was appointed Group Chief Information Officer of Allcargo Logistics Ltd. and its subsidiaries in April 2007. As Group CIO, he is responsible for the IT and Process function. His current responsibility is to build and manage a comprehensive IT portfolio that is aligned to business objectives at both Allcargo Logistics Ltd. and ECU Line. He holds a degree in B.E (Computer Engineering) and has over 21+ years of work experience. Of these, he has spent over 16 years in the transportation and logistics industry.

Mukundan is Chief Assurance & Risk Executive for the group. He is Chartered Accountant, Certified Public Accountant, Certified Information System Auditor and Certified Internal Auditor. He has more than 25 years of versatile experience in Manufacturing, Consulting and Service Industries. He was also honored as Chief Minister's Fellow by Government of Madhya Pradesh for innovative suggestion in the field of accounting. His current responsibilities include overseeing the assurance and risk function for the entire Global operations, Joint ventures and subsidiaries. He additionally performs the role of Ethics and Grievance Officer for the group

Jatin Chokshi, Chief Investment Officer Jatin Chokshi heads the Group's investment division. He is Chartered Accountant & Company Secretary with 27 years of work experience in industries like Shipping, Consumer Durables and Industrial Chemicals. He joined Allcargo Group in 2001 and worked in capacity of Financial controller, CFO & CEO of a business vertical before taking over as Group Chief Investment Officer. He is responsible for building all new Projects of the Group, Investment & Treasury functions and Taxation matters.

 

Elara Securities (India) Private Limited 

Shantha Martin, CEO – NVOCC Shantha Martin heads the NVOCC Division. She holds a B. Sc. Degree and an MBA (Marketing) from Manipal. Her current responsibility is to head the Indian Subcontinent and Middle East region to provide total logistics services with last mile connectivity. She oversees 47 offices in the region of the Indian Subcontinent and the Middle-East.

Logistics

Allcargo Logistics

33

Allcargo Logistics

Coverage History 200

180

160 1 140

120

Not Covered

Date 1

Rating

09-Aug-2012 Buy

Target Price

Closing Price

INR180

INR143

Aug-12

Jul-12

Jun-12

May-12

Apr-12

Mar-12

Feb-12

Jan-12

Dec-11

Nov-11

Oct-11

Sep-11

Aug-11

Jul-11

Jun-11

May-11

Apr-11

Mar-11

Feb-11

Jan-11

Dec-10

Nov-10

Oct-10

Sep-10

Aug-10

100

Covered

 

Guide to Research Rating

34

BUY

Absolute Return >+20%

ACCUMULATE

Absolute Return +5% to +20%

REDUCE

Absolute Return -5% to +5%

SELL

Absolute Return < -5%

 

Elara Securities (India) Private Limited

10 August 2012

India | Logistics

Initiating Coverage 

 

 

Banking on warehousing

Rating : Buy

Unique business model

Target Price : INR170 Upside : 35% CMP : INR126 (as on 9 August 2012)

Arshiya International (ARST) operates in the free trade warehousing zone (FTWZ) space. ARST remains the only sizable company which has operational FTWZ and hence enjoys a significant first mover advantage. The monopolistic advantage coupled with its proximity to one of the key ports in the EXIM trade, ensures strong utilisations as also robust margins. Apart from FTWZ, the company also operates in the rail and logistics businesses, which completes the chain of integration in the logistics space. We expect the FTWZ segment to drive future growth for the company and contribute close to 2/3rd of FY14E EBITDA.

Key data Bloomberg /Reuters Code Current /Dil. Shares O/S (mn) Mkt Cap (INRbn/US$mn) Daily Vol. (3M NSE Avg.) Face Value (INR)

ARST IN/ARTC.BO 59/59 7/133 66,274 2

1 US$= INR55.3 Source: Bloomberg ; * As on 9 August 2012

Price & Volume

Higher contribution of rich margin business Traditionally ARST has operated in the logistics space, which has a steady margin (~20% EBITDA margins) and higher RoCE business (~average of 25%). ARST’s management has decided to venture into the unexplored but high margin FTWZ business. The decision is reaping returns now as is visible from results. The uniqueness of the business coupled with the advantages it offers customers, allow it to earn EBITDA margins in excess of 50%. We expect FTWZ business to contribute ~63% in FY14E from ~42% in FY12. The return ratios for ARST are likely to grow consistently due to higher contribution of FTWZ revenues and EBITDA. Higher leverage; but to provide secular growth ARST is investing in the FTWZ businesses at Panvel as well as Khurja as also in the rail business. Because of the initial capex of the FTWZ business (minimum requirement of 100 acres of land parcel and close proximity to ports) the debt equity ratio of ARST is skewed as of now. However, as these investments become operational, the leverage is likely to decline steadily as ARST gets into debt repayment mode.

