Will buyback lift sentiment for sagging Allcargo shares?

Santosh Nair
moneycontrol.com

The Allcargo Logistics board late Wednesday approved setting aside Rs 75 crore to buyback shares with an upper limit of Rs 142.50, as it looks to revive investor interest in its stock which is hovering around the issue price of Rs 135 six years ago.

Earlier this month, Allcargo shares fell to a near three-and-a-half year low of Rs 109 as a bleak outlook on global trade and the domestic investment cycle is keeping investors at bay.

The company has three main business activities-- Multimodal Transport Operation (MTO) or Non-Vessel Owning Common Carrier (NVOCC), Container Freight Station (CFS), and Project & Engineering Solutions.
With a lower capex plan for the current year (Rs 120-150 crore vs Rs 334 crore in calendar 2011) the company appears to be looking to spend on improving its operating ratios through the buyback.

If the company were to spend the entire Rs 75 crore on buying back shares at the upper limit of Rs 142.50, it would be able to reduce its equity base by around 4%. And while the buyback is unlikely to have investors flocking, it could help provide a floor for the stock, which is quoting at half its peak price seen during the peak of 2007-08 bull market.

The business environment appears challenging, but Allcargo Chairman and Managing Director Shashi Kiran Shetty is confident of maintaining margins at last year levels.

"Despite intense competition, we would continue to hold on to margins," he told moneycontrol.com in an e-mail response.

In financial year 2011-12 (15 months, as the company changed its accounting period from calendar to financial year), the company earned an operating margin of 7% in its MTO business, 43% in the CFS business and 23% in the projects business. The numbers were lower for the March quarter at Key to the company's fortunes this year would be its high margin CFS operations.

"We have seen consistent volumes, despite a slowdown in March quarter. There was some lull during the January-March quarter, but there has been very good recovery in the April-June quarter," Shetty said, of the CFS business.

He added that the company was on track to meet its July end deadline to double existing capacity at its container freight station at JNPT.
Analysts say higher volumes because of the this capacity expansion should help make up for any pressure on margins.

But the low margin MTO or NVOCC business is expected to see a sharp drop in volumes.

"We have grown over 14% in volume in CY11 over CY10 in our NVO business globally. In the current year, we are seeing a volume growth of over 4%," said Shetty.

The company is planning to demerge its NVOCC operation into a separate entity, which could either be listed, or become a fully owned subsidiary of the group. The company has not yet finalized the demerger process.
The company’s projects and engineering solutions division was a major contributor to the topline last year and helped offset sluggishness in the other two segments. Shetty is betting on a repeat performance of that performance this year too.

"Today we have the ability to offer cranes from 70T(tonne) to 750T capacity. We also have a range of equipment and a strong professional team that can design and execute a solution most suitable to our customers in oil & gas, EPC, railways, infrastructure. This division would continue to grow in the current financial year. We have invested fairly in this division and the investment is paying off," says Shetty.

But some analysts are don't share this view, given the slowdown in the investment cycle in the country.

Industrial output, as measured by the index of industrial production--declined 13.5% in March, and was flat in April. With the RBI giving priority to tackling inflation over reviving growth, interest rates could remain high for some time. The combined with the policy inertia in Delhi, could force companies to go slow on, or defer their capex plans.

"We expect growth in the project and engineering solutions segments to moderate going forward as a sluggish domestic capex cycle would weigh on equipment leasing revenue growth. While revenue growth is expected to remain healthy on the back of pick-up in project logistics revenue, margins are likely to contract as the share of low-margin project logistics revenue increases," brokerage house India Infoline said in its report in March. The brokerage has a buy call on the stock.

The stock has lagged the Nifty over the last year, and some analysts are betting on a re-rating as the company’s free cash flows improve because of lower capex spend this financial year.

"Following lower capex likely in FY13 and higher share of high margin/high RoCE (return on capital employed) CFS business, net profit should show 11.4% CAGR and report positive free cash flows of Rs 440 crore over FY12-14(estimated), which calls for a re-rating of its valuation," Nirmal Bang analysts Jignesh Kamani and Saiprasad Prabhu said in their report earlier this month. Analysts' estimates for the company's current year earnings vary from between Rs 15.1-18.6.

Also read:Demerger, stock buyback plans on cards: Allcargo Global