Buy Sical Logistics: Edelweiss

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Buy Sical Logistics: Edelweiss

Edelweiss is bullish on Sical Logistics and has maintained buy rating on the stock. Adjusting for Rs 152/share for the coming projects, SICAL’s standalone business trades attractively at 6.3x and 5.3x our FY08E and FY09E estimates, respectively.

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Edelweiss is bullish on Sical Logistics and has maintained buy rating on the stock. Adjusting for Rs 152/share for the coming projects, SICAL's standalone business trades attractively at 6.3x and 5.3x our FY08E and FY09E estimates, respectively.  

Edelweiss research report on Sical Logistics

In an effort to restructure its business, SICAL Logistics (SICAL) has announced hiving off of its long gestation infrastructure projects in SICAL Infrastructure Assets, a wholly-owned subsidiary. To secure its funding for these big ticket projects, the company has divested 26% stake to Old Lane Mauritius at a consideration of USD 26 million. The SPV is expected to house infrastructure projects like PSA SICAL Tuticorin and Chennai terminal, MIHAN rail and road terminal, SICAL Iron ore terminal (SIOT), SICAL Distriparks, and SICAL Multimodal and Rail transport (container train operations).

Total capex requirement for these projects is estimated at RS 12 billion, of which, SICAL is required to infuse RS 2 billion of equity. Hive off of non-logistics business and dilution on parent level, and recently SPV level, will help SICAL secure its funding for the infrastructure projects. The new subsidiary is also likely to unlock value through an IPO and also to raise money for the upcoming projects. Going forward, SICAL's growth is expected to be driven by offshore logistics business and infrastructure projects.

Post the recent restructuring and developments, we have revised our FY08E and FY09E revenues downwards by 7.8% and 3.1% respectively, and FY09E net profit estimates by 5.6%. We have also included the container train, PSA SICAL Tuticorin terminal and SICAL Distriparks to our SOTP valuation and estimated a value of Rs 152 per share. Adjusting for Rs 152/share for these projects, SICAL's standalone business trades at very attractive valuation of 6.3x and 5.3x our FY08E and FY09E estimates, respectively. We maintain our `buy' recommendation.

Product mix change in logistics business After selling off its non-logistics businesses and segregating the services business with the infrastructure projects, the company is likely to focus more on its logistics business. It is expected to move from carrying bulk trade to merchandise trade, wherein the growth rates are higher at 15-20% as against 4-5% in bulk trade. The cash-to-cash cycle is also lower in merchandise trade as against bulk. Offshore logistics In the logistics segment, the company expects growth to be driven by offshore logistics business.

After acquiring one platform supply vessel (PSV) from Bergen offshore, the company has acquired a cutter-suction dredger from China's Shanghai Duo Jun Dredging Co Ltd at a cost of USD 24.9 million. Currently, the dredger is deployed in China and the company intends to bring it to the international waters. With long term contract rate of USD 15,000 per day, the dredger is expected to generate revenues to the tune of RS 360 million. Significant value unlocking By divesting 26% of stake at USD 26 million to Old lane, the SPV structure is been valued at USD 100 million. With SICAL holding 74% of SICAL Infrastructure Assets, the infrastructure projects are being valued at RS 75 per share.

Outlook and valuations

We expect SICAL to register revenues of RS 8.1 billion and 9.2 billion, and net profit of RS 665 million and 780 million in FY08E and FY09E, respectively. Excluding the service business, we have evaluated SICAL's infra assets at NPV and arrived at a value of RS 152 per share. We have included SICAL Multimodal and Rail transport, PSA SICAL Tuticorin terminal, and SICAL Distriparks in the valuation. Adjusting for Rs 152/share for these projects, SICAL's standalone business trades attractively at 6.3x and 5.3x our FY08E and FY09E estimates, respectively.