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Allcargo Global: Acquisition accretion! - Views on News from Equitymaster

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Allcargo Global: Acquisition accretion!

Apr 25, 2007

Performance summary
Logistics service provider, Allcargo Global Logistics Ltd. (ACGL) announced its results for the first quarter ended March 2007 yesterday. On the back of the ECU Line acquisition, the company reported a 374% YoY growth in topline and a 61% YoY growth in bottomline (consolidated performance). Although the acquisition is earnings accretive in nature, the operating margins of ECU Line are much lower at 4.8%, compared to about 17% for ACGL. This led to a drop in consolidated operating margins, which fell from 18.4% to 8.2% in 1QCY07.

Performance Snapshot - Consolidated Numbers
(Rs m) 1QCY06 1QCY07 Change
Income from operations 791 3,751 374.1%
Expenditure 646 3,444 433.6%
Operating Profit (EBDITA) 146 306 110.3%
EBITDA margin (%) 18.4% 8.2%  
Other income 15 14 -5.5%
Interest 7 13 74.3%
Depreciation 14 45 219.5%
Profit before tax 139 262 88.3%
Tax 12 52 327.8%
Profit after Tax 127 211 65.6%
Minority interest - (6)  
Net profit 127 204 60.6%
Net profit margin (%) 16.1% 5.4%  
No. of Shares (m) 20.3 20.3  
Diluted earnings per share (Rs)*   24.9  
*Trailing twelve months      

What has driven the performance in 1QCY07?
Acquisition drives topline: ACGL registered a topline growth of 374% YoY. The strong performance was mainly on account the ECU Line acquisition, which is the world’s second largest NVOCC (non-vessel owning common carrier, equivalent to an MTO). Adjusting for this acquisition, the topline grew by a modest 5% YoY. During the quarter, while the MTO (multimodal transport operations) revenues recorded a decline of 2% (YoY), revenue from CFS (container freight station) business recorded a robust growth of 38%. The company currently operates a CFS facility (under the name ‘Trans-India Logistics Park) at JNPT, with a capacity to handle 120,000 TEUs (twenty equivalent foot units) annually. The company has informed that its CFS facilities at Mundhra and Chennai have commenced operations from yesterday. Both these facilities have a capacity to handle 50,000 TEUs (twenty equivalent foot units) each.

Lower blended margins impact operating profits: Consolidated operating margins stood at 8.2% in 1QCY07, compared to 18.4% in the year ago period. As a result, the growth in operating profits lagged the topline growth. As mentioned earlier, operating margins for ECU Line (which has presence only in the MTO business) are lower at 4.8%, compared to about 17% to 18% for ACGL. This has resulted in a decline in overall operating margins. The difference in margins of ECU Line and ACGL is on account of higher SG&A expenses of the former. ACGL aims at bringing the ECU Line’s margins in line with that of ACGL’s MTO business (around 7%-8%). Towards this, ACGL has already outsourced some of the important high-cost operations to India. The strategy seems to be paying off as the company has witnessed significant improvement in margins, from 2.9% in CY05 to 4.8% in the current quarter.

Segment-wise performance (standalone)
(Rs m) 1QCY06 1QCY07 Change
Revenue 545 533 -2.3%
%share 77.3% 70.7%  
PBIT 32 34 5.2%
PBIT margin 5.9% 6.3%  
Revenue 160 221 38.2%
%share 22.7% 29.3%  
PBIT 96 110 15.6%
PBIT margin 59.9% 50.1%  
Revenue 705 754 6.9%
PBIT 128 144 13.0%
PBIT margin 18.1% 19.1%  

Higher depreciation and tax subdue bottomline growth: Higher depreciation charge and increase in tax outgo resulted in a subdued bottomline growth of 61% YoY. Net profit margins declined from 16.1% to 5.4% in 1QCY07. The increase in depreciation expense was mainly on account of the capex undertaken by the company. The company has set up CFS facilities in Chennai and Mundhra for a total project cost of around Rs 500 m.

What to expect?
At the current market price of Rs 1,070 the stock is trading at 25 times its trailing twelve-month earnings. ACGL has planned a capex of Rs 3.5 bn for the next two to three years. The investment will be towards company’s foray into surface transportation business, setting up of 7 ICDs (inland container depots) and phase two expansions at Mundra and Chennai CFS. Going forward, we expect ACGL to witness expansion in margins on the back of improved profitability of ECU Line. Furthermore, increased revenue contribution from CFS business, on the back of the commencement of Mundhra and Chennai operations is also likely to improve margins, since CFS business is a higher margin business as compared to the MTO business. However, the growth in revenues will moderate at around 12% to 15%. Though the company is planning to set up new ICD facilities, the same is expected to start contributing only by CY09.

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