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ARSHIYA INTERNATIONAL
PRICE: RS.165 RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.185 FY13E P/E: 6.6X
Strong operational performance in Q3FY12-FTWZ grows at
healthy pace
Arshiya has reported its Q3FY12 net profit at Rs 345 million (+65% YoY).
This was on account of increased share of FTWZ revenues in the overall
revenues which has increased from 3% in Q3FY11 to 16% in Q3FY12. FTWZ
revenues have grown from Rs 60 mn in Q3FY11 to Rs 443 mn in Q3FY12. As
FTWZ is a high margin business, the increased share has helped the overall
margins expand from 19.9% in Q3FY11 to 25.7% in Q3FY12. The company
currently operates 4 warehouses at Panvel FTWZ and we estimate the
company to ramp it up to 8 warehouses by end of FY13E. ARST has also
started its Khurja FTWZ in Q4FY13E with 2 warehouses and we estimate the
company to ramp it up to 4 by end of FY13E. We also expect the VAS to
rental ratio to improve from current 1x to 1.5x by FY13E and further to 2x by
FY14E. In the rail segment the company operates 16 rakes currently which
they would ramp up to 20 by end of FY13E. The company also intends to
take about 10 rakes on lease during the same period. Rail segment has
reported 70% YoY growth in revenues with EBIT margins expanding to
15.5%. The company wants to integrate its entire rail operations with is
logistics business and FTWZ business and run these rakes primarily on the
domestic segment. The company continues to grow steadily in its core third
party logistics (3PL) businesses. Total revenues have grown to Rs 2.7 bn
(+28% YoY). The stock at CMP of Rs 165 trades at 6.6 times FY13E earnings,
below the average one year forward trading multiple of peer companies of
10x. We expect the company to deliver revenue CAGR of 24% over FY11 to
FY13E to ~ Rs 12.7 bn with improvement in operating margins from 19.4%
in FY11 to 24.2% in FY12E and 26.9% in FY13E. With improvement in
margins and benefits of aggressive capex accruing to the company going
ahead, we expect the return ratios of the company to improve. High
leverage, execution delays and poor acceptability of the key FTWZ concept
are some of the pitfalls and can be a drag for the company. Consequently
we value the company at 25% discount to the one year forward multiple of
peer group companies in the Logistics space which comes at Rs 185. The
discount captures the risks on account of the high leverage position of the
company. We rate the stock Accumulate with a one year price target of Rs
185.
Key Highlights:
n Total revenues have grown to Rs 2.7 bn (+28%YoY) from Rs 2.1 bn
n EBIDTA margins have expanded from 19.9% in Q3FY11 to 25.7% in Q3FY12
with increased share of high margin FTWZ business in the total revenues.
n Company continues to pay tax rate which is near MAT
n Consequently PAT came at Rs 345 mn (+65% YoY and +8% QoQ)
n The quarter witnessed significant customer additions and an increased scope of
Value Optimizing Services offered to clients in the FTWZ
n After successfully commissioning its Mumbai FTWZ in 3Q FY11, the company has
commissioned its Khurja FTWZ in January, 2012. The company now plans to add
more FTWZs in future in central, eastern and southern regions of the country.
n Arshiya Rail is currently operating 16 rakes and has won a key tender for movement
of 24,000 million tonnes of copper concentrate for Sterlite Industries (India)
Ltd. from Khetri (Rajasthan) to Tuticorin (Tamil Nadu).
n The integrated business added customers across industries such as Engineering,
Pharma, Solar Energy, Wind Energy, Industrial Safety, Chemicals, Power Systems,
FMCG, Retail, etc.
