Buy Arshiya International; target of Rs 172: Emkay

Emkay Global Financial Services is bullish on Arshiya International (AIL) and has recommended buy rating on the stock with a target of Rs 172 in its June 7, 2012 research report.

“AIL has moved from a 3PL service provider to rail transportation and now to developing Free Trade Warehousing Zone (FTWZs) and Domestic Distriparks (DDP), a high capex driven model. Company has already spent Rs 21.5bn implementing phase 1 of the expansion plan with two FTWZs operation and one DP lined-up in Q1FY13. The model has high operating and financial leverage, although the incremental capex is purely discretionary on the acceptance of the concept.”

“Globally, the success of the warehousing business does not come from mere rentals considering its high capital intensive nature. The VAS provided within the FTWZ premises forms the growth delta as it is less capital intensive. The higher the service provider moves up the VAS chain, the more is the clients’ dependence on them, leading to higher degree of indispensability. Marginal capex for customization of the clients’ requirements is the costs which AIL has to pay for this indispensability. AIL has started moving up the chain by providing customized packaging & storage solution to its clients. In the past, the government has backtracked on its promises on the rail transportation business by increasing haulage charges (benefiting Container Corp) and has taken away tax sops in SEZ/FTWZ by implementing MAT. Going forward too, government can abolish service tax benefits in FTWZ on introduction of GST, making FTWZ less attractive to clients. Other threats to AIL would be from competition, policy inertia and USD billing, which company plans to mitigate by taking USD denominated loan.”

“Some of the key assumptions are WACC assumed at 13% (Cost of Debt at 14.5% marginal tax rate of 20%) and VOS-to-Rental at Mumbai FTWZ at 1.5x. We have not valued phase 2 of Khurja FTWZ and Distripark as we would await the evolvement of the model. Also, main risk to our TP comes from the VOS-to-Rental ratio assumption as well as interest cost scenario in the economy,” says Emkay Global Financial Services research report.   

Institutional holding more than 40% in Indian cos  

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