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Investment thesis backed by ‘Gati’ turnaround

Allcargo Logistics’ (AGLL) posted an impressive Q4FY21 EBITDA of Rs2.2bn (ISec Rs1.7bn). We upgrade AGLL to BUY from Hold with a revised target of Rs189 (Rs131 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 3-5 quarters. We increase Gati’s earnings estimates as well as ascribed multiple (30x FY23E earnings from 25x earlier) -- at our ascribed valuations, implied target price for Gati comes to Rs386/share. MTO business earnings continues to surprise, yet buildup in receivables has led to increase in net debt HoH. Project and Equipment (P&E) segment has again reported EBIT loss – cashflow highlights Rs161mn of provision for doubtful debts/advances in H2FY21.

Gati turnaround allows us to take a constructive view on Allcargo.

Gati continues to show improvement in operations. Sales of trucks and adopting an asset light strategy is the right way forward in our view. From Rs4bn net debt in FY20 to near net debt free entity, the journey has been made possible due to divestment of non-core assets – sale of loss making, high leveraged, Cold Chain business (Gati Kausar), sale of fuel retail business (term sheet has been signed), and identified Rs1.75bn of asset sales of which Rs600-700mn expected to happen in FY22E. Simultaneously, operating parameters are improved and management remains confident of achieving 12% EBITDA margin in the express business over next 3-5 quarters. We increase our profit estimates for Gati and value the entity at 30x FY23E (given peer valuations).

MTO continues to surprise, significantly outperforming our FY21 EBIT assumptions.

Increasing freight rates continue to help in higher operating leverage for the MTO segment. EBIT for the full year at Rs3.4bn is up ~ 100% YoY (despite a pandemic year). AGLL experienced a cyber-security incident related to ransomware IN Q4FY21. Certain online network systems relating to the MTO business and its overseas subsidiaries were impacted. AGLL’s other business systems in India including CFS, PE, warehouses and others were not affected. The Company could contain the incident in a timely basis and has also ensured that all traces of the infection are completely cleaned from the network

CFS business EBIT up 81% for Q4FY21 and 34% for FY21.

Management has earlier harped on additional value added services as the business pivot for CFS segment and looks forward to the upcoming National Logistics policy fine print to replicate the business model, undertaken in AGLL’s JNPT CFS, across business locations.

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