Presence in high-traffic ports, established relationship with major shipping lines and expanding footprint through inland container depots (ICD) make Allcargo Logistics a good long-term investment bet.

No doubt, slowing trade in developed markets will impact its fortunes, but the wide scope of its business offering would lend it the much-needed cushion. It merits note here that the freight consolidation business had remained relatively unscathed in the 2008 downturn.

That in spite of competition, Allcargo has maintained and grown its market shares in JNPT, Chennai and Mundra container freight stations (CFSs) too underscores our recommendation. Improving presence in cold-chain logistics and warehouse development are among the other positives.

At the current market price of Rs 132, the stock trades at about eight times its expected CY-12 per share earnings. With container volumes largely stable and domestic industrial activity showing early signs of revival, growth outlook for the company looks fairly decent, albeit over the long term.

Investors, nonetheless, may do well to moderate their return expectations and accumulate the stock in small lots.

CFS and ICD

Presence in CFS and ICD segment would be the main growth driver for the company. Working relationships with major shipping lines, port agents and local carriers has helped the company strengthen its presence in the CFS business.

Its presence in Mundra and Chennai ports hold long-term strategic advantage, what with the ports expected to see increased action — Gujarat is turning into an investment hot-spot and Chennai has become a car manufacturing hub.

Allcargo enjoys a market share (by volume) of about 9-10 per cent in Chennai and 6-7 per cent in Mundra. While its Chennai CFS has a capacity of 120,000 TEU per annum and enjoys a 75 per cent utilisation), its Mundra CFS, with a capacity of 77,000 TEU per annum run at about 40 per cent utilisation only.

Allcargo will soon be doubling its capacity at JNPT (annual capacity 144,000 TEUs currently) as the CFS is operating at 95 per cent utilisation now. Addition in capacity — expected to become operational by June 2012 — will provide it a welcome relief. But it could be a while before the company begins to see a material increase in revenues due to this.

Higher dwell time due to congestion at ports, mainly JNPT and Chennai, helped the segment report a 47 per cent increase in revenues in the September ‘11 quarter to Rs 71.9 crore (50 per cent increase in the nine-months ended Sep ‘11 to Rs 208.9 crore). This was mainly driven by the 39 per cent increase in realisation at the JNPT CFS (to Rs 13,460 per TEU).

The total throughput volume grew by about 14 per cent to 62,705 TEUs for the quarter. In the coming year, while the volume growth could see some slowdown, realisations are expected to sustain at current levels.

Allcargo also has an inland container depot at Indore with a capacity of 36,000 TEU per annum and has recently commissioned one at Dadri (50:50 JV with Concor).

Freight consolidation

Allcargo, through its wholly-owned subsidiary, ECU Line, has a strong presence in Europe, Latin America and Africa. ECU Line is one of the world's leading providers of freight consolidation services.

Last year, it had acquired two Hong Kong-based companies engaged in non-vessel owning common carrier (NVOCC) business to expand its presence in China. The acquisition helped improve the overall volume in the NVOCC segment in the September 2011 quarter. Volumes grew by about 12 per cent YoY, but remained flat on a sequential basis driven by reduction in freight rates.

Freight rates are a function of trade routes and therefore are not controlled by the company. So, while the volume growth could remain strong in the near term, helped by a low base, it is likely to taper to 8-9 per cent per cent after that, driven by lower freight rate and growth concerns in the developed markets. The company however should be able to sustain its margins.

For the quarter, ECU Line reported a revenue growth of about 8.8 per cent to € 87 million and profit growth of 9.5 per cent to €4.7 million. The Indian NVOCC segment reported a YoY volume growth of 13 per cent; sequential growth was 5 per cent.

Engineering Solutions

Allcargo, through its projects and engineering solutions segment, offers services that include transportation of high-value specialised equipment such as oilfield equipment, power plants and compressor stations that cannot be containerised on a turnkey basis.

As of September 2011, it had an order book of about Rs 450 crore (visibility for about 1-1.5 years). The business however is lumpy and capital intensive.

Scorecard

At a consolidated level, Allcargo's September quarter revenues grew by about 15 per cent to Rs 811 crore. Profits dropped by about one per cent to about Rs 56 crore, driven by higher interest outgo, depreciation and forex loss (about Rs 4.5 crore). For the nine-months ended September 2011, revenue and profit growth were higher at 24 per cent and 34 per cent.

While a manageable debt:equity (at about 0.3 times end of CY10) gives it the leeway to tap debt resources, the higher capex and acquisition have led to an increase in debt to about Rs 650 crore (end of September 2011).

Allcargo plans a capex of about Rs 200 crore in the calendar year 2011-12 towards CFS and warehousing capacity expansions and developing an ICD at Hyderabad.

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