Research Reports On Allcargo Global Logistics By Motilal Oswal, Religare & PL

Contract logistics, land monetization to add value

Management initiatives to improve return ratios

– We expect AGLL to create value in the medium term from strong growth in contract logistics through its subsidiary, ACCI. Monetization of land parcels by roping in strategic partners would add further value to the company.

– The MTO segment should continue to see growth in profits, led by strong revenue growth due to rising proportion of FCL shipments coupled with stable margins. Also, the management has taken multiple initiatives, which should result in an improvement of the company’s overall return ratios.

– AGLL trades at 11x FY20E EPS, which is attractive, given improving return ratio profile and 16% earnings CAGR over FY17-20E. We value AGLL on 14x FY20E EPS and arrive at a target price of INR213, implying 25% upside. We believe an additional value of 25-30% of present market capitalization could get created in the medium term from contract logistics, land monetization and entry into last mile delivery, which we are not factoring into our present target price. Maintain Buy.

Contract logistics the way forward for domestic business

We expect a paradigm shift in contract logistics in India. With rising dependence on third-party logistics (3PL), this segment should witness robust growth. Organized large-sized players are scarce in this space and AGLL has a three-pronged strategy to cement its early mover advantage:

1. Organic growth: AGLL has created a niche for itself in contract logistics, with strong exposure to Autos, Chemicals, E-commerce, fashion and Retail. This also helps improve AGLL’s overall profitability profile, as margins in these segments are higher. Additionally implementation of GST is expected to give a big demand boost to contract logistics business in the country.

2. Acquisitions in last mile delivery: AGLL foresees good prospects in express delivery for e-commerce players – Amazon and other key clients are likely to increase business to 3PL players. AGLL intends to invest upto INR2b towards acquisition, which will give them access to last mile connectivity particularly for B2C segment as they have exposure in B2B segment.

3. Monetization of land parcels in key strategic locations: AGLL intends to develop 500 acres of land bank in multiple locations like Hyderabad, Bangalore, Chennai, Jhajjar and Nagpur into warehouse complexes, Logistics parks along with strategic partners. It intends to follow an asset-light model in this activity with major capex could be incurred by the strategic partner expected to come on board.

MTO segment profitability continues to improve

AGLL’s multi-modal transport operator (MTO) business generates annual free cash flow of over INR2b, led by low capex requirement and steady growth. The segment has witnessed significant improvement in profitability over the last 2-3 quarters, led by revival in container shipping freight rates globally. Rates have firmed up due to consolidation of container shipping companies and demand recovery after prolonged weakness. This bodes well for the segment’s prospects in the medium term; profitability should improve over the next 12-18 months.