Jitendra Kumar Gupta Moneycontrol Research
Recovery in global trade aided Allcargo Logistics to post a good set of numbers in the quarter ended June 2017. The company’s Multimodal Transport Operation (MTO) business, which accounts for almost 85% of the total revenue, clocked volumes of 1,38,479 TEUs thereby registering a strong 14% year-on-year volume growth. While this helped in clocking higher revenue, the segment profit declined 6% owing to a notional currency impact in its global operations.
This also impacted the overall profitability of the company considering that the contribution of the other two segments, namely container freight operation (CFS) and project and engineering, is relatively low. Thus, despite overall 6% growth in consolidated revenues, the company reported a flat net profit at Rs 63.57 crore.
The company's CFS business, which accounts for about7% of the revenues, saw flat growth in revenues at Rs 108.84 crore and reported a marginal decline in net profit at Rs 29.65 crore.
Several one-offs impacted performance
While the business environment is improving, which is also visible in the volume growth, certain business reorganisation impacted profitability.
For instance, in Q1FY18, apart from the notional currency impact, operating costs of managing Mundra CFS (which was not part of Q1FY17 consolidated financials) and consolidation of relatively lower margin ICD at Kheda had a bearing on the financials.
Business restructuring gathering pace
The project and engineering business, which is about 7% of the total revenue saw some sale of assets. This is a capital-intensive business earning a very low return on capital. In Q1FY18, on Rs 660 crore assets employed in the business, it generated segment loss of Rs 5 lakh. However, the capital employed in this segment is reducing. In the latest quarter, it was down by Rs 100 crore compared to the corresponding quarter of the last year. Allcargo is hopeful that with industrial activities picking up, utilisation of the existing assets in this business, like crane rental, will go up thereby resulting in better return.
The new initiatives
The big focus areas are scaling up of the contract logistic business, monetisation of its land bank (200 acre in Bengaluru, Nagpur, and Hyderabad) and the opening of logistics parks at some of the strategic locations.
The company has started working on developing the Jhajjar Logistic Park on 180 acres of land comprising of a rail linked freight terminal, warehousing and a facility to support the contract logistic business. This is located near the Dedicated Freight Corridor in Rewari and is expected to be a huge beneficiary post the completion of the corridor.
High growth segment — contract logistics
The company is aggressively scaling up its contract logistics business. Allcargo owns 62% stake in Avvashya, which undertakes contract logistics activities. Today, the contribution of this segment is a meagre 1% of revenue, but Allcargo is hopeful of the future of this activity. It is one of the top three players in India. This business is expected to benefit post GST with the share of organised players going up. The company is looking for organic and inorganic ways to grow.
This business provides complete client solution in terms of warehousing, pick-up, packaging and other end-to-end services and will be complementary to its existing businesses like global logistics and CFS.
Valuations
While Allcargo’s MTO and CFS businesses are cash cows, what we like is its focus on trimming the low yielding segments. The company plans to leverage resources (land bank and listing of foreign subsidiary). It is also venturing into high growth areas like contract logistics and logistic parks. While many of these initiatives may not have immediate earnings impact, they will, nevertheless, support earnings strongly in the long run.
At the current market price of Rs 159, the stock is trading at 13 times its FY19 projected earnings, which is reasonable for a company with decent returns on equity, dominant position in the industry and low leverage in the balance sheet.
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