AllCargo Logistics - Are good time ahead?

Stock Opportunities Not-so-Hidden Gems
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Hi, Apology for late reply. Please note DPD doesn’t really affect all cargo. 85% of its business comes from ECU worldwide which is in foreign markets. CFS contribute only 8% of total revenue. Of this JNPT is just a small part.

Thats why I am trying to understand whats really wrong with the stock.

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The rental business brings in 8% of revenue, but contributes 31% to the operating profits

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I have been tracking this stock from 175 levels went all the way to 200+ levels and now back to 143.
From what ever I have studied about them on the face if it looks good.
Can anyone let me know why is the stock under performing.

Disc : Took a small position today at 144

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Technically, this Elliott Wave chart may explain why.

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Hi @PE_Ratio Thanks for the inputs, unfortunately I am not good at charts.
From what I understand is from the current level the probability of going up is 50% and if it breaks that level and reaches 105 the probability is 60%

Is that a current reference?

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@pandi.rao No, it’s not the probability. I meant that the current downtrend may go on till it reaches a price level between 105 and 130. Then the next bull run will start.

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Thanks @PE_Ratio for the insights

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The stock is in a free fall. Does anyone know the reason?

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Horror numbers!! This should explain the downward trend.

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Poor results on paper. But not so poor result actually. Because there was an exceptional item for the write off of Goodwill on liquidation of a subsidiary, which is 6.86cr. If you add that to PBT, then it is 43cr, still lesser comparing QoQ and YoY. Other expenses is huge (should get some clarification on this from the con call as to what led to this). Also operating expense is on the higher side. This should be attributed to higher crude price too.
Good thing is that revenue is up both QoQ and YoY.
Disc: Not invested. Tracking.

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The company recorded an exceptional item of 54.55 crores in Standalone FS, while the consolidated FS show that there has been exceptional loss of only 6.86 crores (which is additional based on write off of Goodwill).

May be the company recorded the 54.55 crores (which are not shown as part of exceptional items in consolidated FS) as ‘other operating expenses’?

Yes, very weird, but there is no other separate recognition of the 54.55 crores exceptional loss in consolidated FS. But they should appear somewhere in consolidated FS as well right.

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Highlights of con call:
MTO:
Increased volume. Revenue has gone up despite challenges. Growth on account of just volume.
FCL business – up by 35%
LCL volume – up by 7%

EBITDA down because of several reasons. Lower capacity utilization, declining freight rates, challenging shipping environment, prudent accounting policies.
Volatility in freight rates. Worst shipping cycle industry is going through. Increasing FCL business, but margins in FCL is lower than LCL. But GP is absolutely the same.

Will remain market leader in LCL. At the same time, FCL is also growing.
MTO is outgrowing the industry. Breakup - 60 to 70% come from the land side. 30% come from ocean.
Plan is to consolidate position organically and inorganically and building digital platform.

P&E sector:
160cr orderbook in project division. In equipment division, utilization went up from 30% to 50%. Revival in 8 sectors when P&E operates. Coal, Crude oil, natural gas, refinery products, fertilizer, Cement, steel, wind, and power. Windmill sector is especially revived. Lots of projects auctioned. Have relations with top players – GE, Suzlon. Signed up to supply equipments to some of them. Will stay for much longer time.

P&E is not capital efficient. Poor ROCE. It’s mainly due to provisions made for the equipments leased out, but not getting money for it before the 180 days cycle. It’s not that they are bad debt. Most of the amount is recovered. But they were recovered after the 180-days cycle with interest. Since the recovery is done after 180-days cycle, provisions have to be made, hence bringing the profit down in this division. Due to asset centric business, working capital requirements, ROCE is not upto the mark.

Asset depreciated up to 70%, by increasing utilization, and better yield, expecting better numbers going forward from this division. It’s a debt-free division.
500cr invested in this division is not making any profit. Not planning to invest anymore in this division. Trying to get more out of the existing assets.

Warehousing:
Strategy – Monetize the existing land bought years ago. 100 acres outside Bangalore. Only company to own such land parcel. 40acres of land in Hyderabad. Started construction already. Plan is to build and lease it to MNC’s. Good demand is coming. Land in Nagpur too. Not decided what to do with that.
Demad for grade-A warehouse is rising.

CFS:
Big restructuring happening because of DPD. A lot of decisions will be made by consignees.
Kolkata CFS that commenced operations last quarter is doing well. Only national player in Kolkata. Breaking even in just 3 months. That’s remarkable in current situation.

Jhajjar Logistics park:
It’s in the first phase of development. It will take 18 to 24 months for construction. In the first phase, only land is acquired. 93acres of land for building warehouses. 29acre land for Rail.
This will be in standalone though land is in subsidiary (which is 100%)
3 modes of revenue planned

  1. Warehouses – 93acres land acquired. Warehouses for ecom companies, industries.
  2. Rail – 29acres land acquired.
  3. ICD – Land needed.

Next step is to apply for approvals. Plans are being made for this park. Will be shared with the stakeholders probably during next con call.

Contract logistics:
Plan is to scale up multifold. And to become dominant player by 2022. Pre dominant player in Chemicals, pharma, food, auto, engg, fashion, retail. Grown from 1.5 mln sq.feet to 3.5 mln sq.feet.

6 Likes
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CFS may be contributing to only 8% of the total revenue. But the margins are high. EBIT margin is 30 to 35%, whereas for MTO (whose revenue share is 84% - looks big, but it isn’t) the EBIT margin is just 4%. CFS contributes to more than 25% of the bottomline (even though the topline contribution is just 8%). Now imagine the magnitude of damage DPD can make to AllCargo’s bottomline.

