logistics karvy

INSTITUTIONAL EQUITIES

INDIA RESEARCH

March 22, 2012

LOGISTICSWake Up & Smell The Future

LOGISTICS

Prasun Kumar

+91-22-6184 4325

[email protected]

Rajesh Kumar Ravi

+91-22-6184 4313

[email protected]

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March 22, 2012

Logistics Institutional Equities

India Research

THEME REPORT Wake Up & Smell The Future

On Growth Track, Good Times Ahead

Positive on logistics demand outlook: We expect India’s EXIM trade (non oil)

to grow by at‐least 15% CAGR in FY12‐17E period (>2x India’s GDP growth)

in‐line with India’s 2‐5x GDP growth over the last eight years. The IMF

projects India’s GDP CAGR of 8% for FY12‐17E period.

We believe that government’s continued impetus on infrastructure spending

should help achieve the growth targets: During the 11th & 12th FYPs, the

infrastructure outlay has doubled to US$500 bn and US$1,000 bn, which bodes

well for logistics demand in India. Additionally, the rising FDI in Indian

companies (> Rs. 140 bn in CY08‐11) should drive the need for improved

logistics requirement in India.

Capacity issues to get addressed going forward: Indian logistics sector

remains highly unorganized and inefficient due to lack of infrastructure

capacity across railways, roadways, and ports etc. While the government has

lagged its own investment targets in these sectors by 9% and 21% in 10th & 11th

FYPs respectively, we expect things to improve going forward, as both the

NHAI & the DFCCIL have been trying to speed up their road and rail track

expansion programmes. Meanwhile, the port capacities should benefit led by

the new Maritime Agenda 2010‐2020.

Favourable for companies which increase their asset base ahead of

infrastructure improvement: Various tax incentives (to attract investment in

logistics sector) and Indian Railways allowing private container train operators

should benefit logistics companies that continue to invest in their asset base

(rakes, warehousing, and technology etc). These companies should benefit the

most as infrastructure starts falling in place. The GST implementation in FY13

will be a big driver for the sector. It would pave way for larger, unified and

modern warehousing, thereby allowing India to slowly but steadily move up

the logistics chain from current 2PL toward integrated logistics.

We like growth focused companies: Gateway Distriparks (GDPL) continues

to grow across the CFS, rail and cold chain businesses without straining its

balance sheet. While Allcargo Logistics (AGLL) enjoys the 2nd position globally

in the stable MTO business, it is expanding its presence in the CFS and project

logistics space. The stable presence of Arshiya International (ARST) in 3PL

services should further get boosted as the Company is aggressively expanding

its FTWZ division and is adding more rakes in its rail business. The leading

container train operator ‐ Container Corporation of India (CCRI) with strong

cash position is striving to increase value added services in its bid to protect

revenue growth and margins to sustain competitive pressure.

Valuation Summary

Stocks M Cap

(Rs bn) Rating

RoE (%) RoCE (%) P/E (x) EV/EBITDA (x)

FY12E FY13E FY14E FY12E FY13E FY14E FY12E FY13E FY14E FY12E FY13E FY14E

AGLL 17.6 BUY 16.6 15.5 15.6 14.2 12.9 12.9 8.0 7.2 6.2 5.7 4.7 4.1ARST 8.3 BUY 14.0 15.7 27.8 7.7 9.0 13.3 7.7 6.0 2.8 9.9 7.7 4.9

CCRI 113.7 BUY 16.6 16.6 16.8 16.0 16.0 16.2 12.8 11.2 9.6 7.8 6.3 5.0

GDPL 16.3 BUY 13.0 13.6 14.9 12.3 12.7 14.0 11.5 9.9 8.0 6.0 5.0 3.9

Source: Karvy Institutional Research

Allcargo Logistics (AGLL IN) BUY

CMP 138

Target Price 213

Upside (%) 54

52 Week High/Low (Rs) 190/115

3m ADV (Rs mn /US$ mn) 02/0.0

Arshiya International (ARST IN) BUY

CMP 140

Target Price 227

Upside (%) 62



Container Corp (CCRI IN) BUY

CMP 879

Target Price 1,115

Upside (%) 27

52 Week High/Low (Rs) 1,332/801


Gateway Distriparks (GDPL IN) BUY

CMP 149

Target Price 204

Upside (%) 37



Source; Bloomberg, Karvy Institutional Research

Analysts Contact

Rajesh Kumar Ravi

022 6184 4313

[email protected]

Prasun Kumar

022 6184 4325

[email protected]



2

March 22, 2012

Logistics Thematic

Table of contents

SECTOR

On Growth Track, Good Times Ahead .................................................................... 1

Executive Summary .................................................................................................... 3

Summary of Companies covered in the Report ....................................................... 6

Key Financial Summary ............................................................................................ 7

Sensitivity Analysis ................................................................................................... 8

Profile of Indian Logistics Industry .......................................................................... 9

Segmental Analysis of Companies Covered in the Report ................................... 10

Key Positive Triggers for the Indian Logistics Industry .......................................... 10

1. Growing Indian economy, rising government spends and FDI to keep logistics

demand buoyant .............................................................................................................. 11

2. Ensuing Logistics Inefficiency Provides Opportunities for Logistics Providers .... 16

3. Government Initiatives to Address the Infrastructure Bottlenecks ....................... 18

4. Emergence of Private Container Train Operators have brought in Competitiveness

23

5. FDI Policy related to Logistics Sector has Encouraged Foreign Players/ PEs to

invest in the Sector ......................................................................................................... 27

6. Impending GST – Another Booster for the Industry ............................................. 28

7. Value Added Services ‐ 3PL & above – to Provide the Next Level of Growth for

Logistics Industry ........................................................................................................... 29

Key Risks .................................................................................................................. 30

Companies Section ................................................................................................... 31

COMPANY

Allcargo Logistics…………………………………………………………………..32

Arshiya International……………………………………………………….….…..42

Container Corporation of India………………………………………….…….…52

Gateway Distriparks…………………………………………………….…………62



3

March 22, 2012

Logistics Thematic

Executive Summary

Concerns Overdone; Valuations Attractive Led by Long Term

Growth

While our logistics coverage universe has delivered upto 40% return CAGR over

the past three years, the last 12M’s underperformance has resulted on account of

economy growth concerns. On risk adjusted basis, the valuation multiples do not

discount the long term sectoral growth potential and hence provides attractive

entry point.