180

2.5 2.0

160

1.5

140

1.0

120

0.5

100 Aug-11

Dec-11

0.0 Aug-12

Apr-12

Vol. in mn (RHS)

Arshiya Int. (LHS)

Source: Bloomberg

Share holding (%)

Q2FY12 Q3FY12 Q4FY12 Q1FY13

Promoter

43.2

43.2

43.2

43.2

Institutional Investors

16.6

18.4

15.8

15.4

Other Investors

24.0

21.9

22.2

22.6

General Public

16.3

16.5

18.8

18.8

6M

12M

Source: BSE

Price performance (%)

3M

Sensex

6.6

(1.5)

4.2

Arshiya International

(17.6)

(25.1)

(2.8)

Gateway Distriparks

(9.4)

(1.0)

6.7

Allcargo Logistics

20.6

(0.8)

(10.8)

Source: Bloomberg

Price performance

Jul-12

Aug-12

Jun-12

Apr-12

May-12

Mar-12

Jan-12

Sensex

Feb-12

Dec-11

Oct-11

Nov-11

140 130 120 110 100 90 80 Sep-11

The capital intensive nature of the business has escalated the debt equity ratio for ARST. However, the FTWZ business requires lower maintenance capex (as major investment is towards acquisition of land) but delivers higher profitability as well as higher returns as compared to similar businesses. ARST is likely to post highest growth amongst the sector peers with superior return ratios. Hence although the risk is higher in the stock, we believe once the

Aug-11

Valuation

(Rebased to 100)

Global Markets Research

Arshiya International

Arshiya International

Source: Bloomberg 

Key Financials Y/E Mar (INR mn) FY10 FY11 FY12 FY13E FY14E

Rev 5,259 8,215 10,547 13,094 17,331

YoY (%) 4.5 56.2 28.4 24.1 32.4

EBITDA 895 1,580 2,781 3,837 6,083

EBITDA (%) 17.0 19.2 26.4 29.3 35.1

Adj PAT 618 825 1,256 1,690 2,449

YoY (%) (5.9) 33.6 52.3 34.5 45.0

Fully DEPS 10.5 14.0 21.4 28.7 41.6

RoE (%) 9.7 11.6 15.7 18.1 21.6

RoCE (%) 8.3 8.3 9.8 10.1 12.7

P/E (x) 12.0 9.0 5.9 4.4 3.0

EV/EBITDA (x) 13.9 12.9 10.3 8.8 6.3

Source: Company, Elara Securities Estimate 

 

Ravindra Deshpande • [email protected] • +91 22 4062 6805

 

Elara Securities (India) Private Limited

Arshiya International Valuation trigger

Investment summary

  Visibility of cash inflows from the Panvel as well as Khurja FTWZ

400

ƒ

Foray into highly profitable FTWZ business

ƒ

Panvel & Khurja FTWZs to complete capacity expansion by FY15

350 300

Valuation trigger

250

1. Visibility of cash inflows from the Panvel as well as Khurja FTWZ

200 2

150

Key risks

1

Aug-13

Jun-13

Apr-13

Feb-13

Oct-12

Dec-12

Aug-12

Jun-12

Apr-12

Feb-12

Dec-11

Oct-11

Jun-11

Aug-11

Apr-11

Feb-11

Dec-10

Oct-10

Aug-10

100

Source: Bloomberg, Elara Securities Estimates

High financial leverage

ƒ

Negative FCF generation till end of FY14

Our assumptions

Valuation overview FY14E Multiple

INR Mn SOTP Valuation EV/EBITDA Valuation FTWZ Segment Rail segment Logistics Segment TOTAL EV Less: Net Debt Target Market Cap No. of shares outstanding Target Price Current Mkt Price Upside/(Downside) (%)

ƒ

3,819 930 1,335

ƒ

No further capex apart from Panvel and Khurja FTWZ

ƒ

Debt repayments to start post FY15

INR Mn

8 6 4

30,548 5,113 5,340 41,002 30,856 10,146 59 170 126 35

Source: Elara Securities Research

Peer analysis Logistics comparables Company Name

CMP

M Cap

EV

Expeditors Intl

Revenues EBITDA Adj. PAT EPS ROE EV/EBITDA P/E CY12/ CY13/ CY12/ CY13/ CY12/ CY13/ CY12/ CY13/ CY12/ CY13/ CY12/ CY13/ CY12/ CY13/ USD USD mn USD mn FY13 FY14 FY13 FY14 FY13 FY14 FY13 FY14 FY13 FY14 FY13 FY14 FY13 FY14 36.4 7,668 6,310 6,226 6,853 628 724 364 421 1.7 2.0 17.8 18.9 10.0 8.7 21.3 18.4

Uti Worldwide Inc

13.8

1,429

1,528

4,941

5,016

209

216

81

90

0.8

0.9

9.2

9.1

7.3

7.1

17.2

15.7

Qube Logistics

1.6

1,446

1,510

805

1,034

118

173

62

82

0.1

0.1

7.5

8.3

12.3

8.4

20.7

17.2

Dalian Port (PDA)

0.2

1,823

3,280

664

725

299

327

125

142

0.0

0.0

6.1

6.4

10.9

9.9

7.8

6.8

Sinotrans

0.1

575

809

7,764

8,402

287

376

117

142

0.0

0.0

6.8

7.8

2.8

2.2

5.0

4.0

Average

9.5

10.1

8.7

6.6

14.4

12.4

Warehousing comparables Company Name

CMP

M Cap

EV

Revenues EBITDA Adj. PAT EPS ROE EV/EBITDA P/E CY12/ CY13/ CY12/ CY13/ CY12/ CY13/ CY12/ CY13/ CY12/ CY13/ CY12/ CY13/ CY12/ CY13/ FY13 FY14 FY13 FY14 FY13 FY14 FY13 FY14 FY13 FY14 FY13 FY14 FY13 FY14 5,806 723 804 421 471 375 425 0.1 0.2 10.1 10.7 13.8 12.3 9.9 8.8

