Allcargo Logistics - Market leader in LCL consolidation


Company Name – Allcargo Logistics Ltd (Allcargo)


Current Share Price – INR 310 (June 10, 2022)


Market Cap – INR 7,608 cr


 

1. What is interesting about the stock?

The global supply chain is a fragile system consisting of numerous links and disruption to one can send cascading effects down the chain. Therefore, it is imperative that each link needs to function properly for the whole system to work. The COVID-19 pandemic turned out to be an event of such a magnitude to either bring to halt whole industries and supply chains, or severely reduce their efficiency. Due to its complexity and transcontinental nature, container shipping was hit especially hard by the COVID-19 pandemic. Since the start of the pandemic, the shipping industry has had to struggle with port closures and congestions, labor shortages, difficulties with capacity utilization, as well as a lack of new shipping containers. It has caused inflation for end customers which we are seeing now.

While costs of operating a container fleet have increased, the surge in freight rates has not served just to cover rising expenses. Container ship operators have been reporting record-high operating profit margins since the beginning of the pandemic. In the third quarter of 2021, main container shipping companies had an average profit margin of over 56 percent, up from about 8.5 percent a year earlier. Higher shipping rates have also benefited sea logistics players.


Allcargo Logistics Ltd is one such company. Promoted by Mr. Shashi Kiran Shetty, provides logistics services such as non-vessel owning common carrier (NVOCC or like Uber for shipping), container freight station (CFS), inland container depot (ICD), warehousing, coastal shipping, project logistics, and equipment leasing.


The Company is a multi-modal transport operation (MTO) operator and offers logistics services, such as consolidation of Less than Container Load (LCL) and Full Container Load (FCL) cargo for export and importers. In 2003, it forward integrated into CFS operations.


Company has grown through acquisitions. Since the acquisition of the Belgium-based ECU Line in 2006, Allcargo has emerged as a leading LCL consolidator in the world. In 2011, it acquired MHTC Ltd to strengthen its position in the P&E solutions business. In September 2013, the group acquired Econocaribe Consolidators to increase its presence in the US and its focus on FCL cargo. In May 2016, Allcargo sold its contract logistics, and its freight & forwarding and customs clearance business, housed in subsidiary Hindustan Cargo Ltd, on a slump sale basis to ACCI, its JV with the promoters of CCI. CCI has transferred its warehousing business to the JV. In April 2020, Allcargo completed the acquisition of a 46.8% stake in Gati, and subsequently, Gati has exited non-core businesses like a cold chain, trading/freight forwarding businesses, company-owned commercial vehicles, land, and buildings.


Allcargo has announced a demerger in December 2021 wherein the CFS/ICD business will be de-merged into a new company Allcargo Terminals Limited (ATL) while the equipment rental, logistics parks, and other real estate assets will go into TransIndia Realty & Logistics Parks Limited (TRL). Under the scheme, all the three companies will have mirror shareholding. The Company has initiated the restructuring exercise with a focus on becoming asset-light, which will enhance its efficiency and profitability and deleverage its balance sheet. It has also done a deal with the Blackstone Group for selling a stake in the logistics park business.

As per the proposed scheme, Allcargo (post demerger) will house the flagship and LCL consolidator in the international supply chain business (under multi-modal transport operations (MTO) segment), express logistics (under subsidiary Gati Limited), contract logistics (under 61% JV, ACCI), and project management.

Segment-wise break up of Allcargo is:

  • MTO business is the largest revenue-contributing segment (88% in FY22) for Allcargo. The MTO segment includes NVOCC operations, including LCL consolidation and FCL forwarding activities in India and across the world. Allcargo is a leader in the LCL consolidation market with ~14% market share and a global network in 180 countries with access to 2,400 direct trade lanes. Allcargo provides services to small, medium, and large freight-forwarders. LCL business provides a base for expansion in FCL and other businesses.