Sector in an Up‐cycle Phase – Growing Economy and EXIM Trade

Boosts Outlook for Logistics Demand

The demand for logistics services (transportation, warehousing and value added

services) in India has remained buoyant, as the Indian economy has grown by ~8%

CAGR during the last eight years and the IMF projects India’s GDP CAGR of 8%

for FY12‐17E period (higher than world GDP CAGR of 4.5%). This reflects that

India’s EXIM trade should grow at >15% CAGR (2x GDP growth), as it has grown

at 2‐5x GDP in FY03‐11 period. The sustained focus on rising infrastructure spend

by the government (US$500 bn in 10th FYP and US$1 trillion in 12th FYP) and rising

FDIs in Indian companies (> Rs. 140 bn over the last four years) should drive the

need for improved logistics requirement.

Infrastructure Development Acceleration – Key to Attract Logistics

Players

Despite buoyant demand for logistics the sector remains highly unorganized and

inefficient on account of lack of infrastructure capacity across railways, roadways

and ports, etc. Capacity expansion has lagged the government’s own targets laid

out in the plan documents. Logistics investments in 10th and 11th FYPs have missed

their targets by 9% and 21%, respectively. We expect things to improve going

forward, as both the NHAI and the DFCCIL have been trying to speed up their

road and rail track expansions, which have been delayed by three to five years.

The Ministry of Shipping has launched the new Maritime Agenda 2010‐2020 to

address the slow pace of port expansions. The Government has also introduced

various tax incentives to attract serious logistics companies.

Sector Dynamics opened up to Private Operators

Railways opened up container train operations for private players thereby

attracting 15 operators, who have gained ~32% of market share from incumbent

Container Corporation of India over the last five years.

Who would be benefitted?

Logistics companies who have been investing in asset base (rakes, warehousing

and technology, etc.) to provide logistics solutions across the various segments

should be the major beneficiaries as infrastructure starts falling in place. Almost all

the three segments of Indian logistics (transportation, warehousing and value

added services) have strong growth potential and appear attractive on

comparative analysis and have seen continued interests in form of PE investments

and M&A activities.



4

March 22, 2012

Logistics Thematic

GST Implementation to Accelerate India’s Growth on Logistics

Front

Goods & Services Tax (GST) – to be implemented in FY13 – would do away with

multiple taxations and other complexities that the logistics providers have to deal

with in different states of India. This will boost investments in large warehouses

with latest technologies thereby gaining economies of scale. This in turn will

increase the attractiveness of integrated logistics companies, which can provide

end‐to‐end logistics solutions.

We Initiate Coverage on Four Stocks

We initiate coverage on four large logistic service providers – Gateway Distriparks

(GDPL), Allcargo Logistics (AGLL), Arshiya International (ARST) and Container

Corporation of India (CCRI) with ‘BUY’ recommendation, as they are trading well

below their historical valuations.

Exhibit 1: Comparative positioning of the four logistics companies

Rail

Transport

Cold

chain

MTO

Project

logistics

Warehousing (CFS,

ICD, FTWZ, FTWZ)3PL

Revenue profile (%)

Gateway Distriparks Ltd 50% 7% 43%

Arshiya International 25% 15% 60%

Allcargo Logistics 84% 8% 8%

Container Corporation of India 75% 25%

Key Industry metrics

Market Size & Growth Medium, 10‐15% Low, 20‐30% Low, 15‐20% Low, 20‐30% Medium, 15‐25% Low, 25‐30%

Competitive intensity Medium & rising Low & stable Low & stable Low & stable Low & rising Low & stable

Capital Intensity High Medium Low Medium High Low

EBITDA margins 18‐25% 25‐30% 5‐10% 20‐25% 50‐65% 10‐12%

Overall segmental attractiveness Medium Strong Medium Strong Strong Strong

Source: Company, Karvy Institutional Research

Valuation Summary of Four Stocks

Exhibit 2: Relative valuations & Target multiples – target price arrived at multiplying FY13‐14E average EPS (EBITDA for ARST) by their respective target P/E multiples (EV/EBITDA used for ARST)

Stocks M Cap

(Rs bn)

CMP

(Rs) Rating

Target P/E

multiple** (x)

Target Price

(Rs)

Upside

(%)

P/E (x) EV/EBIDTA

FY12E FY13E FY14E FY12E FY13E FY14E

AGLL 17.6 138 BUY 10.5 213 54 8.0 7.2 6.2 5.7 4.7 4.1

ARST 8.3 140 BUY 7.0 227 62 7.7 6.0 2.8 9.9 7.7 4.9

CCRI 113.7 879 BUY 13.2 1,115 27 12.8 11.2 9.6 7.8 6.3 5.0

GDPL 16.3 149 BUY 12.0 204 37 11.5 9.9 8.0 6.0 5.0 3.9

Source: Karvy Institutional Research ** ARST target multiple (x) is EV/EBITDA



5

March 22, 2012

Logistics Thematic

Logistic companies have delivered strong performance during the

last three years

The logistic sector in general and the stocks under coverage in particular have

delivered strong stock performance over the last three years. Most of the stocks

have delivered double digit price CAGR. However, over the last one year, the

stocks have mostly delivered negative returns and have also underperformed the

broader Index. As the companies’ fundamentals have remained fairly intact and

have been further improving; stock under‐performance can largely be attributed to

the impact of government’s policy inactions on slower pace of infrastructure

development.

