Allcargo Global Logistics: Balancing growth and margins - Views on News from Equitymaster

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  • Dec 22, 2009 - Allcargo Global Logistics: Balancing growth and margins

Allcargo Global Logistics: Balancing growth and margins

Dec 22, 2009

Logistics is one of the fastest growing sectors in India. With the economy growing at a strong rate, and with the emerging need for better supply chain management practices by companies, the sector is poised to take off sharply in the years to come. The past few years have also seen emergence of new companies and business models that are now key constituents of the sector's overall framework. And one company that has been at the core of such a development is Allcargo Global Logistics (AGL), which we have profiled in this report.

AGL is involved in CFS (container freight stations), MTO (multimodal transport operations) and equipment and warehousing business. Domestically, the company is a dominant player in the CFS space and is one of the leading players in project logistics business. The company has also spread its wings across the globe covering 59 countries and over 5,000 destinations.

Lets us take a look at the revenue structure of the company.

Source: Company presentation

CFS/ICDs: Firstly lets us explain what container CFS/ICD means. It is a port facility for loading and unloading containerized cargo to and from ships. AGL has its CFS facilities at major ports and hence is well positioned to leverage growth in domestic container logistics. To strengthen its position and tap the growing container traffic at upcoming ports, it has planned to set up ICDs on a pan-India basis. For the same, the company has acquired necessary land and has also entered into strategic alliances. The company plans to eventually develop these ICDs into full fledged integrated logistics parks in the future.

Multimodal Transport Operations: Trade and transport are inextricably linked. Efficient transport services are a prerequisite to successful trading. This is where the concept of multimodal transport operations comes into the picture. Technically, it is the transportation of goods under a single contract but performed with at least two different means of transport. Under this business, AGL provides services such as LCL Consolidation, Project Logistics and Others.

  • LCL Consolidation: This involves the movement of less than container load (LCL) cargo. In simple words it is quantity of freight less than that required for the application of container load rate (capacity), also called as loose freight. The company consolidates orders from different vendors and then ships it in one container. This way, a particular vendor is not burdened with full charge of the container. The company gets paid for its services rendered and gains volumes.

  • Project Logistics: This is a niche activity that involves end to end services such as route surveys, transportation, and site handling. The growth drivers of for this specialized transport services are infrastructure led sectors like oil and gas (transportation of oil field equipments), cement, steel, etc.

Equipment hiring: This division of AGL provides support services to companies in the logistics and infrastructure sectors. It provides services such as hiring out cranes and other infrastructure equipments as well as port handling. This division also owns equipments which support its CFS/ICD and MTO operations. The company has recently identified equipment hiring business as a separate revenue stream.

AGL's past financial performance
AGL has reported an average annual growth of little over 100% in revenue over the past three years. This has primarily been led by growth in its MTO business, which is around 90% of total revenue. The MTO market is largely fragmented and dominated by unorganised players. However, the company has opted for inorganic growth route (through acquisitions of companies like ECU Line) to tap the opportunities within the logistics sector and increase its reach across the globe. This has not only helped AGL achieve scale but has also enabled it to spread its wings across regions. This segment is also the largest contributor (over 50%) to the total profits before interest and taxes.

Segmental break-up...
Particulars Unit CY06 CY07 CY08
MTO % of sales 93.1 92.7 92.0
PBIT margin % 4.5 4.9 5.1
CFS/ICD % of sales 6.9 5.8 6.3
PBIT margin % 56.5 47.6 57.1
Equipment hiring % of sales - 1.5 1.7
PBIT margin % - 43.5 47.9
Source: Company annual report

Going forward, AGL's growth is likely to be boosted by increase in pan-India presence in terms of ICDs and increase in container traffic at these depots. Focus on high growth sectors like project logistics and equipment hiring is also being seen by the company has key growth drivers for the future. Equipment hire business and CFS/ICD segments are high margins business. Thus, focus on these segments will not only support topline growth but also cushion profitability for the company.

The stock is currently trading at Rs 197. Its P/E valuations (based in trailing 12-months earnings) stand at 16.3 times.

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