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ARSHIYA INTERNATIONAL (ARST)
PRICE: RS.122 RECOMMENDATION: BUY
TARGET PRICE: RS.185 FY13E: P/E: 5.0
We initiate coverage of Arshiya International (ARST) with a BUY rating and a
12- month PT of Rs.185 based on 7.5x FY13E P/E. ARST is in the midst of a
transformation from a 3PL player to becoming an integrated service
provider. Its Free Trade Warehousing Zone (FTWZ) foray, if successful, can
lead to a significant re-rating of the stock even above our target valutions.
We expect 24% sales CAGR over FY11-13E driven by ~Rs.5 bn cumulative
revenue from FTWZs and an increasing presence in container haulage and
3PL logistics. Adjusted PAT is expected to increase at a 34% CAGR driven by
a 750-bps expansion in EBITDA margin as high margin FTWZ business
expands and contributes about 25% to revenues in FY13E from 3% in FY11.
We expect sizeable value accretion from the FTWZ business from FY13E. We
believe a 25% discount to the one year forward multiple of peer group
companies adequately factors in concerns on account of high leverage.
Key investment argument
q FTWZ is a unique business model new in India and adopted by ARST.
FTWZ is a deemed foreign territory. The unit operating within the zone is given
special status with various fiscal and non-fiscal benefits. These benefits include
various tax exemptions and various value added services at relatively low cost
which leads to savings for the clients in the form of low working capital
requirement and reduced logistics cost. ARST is pioneering the FTWZ concept in
India and after successfully commissioning its Mumbai FTWZ in 3Q FY11, the
company is on track to start commercial operations at its Khurja FTWZ by
4QFY12. The company also has plans to add more FTWZs in future in central,
eastern and southern regions of the country.
q Ramping up of the rail business. ARST has a category 1 container rail licence
and a fleet of 15 rakes which primarily runs on domestic segment. Company
intends to buy another 5 rakes and lease 10 rakes over the next 24 months to
support its rail business and also to complement its FTWZ and Logistics business.
Company has already spent more than Rs 4 bn on rail license, rakes and Khurja
Distriparks and would be spending another Rs.1 bn in the next 24 months. We
estimate the rail business to effectively complement the FTWZ and logistics
business with revenues for the segment growing from ~Rs 1.7 bn in FY11 to
~Rs.2.3 bn in FY13E.
q ARST has an integrated business model which helps attract customers.
ARST, with its rail infrastructure network combined with the FTWZ has emerged
as a one-stop-shop to cater to the point-to-point logistics requirement of the
customers. The company has already started its first FTWZ in Panvel, near
Mumbai which would be followed by Khurja, near Delhi in Q4FY12. The
company intends to have FTWZ in every region of the country and all these
FTWZs would be well connected with the rail infrastructure of the company
providing customers with complete logistics solution. Such an arrangement is
very critical today to attract customers, retain them and command better rates.
q We expect 24% revenue CAGR to ~Rs 12.7 bn over FY11-13E led by FTWZ.
Strong initial performance at Mumbai FTWZs gives us visibility of about Rs.3.2 bn
revenue until FY13E as the company benefits from strong entry barriers in the
space. In addition, a differentiated strategy of entering long-term charters with
clients ensures a higher utilization rate in the container rail business, which is
expected to post a 15% CAGR while the third party logistics business is
estimated to grow at 7% CAGR over FY11-13E.
q High margin FTWZ business to improve margins from ~19% in FY11 to
~27% in FY13E. We are factoring in a conservative utilization rate of 75% and
an EBITDA margin of around 60% for the FTWZs. With the company focusing on
the FTWZ business, the share of FTWZ business in the revenues is expected to
expand from 3% in FY11 to 25% in FY13 which would help the margin improve
from ~19% in FY11 to ~27% in FY13E.
Valuation and recommendation - High risk and high return stock
q FTWZ is the key to the growth prospects of ARST. The business is very capital
intensive and has a long gestation period. Also the FTWZ business concept is
nascent in the country and currently has low acceptability. We expect ARST
which has made a strong beginning in the segment to continue with its FTWZ
plan and emerge as a leading FTWZ player in the country. Proper and timely
execution of planned expansion and strong customer base would be very
important for the company and has the potential to take the company to new
highs. However high leverage, execution delays and poor acceptability of the
FTWZ concept are some of the pitfalls associated with the FTWZ business and
can be a drag for the company. Consequently we rate the stock as high risk high
return stock.
q We initiate coverage with a BUY rating with a 12-month target price of Rs 185
based on 7.5 FY13E P/E, a 25% discount to the one year forward multiple of
peer group companies in the Logistics space. The discount captures the risks on
account of the high leverage position of the company. At our target price the
stock would trade at 1.0x P/B and 10.2x EV/EBIDTA FY13E.
Key risks:
q Since no other player in the country has ever set up an FTWZ, there is a vacuum
with regard to availability of trained human resources having understanding of
the concept of FTWZ.
q Significant execution delays in the commissioning FTWZs and/or lower-thanexpected
utilization rates of FTWZ warehouses can impact the performance
negatively.
q Competition from upcoming FTWZs which have got the necessary regulatory
approval and have land parcels at strategic locations can hamper performance
q Arbitrary haulage rate hike taken by Indian Railways which the company is not
able to pass to the customers because of competition especially from the road
sector.
q Any negative implications arising out of change in regulatory policy can be
detrimental for the company's plans.
q Slowdown in global trade which would hurt the overall business of the company.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
ARSHIYA INTERNATIONAL (ARST)
PRICE: RS.122 RECOMMENDATION: BUY
TARGET PRICE: RS.185 FY13E: P/E: 5.0
We initiate coverage of Arshiya International (ARST) with a BUY rating and a
12- month PT of Rs.185 based on 7.5x FY13E P/E. ARST is in the midst of a
transformation from a 3PL player to becoming an integrated service
provider. Its Free Trade Warehousing Zone (FTWZ) foray, if successful, can
lead to a significant re-rating of the stock even above our target valutions.