Exhibit 3: Price performance of various listed logistics companies in India

CMP Mkt cap Absolute return (%) Rel to Sensex (%)

Logistics Stock Performance (%) (Rs) (Rs bn) 3 m return 1yr return 2 yr CAGR 3 yr CAGR 3 m return 1yr return

Container Corporation 875 113.7 5.9 (26.3) (17.1) 8.5 (10.2) (24.5)

Allcargo Logistics 135 17.6 9.7 (14.0) (14.9) 0.2 (6.4) (12.1)

Gateway Distriparks 151 16.3 21.9 40.3 9.8 43.9 5.8 42.1

Arshiya International 142 8.3 17.8 (33.2) (12.4) 41.6 1.7 (31.4)

Blue Dart Express 1,934 45.9 33.7 98.5 65.3 69.7 17.6 100.3

Transport Corporation of India 61 4.5 12.6 (36.8) (22.6) 23.2 (3.5) (35.0)

Gati Ltd 31 2.7 32.9 (41.5) (25.9) (7.9) 16.8 (39.7)

Source: Company, Karvy Institutional Research; (CMP as on close of 20th March 2012)

Improved fundamentals to boost stock performance of stocks

under coverage

Going forward, we expect the stocks under coverage to deliver higher absolute/

relative stock performance led by their strengthening fundamentals and increased

asset utilisations. We expect government reforms to accelerate from their current

levels, which in turn should help speed up logistics infrastructure executions.

Higher Debt to Equity ratio for ARST is a near‐term concern due to its aggressive

FTWZ expansions in FY12‐14E period. However, the same should get relaxed by

FY14E, as the expansion results in improved cash flows thereby helping the

Company reduce its debt exposure. This is turn should boost ARST’s asset turn

over and RoCE in FY14E. Similarly, as GDPL’s rail and CFS businesses expand

along‐with higher utilisation, we expect the Company’s sales turnover and return

ratios to gain.

Exhibit 4: Relative scoring of listed logistics companies– Companies under coverage have fair well on their financial fundamentals

Companies CFO/ EBITDA D:E WC/Sales Sales T. O. RoCE Capex/Sales Overall

Container Corporation 3 4 2 3 4 2 4

Allcargo Logistics 3 3 3 4 3 3 3

Gateway Distriparks 4 3 3 2 3 3 3

Arshiya International 3 2 4 2 2 3 3

Blue Dart Express 2 4 4 4 4 4 4

Transport Corporation of India 1 1 3 4 3 2 2

Gati 1 1 4 3 1 2 2

Source: Capitaline, Karvy Institutional Research



6

March 22, 2012

Logistics Thematic

Summary of Companies covered in the Report

Allcargo Logistics (AGLL IN): We initiate coverage on the stock with “BUY”

recommendation with a target price of Rs. 213 per share, valuing AGLL at 10.5x its

FY13‐FY14E average EPS.

MTO segment buoyed by ECU Line growth: Globally, AGLL is the 2nd largest

LCL consolidator (Multimodal Transport Operations) post acquisition of ECU

Line. This segment accounts for 80% of total revenues. With ECU Lines’

increasing presence in the high growth Asian countries, we expect the MTO

revenues to grow at 14% CAGR during FY12‐14E.

Expanding CFS/ ICD capacities to boost profitability: AGLL has three CFS at

three major EXIM hubs ‐ JNPT, Mundra and Chennai. It is the number one

operator at Chennai and Mundra ports with major concentration towards high

realisation import cargo handling.

Arshiya International (ARST IN): We initiate coverage on the stock with “BUY”

recommendation with a target price of Rs. 227 per share, valuing ARST at 7.0x its

FY13‐14E average EBITDA.

FTWZ expansion boosts earnings growth in FY12‐14E periods: Arshiya

International (ARST) is the pioneer of the FTWZ (Free Trade Warehousing

Zones) concept in India. It plans to ramp up its warehouse capacities at both

the FTWZ by ten‐fold to 35 warehouses by FY14E. Based on these expansions,

we expect revenues of this high margin (EBIT margins of >55%) segment to

grow by >100% CAGR during FY12‐14E.

Rail Business (Third largest operator) on expansion spree: ARST is the third

largest container train operator in India with 16 operational rakes and plans to

add another eight rakes during FY13‐14E. We expect these additions to boost

the segmental revenues by 38% CAGR and EBITDA CAGR of 28% during

FY12‐14E.

Container Corporation of India (CCRI IN): We initiate coverage on the stock with

“BUY” recommendation with a target price of Rs. 1,115 per share, valuing CCRI at

13.2x its FY13‐14E average EPS.

Largest container train operator in India: Container Corporation of India

(CCRI) is India’s largest container train operator (CTO) with container train

fleet strength of 240 container trains and 61 terminals spread across India.

Currently, CCRI has ~68% of total container fleet operational in India.

Strategic tie‐ups with competitors & customers to support revenue growth:

CCRI has formed various JVs across India partnering with its customers as

well as competing CTOs to support its revenue growth. In the domestic train

handling, CCRI’s FY11‐12E volume growths got impact after Indian Railways

in Dec’10 announced commodity‐specific haulage charges increase for

domestic cargoes. However, the quarterly volume trends suggest a bottom out

situation in FY12E. Subsequently, we expect revenues to grow at 12% CAGR

during FY12‐14E.



