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Turning into an asset-heavy logistics player
Allcargo Logistics (AGLL) hosted an analyst meet to discuss future capex in its contract logistics and supply chain business. While the company has earlier announce investment of Rs10bn into the same, the meet failed to address de-risking of balance sheet from what appears to be a significantly large capex over the next three years. Net debt / EBITDA will increase to 1.1x in FY21E from 0.5x in FY19E. Not only does this make AGLL's business model more capital intensive thereby reducing the scope for FCF generation over the next few years, it also increases the risk significantly for minority investors as earnings may be backended. We increase our debt assumptions and reduce valuation multiple for the multimodal transport operator (MTO) business. The only thing working in favour of AGLL now, is recovering dynamics of Project and Equipment segment (PES), which has been a major drag over the past, stabilising CFS segment as drag of DPD volumes normalises, and the significant free cashflow that MTO segment is still generating. Maintain BUY, albeit with a lowered SoTP target price of Rs144 (earlier Rs179).
* Plans in the warehouse and supply chain management. AGLL plans to scale up the business with a topline target of Rs10bn along with increase in the warehouse space to ~10mn-sqft over the next five years. The targeted segments within this vertical are chemical, auto, e-commerce, retail and fashion. Management has earmarked capex of Rs10bn to build 10-12mn-sqft of built-to-suit warehouses. While the management highlighted there may be discussions going on with various possible partners, it is early to share. While revenue potential can be achieved in 9-12 months of incurring the investments, incremental leverage will definitely be a cause of concern. The same were not addressed properly in the meet.
* We forecast a net debt of Rs6bn in FY21E from Rs2.5bn in FY19. AGLL currently has 45 warehousing locations across India (some are on leased customer spaces and not owned). This has enabled the company to acquire expertise as well as ownership of land parcels. AGLL sees opportunity to further foray into the contract warehousing space. However, balance sheet risks were not suitably addressed, which makes the next three years somewhat risky for minority investors.
* MTO faces new competition through technology disruptors; PES seems to have bottomed out. The MTO business has been garnering >20% YoY growth over past two quarters through higher exposure into Full Container Load (FCL) segment. FCL seems to have crossed 15% of the volume mix. Nevertheless, competition emerges with disruptors like ‘Flexport’ trying to establish a digital freight-forwarding platform. Cross-country physical network and largely fragmented nature of the global freightforwarding industry with little pricing power, still present opportunities in the business. Management is also making incremental effort to capture door to door traffic rather than port to port traffic only -- a clear margin lever. PES equipment utilisations have crossed 60%.
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