P&E Division Compensates For Other Divisions

Following 66.3%/36.4% y-o-y/q-o-q growth in project and engineering solutions (P&E) division, Allcargo Logistics reported a 39.1% y-o-y growth in operating profit at Rs1,247mn, 31.8% higher than Nirmal Bang  estimate. It would commission 100,000 TEU CFS facility at JNPT by July 2012, the benefit of which would be visible in FY13/14. Following lower capex likely in FY13 and higher share of high margin/high RoCE CFS business, net profit should show 11.4% CAGR and report positive free cash flows of Rs4.4bn over FY12-14E, which calls for a re-rating of its valuation. Nirmal Bang retain their Buy on Allcargo with a SOTP-based TP of Rs173.

Strong performance of P&E division:

P&E division, which contributed 33.3% to FY12 EBITDA, reported strong performance with revenue up 66.3%/36.4% y-o-y/q-o-q at Rs1,260mn in Q5FY12 and its EBIT up 26.4%/16.1% y-o-y/q-o-q. Due to challenging environment, Allcargo witnessed flat growth q-o-q in NVOCC volume, while its CFS volume declined 12.1% q-o-q in line with Nirmal Bang estimate. Due to lower volume, operating profit of CFS division declined 11.7% q-o-q. Due to cost rationalisation, ECU Line witnessed ~4% improvement in core EBITDA in euro terms. Following strong performance of P&E division, consolidated operating profit increased 39.1%/25.6% y-o-y/q-o-q to Rs1,247mn. With a change in classification of operating lease, other expenses were understated by Rs178mn. Adjusted operating profit of Rs1,069mn was 12.9% higher than our estimate.

Turning free cash flow positive:

After increasing capital employed by Rs5bn over CY09-FY12, Allcargo plans to consolidate its capex plan of low RoCE P&E division. Benefits of new CFS facility with a capacity of 100,000 TEU at JNPT, operational by July 2012, would be visible in FY13/14. Allcargo is consolidating its business, with lower annual capex of Rs1bn and it should report positive free cash flow after a gap of five years. The stock witnessed a de-rating following aggressive capex (mainly of P&E division), which resulted in negative free cash flow of Rs13.7bn over CY07-FY12. Strong free cash flow of Rs4,384mn over FY13-14 would drive up valuation.

Valuation:

Allcargo trades at 7.3x/4.6x/0.9x FY13E PE, EV/EBITDA and P/B, at lower end of its valuation band and below its median of 12.3x/7.3x/1.7x.