7

March 22, 2012

Logistics Thematic

Gateway Distriparks (GDPL IN): We initiate coverage on the stock with “BUY”

recommendation with a target price of Rs. 204 per share, valuing GDPL at 12.0x its

FY13‐14E average EPS.

CFS Business the cash cow; expanding capacities to fuel growth: We expect

GDPL’s CFS volume to grow by 3% and 7% during FY13‐14E vs. 3% during

FY12E, as new capacities get commissioned at JNPT and Kochi. Strong

relationship with shipping lines should boost the growth as it the shipping

lines that notify which CFS to do business with (and not the cargo owners).

Further, CFS is a cash cow, as it has very high OPM of ~54% and the segment

generates >80% of PAT.

Leadership position in the container train business: GDPL currently operates

21 rakes (2nd largest after Container Corp) with >85% of its capacity being

deployed in the EXIM container transportation. It plans to add another 6‐8

rakes during FY13E. We expect GDPL’s rail volumes to grow by 29% and 15%

during FY12E and FY13E.

Key Financial Summary

Exhibit 5: Key financials of the four stocks covered in the report

Companies Year Revenues

(Rs mn)

YoY

(%)

EBIDTA

(Rs mn)

OPM

(%)

PAT

(Rs mn)

YoY

(%)

P/E

(x)

RoE

(%)

RoCE

(%)

AGLL FY12E 43,325 21.1 4,927 11.4 2,765 33.6 8.0 16.6 14.2

FY13E 40,391 16.5 4,667 11.6 2,446 10.6 7.2 15.5 12.9

FY14E 43,169 6.9 5,320 12.3 2,845 16.3 6.2 15.6 12.9

ARST FY12E 10,326 25.7 2,497 24.2 1,079 32.4 7.7 14.0 7.7

FY13E 13,886 34.5 3,686 26.5 1,378 27.8 6.0 15.7 9.0

FY14E 19,404 39.7 6,045 31.2 2,988 116.8 2.8 27.8 13.3

CCRI FY12E 41,471 8.3 10,821 26.1 8,878 1.1 12.8 16.6 16.0

FY13E 47,374 14.2 12,321 26.0 10,185 14.7 11.2 16.6 16.0

FY14E 54,129 14.3 14,077 26.0 11,813 16.0 9.6 16.8 16.2

GDPL FY12E 7,712 28.7 2,593 33.6 1,423 47.1 11.5 13.0 12.3

FY13E 8,813 14.3 3,051 34.6 1,652 16.1 9.9 13.6 12.7

FY14E 10,103 14.6 3,590 35.5 2,029 22.8 8.0 14.9 14.0




8

March 22, 2012

Logistics Thematic

Sensitivity Analysis

Realisation changes have higher impact on earnings metrics and valuation

compared to impact of respective volume changes in general.

Exhibit 6: AGLL ‐ Impact of changes in volumes & realization across CFS and NVOCC(ECU Line) verticals on the earnings metrics and target price estimates

FY14E estimates EPS (%) RoE (bps) RoCE (bps) TP (%)

10% lower CFS realization (11) (160) (108) (6)

10% lower CFS volumes (5) (74) (50) (3)

1% lower ECU Line realization (10) (142) (96) (5)

10% lower ECU Line volumes (6) (90) (60) (3)


AGLL’s target price sensitivity to ECU Line realisation is highest (~5x), as this

is a low but stable margin (~5‐7%) business and constitute >70% of top‐line.

Exhibit 7: ASRST ‐ Impact of changes in VAS multiple (FTWZ), volumes & realisation across FTWZ and Rail verticals on the earnings metrics and target price

estimates


10% lower VAS multiple (FTWZ) (6) (148) (53) (6)

10% lower FTWZ volumes (11) (279) (98) (12)

10% lower FTWZ realisation (17) (427) (150) (18)

10% lower Rail volumes (2) (40) (14) (2)

10% lower Rail realisation (12) (285) (100) (12)


ARST’s earnings have higher sensitivity to FTWZ business compared to the

rail business.

Exhibit 8: CCRI ‐ Impact of changes in realization and volumes on the earnings metricsand target price estimates


10% lower volumes (7) (110) (107) (4)

10% lower realization (34) (566) (549) (18)


Exhibit 9: GDPL ‐ Impact of changes in realisation and volumes across CFS and Rail verticals on the earnings metrics and target price estimates




10% lower Rail realization (19) (261) (219) (10)



CFS business, the cash cow would continue to have higher impact on earnings

over the next two years.



9

March 22, 2012

Logistics Thematic

Profile of Indian Logistics Industry

Indian logistics industry is ~3% of the global logistics and is highly fragmented so

far. Logistics industry comprises of three major segments ‐ transportation, storage

and value added services. Based on the analysis of various sub‐segments in the

Indian context on various comparative factors, we believe companies in the

storage and the value added service segments are well‐placed to capitalize on

growing Indian economy. In the transportation segment, we like companies

present in container train and project logistics.