  • Express logistics (Gati business) – Pan India operations with 99% GOI approved pin codes coverage

  • Contract Logistics (ACCI JV)

  • CFS/ICD - CFS and ICDs are also called dry ports as they handle all customs formalities related to the import and export of goods at these locations. In a multi-modal transport logistics system, ICDs and CFS act as hubs in the logistics chain. CFS and ICD is also the place that consolidates or de-consolidates LCL freight.

  • Equipment rental, logistics parks, and other real estate assets – Allcargo has warehousing infrastructure across key locations in India. Company has leased near 5 million sq. ft. with Indian multinational and other international customers.

Future Prospects


MTO business is directly linked to global trade and its profitability depends on the freight rates. Freight rates are expected to remain relatively strong in 2022/23 (vs pre-pandemic level) but could fall vs rates in 2021 and early 2022.


Management Background


Shashi Kiran Shetty is the founder and Managing Director of Allcargo. He is a first-generation entrepreneur. He has been conferred with the highest civilian honor as ‘Distinction of Commander of the Order of Leopold II’ by H.M. King Philippe of Belgium.


Adarsh Hegde is Joint Managing Director. He has been associated with Allcargo since its inception and has set up the CFS business.


Why invest in Allcargo?

  • Market leadership in LCL business

  • Focus and investment in digital infrastructure, which is essential to compete with disruptive logistics start-ups

  • Integrated logistics player with presence across diversified segments

  • Experienced management team

2. Key Historical Financials

  • Company revenue jumped 91% in FY22 on a YoY basis driven by strong growth in the MTO business

  • LCL and FCL volume increased by 18-21% so the main driver for the increase in revenue was the average freight price increase

  • EBITDA margin expanded from 6.1% in FY21 to 7.6% in FY22 through operating leverage

  • Cash flow convertibility (CFO/EBITDA) has been poor with 51-56% in FY21 and FY22

  • ROCE/ROE increased to 26%/34% in FY22 vs 10%/8% in FY21

3. What is my view on company valuation?


Allcargo’s share price has jumped 134% in the last 1 year reflecting the jump in the freight rates. The question is the sustainability of high freight rates! Freight rates have already cooled ~25% from their peak in September 2021.


Company trades at EV/EBITDA of 5.7x and a P/E (TTM) ratio of 8.6x (vs long-term P/E ratio of 11.7x) which seems quite reasonable.


I expect the freight rates to fall in the next few years as the global supply chain stabilizes post-COVID-19 which may lead to a fall in profitability. So, it may be prudent to wait for the business to stabilize before taking a long-term investment call on the Company.


4. What are the risks to the investment analysis?


Risks to the analysis are:

  • Promoters wanted to de-list the business in 2020 and 2021 creating the question of whether they are interested in keeping the Company as a listed company in the long term

  • Regulatory risk on CFS and ICD business

  • Global trade has been quite volatile and de-globalization is expected to increase in the long-term as economies try to bring part of manufacturing onshore

 

About the Author


I have over 15 years of experience in venture capital, private equity and investment banking in India and Middle East across a wide variety of sectors. I was last working with Majid Al Futtaim Holding (MAF), a leading conglomerate in Middle East, to look after investments, M&A and venture capital. I have prior experience in India with Tata Capital (Private Equity), Merrill Lynch (Investment Banking or IB) and Ambit Corporate Finance (IB). I bring the long-term ownership mindset to the analysis.


I graduated from the MBA program of the Indian Institute of Management Lucknow (2005) after completing the Bachelor of Technology program at the Indian Institute of Technology, Kharagpur (2002).


I am an Insignificant Investor in the public market and co-founder of SocInvest.


Disclosure


I have no stock, option or similar derivative position in any of the companies mentioned since last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.


I am not a SEBI registered advisor. This article is purely for educational purpose and not to be construed as an investment advice. Please consult your financial advisor before acting on it.


I have used publicly available information while writing this article.




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