P&E can provide key earnings support
Reason for report: Q1FY19 review and earnings revision
Allcargo Logistics (Allcargo) reported an in-line Q1 performance. Weak business environment continues to manifest through lower utilisations, declining topline and EBIT loss in the P&E segment. Multimodal transport (MTO) remains more predictable with: i) volumes outperforming global container trade volumes across the lanes where Allcargo is present, and ii) margins broadly tracking the freight rate directions; increasing FCL volumes continue to weigh on margins. Container freight station (CFS) segment numbers were broadly in-line (like its peers, management highlighted peaked out impact of Direct Port Delivery – DPD). We maintain our constructive stance because of: 1) undemanding valuations, 2) nearterm earning levers in the CFS business, and 3) management highlighting green shoots in project P&E segment, allowing for tailwinds to conservative earnings in the coming years. Maintain BUY with a revised target price of Rs179/share.
* P&E segment – improvement at the horizon? With reported EBIT loss restricted to Rs58mn P&E segment provided a breather after four consecutive quarters of receivables write down. No writeback of receivables lost over past 9-12 months against consistent management commentary of possible writeback is disappointing though. Topline is down 27% YoY – hopefully Allcargo has left out suspect parties to avoid a repeat of FY18. Management remains hopeful of a recovery in the wind segment.
* CFS business reported lower than expected numbers. Q1FY19 CFS volumes were 82,210 teu, increasing 4% YoY (this excludes CWC Mundra CFS as well as ICD Kheda volumes, which are part of the CFS segment). Reported volumes in CFS business should show accretion over FY19E as Kolkata CFS ramps up. While Kolkata CFS has achieved breakeven in the quarter, overall EBIT/teu ticked down. Warehousing revenues of Hyderabad and JNPT will accrue to the CFS business from Q3FY18 while Jhajjar will take time to add to the pie.
* MTO volumes surprised. Volumes in the MTO segment increased 26% YoY to 174,043 teu, thereby consistently beating the FCL container volumes in its trade lanes. Allcargo has added some freight lanes in intra-Asia trade. Continuously increasing FCL volumes, while augmenting to MTO volume growth has impacted margins. While management has earlier guided for peaked-out proportion of FCL in the volume mix, FCL volumes continue to inch up and have reached 13-15% of overall volumes; management sees further increase.
* Capex firmed up for Jhajjar. Management has finally started incurring capex for the MMLP at Jhajjar. We hope this does not start the journey of asset heaviness for Allcargo. We have increased FY19E capex for Allcargo to Rs3.5bn.
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