Exhibit 10: Indian logistics market is ~3% of global logistics in value terms (US$)…

Source: CII, ASSOCHAM, Karvy Institutional Research

Exhibit 11: …and is highly fragmented even though the share of organized players is expected to double by FY15E

Source: Industry, Karvy Institutional Research

Exhibit 12: Comparative analysis of Indian logistics sector across its various sub segments

Segments Transportation Storage Value Added

Services

Sub segment/

Comparative factors

Con

tain

er R

ail

Tra

nspo

rtat

ion

Roa

d T

rans

port

-

FTL

Exp

ress

Log

isti

cs

- LT

L

Coa

stal

Shi

ppin

g

Col

d C

hain

Pro

ject

Log

isti

cs

Mod

ern

W

areh

ousi

ng

Log

isti

cs P

arks

Inla

nd C

onta

iner

D

epot

s

Con

tain

er F

reig

ht

Stat

ions

Por

ts

Frei

ght F

orw

ard

ing

3PL

/ 4

PL

Cou

rier

Ser

vice

s

Current Market Size

Growth Potential

Innovation Potential

Technology Requirement

Competitive Intensity

Niche

Capital Intensity

Profit Margins

Overall Attractiveness

Source: KPMG, Industry, Karvy Institutional Research

Global

Logisitcs

industry,

3,500 , 97%

Indian

Logisitcs

industry,

105 , 3%

US$ Bn

6%12%

0%

20%

40%

60%

80%

100%

120%

2008 2015E

Organised Unorganised



10

March 22, 2012

Logistics Thematic

Segmental Analysis of Companies Covered in the

Report

Exhibit 13: Comparative positioning of the four logistics companies

Rail

Transport

Cold

chain

MTO

(LTL)

Project

logistics

Warehousing (CFS,

ICD, FTWZ, FTWZ) 3PL

Revenue profile (%)

Gateway Distriparks 50% 7% 43%

Arshiya International 25% 15% 60%

Allcargo Logistics 84% 8% 8%

Container Corporation of India 75% 25%

Key Industry metrics

Market Size & Growth Medium, 10‐15% Low, 20‐30% Low, 15‐20% Low, 20‐30% Medium, 15‐25% Low, 25‐30%

Competitive intensity Medium & rising Low & stable Low & stable Low & stable Low & rising Low & stable

Capital Intensity High Medium Low Medium High Low

EBITDA margins 18‐25% 25‐30% 5‐10% 20‐25% 50‐65% 10‐12%


Key Positive

Triggers for the

Indian Logistics

Industry

1. Growing economy, rising government

spends to buoy EXIM trade and logistics

demand

EXIM trade to double to US$ 1 trillion by

CY16E

Containerized EXIM throughout to grow at

12% CAGR during FY08‐26E

Logistic spends to rise on sustained

infrastructure investments

Rising FDI in Indian companies

Increased container penetration provides

opportunities for varied logistics services

2. Ensuing inefficiency in logistics

sector provides opportunities for

logistics providers

India lags on logistics efficiency due to its

poor infrastructure

Hinterland connectivity has been a

bottleneck for logistics sector

Rail Road mix should complement each

other

5. FDI policy related to logistics sector has

encouraged foreign players to invest in the

sector

3. Government initiatives to address the

infrastructure bottlenecks DFC (Railways) to augment track capacity by

~2,750 Kms

NHAI has sped up its road execution rates

New Maritime Agenda 2010‐2020 will boost

port capacity

Coastal/ Inland waterways can further relax

logistics constraints

Container ports ‐ Major ports are operating

at peak capacity

Growth of minor ports & private ports

brightens up sector outlook

Multiple tax incentives to attract investment

in the sector

4. Emergence of Private Container

Train Operators have brought in

competiveness

Private CTOs reduce Container Corp’s

monopoly, improve competitiveness

Growth opportunities abound for CTOs

even on a conservative basis

Economics of a CTO/ICD Operator

6. Impending GST another booster the

industry

Modern warehousing segment to be a large

beneficiary of GST

7. Value Added Services ‐ 3PL and above – to provide the next level of growth for the

logistics industry



11

March 22, 2012

Logistics Thematic

1. Growing Indian economy, rising government spends and FDI to keep logistics demand buoyant

Growth in logistics sector is related to increased economic activities and rising

EXIM trade. India’s GDP has grown by ~8% CAGR during the last eight years and

the IMF forecasts it to grow by similar rate during FY12‐17E period. The IMF also

forecasts world GDP growth to pick up in CY12‐16E period. These bode well for

the Indian logistics sector, as the growing economies should boost demand for

logistics services.

Exhibit 14: IMF expects India’s GDP to grow at 8% CAGR during CY11‐16E periods…at the same at which it grew during the preceding 7‐8 years

Source: IMF, Karvy Institutional Research

1.1 India’s EXIM trade should double to US$ 1 trillion by CY16E

During FY03‐11 period, EXIM trade (non‐oil) has grown at ~2‐5x GDP growth.

Assuming EXIM trade (non‐oil) growth of 2 times GDP growth, India’s EXIM

trade should grow at more than 15% CAGR through CY16E to US$1 trillion. Over

the last eight years, India’s global trade has grown at ~1.7x global trade in value

term. This resulted in 100 bps expansion in India’s share in global trade thereby

boosting India’s significance on the global trade map.

Exhibit 15: Both imports and exports growth in India picked up after a temporary dip in FY10

Source: CEIC, Karvy Institutional Research (Non Oil Export Import trends)

Exhibit 16: India’s EXIM trade (non Oil) has grown at >2x GDP growth during the last nine years

Source: CEIC, Karvy Institutional Research

4.6 5.3 5.4

2.8

(0.7)

5.1 4.0 4.0 4.5 4.7 4.8 4.9

9.0 9.5 10.0

6.2 6.8

10.1

7.8 7.5 8.1 8.1 8.1 8.1

‐2

0

2

4

6

8

10

122005

2006

2007

2008

2009

2010

2011E

2012E

2013E

2014E

2015E

2016E

World GDP India GDP (%)

11

39

3

32

‐10

0

10

20

30

40

50

2000

2001

2002

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

Exports YoY (%) Imports YoY (%)