USD USD mn USD mn Cosco Pacific

1.4

Shenzhen Chiwan

1.2

903

1,179

267

291

154

171

81

93

0.1

0.1

14.3

14.7

7.6

6.9

9.8

Agility

1.4

1,482

1,267

4,987

5,294

223

346

98

178

0.1

0.2

-

-

5.7

3.7

13.2

8.0

53.9

8,767

8,527 11,340 12,405

769

857

455

505

2.8

3.2

34.5

35.0

11.1

9.9

19.2

17.1

Gulf Warehousing 11.2

446

598

133

164

37

47

19

25

0.5

0.6

9.9

13.0

16.2

12.7

23.6

17.7

Royal Wolf Zhangjiagang Freetrade

2.2

221

296

161

170

46

49

20

22

0.2

0.2

12.9

13.7

6.5

6.0

11.3

9.9

1.8

383

354

68

77

40

46

24

28

0.1

0.1

23.5

21.3

9.0

7.9

15.3

13.4

Average

17.5

18.1

10.0

8.5

14.6

12.0

C.H. Robinson

3,826

8.9

Indian comparables (INR mn)

36

CMP (INR)

M Cap

EV

Revenues

EBITDA

PAT

EPS (INR)

FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY14E

ROE (%)

EV/EBITDA (x)

P/E (x)

FY13E FY14E FY13E FY14E FY13E FY14E

Gateway Distriparks

136 14,732 13,935

8,832 10,150

2,991

3,308

1,631

1,822

15.1

16.8

14.2

14.9

4.7

4.0

9.0

8.1

Allcargo

143 17,872 19,384 36,813 42,772

4,662

5,483

2,387

3,107

19.0

24.8

15.8

17.8

4.3

3.3

7.5

5.8

Arshiya

126

3,837

6,083

1,690

2,449

28.7

41.6

18.1

21.6

8.8

6.3

4.4

3.0

7,413 33,955 13,094 17,331

   Source: Bloomberg, Elara Securities Research

Elara Securities (India) Private Limited

Arshiya International

Financials (Y/E Mar)

Share Capital Reserves Borrowings Minority Interest Deferred Tax (Net) Total Liabilities Gross Block Less:- Accumulated Depreciation Net Block Add:- Capital work in progress Investments Net Working Capital excluding Cash Cash & Cash Equivalents Other Assets Total Assets

FY12

FY13E

FY14E

118 7,338 14,421 0 0 21,876 6,697 287 6,410 12,560 1,026 1,668 212 21,876

118 8,432 21,653 0 0 30,203 15,170 601 14,569 13,320 1,452 650 212 30,203

118 10,040 27,653 0 0 37,811 21,990 1,086 20,904 13,500 1,934 1,260 212 37,811

118 12,407 33,253 0 0 45,778 30,990 1,928 29,062 11,500 2,605 2,398 212 45,778

FY11

FY12

FY13E

FY14E

690 918 1,607 (9,368) (7,761) 8,706 (145) 800

1,408 (426) 982 (9,233) (8,251) 7,233 (1,018)

2,092 (482) 1,610 (7,000) (5,390) 6,000 610

3,209 (672) 2,537 (7,000) (4,463) 5,600 1,137

FY11

FY12

FY13E

FY14E

Cash Flow Statement (INR mn) Cash profit adjusted for non cash items Add/Less : Working Capital Changes Operating Cash Flow Less:- Capex Free Cash Flow Financing Cash Flow Investing Cash Flow Net change in Cash Ratio Analysis Income Statement Ratios (%) Revenue Growth EBITDA Growth PAT Growth EBITDA Margin Net Margin Return & Liquidity Ratios Net Debt/Equity (x) ROE ROCE Per Share data & Valuation Ratios Diluted EPS (INR/Share) EPS Growth (%) DPS (INR/Share) P/E Ratio (x) EV/EBITDA (x) EV/Sales (x) Dividend Yield (%)

56.2 76.6 33.6 19.2 10.0

28.4 76.0 52.3 26.4 11.9

24.1 38.0 34.5 29.3 12.9

32.4 58.5 45.0 35.1 14.1

1.73 11.6 8.3

2.47 15.7 9.8

2.61 18.1 10.1

2.48 21.6 12.7

14.0 33.6 1.2 9.0 12.9 2.5 1.0

21.4 52.3 1.2 5.9 10.3 2.7 1.0

28.7 34.5 1.2 4.4 8.8 2.6 1.0

41.6 45.0 1.2 3.0 6.3 2.2 1.0

35.1

20,000 26.4

15,000

40

29.3 30

19.2 10,000

20

5,000

10

0

0 FY11

FY12

Net Revenues (LHS)

FY13E

FY14E

EBITDA Margin (RHS)

Source: Company, Elara Securities Estimates

  Adjusted profits growth trend 52.3

3,000

60 45.0

2,500 2,000

50

34.5

33.6

40

1,500

30

1,000

20

500

10

Logistics

FY11

Balance Sheet (INR mn)

Revenue & margins growth trend

(%)

FY14E 17,331 6,083 79 6,162 842 5,320 2,369 2,951 502 2,449 2,449

(%)

