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MTO business drives earning upgrades

Allcargo Logistics’ (AGLL) posted an impressive Q1FY22 EBITDA of Rs2.17bn (ISec Rs1.56bn). We downgrade AGLL to ADD from BUY with a revised target of Rs233 (Rs189 earlier). Turnaround in Gati (subsidiary of AGLL) operations can accrue significant value to AGLL. The management appears to be on the right track in Gati to i) delever through divestment of non-core assets and ii) bring about operational improvements to increase ‘express’ segment EBITDA to 12% in the next 2-4 quarters. MTO business earnings continue to surprise, with a 39%YoY volume growth coupled with expansion in EBIT margins (QoQ). This leads to significant upgrade in earnings. Rs1.2bn (enterprise value) purchase of speedy CFS can lead to improvement in CFS earnings going forward.

* Strong volume and margin performance in the MTO segment drives beat. MTO segment reported 39% YoY growth in volumes (I-Sec 18%). EBIT margins have also improved 10bps QoQ to 4.6% (€63/teu). This leads to upgrade in our MTO earnings for FY22E/FY23E. ECU360 continues to gain traction and is increasing share in overall bookings facilitating customers through digital interface. Segment annualized ROCE at its highest levels of +35%.

* CFS volumes and profitability moderated during Q1FY22. Post registering strong growth in Q4FY21, Indian port volumes tapered in Q1FY22 (AGLL CFS volumes declined 11% QoQ). Volumes were largely hit by second wave led lockdowns in certain operated cities. Despite lockdown, business division delivered strong performance despite the challenging economic scenario. Realisation increased 4% QoQ, while EBIT/teu declined 7%QoQ to Rs4,156/teu. CFS segment annualized ROCE stood at +34%.

* Project logistics reported Rs17mn EBIT loss. Project Logistics maintains its order book at Rs1.8 bn at the end of Q1FY22. The focus on infrastructure growth and development of new metro and renewable power projects is likely to provide good opportunity in future. Crane utilization has steadily improved from 42% in Q1FY21 to currently nearing 75% utilization levels. The segment continues its efforts on monetizing older and low yield assets and focus on narrowing its losses. ROCE remains low due to significant depreciation on equipment.

* Deal with Blackstone continues to see delays. The company’s transaction with Blackstone will reduce its shareholding to a strategic minority holding of 10%. The transaction has seen delays due to Covid-impact on getting certain approvals, however the work is in progress now. Logistics parks continue to operate on annuity income. Lease income from warehouses continues to rise and the trend will continue as more space gets ready and leased. AGLL deleveraging thesis remains subject to completion of the Blackstone deal.

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