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Meaningful improvement in Gati operations

Operational improvement in Gati operations remains the key takeaway from Allcargo Logistics’ (AGLL) Q2FY21 result, and the same led to an operational beat. While recovery is visible in MTO segment, project and engineering business is yet to see pre-Covid volumes. CFS and ICD business has seen improvement in EBIT on the back of cost reduction and increase in ground rent despite lower volumes. Management has reiterated its intent to stay asset-light. Allcargo expects freight rates to stabilise. Decrease in government subsidies, stabilisation in freight rates and volume pick up can dictate further margin uptrend. Balance sheet management remains the key near-term monitorable along with operational turnaround in express logistics business (Gati). We maintain HOLD with a revised target price of Rs126/share (Rs115/share earlier).

* MTO RoCE stood at 27.43% (annualised). The activation of business continuity plan across the global network helped in overall reduction of SG&A costs, which was further assisted, by help from government subsidies. Incremental revenue for this business has been coming by handling specialised cargo.

* CFS and ICD business segment: Q2FY21 volumes were 59,000 (down 34% YoY). EBIT is up 10% YoY (margins at 34%, up 9% point YoY). This is on the back of cost reduction, increase in ground rent (storage income) etc. Good volume growth in EXIM was hampered by shortage of containers, blank sailing and higher freight rate. RoCE has improved from the usual average level of 20-32% to 45%. Management believes volume increase is the key.

* Project and engineering business was impacted mainly due to lower utilisation. With more and more projects coming into action, there is a continuous improvement in terms of equipment utilisation. Utilisation has been steadily improving for cranes and stood at ~65% over Q2FY21.

* Logistics park asset sales, key to deleveraging. The construction activity is going as per schedule and is likely to complete in ~2 years. What remains to be seen is the extent of equity contribution that Blackstone (BRE) deal brings in, as FY20 contribution has been largely in the form of debentures, against which AGLL has pledged the shareholdings of eight subsidiaries in favour of BRE.

* Gati integration. Gati has been able to show substantial improvement in operations with ~6% consolidated EBITDA margin (from an EBITDA loss QoQ). Management is of the view that Gati brings the capability to distribute across hinterland, delivers to 19k pin codes. Leveraging door-to-door delivery, cross selling and pooling of resources are the major synergies identified by the management for this transaction. As the firm has long-term contracts with e-commerce players, it is immune to festive season volatility.

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