Allcargo: M&A route to growth amid slowdown blues

After jumping 11 per cent on Friday, the Allcargo Logistics scrip extended its gains by gaining another 5 per cent in  trade today. The gains came on the back of its announcement that it acquired Econocaribe Consolidators, one of the largest cargo aggregators in the US for $50 million.

Analysts say that the company which operates in the lower than container load (LCL) segment was acquired by Allcargo at reasonable valuations pegged at 5-6 times Ebidta. “The company had its own infrastructure in all the markets except the US and this move was long pending. While the news is a positive, the stock surge was also on the back of attractive valuations,” says an analyst at a domestic brokerage. Given that Econocaribe is a profitable, zero debt company and the deal was at reasonable valuations, the company expects the acquisition to be earnings accretive from the first year itself. Though 80 per cent of the acquisition is being funded by debt, Allcargo will be able to fund it given a comfortable debt-to-equity ratio of 0.46 and the fact that it is sitting on cash and equivalents of Rs 231 crore. The company is eyeing a turnover of $1 billion in FY15 from the current level of $654 million achieved in FY13.

While the economic slowdown has affected Allcargo as well, the impact has not been as severe. The LCL segment is getting steady volumes and does well even in an economic slowdown given customers tend to reduce their cargo and the volumes are better than the full container business. Says Amit Agarwal of Kotak Securities, Private Client Group, “While global container freight routes have fallen by 50 per cent over the last two years, Allcargo, being a LCL consolidator won't be much impacted by the weakness in the container market as a large part of Full Container Load (FCL) volumes during bad times gets converted into LCL volumes.”

While consolidated multimodal transport operations or LCL volumes grew by 3 per cent in FY13, Agarwal estimates that it will grow by 7 per cent in FY14. This could increase given the US acquisition. While the LCL business is likely grow, triggers for the scrip remain the volume recovery in other key segments of the company such as the container freight station and project engineering solutions. With little indication of volume growth and higher competition, analysts do not expect much from this business in the near term.  Agarwal, however, believes that the company will outperform its peers given its relationship with shipping lines and presence in other logistics verticals such as multimodal transport operations. Given these strengths as well as the company’s CFS assets, it is well placed to benefit in case of recovery.

Most logistics firms have seen sharp fall in their share prices on the drop of demand destruction in the global trade and slowing down of volumes as a consequence. Prior to Friday’s run up, Allcargo fell 41 per cent since the start of the year (January 2013). Currently the stock is trading at 7 times its FY14 estimates. Most analysts have a buy or an outperformer rating for the stock.

Geographic expansion

The acquisition of the US-based company, its seventh, has expanded the footprint for Allcargo Logistics. The company’s executive chairman Shashi Kiran Shetty believes that the strategic investment will help increase market share, improve efficiencies by keeping procurement costs low and rationalizing costs across its global network. The multimodal transport business/LCL business accounts for 80 per cent of the company revenues and helps in getting the volumes. However, it is a low margin business with FY13 Ebit margins in the range of 5-6 per cent as against the company’s overall Ebidta margins of 11 per cent.

The company indicated that the margins for the Econocaribe are at about 7 per cent levels. The US geography according to the management is key given that it will generate 20 per cent of overall volumes, the highest in all geographies followed by China at 16 per cent.  

To expand its global footprint further eyeing another acquisition over the next couple of months which will likely be in geographies such as Australia and Europe. The acquisition cost, according to the company, however will be much smaller than the Econocaribe deal.