Allcargo Global

Allcargo Global is expected to gain from a revival in the global logistics sector over the next few years

ALLCARGO Global Logistics, partly owned by the world’s biggest buyout fund Blackstone Group, may be a good investment option given the slowly reviving world trade, coupled with the company’s diversified businesses. Allcargo is now the world’s second-largest player in the less than container load (LCL) segment following its acquisition of Belgium based ECU Line in 2006. LCL implies goods which don’t require a full container, but only a portion of it. So, there are logistics operators such as Allcargo who receive goods from various customers at its offices across the globe and in turn, books space on shipping lines, to transport goods to its final destination.

In addition, in the domestic market, the company is present across several segments, including container freight station (CFS) and inland container depots (ICDs), equipment hiring and project cargo, and is aggressively expanding.

Allcargo trades at 18.9 times on a trailing four-quarter basis, which is lower than the largest domestic logistics player, the PSU- Container Corporation of India. Investors could consider Allcargo Global in a bid to gain from the growth opportunities in the logistics sector over the next few years, both within the country and globally.

NETWORK INFRASTRUCTURE

Allcargo acquired Belgium-based ECU Line in 2006 and revenues from its overseas operation contributed almost 76.9 % to its consolidated net sales of Rs 2314.1 crore in the financial year CY08. In the domestic logistics industry, Allcargo’s CFS are located at key container ports at Jawaharlal Lal Nehru Port Trust, near Navi Mumbai, Chennai in Tamil Nadu and Mundra in Gujarat. Its CFS have a total capacity of 2.78 lakh twenty foot equivalent units (TEUs) in November 09, helped by facilities set up at Chennai and Mundra in CY 07. However, the dominant player in the domestic containerised rail freight segment is Concor. Meanwhile, Allcargo’s equipment division currently operates 64 cranes, 72 forklifts and 363 trailers. The operations of this division have been scaled-up considerably with the acquisition of 50 cranes in January 08.

During its financial year ended December 06 and December 09, the company has invested nearly Rs 574 crore, on a consolidated basis, to expand its nfrastructure, while its cash flow during the period was just Rs 238.9 crore. As a result, the company had to borrow, pushing its total debt four and half times to Rs 344 crore at the end of December 08. Its leverage ratio was also 0.3 at the end of the previous financial year.

FINANCIALS & EXPANSION PLANS

Allcargo’s consolidated net sales declined 21.2 % yo-y to Rs 497.85 crore in the September ‘09 quarter, compared to a 3.6 % growth in the trailing four quarters. This was largely due to a 15.5 % y-o-y fall in the volume of cargo handled at its overseas operations given the falling trade. However, its operating profit margins improved 40 basis points y-o-y to 11.7 % in the second quarter of FY 10, helped by a tight check on its operational costs. Allcargo plans to set-up ICDs at Bangalore, Hyderabad, Nagpur and in addition, it has entered into a joint venture with Concor to establish an ICD at Dadri in Uttar Pradesh. The company recently got shareholder approval to raise upto $150 million (nearly Rs 700 crore) through share sales to expand existing facilities, acquisitions and working capital needs. This is in addition to nearly Rs 242.3 crore investment by Blackstone in Allcargo from recent warrant conversion.

VALUATIONS

Allcargo Global trades at 18.9 times on a trailing fourquarter basis. Industry peer Gateway Distriparks trades at 18.4 times and Concor at around 20.7 times. Investors could consider Allcargo Global to leverage the growth opportunities in logistics.

Stock views on ACC, Mundra Port, Idea Cellular, Ambuja Cements, GMR Infrastructure

HSBC on GMR Infrastructure
HSBC maintains the `Underweight' rating on GMR Infrastructure with a target price of Rs 53. There has been no respite in GMR's existing business. GMR's airport business faces: a) continuing decline in air traffic b) continuing delays in real estate development at Delhi airport, impacting fund availability, and c) inability to raise tariff at the Delhi and Hyderabad airports, impacting overall profitability. However, there has been some relief in the power business due to fresh gas supply and lower naptha prices. GMR runs a refinancing risk on the loan at the end of the two-year period. HSBC expects that in order to complete the Delhi airport in time, the government will have to provide incentives to GMR. These incentives might be in the form of allowing it to charge higher user fees or a higher equity contribution to meet the fund requirement. However, given the current financial condition of the airline industry, it would be difficult for the government to increase the charges without opposition from the airline industry. The outlook for the company remains weak given: a) no signs of recovery in airport traffic growth b) the ability to increase airport charges remains dependent on the government's approval c) no improvement in real estate outlook d) potential difficulties in refinancing its acquisition.

