The Hindu Business Line : Allcargo Global Logistics: Avoid

Allcargo Global Logistics' public offer appears priced on the high side. At the price band of Rs 625-725 per share, the Allcargo offering does not leave much on the table for investors. Comparable stocks are available at cheaper valuations. There is tremendous potential in the logistics business but the pricing of the offer is such that an investment now may fetch only modest returns over the medium term. As such, investors can stay away from the offer.

Allcargo owns a container freight station (CFS) near Jawaharlal Nehru Port Trust, Mumbai, and is in the process of setting up two more in Chennai and Mundra, apart from a third in the National Capital Region, New Delhi. It is a multimodal transport operator (MTO) and has recently entered the project cargo business.

High margins in CFS

Margins in the container freight station (CFS) business are mouth-watering but Allcargo is not yet a major player in this business; CFS revenues account for just 25 per cent of total revenues. The bulk (68 per cent) of Allcargo's revenues comes from the MTO business but the margins here are not as high as in the CFS business.

Comparable logistics players in the listed space such as Container Corporation (Concor) and Gateway Distriparks derive a chunk of their revenues from CFS; almost the entire revenues of Gateway, which operates CFSs at four locations, comes from this business. Despite such a focus on high-margin CFS business, these stocks are valued only in the 19-26 times PEM band (based on their trailing earnings). Allcargo's offer price at the lower end would discount its trailing earnings 26 times, which appears expensive.

The company's revenues and margins would accelerate once the CFS that it has planned in Chennai, Mundra and the National Capital Region of Delhi are commissioned in phases over the next 18 months. But the full benefits may begin to be reflected on the financials only from fiscal 2008-09. This is, of course, assuming that the company is able to generate container volumes at each of these locations.

The company's presence in MTO and in multi-city consolidation of cargo would be a definite help but it may not mean much for CFS revenues as export cargo is not charged for the duration of its stay in the CFS. CFS revenues accrue in the main from import cargo in the form of ground rent and container handling charges.

It is here that the acquisition of a 49.99 per cent equity in a Belgian logistics company called ECU Line, would be of help. Apart from extending the network of Allcargo worldwide, ECU can also help generate in-bound containers for the domestic CFS of the company. Allcargo plans to acquire 100 per cent equity in ECU for which due diligence is on.

MTO provider

MTO involves end-to-end freight services for export and import cargo using multiple transport modes. Goods are moved on the strength of a single document generated at source.

The size of cargo can be a full container load or less in which case the aggregation of cargo for the whole container is done at the container freight station.

Allcargo also does multi-city consolidation by moving cargo meant for export from hinterland areas to the CFS at the port for consolidation into full container loads and onward despatch. This facility helps small exporters who may not have the volumes to contract full containers.

The company's MTO revenues are dominated by less than container load cargo but it plans to focus more on full container load cargo where margins would be higher as there is no labour cost involved in stuffing and de-stuffing containers at the CFS.

CFS is a growing business for Allcargo with its presence at JNPT, Mumbai. The CFS' main role is to facilitate temporary storage, stuffing and de-stuffing of containers, Customs clearance of cargo and maintenance of container units.

The CFS business is dominated by public sector behemoth, Container Corporation of India (Concor), an integrated logistics provider. There are also others such as Gateway Distriparks, Balmer Lawrie and Central Warehousing Corporation in this segment.

It is a high-margin business with operating margins in the 60-75 per cent region, depending on which player one looks at. The main revenue in the CFS business comes from rentals for containers stored on the premises pending Customs clearance.

The project cargo business mainly involves moving high-value machinery and equipment for power plants, oilfields and so on.

Such cargo is typically of large dimension and heavy and requires specialised logistics and handling skills. Allcargo recently entered into this business and it is a very minor contributor to its revenues.

Issue details

There are 20.28 lakh shares on offer at a price of Rs 625-725. The offer is managed by Enam Financial Consultations and is open from June 1 to June 6.

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