Published on 16/06/2018 10:08:01 AM | Source: ICICI Securities Ltd

Buy Allcargo Logistics Ltd For Target Rs.217.00 - ICICI sec

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P&E continues to drag performance

Reason for report: Q4FY18 result review and earnings revision

Allcargo Logistics (Allcargo) reported weaker than expected performance with Project and Equipment (P&E) segment leading the miss. Weak business environment continues to manifest through lower utilisations, declining topline and EBIT loss owing to bad debt provisions in the P&E segment. Multimodal transport (MTO) continues to be 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 (management like its peers highlighted peaked out impact of Direct Port Delivery – DPD). We maintain our constructive stance because of: 1) undemanding valuations, 2) near-term margin 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.

* P&E segment continues to disappoint with reported EBIT loss of Rs366mn (I-Sec: profit of Rs8mn). Allcargo has recorded its fourth successive quarter of bad debt provisions in the P&E segment, highlighting the stress in debtors. Utilisation of assets has started to improve, as per management. The business continues to be a major drag in RoIC for Allcargo and generates the maximum earnings headwind for FY17-FY19E. What was disappointing was that contrary to guidance of write back of provisions in Q4FY18 when we met management in Jan/Feb’18, loss due to provisions increased.

* CFS business reported in-line numbers. Q4FY18 CFS volumes were 76,304 teu, increasing 9% YoY (this excludes CWC Mundra CFS as well as ICD Kheda volumes, which are part of the CFS segment). Reported volumes in CFS business will show significant accretion over FY19E as Kolkata CFS ramps up. EBIT/teu has improved ~6% QoQ. Management reiterated that most of the impact on account of the DPD is behind the company.

* MTO performance below expectation. Volumes in the MTO segment increased 26% YoY to 159,951 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 a peaked out proportion of FCL in the volume mix, FCL volumes continue to inch up.

* Q4FY18 PAT missed estimates on asset write-downs. Write-down of Rs485mn of assets in Trans India Logistics Park, where the company invested similar amount over the past year to set up a warehouse, came as a surprise. The same has been written down as the subsidiary has been merged into parent.

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