FY13E 13,094 3,837 78 3,915 485 3,430 1,394 2,036 346 1,690 1,690

(INR mn)

FY12 10,547 2,781 77 2,858 314 2,544 1,060 1,484 228 1,256 1,256

(INR mn)

FY11 8,215 1,580 28 1,608 180 1,429 462 967 140 827 (5) 822

Net Revenues EBITDA Add:- Non operating Income OPBIDTA Less :- Depreciation & Amortization EBIT Less:- Interest Expenses PBT Less :- Taxes Adjusted PAT Add/Less: - Extra-ordinaries Reported PAT

0

0 FY11

FY12

Adjusted PAT (LHS)

FY13E

FY14E PAT Growth (RHS)

Source: Company, Elara Securities Estimates

  Return ratios 25

21.6 18.1

20 (%)

Income Statement (INR mn)

15

15.7 11.6

10 5

12.7 8.3

9.8

10.1

FY11

FY12

FY13E

ROE

FY14E ROCE

Source: Company, Elara Securities Estimates

   

Strong revenue growth with phasewise commissioning of FTWZ warehouses

Reduction in debt:equity with improved cash flow generation from FTWZ business

Source: Company, Elara Securities Estimates

 

Elara Securities (India) Private Limited 

37

Arshiya International Arshiya International

Investment rationale ‰ Unique business model, to provide higher growth as also returns ‰ Shift from traditional logistics business to higher margin contribution business ‰ Higher leverage will diminish as growth kicks in

Unique business model ARST has ventured into the business of free trade warehousing zone (FTWZ) which is a newly designed concept in India similar to special economic zones (SEZ) abroad. Considering the opportunities this concept offers, ARST’s management has invested in two locations viz. Panvel (near JNPT port) and Khurja (near Delhi). It is also exploring options to develop FTWZs at Nagpur (Central India), Chennai (Southern India) as also the eastern region. Post completion of the FTWZs, ARST will have a nationwide reach of FTWZs which will be complimented by its rail network. We expect investment in FTWZ to reap strong returns for ARST. Thought the project is capex intensive, we expect rising foreign trade as well as the first mover advantage to work in ARST’s favour boosting the internal rate of return (IRRs) for the project. The concept of FTWZ Free Trade Warehousing Zone (FTWZ) is a special category of economic zone governed by the Special Economic Zone (SEZ) Act passed by the Indian legislature in 2006. The world over, FTWZs are used as integrated hubs for international trading. Although the concept is new in India, the same has been prevalent in countries like Dubai, China and Singapore for a long period of time. The basic concept of FTWZ is that, it is treated as a deemed foreign territory for all statutory purposes. Hence, the convenience as well as the cost savings offered by FTWZ makes it an attractive proposal

for EXIM traders as well as Original Equipment Manufacturers (OEMs). India, with more than 7,000 kms of coastline and evenly distributed population, is an attractive FTWZ warehousing option for EXIM traders as well as trans-shippers. Advantages offered by FTWZ Being a deemed foreign territory, any goods entering into FTWZ from within the Indian territory are considered as exports for all practical purposes. Similarly, any goods entering FTWZ from outside India are not treated as imports. Hence, deferment of customs duty is one of the more attractive propositions of the FTWZ to clients. Besides, exemptions from other taxes leviable in the Indian territory (e.g. sales tax, SAD, VAT) also offer significant savings for FTWZ clients. We have summarised the advantages FTWZ offers according to the customer classes. Besides, the FTWZs also offer value optimising services (VOS) such as packaging, labeling, CKD and SKD assembly amongst others to be carried on in the FTWZ itself. The VOS offers clients flexibility in imports and exports as they can customise their consignments as per needs of different destinations. The customs clearance at the FTWZ site saves time and also frees the working capital requirements of the consignor. Arshiya’s positioning in FTWZ business in India Arshiya is the only sizable independent operating FTWZ within the Indian boundaries. Although there are no

Exhibit 1: Benefits of FTWZ For Imports

For Exports

For Re-Exports

Flexibility towards end distribution in India

Products from India entering the FTWZ are treated as deemed export providing immediate benefits to suppliers

Service tax exemption on all activities conducted inside the FTWZ including rental & labour

Duty deferment benefits (freeing up working capital & increasing sales)

Local Tax Exemption (e.g. CST, Sales Tax, Exemption from custom and stamp duty on Excise & VAT) on all activities conducted inside products imported into FTWZ; meant for rethe FTWZ export out of India

Quality control capability prior to dutypayment

Export quotas able to be met for companies exporting into FTWZ

Income tax exemption on profit where applicable

Exemption on SAD, VAT & CST on imports through FTWZ. Service Tax exemption on services availed; including transportation inside India

Increased efficiency through lowered reverse logistics through quality control before dispatch from India

Hassle-free re-export process

Hassle-free re-export regulatory /duty implications

Foreign exchange transactions capability

Permission of 100% FDI for the set-up of units by the unit holder of the FTWZ

Reduced buffer stocks

Ability to leverage India’s cost, skill & Increasing supply chain efficiencies (forward & geographic positioning advantage as a hub reverse) while enhancing capital cash flow for regional/global distribution post Value Optimising Services

Lowered product costs Foreign exchange transaction capability Source: Company, Elara Securities Research

38

 