In late 2016, the government directed JNPT and Customs to raise the proportion of DPD first from 3 per cent to 40 per cent and later to 70 per cent. If the proportion of DPD is going to be 70%, then it’ll dent the PAT of AllCargo severely.

The stock was trading at 225 when this news was published. And from that point of time, it’s been moving southwards. Almost lost 50%. This can be one reason for the downfall.

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Yes but JNPT isn’t the only port where allcargo has business. They have business at Chennai too. They recently started business at Kolkata port where they are aware about DPD status.
All I am saying is, business might be doing bad, but this doesn’t prove such a sharp fall in market price. There has to be some other facts which aren’t public (at least not traceable by me).

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In Chennai also, DPD volumes are increasing. Currently it’s at 46%. The share is expected to rise to 80%. Look at this news.

I listened to the con calls of Navkar Corp. They don’t seem to be concerned with the rise in DPD volume. According to their CFO,
"Realisation may dip. But the costing remains same. If you will ask me today I have a tariff for import is Rs. 15000. After DPD it may be around Rs. 10000. But out of that 15000 right now I am paying 5000 for the incentives. So per TEU realisation for me is only 10000

So they may dip in – DPD pricing maybe around 10000. It may be getting down by 9000. But below than that nobody is having a control. Nobody can do that also."

So, according to him, they are doing some DPD volumes, and the realisation is less, but the EBITDA remains almost the same. They’ve started reporting the DPD along with domestic (only in terms of revenue, but not in terms of volume).

And in All Cargo Q4 con call, it was mentioned that DPD is there in Kolkata port too, but to a minimal extent. What guarantees that the DPD share won’t increase in Kolkata?
Kolkata CFS plan was started even before the DPD was not a big headache for CFS. So, you can’t say that they started CFS operation in Kolkata despite knowing the DPD thing.

Also in Q4 call, they said that DPD volume is not increasing further, but the news above from Chennai customs is contradictory. So, we can’t go by management’s commentary on this too.

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News item on Allcargo

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Off late, lot of focus on technology based hiring

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The company in my opinion is going through a perfect storm. They are facing problems in all their businesses:

  1. MTO: Currently going through “the worst shipping cycle” in the words of the company. Hence margins have been affected.
  2. CFS: DPD
  3. Asset leasing: again going through a terrible business cycle

In addition, two other factors dont inspire much confidence either:

  1. Growth: growth has been anaemic for the last 4 years both in terms of topline and bottomline
  2. The management has displayed poor capital allocation record.

Taking all of this together has led to the price falling to really low levels. While things can get worse, but it stretches my imagination to think how much more worse can things get.

Are the valuations becoming compelling at these levels. The facts are as follows:

  1. The company has generated cash flow from operations of 2700cr during the last 10 years, average of 270cr per year. At current valuations, the market cap is 10x the average CFO for the last 10 years.
  2. The company has done cumulative capex plus investments of 2900cr during the last 10 years. The current market cap is less than these investments.

Why I think that the valuations are attractive at these levels, despite all the problems mentioned above:

  1. The company is consistently generating cash from operations as mentioned above
  2. MTO is an excellent business with good economics. This business has grown at a CAGR of 14% over the last 10 years and 11% over the last 5 years.
  3. CFS is facing headwinds and its value may have been permanently impaired due to DPD. But i dont think it is worthless. Large amount of investments have happened in the industry in the past decade. In my opinion, they will over a period of time work out an alternate business model as alluded to in the earnings call as well.
  4. Asset leasing is a mediocre business with very high volatility. It is currently going through very difficult times. It will recover, it is a matter of when and not if.

Finally, the risks to this thesis are:

  1. The businesses continue to deteriorate and the recovery takes much longer
  2. Corp governance issues which i’m not aware of
8 Likes
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Has anyone analysed this? Why 54.55 crores have not been shown as exceptional item in Consolidated FS, and only 6.86 Crores has been shown?

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How can things go right for All Cargo from now on?

  1. MTO - They are picking up slowly in the FCL segment too. Though margins are less in FCL, the volumes are increasing.
  2. CFS - Navkar Corporation told that most DPD customers still go through CFS and though the margins are less, EBITDA remains the same. And not all importers can quickly take the delivery from port and get it to their premise. They may need some warehouse, which the CFS can provide, though warehousing will need more Floor Space Index.
  3. Last-mile-delivery business - All Cargo is looking at it. Their idea is to not own any assets, but to go like Uber model. If they venture into it, it may be profitable one.
  4. Multi-modal logistics park - Planned in 3 places as of now. This will be huge.
  5. P&E segment - In the recent past, it has been loss-making. But many sectors are reviving, and this may lead to better asset utilization over the next year or two. And also, like mentioned in Q4 con call, asset value has depreciated much in this segment and hence the book value is very less here. Hence ROCE can only get better. And when the asset is fully depreciated, then the segment will fully benefit from it. Also they are not planning to invest anymore in this business, which means the current assets (though fully depreciated) will keep generating revenue.
  6. Contract logistics - All Cargo is looking to expand this multi-fold. And they have huge experience in it. Also this has better margins.

It will take some time to show some improvement in numbers because DPD will affect the margins in the next few quarters. Like All Cargo said in Q4 con call, there is some restructuring going on in CFS because of DPD. Most consignees are looking for integrated logistics companies, which All Cargo is one.
Company’s approach towards DPD will be something to look forward to in the next couple of quarters.