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Allcargo Logistics Q1FY13: Strains balance sheet further

Nirmal Bang | Published: 09 Aug, 2012  | Source : | Follow Author | Add to my Favourites

Following a 28.3% growth in low-RoCE project and engineering solutions (P&E) division, Allcargo Logistics' net revenue for Q1FY13 grew 14.2% YoY, 6.1% higher than Nirmal Bang's estimate. However, its high-RoCE CFS division’s operating profit fell 14.4% YoY and as a result consolidated operating profit stood at Rs1,135mn, down 2.1% from Nirmal Bang's estimate but up 11% YoY. Following higher capex as well as working capital of P&E division, interest costs increased 105.2%, resulting in a 16.3% decline in net profit to Rs556mn versus their estimate of Rs620mn. They expect profit mix to be tilted towards the low-returns P&E division in FY13/FY14. With a weak NVOCC business and margin pressure faced by CFS division, they have cut their revenue/net profit estimates by 2.9%/6.7%, respectively, for FY14E. Allcargo has already incurred a capex of Rs1.2bn in Q1FY13. In addition, it put on hold its restructuring exercise to separate asset-light and capital intensive businesses. Following likely higher capex and lower returns/free cash flow due to increased profits coming from low-return P&E division, Nirmal Bang downgrades the stock to Hold (from Buy) with a SOTP-based target price of Rs146 (from Rs173).

P&E division supported profit but not returns: After a 24.4% growth in FY12, the P&E division (33.3% of FY12 EBITDA) continued its strong performance with revenue/EBIT up 28.3%/24.8% YoY in Q1FY13. Allcargo reported 9.4% volume growth in CFS division. However with lower dwell time by 1-3 days, coupled with stiff competition EBITDA of CFS division fell 14.4%. Following strong performance of P&E division, consolidated EBITDA rose 11% YoY to Rs1,135mn, 2.1% below Nirmal Bang's estimate due to lower EBITDA of CFS division and lower volume growth of 3.2% of NVOCC division. But, as the RoCE of P&E division is lowest among three divisions, its higher share would put strain on consolidated RoCE.

Nirmal Bang expects lower returns on incremental capital: Allcargo has incurred capex of Rs1.2bn in Q1FY13 and out of that Rs300mn was spent to buy third vessel for the coastal shipping division. Currently, this division is not making significant profits and with the addition of third vessel incremental RoCE would be negative in FY13/FY14.

Stock Valuation and Recommendation:
Allcargo trades at 8.7x/5.7x/1.1x FY13E PE, EV/EBITDA and P/B, would continue to trade at the lower end of its valuation band and below its median of 12.3x/7.3x/1.7x following likely lower free cash flow of Rs2.1bn (down from and lower RoCE at 13.1% in FY14E from 14.6% in FY12.

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