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Restructuring will simplify corporate structure

Recently, Allcargo Logistics (AGLL IN) announced 1:1 demerger of its global international supply chain business into a new entity, Allcargo ECU. Also, AGLL seeks to amalgamate its listed subsidiary, Allcargo Gati (ACLGATI IN) and the wholly-owned subsidiary, Allcargo Supply Chain Pvt. (ASCPL) into a single entity – i.e., AGLL (comprising asset light businesses of express logistics and contract logistics with simplified corporate structure).

Existing shareholders of Allcargo Gati, for every 10 shares held, will receive 63 shares of Allcargo Logistics (post 3:1 bonus shares approved by shareholders of AGLL). The aim is to complete the deal by Jan-2025 post the receipt of requisite approvals. Post restructuring, promoter shareholding will drop to 49.4% from 52.9% currently.

Combined synergies to focus on expansion, ‘fund raise’ planned

ASCPL is the market leader in Chemical Warehousing segment and manages 5mn sqft of warehousing space. Gati Express and Supply Chain (GESCPL) has significant presence in B2B express surface logistics with 31 hubs, 91 distribution warehouses and digitalization at its core.

The restructuring may sharpen management control, streamline operations, optimize cost and pare holding company discount. Allcargo Gati’s management retained its outlook to achieve INR 30bn revenue and 10-15% EBITDA margin, which we believe, may be achieved via synergies post amalgamation. The combined entity may yield INR 20bn revenue, with 9% margin. Long term, the Board has approved fund raising of INR 5bn for expansion, capex and working capital. Plans are underway to double the warehousing space from 5mn sqft to 10mn sqft, provide digitalized value-added service and improve margin profile.

Valuations – Maintain Accumulate; TP pared to INR 145

The amalgamation of the contract logistics and express logistics businesses is along expected lines. The current 244mn shares in AGLL, post bonus of 3:1, will increase to 983mn shares and incremental 404mn shares will be issued to Allcargo Gati shareholders (other than parent) in the ratio of 63:10 shares. The combined entity may have a share capital of INR 2.8bn, with 1,390mn share of face value INR 2 and debt of INR 3bn resulting in an EV of INR 5.8bn and valuation of 3x EV/EBITDA. We retain our estimates but lower the P/E multiple to 25x from 27x as near-term focus would be on smooth integration of operations. Thus, our TP is pared to INR 145 from INR 157.

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