Merrill Lynch on Ambuja Cements

Merrill Lynch maintains `Underperform' rating on Ambuja Cements due to lack of upside triggers. Ambuja's CY09 earnings decline will likely be modest versus other majors due to a tad better supply-demand outlook for west India. Ambuja sells ~30-40% of volumes in the west, which is forecast to witness fewer capacity additions versus other regions. However, exposure to the north will likely hurt. Ambuja's CY08 EBITDA stood at ~Rs 1,770 crore, down ~13% y-o-y due to cost-led margin pressures. The company indicated that high-cost coal inventories, greater use of imported coal and year-end adjustments/provisions dragged 4Q results. 4Q realisations were up 1% y-o-y and 3% q-o-q; cost increase was sharper at ~10-12%. Volumes grew 5% y-o-y and 16% q-o-q. In its 4Q press release Ambuja said the industry's demand growth in CY09 will range between 6-8%. This compares with 11-12% volume growth witnessed in November-December 2008, likely led by pre-election government spending. Reflecting the pattern of previous election years, we worry that the recent demand impetus will ease in 3-4 months as elections draw closer.

Indiabulls Securities on Idea Cellular

Indiabulls Securities has reiterated the `Hold' rating on Idea Cellular, however, it has downgraded the target price to Rs 49. Idea ended the third quarter with a handsome topline growth of 13.1% q-o-q, backed by a robust 13% share in the all-India net additions of 38 lakh and a 3.7% improved realisation of 65 paise per minute. Idea's market share (excluding Spice) is to inflate beyond 11% by March 2010 from the current 9.9%. The company's share of the market net additions is likely to peak at 14-15% in FY10, given the upcoming roll-outs in five new circles and the overwhelming response received for the roll-out in Bihar and the re-branding in Punjab. Moreover, Idea's brand, which has all-India recognition, renders it a competitive edge over the other entrants in the new circles. The operating margin will likely remain under pressure in FY10E-11E and is expected to come down to ~11% as Idea opts for higher opex rather than capex for network expansion. In addition, intensifying competition and penetration in Class C circles calls for competitive pricing, which would further bring down ARPUs to around Rs 250 and Rs 210 for FY09E and FY10E respectively. While the company's business model points towards a strong longer-term growth trajectory, the upcoming congestion in the telecom market would exert significant strain on its key operating and financial parameters, thereby limiting major upsides in the stock price.

Citigroup on Mundra Port

Citigroup initiates `Sell' rating on Mundra Port and Special Economic Zone (MPSEZ) as the stock looks expensive. MPSEZ is a private port (capacity ~55 mtpa) on India's west coast:
1) Strategically located for north-bound cargo;
2) Handles more container volumes than all major ports, except JNPT and Chennai;
3) Has one of the deepest drafts;
4) ~40% of projected volumes are under long-term contracts; and
5) SEZ over ~32,000 acres should support volume growth.

Cargo/profits growth has been impressive at 53%/132% CAGR over FY04-08. Citigroup expects cargo, revenues and profits to grow at 17%, 25% and 47% respectively over FY09-11E, and RoEs to improve to 24% by FY11E from 11% in FY08. While Citigroup forecasts healthy cargo growth at MPSEZ, they see risks in the medium term given the deteriorating global environment. Volumes at major ports grew only by 4% y-o-y in April-November 2008 and fell 28% y-o-y in December 2008 at the DP World-operated container terminal at Mundra. A pullback in investments would hit development of the SEZ, a growth driver for the port. We value: 1) the port at Rs 262/sh; 2) SEZ at Rs 22/sh; 3) investments in subs at Rs7/sh. MPSEZ trades at 24x FY10E PE, a premium of ~85% to Asian ports' average of ~13x, which we find excessive despite EPS growth of 47% over FY09-11E versus the Asian average of -1%. Upside risks include better-than-expected traffic growth and demand for land at the SEZ.

Macquarie on ACC

Macquarie lowers the rating on ACC from `Neutral' to `Underperform' in the absence of cost-reduction levers and the stock lacks any positive catalyst except for cement prices. It believes that the current rally in the stock along with an improved business outlook is a good opportunity to book profits. ACC declared its CY08 results, which were about 11% below the estimates at the operating level due mainly to lower volumes and higher costs. Macquarie reduces the target price by 2% to Rs 452 to factor in lower volumes for the next year and also reducing CY09 and CY10 estimates to account for lower volume expectations because it foresees some delays to expansion plans. ACC has already exhausted the easy ways to reduce costs because most of its production is based on domestic subsidised coal. It already has coal-based captive power plants and it is reaching saturation in blending. The only major avenue is a merger with its sister concern, Ambuja Cements. The majority of 7 mtpa of further expansion will not be completed until CY10. ACC will, at best, grow in line with the industry.