Hey Sulabh,
I think we need to now start seeing this company as two businesses rather than one which is vertically integrated:
- Management has claimed that they run it like so; i.e. they will sell their capacity to a 3rd party if the rates they are recieving are better than what their own bitumen trading business can provide
- Now for some maths: (very very rough with lots of approximations)
- Lets assume an average ship of 5000 tons (their ppt shows range of 3k to 10.6k tons)
- According to Google Bard an approximate cost of hiring for a shipment can range from $100k to $200k to the west coast in India (I couldn’t find a better source for getting a quotation)
- This implies a per ton cost of transportation at 1600 to 3200
- According to their PPT they have transported 2L MT of bitumen in their ships; this implies their subsidiary should have recieved 32Cr to 64Cr from parent company
- However, we know that their shipping revenue is 177 Cr in that year which implies they are taking significant outside business
- We also know that the ship takes 4 to 6 days to travel between UAE to India (West and East coast respectively) – once again the source is Bard
- With a total ship capacity of 48k tons, and assuming 50% efficiency (accounting for loading and unloading – bard suggests 75% efficiency), this still implies the ships can transport (365/6)*50%*48000 = 14.6L tons / year
- Once again it implies they have more than adequate capacity to sell to third parties
- Hence there is a strong case to viewing these businesses independently in which case the companies overall margin is purely a matter of revenue mix from the two segments. If shipping grows faster than bitumen (which has been the case so far) the overall company margins should improve
This maths may be completely useless as there are just TOO many assumptions here. But I suspect they are directionally right.
Bottom line, I think, is that it is now critical the Agarwal Industrial grow their shipping business independently for them to sustain their EPS growth numbers. We should be asking them more questions on how they run their shipping business, size of the market, means of sales, competition etc.
Side Note:
- I suspect the shipping business margin is overstated
- If you look at the screener segment wise data you will see that their bitumen business was averaging 5-6% margins till 2019. However, as soon as the shipping business started their margins fell to 3% and then stabalized at 4%. I would conjecture (and this is pure conjecture) that they are utilizing transfer pricing to book greater profits in their shipping subsidiary.
- Why would they be doing this? If you see their standalone tax rate, it is 26% but their consolidate tax rate is only 16%. The Shipping business is housed in a region in UAE where the corporate tax rate is 0%. Hence it would make sense to book the larger profits here.
- The best way to prove this would be to look at the transfer payments between them; but embarassingly, I am unable to do so. If someone who is financially more savvy than me can do so it would be a great help (the relevant subsidiary is AICL Overseas).
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