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Allcargo Logistics: PES and CFS segment remain a drag - Views on News from Equitymaster
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  • Jul 23, 2014 - Allcargo Logistics: PES and CFS segment remain a drag

Allcargo Logistics: PES and CFS segment remain a drag
Jul 23, 2014

Allcargo Logistics Ltd has announced results for the fourth quarter of financial year 2013-14 (4QFY14) and full year FY14. The topline for the quarter registered a growth of 33% YoY while the net profits were down 31.4% YoY. Here is our analysis of the results.

Performance summary
  • Net sales for the quarter registered a growth of 33% YoY. For FY14, the revenues registered a growth of 23.6% YoY.
  • The operating profit (EBIDTA) for the quarter grew by 60.1% YoY with EBITDA margins at 7.6% (versus 6.8% in corresponding quarter last year). For FY14, the operating profits grew 9.9% YoY with margins at 8.1% as compared to 9.1% last year.
  • The net profits for the quarter witnessed a decline of around 31.4% YoY with net profit margins at 0.9% versus 1.7% in the corresponding quarter last year. For FY14, the net profits declined by 12% YoY with margins at 3.1% versus 4.3% in FY13.
  • The Board of Directors has recommended a dividend of Rs 1.5 per share.
  • The company made two key acquisitions during the year through its wholly owned subsidiary Eculine . It acquired 100% interest in Econoacribe Consolidators and a major stake in FCL Marine Agencies, Rotterdam.
  • The net debt to equity ratio at the end of March 2014 stood at 0.39 times.

Consolidated financial summary
(Rs m) 4QFY13 4QFY14 Change FY13 FY14 Change
Sales 9,647 12,826 33.0% 39,263 48,512 23.6%
Expenditure 9,038 11,851 31.1% 35,701 44,599 24.9%
Operating profit (EBDITA) 609 975 60.1% 3,561 3,913 9.9%
EBDITA margin (%) 6.3% 7.6% 1.3% 9.1% 8.1% -1.0%
Other income 202 39 -80.9% 662 365 -44.8%
Interest (net) 67.1 163 142.2% 414.4 563 35.9%
Depreciation 359 760 111.8% 1474 1755 19.1%
Profit before tax (before excep. Items) 386 91 -76.3% 2,335 1,960 -16.1%
Pretax margin (%) (before excep. Items) 4.0% 0.7% -3.3% 5.9% 4.0% -1.9%
Exceptional items -0.1 0   -0.1 0  
Pretax profit 385 91 -76.3% 2,335 1,960 -16.1%
Pretax profit margins (%) 4.0% 0.7% -3.3% 5.9% 4.0% -1.9%
Tax 199 -23   512 416 -18.8%
Profit after tax/(loss) 186 114 -38.6% 1,823 1,544 -15.3%
Net profit margin 1.9% 0.9% -1.0% 4.6% 3.2% -1.5%
Minority interest -21.5 1.1   -129.4 -51.1 -60.5%
Share of associates 3.5 0   3.5 0  
Net profit post minority 168 115 -31.4% 1,697 1,493 -12.0%
Net profit margin for the group 1.7% 0.9% -0.8% 4.3% 3.1% -1.2%
No. of shares (m)         126  
Diluted earnings per share (Rs)*         11.8  
Price to earnings ratio (x)**         21.4  
*On a trailing 12 months basis

What has driven performance in 4QFY14?
  • The growth in the net sales for the quarter was mainly on account of increase in the volumes and revenues from the Multimodal Transport Operation (MTO) division. Driven by the growth in the MTO segment (84% of the revenues), the revenues for FY14 also grew 23.6% YoY. The company made two acquisitions in this segment- Econoacribe Consolidators in US and FCL Marine Agencies based in Netherlands in FY14. With this, the company has expanded presence in regions across the world.

  • The volumes in the MTO segment grew 30% YoY (down 4% QoQ) while revenues grew by 44% YoY. The operating margins (EBIT margins) for the division grew 2.6% YoY (down 0.6% QoQ). For FY14, the MTO division witnessed volume growth of 15.4% YoY and revenue growth of 30% YoY (including the two acquisitions). The operating margins for the division in FY14 stood at 4.4%, down 0.2% YoY.

  • For Container Freight Station segment (6% of revenues in FY14), the volumes declined 3.4% YoY for the quarter (down 4.6% QoQ). The revenues for the segment grew 1.3% YoY while margins for the segment grew by 16.7% YoY during the quarter (up 4.9% QoQ). For FY14, the revenues for the segment grew 1.7% YoY while volumes declined 15.9% YoY. The decline in the volumes was mainly due to drop in laden import volumes at the ports. The EBIT margins for the segment declined by 4.4% YoY.

  • In PES segment (Project and Engineering Solutions, 9% of revenues in FY14), the revenues declined 5.4% YoY during the quarter and company posted loss at the EBIT level (operating loss margin 26% versus operating profit margin of 27% in 4QFY13).For FY14, the revenues declined 7% YoY and EBIT margins were down 11.8% YoY. The lower EBIT margins are also due to one time goodwill write off for MHTC that was merged into the parent company. The fleet size for the PES segment stood at 1000 equipments.

