Secular trends India Logistics Ravindra Deshpande 10 August 2012 [email protected] +91 22 4062 6805 Elara Securities (India) Private Limited Notes Elara Securities (India) Private Limited India | Logistics 10 August 2012 Initiating Coverage India Logistics Secular trends Inefficient nature of domestic industry 100 Consistent rise in container traffic 18 10 31 80 9 25 Trends of India’s container traffic are showing definitive strength and 60 24 direction aided by strong EXIM traffic. EXIM trade in value terms has 25 15 (%) registered growth of 21.9% over the last five years. The increased port 40 9 49 50 capacities have driven the 10.4% CAGR in tonnage terms and 7.0% 20 35 growth in Twenty Foot Equivalent Unit (TEU) terms. Evidence shows 0 that India’s EXIM trade is insulated from the gyrations in currency and India China USA Transportation Warehousing we expect the same trend to continue going forward. Inventory Others (including losses) Improving logistics infrastructure & structural drivers Source: Cygnus, Elara Securities Research India traditionally has lacked logistics infrastructure. Logistics cost as a Rising EXIM traffic despite GDP variations (%) per cent of GDP in India is around 13%-14% as compared to 7%- 9% in 40 the developed countries. However, there have been winds of change 30 off late with the government’s thrust upon infrastructure investments 20 and increased presence of organized players. Tax sops, Free Trade 10 Warehousing Zones (FTWZs) and the long-awaited GST once 0 implemented would provide impetus for organized logistics players (10) with national presence. FY91 FY93 FY95 FY97 FY99 FY01 FY03 FY05 FY07 FY09 FY11 Companies beyond Capex; high FCF visibility EXIM Trade growth GDP Growth Interestingly, companies in our coverage (Gateway Distriparks, and Source: Industry, IPA, Elara Capital Research Allcargo) will leave behind a period of huge capex and will look to Container traffic is on the rise as well (TEUs) Global Markets Research monetise their assets. The business models have now become 9,000 integrated and attained a credible size. These businesses have a 8,000 significant lag and have an entry barrier to some extent. For an 7,000 economy of India’s size, these companies look to be structural 6,000 beneficiaries. Arshiya, although is into the capex, its unique business model and first mover advantage promise a strong cash generation 5,000 once the project attains the operationalisation stage. The leverage on 4,000 Arshiya’s balance sheet is likely to recede once the cash inflows start 3,000 FY08 FY09 FY10 FY11 FY12 with the phase wise commissioning of its Panvel and Khurja JNPT Chennai Tuticorin Kolkatta Cochin Others warehouses. Source: IPA, Elara Capital Research Valuation We are optimistic on the stability of Gateway Distriparks operations Price performance and see its high cash generation and payout policy as reasons to 140 own the stock. Allcargo has robust growth outlook and a balance 120 sheet to support its price. Arshiya International is a high-risk high 100 return play which is fighting the bogey of debt and incident 80 concerns on its business model. We would urge investors to keep it (Rebased to 100) to (Rebased 60 in their radars, as we expect the concept of FTWZs gain credence Jul-12 Jan-12 Sep-11 Oct-11 Jun-12 Apr-12 Feb-12 Dec-11 Mar-12 Nov-11 May-12 Aug-12 progressively. We have a Buy on all the three companies. Aug-11 Sensex Gateway Distriparks Allcargo Arshiya International Source: Bloomberg Key Financials CMP Market Cap Target Upside/ P/E (x) EV/EBITDA (x) Price/ Book(x) Dividend Yield (%) ROE (%) (INR) (INR mn) price (INR) (Downside) (%) FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY14E Gateway Distriparks 136 14,732 180 32.3 9.0 8.1 4.7 4.0 1.2 1.2 5.5 6.2 14.2 14.9 Allcargo 143 17,872 180 26.3 7.5 5.8 4.3 3.3 1.1 0.9 1.1 1.2 15.8 17.8 Arshiya 126 7,413 170 34.9 4.4 3.0 8.8 6.3 0.7 0.6 1.0 1.0 18.1 21.6 Source: Company, Elara Securities Estimate Ravindra Deshpande • [email protected] • +91 22 4062 6805 Elara Securities (India) Private Limited India Logistics Table of Content Executive Summary……………………………………………………………………………………………………………… 3 Secular trends……………………………………………………………………………………………………………………….. 5 Consistent rise in container traffic……………………………………………………………………………………… 8 Intensifying thrust on infrastructure………………………………………………………………………………….. 9 Government policies: Encouraging investment………………………………………………………………. 11 Valuation & Recommendation…………………………………………………………………………………………… 13 Company Section Gateway Distriparks A safe bet………………………………………………………………………………………………………………………………. 15 Investment rationale……………………………………………………………………………………………………………. 18 Valuation & Recommendation…………………………………………………………………………………………… 22 Allcargo Global Logistics Growth on wheels………………………………………………………………………………………………………………. 