Panvel FTWZ
n The company had acquired new clients at its Panvel FTWZ who have made
Arshiya's Free Trade and Warehousing Zone (FTWZ) as their regional distribution
hub for e.g. Broekman Logistics India Private Limited, Soilmec India etc.
n Company is also working towards creating multi-tiered area for Value Optimizing
Services (VOS) within Warehouses that improves productivity and efficiency of
VOS activities.
n Management mentioned that the company had started performing high end
Value Optimizing Services such as Kitting, Export and Import Consolidation, Sorting
and Quality Control for various products including temperature sensitive and
hazardous cargo
Khurja FTWZ
n Arshiya launched its second FTWZ at Khurja near Delhi in Jan 2012 in an area of
135 acres with 2 warehouses.
n This FTWZ is expected to help manufacturers bring down transactional cost and
boost EXIM, facilitate imports through implementation of vendor managed inventory
and encourage exports by enabling quality check & consolidation before organized
shipment.
n The Khurja FTWZ would be complemented by a Domestic Distriparks (DDP) and
a rail siding and would cater to northern manufacturing belt through services like
warehousing, value optimizing and distribution of EXIM and domestic cargo
Container rail business - 4 more rakes to be added by end of
FY13E
Arshiya Rail is currently operating 16 rakes and intends to another 5 rakes and lease
4 rakes over by end of FY13E 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. 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.
In Q3FY12 it has won a key tender for movement of 24,000 MT of copper concentrate
for Sterlite Industries (India) Ltd. from Khetri (Rajasthan) to Tuticorin (Tamil
Nadu).
Heavy capex funding - primarily in FTWZ and container rail business
FTWZ is a very capital intensive business. It involves purchase of land near the port
or close to industrial hubs (minimum 100 acres), ground leveling, construction of
warehouses and purchase of equipment and so on. While success of rail business
depends on purchase of rakes and creation of demand creating hubs known as Inland
container depots (ICDs). Arshiya has already spent ~Rs 24 bn till date primarily
on the above two businesses and intends to spend another Rs 11 bn over FY11 to
FY13E to complete phase one of its capex programme.
Remaining part of First Phase of Capex by Arshiya
Capex (Rs mn) FY12E FY13E
FTWZ 4,000 5,100
Container rail business 500 500
Others 250 250
Total capex 4,750 5,850
Source: Kotak Securities - Private Client Research
High margin FTWZ business has positively impacted the margins
With the company focusing on the FTWZ business, the share of high margin FTWZ
business (60% Ebidta margin) in the revenues has expanded from 3% in Q3FY11 to
16% in Q3FY12 which has helped the margin improve from ~19.9% in Q3FY11 to
25.7% in FY13E. We further expect the share of FTWZ business to expand to 31%
in FY13E which would help the margin improve from ~19% in FY11 to 27% in
FY13E.
Return ratios to improve as benefits of aggressive capex will accrue
from FY13E
As the company has been on an aggressive expansion spree in the past few years,
free cashflows have remained negative and are likely to remain in the negative until
FY13E as positive cumulative operating cashflows of about Rs 1.8 bn will be inadequate
to fund cumulative capex of ~Rs 11 bn, resulting in a substantial increase in
debt. Post that we expect improvement in asset turnover and improvement in margin
which will increase the ROCE, which has been in the low single-digits for the
past two years, to improve. For FY13E we expect the ROCE to improve ~9% in
FY13E from 7% in FY11. With improvement in margins we also expect ROE to improve
to ~15% in FY13E from 11% in FY11.
Valuation and recommendation
ARST is getting transformed from a 3PL player to becoming an integrated service
provider, and its Free Trade Warehousing Zone (FTWZ) foray, if successful, can lead
to a significant re-rating. 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-bp expansion in EBITDA margin as high margin FTWZ expands and contributes
about 25% to revenues in FY13E from 3% in FY11. We expect sizeable value
accretion from the FTWZ business from FY13E. Consequently we value the company
at 25% discount to the one year forward multiple of peer group companies in the
Logistics space which comes at Rs 185. The discount captures the risks on account of
the high leverage position of the company. We rate the stock ACCUMULATE with a
one year price target of Rs 185.
