Stock Review: Aqua Logistics

Aqua Logistics is likely to benefit from a rise in trade between India and other fast-growing emerging markets in the Asia-Pacific region

 

AQUA Logistics, a mid-sized logistics player, has aggressively expanded its presence in the neighboring East Asia and Middle East in a bid to take advantage from a rise in trade between India and other fast-growing emerging market economies in the region.

   In addition to this, during the period from March 2007 to March 2010, the company recorded one of the fastest growth rates in its topline and net profit in the domestic logistics sector.

LOGISTICS NETWORK

Aqua Logistics is present in different segments of the domestic logistics sector, including warehousing, project and contract logistics and supply chain solutions.

   Also, unlike other players in the sector, it has been following an asset light strategy over the past few years, thereby largely relying on third-party providers for necessary equipment.

   Its senior management has pointed out that Aqua only purchases equipment, which is viewed as critical, depending on the client and project's needs. As part of the strategy, the company had utilised 30.5 crore of its initial public offering (IPO) proceeds for the purchase of specialised equipment, including hydraulic motor trailer and cranes by the end of the second quarter.

   The company had come out with its IPO, aggregating 150 crore in early 2010 and the stock was listed in February 2010.

   In addition, Aqua Logistics had acquired three Hong Kong-based companies in early June. It has also opened its offices in Sharjah and Jumeriah Free Trade Zone. This appears timely, given the increasing trade between fast growing emerging economies and the resulting logistic opportunities.

FINANCIALS

The company's operating profit margin declined 290 basis points year-on-year to 10.1% in the September 2010 quarter and that's despite a 36.7% rise in its net sales. This was largely due to a rise in its operating costs.

   Also, during its preceding three financial years, the company's net sales had grown at a blistering 95.6% on a CAGR basis, while adjusted net profit grew at 95.4% during this period. This was considerably faster than other players in the logistics sector. However, a cause for concern is the company's weak operational cash flows during this period. This had resulted in Aqua Logistics' sundry debtors reaching nearly 103 crore at the end of FY10, a six-fold jump in three years. It is estimated that the company's debtors on an average took 116 days to clear their outstandings during FY10, compared with 102 days a year earlier. According to the company, a focus on rapid growth over the past few years had resulted in such a high debtor outstandings. In addition, the company had invested 46.4 crore during the three years ended March 2010. This resulted in a three-fold rise in its secured loans at 29.7 crore.

Nevertheless, its leverage ratio (debt-equity) remained quite low during this period, given the rapid deployment of its logistics assets. In addition, the company has also got board approval for a GDR issue worth up to $70 million.

VALUATIONS

Aqua Logistics, at CMP, trades at nearly five times its book value for the year ended March 2010. The largest domestic player in the logistics sector Container Corporation of India trades at 3.8x trailing book value, while other mid-sized logistics players like Transport Corporation of India trades at a book value of 2.6.