Elara Securities (India) Private Limited

Arshiya International

Arshiya has acquired 165 acres of land for FTWZ at Sai Village in Panvel. The FTWZ is located within close proximity (~24 kms) from JNPT (major port in India handling more than half of container traffic in India) which acts as an ideal location. The FTWZ is well connected by road on the Mumbai Goa highway, ensuring faster mobilisation of goods to and fro from the JNPT port. The FTWZ is located at a distance of ~23 kms from the proposed new airport at Panvel. Hence, it is well connected with rail, road as well as air which will mobilise faster movement of goods. Besides, being an important destination for the Indian EXIM trade, the FTWZ is also likely to play a major role in international trade in the long term future. ARST has also acquired 315 acres of land at Khurja in Uttar Pradesh. Apart from FTWZ, the complex will also house a distripark and will also include rail infrastructure. The site is well connected by rail and lies both on the north-west as well as the north-east rail routes, which account for a large share of rail traffic in the country. Besides it is also well connected to the Yamuna Expressway thereby facilitating easier and faster road transport. Apart from the FTWZs at Panvel and Khurja, the management is planning to build a FTWZ in Nagpur, Chennai and other parts to create a network of FTWZs across the country. As of now, investments in these projects are on hold and the management will take further steps post completion of Panvel and Khurja facilities. Economics of FTWZ for ARST – The FTWZ is a niche concept in India and as of now, only Arshiya is engaged in the business of commercial FTWZ. The rentals in FTWZ are higher as compared to the CFSs primarily due to the flexibility they offer to customers in terms of payment of duty and clearance of goods. Besides, the several value added services offered within the FTWZ are a strong revenue source for the FTWZ owner. The revenue/TEU for FTWZ are bound to be higher than normal CFS as the services offered by FTWZ and the several duty benefits that customers can afford make it the more preferred option for importers or exporters. Our back of the envelope calculations derive that a

 

Elara Securities (India) Private Limited 

FTWZ charges atleast 16% – 17% higher rentals /TEU as compared to normal CFS. Besides, the VOS which also allows customisation, flexibility as well as cost saving opportunities for its customers provide a steady stream of income for the FTWZ owner. Accordingly, we have analyzed the profitability as well as the investment rationale of the FTWZ for Arshiya. The investment per warehouse for the FTWZ is approximately INR850mn/warehouse excluding the cost of land. A typical FTWZ at Panvel can hoard ~13,500 pallets (~19.30 TEU space) at a time. We have factored in the current rentals for the FTWZ and have taken in VOS/rentals ratio of 2x (which currently stands close to 1.5x but as the business attains maturity the same is likely to be closer to 3x). For the calculations, we have not taken into account additional revenues that might be generated from the over dimensional cargo (ODC) yard adjacent to the FTWZ warehouse. Besides, we have taken into account only 80% capacity utilisation, which stands at 90%+ currently. As per our calculations, the investment in warehouse might earn 23.6% RoCE for Arshiya. Hence, in our view FTWZ is an attractive investment opportunity with significantly higher returns even at 80% capacity utilizations.

Logistics

stringent regulatory requirements for starting FTWZ, the land acquisition process as well as the capex intensive nature of the business remains a deterrent for new players looking at entering the segment. The Indian statute makes it mandatory to have a contiguous land parcel of 100 acres for FTWZ. Several players have crossed the formal approval stage for FTWZ but do not have operational FTWZs as of now.

Exhibit 2: Attractive returns on investments (FTWZ) Particulars Construction cost of a typical warehouse in FTWZ (INR mn)

850

No. of pallets available in FTWZ

13,500

Temperature control rooms (Sq ft/warehouse)

10,000

Rentals Rent/Pallet/year (INR/ Annum)

9,600

9,600

9,600

900

900

900

2

2

2

80.0

90.0

100.0

104

117

130

7

8

9

VOS Revenues (INR mn)

222

249

277

TOTAL Revenues

333

374

416

EBITDA margins for the FTWZ (Actual for FY12) (%)

73.0

73.0

73.0

EBITDA (INR mn)

243

273

304

43

43

43

EBIT(INR mn)

200

231

261

RoCE (%)

23.6

27.1

30.7

Rent/Temperature control room/annum (INR/sq ft/annum) Proportion of VOS to rental revenues Capacity utilizations (%) Revenues Pallet Revenues (INR mn) Temperature control room revenues (INR Mn)

Less: - Depreciation (INR mn)

Source: Company, Elara Securities Research

 

39

Arshiya International Discounted Cash Flow (DCF) Value of Panvel project We have valued the Panvel FTWZ project of Arshiya on a DCF basis. According to our calculations, the project is likely to provide an IRR of 35%+ on the investment in the Panvel FTWZ. The total investment at Panvel would be INR15,750 mn which includes the value of land, infrastructure and cost of building the warehouses. Most of the investments are at the incubation stage as land and infrastructure are the most capital intensive stages of the project. The project is to be financed through a debt:equity of 3:1 ratio. Till date ARST has invested close to INR10,500mn on the project. Our assumptions include cost of debt of

12.5% and cost of equity of 17.5%, leading to a weighted average cost of capital of 13.7%. We have assumed 80% capacity utilisation (which stands at 90%+ at present), and have also taken the rentals which are equivalent to the current rentals charged by Arshiya. We have taken only a percentage point increase per annum in the rentals, far lesser than the prevailing inflation rates in the country. Our DCF model vindicates that the strategic location as well as the first mover advantage are likely to reap benefits for ARST in the coming years. The project at Panvel itself is likely to provide an IRR of more than 35% over a period of twenty years.