Risk:
n High leverage
n Execution delays
n Poor acceptability of the key FTWZ concept
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
ARSHIYA INTERNATIONAL
PRICE: RS.165 RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.185 FY13E P/E: 6.6X
Strong operational performance in Q3FY12-FTWZ grows at
healthy pace
Arshiya has reported its Q3FY12 net profit at Rs 345 million (+65% YoY).
This was on account of increased share of FTWZ revenues in the overall
revenues which has increased from 3% in Q3FY11 to 16% in Q3FY12. FTWZ
revenues have grown from Rs 60 mn in Q3FY11 to Rs 443 mn in Q3FY12. As
FTWZ is a high margin business, the increased share has helped the overall
margins expand from 19.9% in Q3FY11 to 25.7% in Q3FY12. The company
currently operates 4 warehouses at Panvel FTWZ and we estimate the
company to ramp it up to 8 warehouses by end of FY13E. ARST has also
started its Khurja FTWZ in Q4FY13E with 2 warehouses and we estimate the
company to ramp it up to 4 by end of FY13E. We also expect the VAS to
rental ratio to improve from current 1x to 1.5x by FY13E and further to 2x by
FY14E. In the rail segment the company operates 16 rakes currently which
they would ramp up to 20 by end of FY13E. The company also intends to
take about 10 rakes on lease during the same period. Rail segment has
reported 70% YoY growth in revenues with EBIT margins expanding to
15.5%. The company wants to integrate its entire rail operations with is
logistics business and FTWZ business and run these rakes primarily on the
domestic segment. The company continues to grow steadily in its core third
party logistics (3PL) businesses. Total revenues have grown to Rs 2.7 bn
(+28% YoY). The stock at CMP of Rs 165 trades at 6.6 times FY13E earnings,
below the average one year forward trading multiple of peer companies of
10x. We expect the company to deliver revenue CAGR of 24% over FY11 to
FY13E to ~ Rs 12.7 bn with improvement in operating margins from 19.4%
in FY11 to 24.2% in FY12E and 26.9% in FY13E. With improvement in
margins and benefits of aggressive capex accruing to the company going
ahead, we expect the return ratios of the company to improve. High
leverage, execution delays and poor acceptability of the key FTWZ concept
are some of the pitfalls and can be a drag for the company. Consequently
we value the company at 25% discount to the one year forward multiple of
peer group companies in the Logistics space which comes at Rs 185. The
discount captures the risks on account of the high leverage position of the
company. We rate the stock Accumulate with a one year price target of Rs
185.
Key Highlights:
n Total revenues have grown to Rs 2.7 bn (+28%YoY) from Rs 2.1 bn
n EBIDTA margins have expanded from 19.9% in Q3FY11 to 25.7% in Q3FY12
with increased share of high margin FTWZ business in the total revenues.
n Company continues to pay tax rate which is near MAT
n Consequently PAT came at Rs 345 mn (+65% YoY and +8% QoQ)
n The quarter witnessed significant customer additions and an increased scope of
Value Optimizing Services offered to clients in the FTWZ
n After successfully commissioning its Mumbai FTWZ in 3Q FY11, the company has
commissioned its Khurja FTWZ in January, 2012. The company now plans to add
more FTWZs in future in central, eastern and southern regions of the country.
n Arshiya Rail is currently operating 16 rakes and has won a key tender for movement
of 24,000 million tonnes of copper concentrate for Sterlite Industries (India)
Ltd. from Khetri (Rajasthan) to Tuticorin (Tamil Nadu).
n The integrated business added customers across industries such as Engineering,
Pharma, Solar Energy, Wind Energy, Industrial Safety, Chemicals, Power Systems,
FMCG, Retail, etc.
