Allcargo Global: Buy


The strategy to expand presence through inland container depots may help it scale up revenues.


Investments with a two-three year perspective can be considered in the stock of Allcargo Global Logistics, a leading integrated logistics solution provider. The company's strengths are: presence in ports that enjoy high traffic, established relationships with major shipping lines and an expanding presence through inland container depots (ICD).

Besides, wider reach and synergies in operation with ECU Line, its Belgium-based subsidiary, also lend strength to Allcargo's business model. At current market price of Rs 809, the stock trades at a reasonable 15 times its likely CY09 per share earnings.

Growth potential

Apart from its presence in JNPT (Mumbai), Allcargo's Chennai and Mundra CFS (container freight stations), which commenced operations in May 2007, hold significant revenue potential. For one, both the ports are expected to scale up considerable traffic over the next five years. Two, Allcargo will gain a pan-India presence, helping it widen its reach and service offerings. A lot will however, hinge on Allcargo's ability to expand capacities on time and attract incremental business, amidst competition.

In this context, Allcargo appears to be making oprogress; its Chennai CFS broke even last quarter. Encouraged by the growth potential in the Chennai port, Allcargo now plans to increase its annual capacity from 50,000 tonnes to 85,000 tonnes. We view the company's strategy to take measured steps positively, given the capital-intensive nature of such expansions. The company has considerable unutilised land available at its facilities in Chennai and Mundra. This may be utilised for the development of logistics park, distribution centres or warehouses, if the need arises.

With regard to establishing a network of inland container depots, the company has already procured land at five locations — Pithampur (near Indore), Goa, Bangalore, Nagpur and Hyderabad. The Indore ICD, the first one to be developed, is expected to be operational by September 2008. The company's recently announced joint venture with Container Corporation to share its ICD at Dadri, Greater Noida, also holds potential. It is expected to commence operations by January 2009.

Capex plan

The company has laid out an aggressive growth strategy, entailing an investment of over Rs 400 crore. In order to fund its various expansion initiatives, Allcargo had recently sold about 10.4 per cent stake to Blackstone Group LP, a global buyout fund. For a consideration of Rs 242 crore, this stake sale, despite the short-medium term equity dilution, may help Allcargo fund its growth plans. The presence of Blackstone nominees on its board also inspires confidence.

Allcargo's increased focus on its equipment division, by virtue of the recently merged project and equipment business of Transindia Freight Services with itself, may also yield attractive returns. Engaged in the movement of containers principally from port to CFS and vice versa and factory stuffed containers from factories to the port, this business supplements Allcargo's core operation. The management plans an investment of up to Rs 100 crore for the purchase of cranes with differing capacity.

Financials

On a consolidated basis, Allcargo's revenues for the quarter ended December 2007 grew by 9.6 per cent. While revenues from its MTO (multi-modal transport operations) business fell by about 7 per cent, the increased contribution from ECU Line and the additional revenues from its two new CFSs made up for the shortfall. Operating margins expanded by three-percentage points to about 33 per cent. However, earnings dipped by about 24 per cent due to lower other income and high depreciation. Over the medium term, newer revenue outlets in the form of ICDs and CFSs may translate into higher topline growth. However, earnings growth is likely to trail revenue growth owing to the higher capex incurred.