Exhibit 3: DCF value of Panvel - FTWZ project Details of the project Project cost (INR mn) Capex spent till date (INR Mn) Total debt component (INR mn) Total debt component (INR mn) Assumptions (%) Risk Free Rate Equity risk premium Business risk premium Cost of Equity Cost of debt WACC DCF Warehouses Capex Debt Raised /(repaid) Total debt outstanding Capacity Utilizations (%) Pallets Temperature control rooms ODC Yard Rented Space Pellets Temperature control rooms ODC Yard Rent Assumptions Pellets Tempreture control room ODC Yard VOS (x) Total Revenues (INR mn) Total EBITDA (INR mn) Cash Flow statement Cash profit from operations Add/(Less): Working capital changes Operating Cash flow Less:- Capex Free cash flow of the project Discounting Factor Discounted Cash Flows Sum of DCF Project IRR DCF For Equity holders Free cash flow to the firm Less: Debt Repayments FCF to Equity Holders Discounting Factor Discounted Cash Flows Sum of DCF No. of shares outstanding Value per share

15,750 10,500 11,813 3,938 9.0 3.5 3.0 17.5 12.5 13.7 FY13E 7 (3,500) 2,953 10,828

FY14E 12 (1,750) 984 11,813

FY15E 17 (866) 10,947

FY16E 17 (879) 10,068

71.3 71.3 100.0

63.8 67.3 100.0

79.6 79.6 100.0

807,975 598,500 1,560,000

1,239,300 969,000 1,560,000

INR/Month INR/sq ft INR/sq ft (x) INR mn INR mn

853.3 150.0 75.0 1.5 2,065.1 1,531.7

INR mn INR mn INR mn INR mn INR mn

178 (155) 23 (3,500) (3,477) 1 (3,057) 18,691 35.5 FY13E (3,477) (3,477) 1 (2,960) 9,080 59 154.3

Units INR mn INR mn  INR mn 

Units Sq Ft Sq Ft

INR mn INR mn (%) INR mn INR mn INR mn INR mn INR mn Mn INR/share

FY17E ……. 17 (887) 9,181

FY32E 17 -

80.0 80.0 100.0

80.0 80.0 100.0

85.0 85.0 100.0

2,193,075 1,624,500 1,560,000

2,203,200 1,632,000 1,560,000

2,203,200 1,632,000 1,560,000

2,340,900 1,734,000 1,560,000

862.1 154.0 76.9 1.6 3,266.3 2,389.2

870.7 160.3 80.0 1.7 5,997.3 4,329.7

879.4 161.9 80.8 1.7 6,084.7 4,392.6

888.2 163.5 81.6 1.7 6,145.5 4,436.5

933.5 171.8 85.8 2.0 7,583.7 5,383.5

983 (245) 738 (1,750) (1,012) 1 (782)

3,418 (450) 2,968 2,968 1 2,017

3,653 (456) 3,196 3,196 1 1,910

3,814 (461) 3,353 3,353 1 1,762

6,941 (569) 6,372 6,372 0 486

FY14E (1,012) (1,012) 1 (734)

FY15E 2,968 (866) 2,102 1 1,297

FY16E 3,196 (879) 2,318 1 1,218

FY17E ……. 3,353 (887) 2,466 0 1,103

FY32E 6,372 6,372 0 255

Source:Company, Elara Securities Research

40

 

Elara Securities (India) Private Limited

Shift towards more profitable revenue mix

Higher leverage, but provides secular growth opportunities

ARST’s current business comprises of traditional logistics segment (~48.9% of revenues) while, the rail and FTWZ segments contribute rest of the revenues. FTWZ remains the most profitable segment for ARST with average blended EBITDA margins of ~73%+. It has historically earned operating margins close to 20% for both its logistics as well as the rail segment. Considering the nature of FTWZ business and the composition of costs, which can be controlled by the company, we believe FTWZ segment will continue to earn strong operating profit margins in the future as well.

In the logistics space, ARST remains the only company which has leveraged balance sheet. The major part of the borrowing caters to capex towards Panvel and Khurja FTWZ projects. The nature of FTWZ business requires huge capital investments at the incubation stage as the company needs to acquire contiguous land in excess of 100 acres for getting necessary approvals for the FTWZ status. Accordingly, ARST has acquired 165 acres of land for its Panvel FTWZ and 315 acres of land for the Khurja FTWZ as well as distriparks facilities. Apart from land, the infrastructure also has to be built at the initial stages. ARST has invested on infrastructure at both its facilities with the objective to cater to the requirements of the entire project. The cost of building a warehouse is less capital intensive than the cost of land as well as infrastructure. Hence, once the company starts generating revenues from the warehouses, the model would be self-sufficient to meet the capex requirement for the next phase of warehousing in the same facility thereby lowering the need for external finances.