Panvel FTWZ
n The company had acquired new clients at its Panvel FTWZ who have made
Arshiya's Free Trade and Warehousing Zone (FTWZ) as their regional distribution
hub for e.g. Broekman Logistics India Private Limited, Soilmec India etc.
n Company is also working towards creating multi-tiered area for Value Optimizing
Services (VOS) within Warehouses that improves productivity and efficiency of
VOS activities.
n Management mentioned that the company had started performing high end
Value Optimizing Services such as Kitting, Export and Import Consolidation, Sorting
and Quality Control for various products including temperature sensitive and
hazardous cargo
Khurja FTWZ
n Arshiya launched its second FTWZ at Khurja near Delhi in Jan 2012 in an area of
135 acres with 2 warehouses.
n This FTWZ is expected to help manufacturers bring down transactional cost and
boost EXIM, facilitate imports through implementation of vendor managed inventory
and encourage exports by enabling quality check & consolidation before organized
shipment.
n The Khurja FTWZ would be complemented by a Domestic Distriparks (DDP) and
a rail siding and would cater to northern manufacturing belt through services like
warehousing, value optimizing and distribution of EXIM and domestic cargo
Container rail business - 4 more rakes to be added by end of
FY13E
Arshiya Rail is currently operating 16 rakes and intends to another 5 rakes and lease
4 rakes over by end of FY13E 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. 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.
In Q3FY12 it has won a key tender for movement of 24,000 MT of copper concentrate
for Sterlite Industries (India) Ltd. from Khetri (Rajasthan) to Tuticorin (Tamil
Nadu).
Heavy capex funding - primarily in FTWZ and container rail business
FTWZ is a very capital intensive business. It involves purchase of land near the port
or close to industrial hubs (minimum 100 acres), ground leveling, construction of
warehouses and purchase of equipment and so on. While success of rail business
depends on purchase of rakes and creation of demand creating hubs known as Inland
container depots (ICDs). Arshiya has already spent ~Rs 24 bn till date primarily
on the above two businesses and intends to spend another Rs 11 bn over FY11 to
FY13E to complete phase one of its capex programme.
Remaining part of First Phase of Capex by Arshiya
Capex (Rs mn) FY12E FY13E
FTWZ 4,000 5,100
Container rail business 500 500
Others 250 250
Total capex 4,750 5,850
Source: Kotak Securities - Private Client Research
High margin FTWZ business has positively impacted the margins
With the company focusing on the FTWZ business, the share of high margin FTWZ
business (60% Ebidta margin) in the revenues has expanded from 3% in Q3FY11 to
16% in Q3FY12 which has helped the margin improve from ~19.9% in Q3FY11 to
25.7% in FY13E. We further expect the share of FTWZ business to expand to 31%
in FY13E which would help the margin improve from ~19% in FY11 to 27% in
FY13E.
Return ratios to improve as benefits of aggressive capex will accrue
from FY13E
As the company has been on an aggressive expansion spree in the past few years,
free cashflows have remained negative and are likely to remain in the negative until
FY13E as positive cumulative operating cashflows of about Rs 1.8 bn will be inadequate
to fund cumulative capex of ~Rs 11 bn, resulting in a substantial increase in
debt. Post that we expect improvement in asset turnover and improvement in margin
which will increase the ROCE, which has been in the low single-digits for the
past two years, to improve. For FY13E we expect the ROCE to improve ~9% in
FY13E from 7% in FY11. With improvement in margins we also expect ROE to improve
to ~15% in FY13E from 11% in FY11.
Valuation and recommendation
ARST is getting transformed from a 3PL player to becoming an integrated service
provider, and its Free Trade Warehousing Zone (FTWZ) foray, if successful, can lead
to a significant re-rating. 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-bp expansion in EBITDA margin as high margin FTWZ expands and contributes
about 25% to revenues in FY13E from 3% in FY11. We expect sizeable value
accretion from the FTWZ business from FY13E. Consequently we value the company
at 25% discount to the one year forward multiple of peer group companies in the
Logistics space which comes at Rs 185. The discount captures the risks on account of
the high leverage position of the company. We rate the stock ACCUMULATE with a
one year price target of Rs 185.
Risk:
n High leverage
n Execution delays
n Poor acceptability of the key FTWZ concept
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