Allcargo Global Logistics – 3QCY2010 Result Update- Angel Broking

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Allcargo Global Logistics – 3QCY2010 Result Update

Angel Broking maintains a Buy on Allcargo Global Logistics with a Target Price of Rs217

Allcargo Global Logistics’ (AGL) consolidated 3QCY2011 results were

significantly above our expectations, on account of strong performance across

segments. During the quarter, the company re-assessed useful life of its cranes,

which resulted in lower depreciation thereby boosting profit by `11cr to `57cr.

ECU line continued its strong performance and registered yoy revenue and profit

growth of 27% and 77% respectively, thereby emphasising our call of sustainable

recovery in margins. On the bourses, the stock has grossly underperformed since

the last one year owing to subdued performance by ECU Line; however the

subsidiary has been gaining traction since the last two quarters. We maintain a

Buy on the stock.

ECU Line drives profitability: AGL reported 41.4% yoy (10.1% qoq) jump in

revenues to `704cr on the back of strong performance across segments and

marked improvement in ECU Line’s business. The Indian MTO and CFS business

grew 44.8% yoy and 25.9% respectively, on strong volumes owing to improving

Exim visibility. Overall, OPM stood at 11.1% (up 50bp qoq and flat yoy), while

ECU Line recorded OPM of 6.2% (up 110bp yoy and 80bp qoq). Consequently,

consolidated operating profit grew 34.6% yoy to `78cr. During 3QCY2010, AGL

reassessed estimated useful life of its cranes due to which depreciation expense

declined by a sharp 76.9% yoy to `3.1cr. Interest cost also fell by 36.1% yoy to

`5.0cr. Consequently, PAT surged 56.6% yoy to `57cr in 3QCY2010.

Outlook and Valuation: We believe that AGL is well positioned in the container

segment through its MTO and CFS divisions. We have upgraded our CY2010 and

CY2011 earnings estimates by 16.1% and 13.3% respectively, and introduced

CY2012 numbers. We expect the company to register 29.7% CAGR in profit over

CY2009-12. At the CMP of `166, the stock is trading at 7.6x CY2012E EPS of

`21.7. We maintain a Buy on the stock, with a revised Target Price of `217 (`195)

based on10.0x CY2012E EPS.

Investment Arguments

High infra spend to boost project cargo, equipment hire

businesses

The Eleventh Five-Year Plan has earmarked a substantial US $500bn for the

infrastructure sector, which will lend a boost to the logistics segment and in

particular to the project cargo and cranes business. We believe that AGL's

high-margin project cargo and equipment hire divisions are well placed to

capitalise on the emerging opportunities and post 23% CAGR in revenues over

CY2009-12E taking its share to consolidated revenues to 15.0% in CY2012E from

current levels of 5.2%.

Steady performance by MTO and CFS/ICD segments to sustain

AGL is the leader in the MTO segment offering services of full container load (FCL)

and less than container load (LCL). It has three operational CFS near the vital ports

of JNPT, Chennai and Mumbai, and an ICD at Indore (Pithampur). We expect

container traffic to register 15% CAGR over the next five years following addition of

new container terminals and improvement in Exim visibility. Management has

indicated doubling of capacity at its JNPT CFS by the end of CY2011, which will

enhance profitability in the longer term. Recently, AGL commissioned its first

road-linked ICD at Pithampur with annual capacity of 30,000 TEU. Additionally, it

also acquired land at Nagpur, Hyderabad, Hosur and Goa for further expansion.

The company has also entered into a joint venture (JV) with Hind Terminal for

setting up, commissioning, operating and managing the CFS’s and ICDs at Indore,

Hyderabad, Nagpur and Bangalore. With this JV, we expect AGL to garner Hind

Terminal’s captive volumes (10 rakes are operating and have plans to add another

10-12 rakes over the next two years) at its respective ICD/CFS. AGL has also

entered into a JV with Concor to share its ICD at Dadri, which is expected to get

operational by end CY2010E. AGL on account of having a pan-India presence is

well-placed to benefit from the growing container traffic.

ECU Line performance holds key for stock performance

The stock has grossly underperformed since the last one year on account of

subdued performance by ECU Line. Post the ECU Line acquisition, AGL targeted to

improve its OPM by 100bp every year. However, while it managed to register

cumulative 150bp improvement in OPMs, net margins have languished over the

last three years. This can be attributed to the slowdown in the global economy,

which has delayed the integration of ECU with AGL. However, over the next two

years, we expect 100bp improvement in ECU Line business each year following

improvement in the global economy and increasing outsourcing to India.

Outlook and Valuation

We believe that AGL is well positioned in the container segment through its MTO

and CFS divisions. Moreover, with the ECU Line acquisition, AGL has the

opportunity to scale up its operations globally as well as enhance profit. We

believe that going ahead the stock’s performance will depend on continued

improvement in ECU Line’s operational efficiency. We have upgraded our CY2010

and CY2011 earnings estimates by 16.1% and 13.3% respectively, and introduced

CY2012 numbers. We expect the company to register 29.7% CAGR in profit over

CY2009-12. At the CMP of `166, the stock is trading at 7.8x CY2012E EPS of

`21.7. We maintain a Buy on the stock, with a revised Target Price of `217/share

(`195) based on10.0x CY2012E EPS.