Exhibit 4: Increasing contribution to revenues (INR mn) 12,000 10,000 8,000 6,000 4,000 2,000 0 FY12 FTWZ Segment

FY13E

FY14E

Rail Segment

FY15E

Logistics & Others

Source: Company, Elara Securities Research

Similarly, FTWZ due to its low cost model will derive higher operating margins than other business segments of the company. We expect the FTWZ business to contribute 44% of EBITDA in FY13E which is likely to increase to 63% in FY14E. The segment is also likely to provide a steady earnings growth for the business as a whole. As the operational warehouses attain maturity, we expect the ratio of VOS to increase going ahead. Similarly, the company has a warehouse commissioning schedule which will keep adding to revenues as well as the operating profits in the years to come.

Logistics

Arshiya International

As of now, the company has put its plans for the eastern, central and southern region FTWZ on hold and hence would not require significant capex after completion of Khurja facility. ARST management has decided to opt for operating lease for the expansion (10 rakes) in its rail business. Hence, the same would not require heavy funding thereby reducing the need for borrowings. Hence, once the company attains the operationalisation stage for its warehouses, the leverage of the company should start reducing thereby improving the return ratios. We expect RoCE for ARST to improve from 9.8% in FY12 to 12.7% in FY14E and the ROE to improve to 21.6% in FY14E from 15.7% in FY12.

Exhibit 5: Increasing contribution to EBITDA (INR mn) 12,000 10,000 8,000 6,000 4,000 2,000 0 FY12 FTWZ

FY13E Rail

FY14E

FY15E

Logistics & Others

Source: Company, Elara Securities Research

 

Elara Securities (India) Private Limited 

41

Arshiya International

Valuation & Recommendation ‰ Unique business model, to provide higher growth as also returns ‰ Shift from traditional logistics business to higher margin contribution business ‰ Higher leverage will diminish as growth kicks in We have valued ARST based on SOTP valuation. We have valued the company on FY14 multiples as the company would be in capex stage in FY13 and the entire revenue stream of the FTWZ business segment would not be reflected in that year.

Exhibit 6: Valuation summary FY14E INR Mn

Multiple

INR Mn

3,819

8

30,548

930

6

5,113

1,335

4

5,340

SOTP Valuation EV/EBITDA Valuation

We have used EV/EBITDA multiple of 8x FY14E for its FTWZ segment which is at par with the global warehousing valuations. The rail segment has been valued at 5.5x FY14E EV/EBITDA, a marginal discount to the global peers in that segment. The logistics business has been valued at 4x EV/EBITDA, which is at a marginal discount to its global peers.

FTWZ Segment

Accordingly, we derive our target valuation of INR 170/ share which provides an upside of ~23%.

No. of shares outstanding

Rail segment Logistics Segment TOTAL EV

41,002

Less: Net Debt

30,856

Target Market Cap

10,146 59

Target Price

170

Current Mkt Price

126

Upside/(Downside) (%)

35

Source: Elara Securities Estimates

 

42

 

Elara Securities (India) Private Limited

Arshiya International

Company Description

 

Board of Directors & Management Ajay Mittal, Chairman Ajay Mittal has over 20 years of entrepreneurial career, He has successfully scaled Arshiya International Group by adding International Logistics, Supply Chain Management, Information Technology, Logistics Infrastructure such as Free Trade & Warehousing Zones (FTWZ), Domestic Distribution Hubs, Rail Infrastructure and Transport & Handling to its integrated business portfolio. He has held key leadership positions in diverse sectors including Commercial and Private Real Estate Development, Financial Services, Manufacturing, International Trading, Information Technology and Global Supply Chain Management. He received his M.B.A from United States. Archana Mittal, Joint Managing Director Archana Mittal represents Arshiya as one of the Board of Directors while also leading the charter of Projects & Procurement for Arshiya’s intensive CAPEX deployment into globally integrated logistics infrastructure. She brings extensive experience and leadership towards implementation, budgeting & adherence for Arshiya’s consolidated infrastructure projects including the creation of Free Trade and Warehousing Zones (FTWZ), Domestic Distriparks (DDP) and Rail Infrastructure projects across India. She is also a key member of Arshiya’s executive management team involved with strategic decision-making towards Arshiya’s growth & development. She is also in the promoter group of Bhushan Steel Limited – one of the leading integrated steel producers of India. Archana Mittal is a graduate in Bachelor of Arts (Honours) from Punjab University.

 

Elara Securities (India) Private Limited 

Sandesh Chonkar, Executive Financial Officer (CFO)

Director

&

Chief

Sandesh Chonkar has over 20 years of senior management experience including international assignments. His experience includes having held key positions in financial, commercial, logistics, trading and operational areas. He is currently involved in financial control, strategic planning, foreign trade documentation and business process development within the group.

Logistics

Arshiya International Limited (ARST) is a unified supply chain infrastructure and solutions group. The group envisages a phased investment of approximately USD 1.6 billion towards creating state-of-the-art infrastructure across strategic locations in India. The infrastructure comprises free trade & warehousing zones (FTWZs), industrial & distribution hubs, rail, rail infrastructure, forwarding, transport & handling and supply chain technology & management solutions. ARST has commissioned India’s first Free Trade & Warehousing Zone (FTWZ) at Panvel, Mumbai spanning across 165 acres and is in the process of rolling out second FTWZ at Khurja, near Delhi followed by Nagpur with plans afoot for two more at South & East. Along with FTWZs, the company is also investing in the development of rail infrastructure to provide pan-India rail freight operations and building Rail terminals in strategic locations across the country.

