Buy Arshiya International - Strong operational performance in Q2FY13 - FTWZ and container rail grows at healthy pace - Kotak

Arshiya has reported its Q2FY13 net profit at Rs 354 million (+11% YoY). This was on account of increased share of FTWZ revenues in the overall revenues which has increased from 16% in Q2FY12 to 24% in Q2FY13. FTWZ revenues have grown from Rs 387 mn in Q2FY12 to Rs 893 mn in Q2FY13. As FTWZ is a high margin business, the increased share has helped the overall margins expand from 25.6% in Q2FY12 to 29% in Q2FY13.

The company currently operates 4 warehouses at Panvel FTWZ and we estimate the company to ramp it up to 8 warehouses by end of FY13E. ARST has also started its Khurja FTWZ in Q4FY12 with 2 warehouses and we estimate the company to ramp it up to 4 by end of FY13E. The VAS to rental ratio has improved from 1.25 x to 1.4 x sequentially and we estimate it to improve from to 1.5 x by FY13E and further to 2x by FY14E. In the rail segment the company operates 20 rakes currently and we estimate the company to ramp it upto 24 by end of FY13E. Rail segment has reported 55% YoY growth in revenues with EBIT margins expanding to 16.5%. The company wants to integrate its entire rail operations with its logistics business and FTWZ business and run these rakes primarily on the domestic segment. The company continues to grow steadily in its core third party logistics (3PL) businesses. Total revenues have grown to Rs 3.72bn (+50% YoY).

We expect the company to deliver revenue CAGR of 24% over FY12 to FY14E to ~ Rs 16.4 bn with improvement in operating margins from 25.7% in FY12 to 27.3% in FY13E and 29.3% in FY14E. With improvement in margins and benefits of aggressive capex accruing to the company going ahead, we expect the return ratios of the company to improve. High leverage, execution delays and poor acceptability of the key FTWZ concept are some of the pitfalls and can be a drag for the company. Consequently we value the company at 30% discount to the one year forward multiple of 8 x of peer group companies in the Logistics space which comes at Rs 188. The discount captures the risks on account of the high leverage position of the company. We re-iterate BUY with a price target of Rs 188.

Source : Equity Bulls

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