Allcargo Logistics - Turnaround in Gati may unlock value - ICICI Securities

Allcargo Logistics' (AGLL) Q3FY21 result missed expectations. Management has reiterated its intent to stay asset-light - with sales of trucks in the Gati express business and sale of crane in the Project and equipment (P&E) business, management is walking the talk. Warehousing asset sales to Blackstone and corresponding deleveraging (from current net debt of Rs 13bn), along with operational turnaround in express logistics business (Gati) remain the key near-term monitorable. We maintain HOLD with a revised target price of Rs131/share (Rs141/share earlier).

- MTO business EBIT witnessed one-off cost impact of US$1.5-1.6mn. Higher freight expenses help in higher operating leverage for the MTO segment. The same should be visible in the coming quarters. Higher one off costs due to severance payments impacted Q3FY21. Also, higher working capital due to higher freight rates impacted business RoCE. MTO business though continues to witness healthy double digit volume growth (11.6% in Q3FY21).

- Lower dwell time reduced ground rent income in CFS segment and helped to increase volumes. Q3FY21 volumes were 81,666teu (up 8% YoY). As impact of higher ground rent (due to higher dwell time of containers in Q1/Q1FY21) normalises, volume picks up to offset the impact of the same. EBIT/teu has normalised to Rs 4472/teu from Rs 6478/teu QoQ. Management continues to harp on additional value added services as the business pivot for CFS segment and looks forward to the upcoming National Logistics policy fine print to replicate the business model, undertaken in AGLL's JNPT CFS, across business locations.

- Sale of crane undertaken to make P&E business more asset light. A relative asset light model also helps in better asset utilisation (vis-à-vis industry) for Q3FY21. Management further guides for further headroom in 10-15% reduction of the book value of the P&E business.

- Logistics park asset sales key to deleveraging. Capex work is undertaken in the six subsidiaries in agreement with Blackstone. The ongoing capex is debt funded (Blackstone has also invested money in the form of debentures). As the final regulatory approvals are achieved and AGLL and Blackstone formally agree upon deal, the majority stake (90%) of these subsidiaries will be transferred to Blackstone leading to deconsolidation of assets and debt from the AGLL balance sheet. However, if the deal is not completed, then debt will be serviced from those assets and a certain guaranteed return will most probably accrue to Blackstone.

- Gati integration. Gati continues to show improvement in operations with ~6.1% consolidated EBITDA margin. Sales of trucks and adopting an asset light strategy is the right way forward in our view. In addition, ecommerce business strategy will be clearer in the coming quarters, as restricted large shipment deliveries have helped double digit EBIT margin in the ecommerce segment for Q3FY21.

Shares of ALLCARGO LOGISTICS LTD. was last trading in BSE at Rs.128.3 as compared to the previous close of Rs. 130.4. The total number of shares traded during the day was 37584 in over 1546 trades.

The stock hit an intraday high of Rs. 131.65 and intraday low of 128.05. The net turnover during the day was Rs. 4859029.

Source : Equity Bulls

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