Ashish Bairagra, Independent Director and Chairman of the Audit Committee Ashish Bairagra has extensive experience in handling internal audits, statutory audits, management audits, tax advisory and business advisory assignments. His areas of specialisation include international taxation, transfer pricing, valuation, due diligence, PE and VC funding and cross border business structuring. He is a Partner of M. L. Bhuwania & Co., Chartered Accountants, which is an independent member of Geneva Group International (GGI). He is also the Regional Chairperson - Asia of the International Taxation Practice Group (ITPG) of GGI. Prof G Raghuram, Independent Director Prof Raghuram is a professor in the Indian Institute of Management, Ahmedabad. His specialization is in infrastructure and transportation systems, and supply chain and logistics management. His research, consultancy, case studies and publications focus includes railways, ports and shipping, air and road sector, service organizations and issues in logistics and supply chain management. He has also taught at Northwestern University and Tulane University, USA. He has been visiting faculty at universities in USA, Canada, Yugoslavia, Tanzania, UAE, Singapore and several institutions in India. He has also co-authored four books. He is a member of boards and government committees related to infrastructure and logistics.

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Arshiya International James Beltran, Independent Director

Mukesh Kacker, Independent Director

James Beltran currently serves as Chairman, MAA International (Malaysia's largest insurance corporation with international offices throughout the region). He previously headed his own law firm, Ravi Beltran Advocates and Solicitors, served as partner at Gurbakash and Tan Advocates and Solicitors, and worked in litigation and corporate law of Sebastian and Company in London.

Kacker has almost 31 years of experience of working in the Government as an I.A.S. officer before he opted for voluntary retirement to work in the area of infrastructure, and has held important senior positions, both in policy formulation roles as well as in executing capacities. As Member, National Highways Authority of India (NHAI), he was in the vanguard of personnel leading India’s highways revolution and was instrumental in planning and executing a major portion of the Golden Quadrilateral. In his state cadre of Madhya Pradesh, he has held various positions including Secretary to the Government, Managing Directors of two state Public Sector Undertakings and Secretary to the Chief Minister.

Rishabh Shah, Independent Director Rishabh Shah is a practicing legal counsel and a legal consultant who advises on several areas of civil law, in particular, commercial documentation, property documentation, various areas of banking, commercial contracts, company restructuring and securities law. Banking and Corporate law and litigation are his areas of specialisation. He has over 17 years of experience representing major corporations as legal counsel.

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In view of his experience in the infrastructure sector, the Government of India has inducted him as Member, Task Force on Infrastructure Development and Mega Projects. He is also a Member on the Governing Board of Lifeline Foundation, an NGO based in Vadodara and working in the field of highway rescue.

Elara Securities (India) Private Limited

Arshiya International

Coverage History 400 350 300 250

150

1

Not Covered

Date 1

Rating

09-Aug-2012 Buy

Target Price

Closing Price

INR170

INR126

Covered

Aug-12

Jul-12

Jun-12

May-12

Apr-12

Mar-12

Feb-12

Jan-12

Dec-11

Nov-11

Oct-11

Sep-11

Aug-11

Jul-11

Jun-11

May-11

Apr-11

Mar-11

Feb-11

Jan-11

Dec-10

Nov-10

Oct-10

Sep-10

Aug-10

100

Logistics

200

Guide to Research Rating BUY

Absolute Return >+20%

ACCUMULATE

Absolute Return +5% to +20%

REDUCE

Absolute Return -5% to +5%

SELL

Absolute Return < -5%

 

 

 

Elara Securities (India) Private Limited 

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Elara Securities (India) Private Limited

 

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of any be no future. of the

Elara Securities (India) Private Limited Disclosures for U.S. Investors The research analyst did not receive compensation from Gateway Distriparks Limited, Allcargo Logistics Limited and Arshiya International Limited.

Elara Capital Inc.’s affiliate did not receive compensation from Gateway Distriparks Limited, Allcargo Logistics Limited and Arshiya International Limited in the last 12 months. Elara Capital Inc.’s affiliate does not expect to receive compensation from Gateway Distriparks Limited, Allcargo Logistics Limited and Arshiya International Limited in the next 3 months.

Disclaimer for U.S. Investors This material is based upon information that we consider to be reliable, but Elara Capital Inc. does not warrant its completeness, accuracy or adequacy and it should not be relied upon as such. This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. Prices, values or income from any securities or investments mentioned in this report may fall against the interests of the investor and the investor may get back less than the amount invested. Where an investment is described as being likely to yield income, please note that the amount of income that the investor will receive from such an investment may fluctuate. Where an investment or security is denominated in a different currency to the investor’s currency of reference, changes in rates of exchange may have an adverse effect on the value, price or income of or from that investment to the investor. The information contained in this report does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation of particular securities, financial instruments or strategies to you. Before acting on any recommendation in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice.

Global Markets Research

Elara Capital Inc.’s affiliate did not manage an offering for Gateway Distriparks Limited, Allcargo Logistics Limited and Arshiya International Limited.

Certain statements in this report, including any financial projections, may constitute “forward-looking statements.” These “forward-looking statements” are not guarantees of future performance and are based on numerous current assumptions that are subject to significant uncertainties and contingencies. Actual future performance could differ materially from these “forward-looking statements” and financial information.

 

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