    Segmental summary
    CFS (Rs m) 4QFY13 4QFY14 Change FY13 FY14 Change
    Revenues 767 777 1.3% 3,095 3,149 1.7%
    EBIT 68 199 192.8% 960 837 -12.7%
    EBIT Margin 8.9% 25.6% 16.7% 31.0% 26.6% -4.4%
    MTO (Rs m) 4QFY13 4QFY14 Change FY13 FY14 Change
    Revenues 7,674 11,020 43.6% 31,921 41,491 30.0%
    EBIT 93 419 351.9% 1,448 1,814 25.3%
    EBIT Margin (%) 1.2% 3.8% 2.6% 4.5% 4.4% -0.2%
    PES (Rs m) 4QFY13 4QFY14 Change FY13 FY14 Change
    Revenues 1,134 1,073 -5.4% 4,543 4,230 -6.9%
    EBIT 306 -279 nm 629 86 nm
    EBIT Margin (%) 27.0% -26.0% nm 13.8% 2.0% -11.8%

    Cost breakup
    (Rs m) 4QFY13 4QFY14 Change FY13 FY14 Change
    Operating expenses 6,846 9,051 32.2% 26,995 34,039 26.1%
    as a % of sales 71.0% 70.6% -0.4% 68.8% 70.2% 1.4%
    Staff expenses 1,383 2,023 46.3% 5,634 7,276 29.1%
    as a % of sales 14.3% 15.8% 1.4% 14.3% 15.0% 0.6%
    Other expenses 769 789 2.6% 2,760 3,366 22.0%
    as a % of sales 8.0% 6.2% -1.8% 7.0% 6.9% -0.1%
    Provision for doubtful debts 40 -12.3   313 -82  
    as a % of sales 0.4% -0.1%   0.8% -0.2%  
    Total expenses 9,038 11,851 31.1% 35,701 44,599 24.9%
    as a % of sales 93.7% 92.4% -1.3% 90.9% 91.9% 1.0%

  • The net profits for the quarter declined by around 31% YoY. This was mainly due to decline in other income and increase in depreciation and interest expenses. The steep decline in the other income was mainly due to unwinding of the hedge worth around Rs 310 m in 4QFY13 that did not happen in 4QFY14. For full year, the net profits for the group declined 19% YoY due to fall in other income and increase in interest and depreciation expense.
What to expect?
During the quarter the company witnessed growth in volumes and revenues in the MTO business (84% of the business) even in a tough economic environment. The company did two major acquisitions during the year due to which consolidated capital employed grew by 20% YoY.

The management seems quite confident as far as the prospects of MTO segment are concerned. The management has done massive restructuring of the organization outside India and has also added senior professionals. As per the management, in the last six months, foundations have been laid for accelerated growth in US, China, Germany, Brazil and the United Kingdom and others regions like Africa. The management expects more than 13% growth (Euro terms) that was budgeted for the year.

As far as shipping business from three ships is concerned, the management has said that the returns on capital employed are upwards of 16% -17%.

In the PES division, the company booked operating losses in the fourth quarter. As per the management, the order book for the segment remains strong. However, the earnings have suffered as the major customers; especially from power sector have postponed their capex plans. The management expects better times ahead on account of an economic recovery and also expects growth from the refining sector.

The volumes in the CFS segment have dropped due to lower overall volumes at the ports. The surplus capacity in the segment has also put margins under pressure. The management expects things to improve for the segment with the change in the economic scenario.

Ultimately, the business prospects for Allcargo will depend upon the economy. While the company generates 84% revenues from MTO segment, at operating level it accounts for 50% of the profits. The management plans to use the cash generated to reduce debt and focus on PES and CFS business as the economy recovers. The company will also examine opportunities in coastal shipping segment. In the PES segment, the company has been hit due to poor economy in the beginning of the cycle (bulk of its investment started in 2010 and 2011). However, over the long term, the management is hopeful of higher returns from this business segment.

The management now seems to be focused on sweating its assets and growth in revenues and profits. Barring acquisitions, on the capex front, the management has been quite conservative keeping in mind the economic situation. The net debt to equity ratio stands at around 0.4 times while gross debt to equity ratio comes at 0.55 times. Going forward, the management has suggested capex in the range of Rs 600-700 m. The company will focus on increasing asset utilization from 72% to upto 90% over the next two years (currently at 82%) in PES segment.

The latest acquisitions will help company diversify business across regions. However, an economic recovery is yet to happen and it may take some time for the business, especially in the CFS and PES segment to recover.

At the current price, the stock is trading at 21 times its trailing twelve months earnings. We are in the process of revising our estimates for the stock and will update the subscribers with the target price soon. Until then, we recommend investors to Hold the stock. They should also ensure that the stock does not form more than 3% of their portfolio. For further details on asset allocation investors should have a look at the asset allocation guide.

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