2.7 3.4 3.8

2.5 2.0

4.8

3.0

(0.4)

4.5

‐1

0

1

2

3

4

5

6

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

Exim / GDP Multiple



12

March 22, 2012

Logistics Thematic

Exhibit 17: At 2x GDP growth, India’s EXIM (non Oil) trade should double to US$ 1 trillion by CY16E


Exhibit 18: Strong EXIM growth has increased India’s share in global trade by ~100bps during the last eight years


1.2 Containerized EXIM throughout to grow at 12% CAGR during FY08‐26E – to benefit logistics services across 3 verticals

Indian Port Association (IPA) forecasts India’s EXIM volumes at major Indian

ports to grow at 6.5% CAGR during FY08‐26E – at about the similar rate of 7% at

which volumes grew during FY00‐10 period. Containerized cargo handling at

major ports would be the major beneficiary and is expected to grow at 12% CAGR

during the same period. At this rate, EXIM throughput at major ports will double

to 228 bn MT during FY11‐17E period. Even if we assume this growth rate to be

optimistic and factor in an 8% base case scenario, EXIM throughput should

grow by 1.6 times to 182 bn MT by FY17E thereby depicting strong demand

potential for logistics services across all the three verticals – transportation,

warehousing and value added services.

Exhibit 19: EXIM volumes handled at major ports in India has grown by 7% CAGR during FY00‐10


Exhibit 20: EXIM traffic handled at major ports in India is expected to grow by 6.5% CAGR during FY08‐26E…

Source: IPA, Karvy Institutional Research

197

476

1,000

0

200

400

600

800

1,000

1,200

2006

2007

2008

2009

2010

2011E

2012E

2013E

2014E

2015E

2016E

0.8%

1.8%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

1.8%

2.0%

2002

2003

2004

2005

2006

2007

2008

2009

2010

0%

2%

4%

6%

8%

10%

12%

14%

‐

100

200

300

400

500

600

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

Total EXIM (Bn MT) at major ports YoY Growth (%) RHS

‐

200

400

600

800

‐

100

200

300

400

FY08 FY26EPOL Iron Ore

Coal Fertilisers

Other Cargo Containers (RHS)

mn MT mn MT



13

March 22, 2012

Logistics Thematic

Exhibit 21: …Containerized cargo is expected to witness highest ~12% growth during the same period (FY08‐26E) …


Exhibit 22: …and at this rate EXIM container throughput (mn MT) at major ports should double in next six years


1.3 Logistic spend to rise on sustained infrastructure investments

While the 11th and 12th Five Year Plans have seen the government’s investment in

the infrastructure segment double during each plan period to Rs. 5.7 trillion

during the 11th FYP, the 12th FYP has further doubled it to Rs. 11.3 trillion.

Exhibit 23: Infrastructure investment outlay has doubled during each of 10th

11th and 12th FYPs

Source: Planning Commission of India, Karvy Institutional Research

Exhibit 24: Infrastructure investment share of GDP has risen sharply during FYP10‐12 (FY02‐17)

Source: Planning Commission of India, Karvy Institutional Research

Exhibit 25: Transportation spend (% of GDP) has also grown by ~100bps to ~6% during the last 20 years


4.2%

2.1%

5.3%

12.3%

5.0% 5.6%6.5%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

POL

Iron Ore

Coal

Containers

Fertilisers

Other Cargo

Total

114,040

225,095

‐

50,000

100,000

150,000

200,000

250,000

FY11 FY17E

‐ 2,000 4,000 6,000 8,000 10,000 12,000

Roads

Railways

Ports

Airports

Storage

Water & Sanitation

Gas

Irrigation

Telecom

Power

Expenditure ‐XI Plan Allocation Expenditure ‐ XII Plan Alloacation (Rs bn)

‐

2

4

6

8

10

12

14

FYP1

FYP2

FYP3

FYP4

FYP5

FYP6

FYP7

FYP8

FYP9

FYP10

FYP11

FYP12

% of GDP

Five Year Plans

4.0

4.5

5.0

5.5

6.0

6.5

7.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011



14

March 22, 2012

Logistics Thematic

1.4 Rising FDI in Indian companies should increase demand for organized logistics players

Strong economic growth during the last several years has attracted strong FDI

across various industries in India. These foreign companies have seen the cost

benefits of enhanced logistics systems in their countries. Hence, these companies

should be willing to allocate their logistics requirements to organized logistics

players thereby increasing the demand for integrated logistics service providers in

India.

Exhibit 26: FDI Inflow in India has grown multifold over the last decade


Exhibit 27: Major beneficiaries of FDI Inflows in India during the last five years


1.5 Increased container penetration provides opportunities for varied logistics services – multimodal transport, warehousing

& value added services

While container logistics in India was introduced by Indian Railways as early as in

1966 to provide door‐to‐door service to their customers, it was only after 20 years

when Government of India realized the importance of containerization. In 1988, it

commissioned the JNPT and subsequently created a Corporation called Container

Corp of India, which constructed its first ICD at Tughlakabad in New Delhi.

Container traffic in India has grown at 11% CAGR during FY01‐12 boosted by

rising EXIM trade. Increased containerization has further facilitated multimodal

transport in India.

4.06.1

5.0 4.3 6.1 9.0

22.8

34.8

41.937.7

32.9

0

10

20

30

40

50

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

FDI in India (Rs bn)

‐

50

100

150

200

Cem

ent & Gypsum

Prod

Chem

icals

Pharma

Electricals

Food Proc.

