Thanks Raj. Found a report on Arshiya )- analysing issues raised by you. Should be useful for all.
Arshiya International: A Collapsing Star
**Punit Jain**| Published: 16 Jan, 2013 | Source : ValueNotes.com |
Arshiya International is a small cap Logistics and Transportation firm.
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Business Snapshot:
)- The consolidated turnover is 1057 crores and Profits 118 cr (FY12). Promoters hold 45%.
)- The CMD is Ajay S Mittal, who set up this firm in the year 1999. It has about 1700 employees.
)- The service offerings include freight forwarding, two Free Trade & Warehousing Zones (FTWZ), first and last mile road transportation, a dedicated rail freight infrastructure network, and strategically located industrial & distribution hubs.
)- The main business revenue segments are:
Fig 1 a Segment Revenues FY2012
)- The two FTWZ are located at - Panvel near Mumbai and Khurja, UP near New Delhi. Deemed foreign territory, the FTWZs offer 24X7 customs clearance and services for imports, exports and re-exports.
Pricing Snapshot
**The 3-year view of the share price of Arshiya shows us:
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)- Share price has fallen by an annual average of 30% for 3 years.
)- The share has been very volatile, as from a initial price of 160, it rose to a high of 362 in Dec 2010; then was at 121 in early Jan 2013, till it started the current sharp fall of 53% in the last 5 days!
Fig 2 a Consolidated Financials Snapshot
)- Consolidated Revenues, EBITDA and PAT have gained by 27%, 48% and 28% CAGR over 5 years.
)- P/E has moved in a range of 6-25 times, before the recent crash to the current 2.8 times.
)- Dividend has been increasing steadily, and the current 70%, indicates a dividend yield of 2.5%.
Opportunities and Concerns
Opportunities
)- In India spending on logistics is at 14% of GDP, much higher than in developed countries where logistics spend is 8-9 % of GDP. This presents a massive market opportunity for Arshiya.
)- Logistics in India is highly fragmented, and mostly from unorganized sector. Thus if Arshiya can attract the business by offering better services, stable pricing, multimodal efficiencies and performance guarantees, it can win customers from the unorganized sector.
)- In transportation in India, the main pillars are Ports, Trains, Trucks and Airlines. However the integration among these pillars is poor, so a big opportunity is in multi modal infrastructure and door to door delivery services for business.
)- Arshiya has certainly executed on a vision, and built high quality logistics assets and a good client base. The challenge in logistics is to achieve critical mass and business volumes.
Concerns and Current Crisis
)- Overall the import/ export outlook is flat to negative today, as imports & exports are falling.
)- Arshiya has built on this business vision, and created good infrastructure by investing heavily in facilities, but is not yet earning much from current operations. The cash flows ofArshiya are poor. See Fig3.
Fig 3 a Consolidated Cash Flows are a Concern
)- The total debt of the company at end of FY12 was 2,195 cr., Debt-Equitywas 2.53 (FY12).
)- Promoter shares encumbered - Promoters as of last quarter have 44.5% of shares. Of this 72% are encumbered/ pledged against loans, i.e. of the entire share capital 32% are pledged by Promoters.
)- All this makesArshiya very fragile financially. If they pay interest on time then it is OK. But the recent news is that they failed to raise a loan of 80 cr. recently. Now they have decided to stop all further capital investments for 12 months in order to salvage the debt condition.
)- Another recent bad news is about employee retrenchments and a company strike. A news article says aArshiya has let go of 290 of its 1,700-people workforce mainly on grounds of performance. WhileArshiya has already relieved 100 people of all their duties, it will now look to relieve the remaining 190 people over the next one week as part of its cost rationalizing measures. The move will bring down Arshiya’s wage bill by about 30% to Rs7 crore from the current Rs10 crorea.
)- Also some sacked employee made allegations about a ‘Satyam type scam’ in Arshiya caused a fall in share prices, which is likely to have triggered a sale of pledged shares.
)- From 122 on 8th Jan, it has fallen 53% in 4 days, hitting trading limits every day to todayas 57.
Opinion, Outlook and Recommendation
)- The Arshiya stock is collapsing today, and in the short term the share can keep falling till strong hands like promoters or bargain hunter supporter steps in. One canat say how much it will fall.
)- Once the fall stops, the stock will be very cheap and oversold. It will then be a high risk/ high gain purchase opportunity. But the share recovery period thereafter is also difficult to predict.
)- But Arshiya is in a terrific industry, has good vision and has shown good growth in the last 5 years. However, its financial plans have not worked out, as Free Cash Flow has been consistently negative.
)- The lesson for us is - Corporate profits are paper profits unless supported with cash flows.
)- The Infrastructure sector is notorious for debt and cash flow issues, and Arshiya is another such situation.
)- Investors need to stay away from this stock untilArshiya is able to repair the highly stressed Balance Sheet, and the debt and Free Cash Flow levels revert to sustainable levels.
_JainMatrix Investments (www.jainmatrix.com) is a firm started by Punit Jain that offers an Investment Advisory Service._The author can be contacted at punit.jain@jainmatrix.com