We expect 24% sales CAGR over FY11-13E driven by ~Rs.5 bn cumulative
revenue from FTWZs and an increasing presence in container haulage and
3PL logistics. Adjusted PAT is expected to increase at a 34% CAGR driven by
a 750-bps expansion in EBITDA margin as high margin FTWZ business
expands and contributes about 25% to revenues in FY13E from 3% in FY11.
We expect sizeable value accretion from the FTWZ business from FY13E. We
believe a 25% discount to the one year forward multiple of peer group
companies adequately factors in concerns on account of high leverage.
Key investment argument
q FTWZ is a unique business model new in India and adopted by ARST.
FTWZ is a deemed foreign territory. The unit operating within the zone is given
special status with various fiscal and non-fiscal benefits. These benefits include
various tax exemptions and various value added services at relatively low cost
which leads to savings for the clients in the form of low working capital
requirement and reduced logistics cost. ARST is pioneering the FTWZ concept in
India and after successfully commissioning its Mumbai FTWZ in 3Q FY11, the
company is on track to start commercial operations at its Khurja FTWZ by
4QFY12. The company also has plans to add more FTWZs in future in central,
eastern and southern regions of the country.
q Ramping up of the rail business. ARST has a category 1 container rail licence
and a fleet of 15 rakes which primarily runs on domestic segment. Company
intends to buy another 5 rakes and lease 10 rakes over the next 24 months to
support its rail business and also to complement its FTWZ and Logistics business.
Company has already spent more than Rs 4 bn on rail license, rakes and Khurja
Distriparks and would be spending another Rs.1 bn in the next 24 months. We
estimate the rail business to effectively complement the FTWZ and logistics
business with revenues for the segment growing from ~Rs 1.7 bn in FY11 to
~Rs.2.3 bn in FY13E.
q ARST has an integrated business model which helps attract customers.
ARST, with its rail infrastructure network combined with the FTWZ has emerged
as a one-stop-shop to cater to the point-to-point logistics requirement of the
customers. The company has already started its first FTWZ in Panvel, near
Mumbai which would be followed by Khurja, near Delhi in Q4FY12. The
company intends to have FTWZ in every region of the country and all these
FTWZs would be well connected with the rail infrastructure of the company
providing customers with complete logistics solution. Such an arrangement is
very critical today to attract customers, retain them and command better rates.
q We expect 24% revenue CAGR to ~Rs 12.7 bn over FY11-13E led by FTWZ.
Strong initial performance at Mumbai FTWZs gives us visibility of about Rs.3.2 bn
revenue until FY13E as the company benefits from strong entry barriers in the
space. In addition, a differentiated strategy of entering long-term charters with
clients ensures a higher utilization rate in the container rail business, which is
expected to post a 15% CAGR while the third party logistics business is
estimated to grow at 7% CAGR over FY11-13E.
q High margin FTWZ business to improve margins from ~19% in FY11 to
~27% in FY13E. We are factoring in a conservative utilization rate of 75% and
an EBITDA margin of around 60% for the FTWZs. With the company focusing on
the FTWZ business, the share of FTWZ business in the revenues is expected to
expand from 3% in FY11 to 25% in FY13 which would help the margin improve
from ~19% in FY11 to ~27% in FY13E.
Valuation and recommendation - High risk and high return stock
q FTWZ is the key to the growth prospects of ARST. The business is very capital
intensive and has a long gestation period. Also the FTWZ business concept is
nascent in the country and currently has low acceptability. We expect ARST
which has made a strong beginning in the segment to continue with its FTWZ
plan and emerge as a leading FTWZ player in the country. Proper and timely
execution of planned expansion and strong customer base would be very
important for the company and has the potential to take the company to new
highs. However high leverage, execution delays and poor acceptability of the
FTWZ concept are some of the pitfalls associated with the FTWZ business and
can be a drag for the company. Consequently we rate the stock as high risk high
return stock.
q We initiate coverage with a BUY rating with a 12-month target price of Rs 185
based on 7.5 FY13E P/E, a 25% discount to the one year forward multiple of
peer group companies in the Logistics space. The discount captures the risks on
account of the high leverage position of the company. At our target price the
stock would trade at 1.0x P/B and 10.2x EV/EBIDTA FY13E.
Key risks:
q Since no other player in the country has ever set up an FTWZ, there is a vacuum
with regard to availability of trained human resources having understanding of
the concept of FTWZ.
q Significant execution delays in the commissioning FTWZs and/or lower-thanexpected
utilization rates of FTWZ warehouses can impact the performance
negatively.
q Competition from upcoming FTWZs which have got the necessary regulatory
approval and have land parcels at strategic locations can hamper performance
q Arbitrary haulage rate hike taken by Indian Railways which the company is not
able to pass to the customers because of competition especially from the road
sector.
q Any negative implications arising out of change in regulatory policy can be
detrimental for the company's plans.
q Slowdown in global trade which would hurt the overall business of the company.
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