25 Investment rationale……………………………………………………………………………………………………………. 28 Valuation & Recommendation…………………………………………………………………………………………… 31 Arshiya International Banking on warehousing…………………………………………………………………………………………………… 35 Investment rationale……………………………………………………………………………………………………………. 38 Valuation & Recommendation…………………………………………………………………………………………… 42 2 Elara Securities (India) Private Limited India Logistics Executive Summary near ports. Except in rails the government has even allowed 100% FDI in the sector. FDI investments are Picking up momentum increasingly visible via the PE route. Everything is falling in place Clearly, things are finally falling in place for the Indian The Indian logistics industry is set to reap the benefits of logistics sector. The market size remains huge and scope the macro economic factors which are conducive for the for market share gains remains strong given the highly growth of organised players in the market. Although the fragmented setup. The improving state of infrastructure domestic logistics is ~USD90bn + industry, it suffers due in the country is likely to lead to firming up of margins to fragmented nature as well as lack of technological as widening the scope for technological investments in the also manpower investments. Hence, the logistics cost as sector. Better infrastructure is also likely to project India a percentage of GDP stands nearly double (at 13%) as as a favorable destination for transshipment cargo in the compared to the developed world. Therefore, we long term. The government’s tax policies as well as believe, companies investing in the right areas or having several other schemes, underscore the government’s a proven track record are likely to benefit due to growth willingness to incentivise investments in the sector. With in the domestic logistics sector. increasing volumes and improvement in the overall state of the industry, we believe players in the sector with Growth continues despite tepid GDP and rupee presence at strategic locations (e.g. CFS at Mumbai, The Indian logistic industry is characterised by lower Chennai ports) and track record of growth in the logistics containerisation (~20% vis a vis 75% in developed world) space will be clear winners. We have identified three Logistics which underscores inefficient nature of the industry. players in the logistics space viz Gateway Distriparks, However, the EXIM transport has been witnessing Allcargo Logistics and Arshiya International that are likely higher containerisation in the past decade or so. The to witness strong growth in the near future and are likely container traffic has registered growth despite to present an attractive investment opportunity. slowdown in the GDP growth rates or the volatility in the rupee. Similarly, the country is witnessing higher EXIM Gateway Distriparks: Beyond capex, towards huge cash flow generation traffic in value terms as well. In the last decade, EXIM trade in the country has registered strong growth of Gateway Distriparks is one of the largest private players 23.7% CAGR in value terms. The growth has been in the rail business, and also has Container Freight unabated throughout the decade notwithstanding Station (CFS) operations at key locations. It also operates rupee depreciation and slowdown in the GDP. Hence the only organised cold chain logistics business in the we believe higher containerisation as well as consistent country. It has shown a consistent track record of growth rise in the EXIM trade is likely to provide opportunities for in all segments. The PE investment in the rail business domestic logistic players. Companies having presence has turned around the segment, which was loss making. near Mumbai and Chennai ports (which handle ~75% of It has successfully delivered a positive PAT over the past EXIM traffic) are likely to be direct beneficiaries of this six quarters. The company generates strong operating growth. cash flows and doesn’t have any sizable capex lined up as of now. While the rail and CFS businesses are likely to Impetus of government on infrastructure provide growth, free cash generation is also likely to A common theme emerging from the last few 5-year remain strong. Management has a dividend payout plans of the central government is increasing thrust on policy that envisages high payouts, at the CMP; the yield the uplift of infrastructure in the country. Although at the works out to a handsome 5%. We are bullish on the execution level, targets have been missed, the general stock and recommend BUY with a target price of INR180. direction of infrastructure in the country has been Allcargo Logistics: On a firm footing forward. We maintain improvement in infrastructure