Hotel & Tourism

Industrial M

ach

Metallurgy

2006 2007 2008 2009 2010



15

March 22, 2012

Logistics Thematic

Exhibit 28: Container traffic throughput at major Ports has grown at ~11% CAGR during FY01‐FY12


Exhibit 29: Containerized cargo market share has been on a rise over the last six years


Exhibit 30: Railways share in container trade increased to ~44% in 2005 vs 35% in 1994

Source: Indian Railways, Karvy Institutional Research

0.0

2.0

4.0

6.0

8.0

10.0

FY95

FY96

FY97

FY98

FY99

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12E

Mn TEUs

14.6%

15.8%

17.8% 17.6%18.0%

20.0%

12%

13%

14%

15%

16%

17%

18%

19%

20%

21%

2006

2007

2008

2009

2010

2011

‐

1.0

2.0

3.0

4.0

5.0

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Rail Road

Mn TEUs



16

March 22, 2012

Logistics Thematic

2. Ensuing Logistics Inefficiency Provides Opportunities for Logistics Providers

2.1 India lags on logistics efficiency due to its poor infrastructure

India ranks 47 amongst 155 countries on a Logistics Performance Index (LPI) of

World Bank. The ranks have been populated based on six parameters – Customs,

Infrastructure, International Shipment, Logistics competence, Tracking & Tracing

and Timeliness.

Exhibit 31: India ranks low on World Bank’s logistics index…

Source: World Bank, Karvy Institutional Research

Exhibit 32: …as India is at the early stages of logistics evolution

Source: IMaCS, Karvy Institutional Research

2.2 Hinterland connectivity has been a bottleneck for logistics sector

India’s freight traffic is heavily concentrated along the seven major routes (as

shown in Exhibit 34 below). These seven routes account for ~50% of total freight

traffic (2007). I. The northern Corridors ‐ Delhi Mumbai and Delhi Kolkata

routes handle ~19% of total traffic. The high traffic flow along these two routes is

on account of EXIM traffic from the hinterland areas to the ports of Kandla,

Mumbai and Kolkata. II. The Southern Corridors – Chennai Mumbai and

Chennai Kolkata routes ‐ handle relatively lower freight traffic (10%). The

presence of most of the major and minor ports along the coastline of the southern

half of the country reduces the need to traverse longer distances along the major

routes discussed above.

While traffic concentration along these routes is expected to grow further, road

and rail infrastructure development has not kept pace with traffic growth.

Rail: Almost 80% of the present railways network was built before India’s

independence in 1947. Rail traffic grew by >10x since independence, while track

length grew by a modest ~1.5x. The existing trunk routes of Howrah‐Delhi on the

Eastern Corridor and Mumbai‐Delhi on the Western Corridor are highly saturated

with line capacity utilization varying between 115% and 150%.

Road: While road traffic grew by >200x since 1951, road length has grown by just

8x thereby impacting transportation efficiency of the country. Almost 30% of the

existing National Highways were constructed prior to independence.

1 23

15

27

4753

0

10

20

30

40

50

60

German

y

Singap

ore

Swed

en

USA

China

India

Vietnam

LPI Rank

Physical Distribution –India, Vietnam, Laos

Internal Integrated Logistics‐3PL‐China, Phillipines, Indonesia External

Integrated logistics‐ 4PL‐Hong Kong, Korea, Singapore

Global logistics Management ‐USA, UK, Germany



17

March 22, 2012

Logistics Thematic

Exhibit 33: Indian Roadways– Highways form a meager 6% of total road network; Developing the remaining 94% will enhance the last mile connectivity

(<100 kms) – a key ingredient to improve logistics efficiency

Source: NHAI, Karvy Institutional Research

Exhibit 34: The seven major routes in India accounted for ~50% of freight traffic in Indiain 2007 (Roadways – 24%, Railways – 20%, Waterways 6%)

Source: McKinsey, Karvy Institutional Research

Expressways

0.01%National

Highways

2.1%

State Highways

4.0%

Major District

Roads

14.1%

Rural and Other

Roads

79.8%

1Kandla

New Delhi

Kochi

Chennai

MumbaiKolkata

2

3

4

5

6

7



18

March 22, 2012

Logistics Thematic

2.3 Rail Road Mix should complement each other

Predominance of road transport in India has added to higher logistics costs for

India. India spends ~13% of its GDP on logistics vs. 7‐8% in the developed

countries. In India, a large chunk of cargo traffic moves through roadways even

though these are capable of being transported through railways. On an average,

rail transport costs one third the transportation cost by road. However, roads have

the advantage of the last mile connectivity and hence logistics costs can be reduced

by judicious mix of both rail and road transport

Exhibit 35: Even though India freight traffic comprises majorly bulk materials movement over longer distances, 57%

of freight traffic (~2.5 Bn MT in 2008) move through

roadways leading to logistics inefficiency…

Source: McKinsey, Karvy Institutional Research

Exhibit 36: …As road transport is the most expensive mode of transportation in India; Two thirds of road freight is

structurally suitable for rail and waterways

transportation

Modes Logistics cost

Pipelines Rs 0.11 per km per MT

Coastal Rs 0.35 per nautical mile per MT

Rail Rs 1.25 per km per MT

Road Rs 3.50 per km per MT

Source: India Infrastructure, Karvy Institutional Research

3. Government Initiatives to Address the Infrastructure Bottlenecks

3.1 Planned Expenditure by Govt has missed targets – 12th Plan fixed at Rs. 13 trillion

There have been initiatives to augment capacities across all the modes of

transportation. While the 10th Five Year Plan (2002‐2007) outlay Rs. 2.6 trillion for

the logistics sector, the same has been doubled to Rs. 5.6 trillion in 11th FYP.

