Allcargo's M&A strategy to boost growth amid slowdown blues

Gains came on back of company's announcement that it has acquired Econocaribe Consolidators

After jumping 11 per cent on Friday, the Allcargo Logistics scrip extended its gains, rising another five per cent intra-day to Rs 106 on Monday. The gains were due to the company’s announcement it acquired Econocaribe Consolidators, one of the largest cargo aggregators in the US, for $50 million (about Rs 310 crore). Analysts say the US company, which operates in the lower-than-container-load (LCL) segment and offers other services such as warehousing, full-container-load (FCL), air cargo, etc, was acquired by Allcargo at reasonable valuations, pegged at five-six times the earnings before interest, tax, depreciation and amortisation (Ebitda).

“The company (Allcargo) 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 Econocaribe is a profitable, zero-debt company and the deal was at reasonable valuations, Allcargo expects the acquisition to be earnings-accretive from the first year. Though 80 per cent of the acquisition is being funded by debt, Allcargo would be able to fund it, given a comfortable debt-to-equity ratio of 0.46 and its cash and equivalents of Rs 231 crore as on March 31, 2013. The company is eyeing a turnover of $1 billion in FY15, compared with $654 million in FY13, and acquisitions are part of its strategy to achieve this target.

Most logistics firms have seen sharp falls in their share prices due to the fall in demand in global trade and, consequently, slowing volumes. Before Friday’s run-up, Allcargo was down 41 per cent since January this year. Currently, the stock is trading at seven times the FY14 estimates. Given the outlook, most analysts have a ‘buy’ or an ‘outperformer’ rating for the stock. They estimate Allcargo to report revenue and EPS growth of 6.3 per cent and 7.5 per cent, respectively in FY14.

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

While consolidated multimodal transport operations, or LCL volumes, grew three per cent in FY13, Agarwal estimates these would grow seven per cent in FY14. This could increase further, given the acquisition of the US company.

While the LCL business is likely to grow, triggers for the scrip remain volume recovery in the company’s other key segments such as the container freight station (CFS) and project engineering solutions. However, with little indication of volume growth and higher competition, analysts do not expect much from this business in the near term.

Agarwal, however, believes 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 a recovery.

Geographic expansion
The acquisition of the US-based company, its seventh, has expanded Allcargo Logistics’ footprint. Shashi Kiran Shetty, the company’s executive chairman, believes the strategic investment would help increase market share, improve efficiencies by keeping procurement costs low and rationalise costs across its global network.

The multimodal transport/ LCL business accounts for 80 per cent of the company’s revenues and helps in securing the volumes. However, it is a low-margin business, with FY13 earnings before interest and tax margins at five-six per cent, against the company’s overall Ebitda margins of 11 per cent. Econocaribe, which went private in 2008, as per last available figures had reported revenues of $96 million and net profit of $4 million in 2007. While not giving any revenue and profit figures, Allcargo indicated that the margins for the Econocaribe are at about 7 per cent levels. The US geography, the management said, was important, given it would generate 20 per cent of the overall volumes, the highest among its current geographies, followed by China (16 per cent).

To expand its global footprint, the company is eyeing another acquisition through the next couple of months. It is likely thus would be in Australia or Europe. The acquisition cost, according to the company, would be much smaller than that for the Econocaribe deal.