There have been slippages in these investments with the railways being a major

laggard in terms of investments. In the 11th FYP, the port development suffered

major setbacks, as the actual spending estimates were halved. Going forward, the

12th FYP has doubled the outlay to ~Rs. 13 trillion to augment logistics

infrastructure.

Exhibit 37: Logistics development has suffered as planned expenditures have missed targets during Xth and XIth FYPs; XIIth FYP has further doubled its outlay to Rs 13 trillion

Logistics Segment Xth FYP Xth FYP Dev XIth FYP XIth FYP Dev

(Rs bn) Actual Planned % Actual# Planned %

Roads & bridges 1,271 1,449 (12) 2,787 3,142 (11)

Railways (incl. MRTS) 1,021 1,197 (15) 2,008 2,618 (23)

Ports (incl. inland waterways) 230 141 63 406 880 (54)

Airports 69 68 2 361 310 17

Storage 56 48 17 90 224 (60)

Total 2,647 2,902 (9) 5,652 7,173 (21)

% of Total Infrastructure 29 33 28 35

Source: Planning Commission of India, Karvy Institutional Research #Revised investment estimates in the Mid‐term review of the XIth FYP

6 1430

36

48

47

5737

22

0%

20%

40%

60%

80%

100%

India US China

Airways Waterways Railways Roadways



19

March 22, 2012

Logistics Thematic

3.2 Dedicated Freight Corridors (railways) to augment track capacity by ~2,750 Kms

The Ministry of Railways (MoR) set up the Dedicated Freight Corridor

Corporation of India Limited (DFCCIL) in 2006 to address the issue of capacity

constrain for freight traffic movement in India. The DFCCIL conceived the

quadrilateral project to augment freight handling capacity by Indian railways.

The quadrilateral includes a Western and Eastern Corridor linking the four metro

cities ‐ Delhi, Mumbai, Chennai and Howrah. While it was expected to be

operational by 2017, inadvertent delays at various fronts have delayed the

project by 3‐4 years. Nonetheless, the commissioning of the same would help

decongest the major traffic routes as well as improve the hinterland connectivity

with the ports.

Exhibit 38: Phasing of Dedicated Freight Corridors; Expect Delays of 3‐4 years

The Western Corridor would connect JNPT to Dadri via Vadodara‐Ahmedabad‐Palanpur‐

Phulera‐Rewari, total distance of 1,483 km of double line electric (2 X 25 KV) track. This route is

one of the most congested rail routes and hence the proposed expansion will benefit both train

operators in term of increased cargo volumes as well as companies in reducing their logistics

costs.

Phase I Rewari‐ Vadodara (920 Kms) 2009‐2016

Phase II Vadodara‐ JNPT(430Kms) 2010‐2017

Phase III Rewari – Dadri(140 Kms) 2010‐2017

The Eastern Corridor connects Ludhiana to Sonnagar, total distance of 1,279 Km covering 6states and is projected to cater to a number of traffic streams ‐ coal for the power plants in the

northern region of U.P., Delhi, Haryana, Punjab and parts of Rajasthan from the Eastern coal

fields, finished steel, food grains, cement, fertilizers, lime stone from Rajasthan to steel plants in

the east and general goods.

Phase I‐APL1 Khurja ‐ Kanpur (343 Kms) 2009‐2016

Phase II‐APL2 Kanpur ‐ Mughalsarai (390 Kms) 2010‐2016

Phase III‐APL3 Khurja‐Ludhiana (397 Kms) 2011‐2016

Phase IV (Funding through PPP) Dankuni ‐ Sonnagar (550 Kms) 2011‐2016

Phase Ia ( Funding by Ministry of Railways) Sonnagar ‐ Mugal Sarai (125 Kms) 2010‐2016

Source: DFCCIL, Karvy Institutional Research

3.3 NHAI has sped up its road execution rates

Over the last few years, the National Highway Development Authority (NHAI ‐

the apex government body in India for the planning and implementation of

development projects on national highways) has faced various hurdles such as

problems in land acquisition, non availability of funds and cost escalations, etc.,

which has led to slippages in implementing the targets set out in the various FYPs.

Recently, NHAI’s project execution has sped up and this should help ease

infrastructure constraints for the logistics industry.



20

March 22, 2012

Logistics Thematic

Exhibit 39: Most of the major expansions – 2‐laning & 6‐lanning, Expressways & Flyovers works are yet to be completed ‐ These should improve road connectivity

Project Particulars Approval Date Planned Timeline Total Length

(Km)

Completed so

far

Golden Quadrilateral Dec‐00 5,846 100%

NS‐EW Phase ‐ I & II Dec‐03 Dec‐09 7,300 81%

NHDP Phase ‐ III Upgradation of NH on BOT basis Mar‐05 to Apr‐07 Dec‐09‐Dec12 12,109 24%

NHDP Phase ‐ IV Two‐laning of single laned NH Dec 06‐ to Dec 09 Dec‐06‐Dec15 14,799 0%

NHDP Phase ‐ V Six laning of GQ & other stretches Oct‐06 Dec‐12 6,500 11%

NHDP Phase ‐ VI Building Expressways Nov‐06 Dec‐07 to Dec‐15 1,000 0%

NHDP Phase ‐ VII Flyover, bypasses, ring roads Dec‐07 Dec‐06 to Dec‐14 700 1%

Port Connectivity Dec‐00 380 89%

SARDP & Others 1,778 53%

Total 50,412 33%

Source: NHAI, Karvy Institutional Research

3.4 New Maritime Agenda 2010‐2020 will boost port capacity – driving EXIM trade growth

Currently there are 12 major ports (capacity 681 mn MT) in India and ~187 minor

ports (capacity 392 mn MT). The non‐major ports have maximum concentration in

the states of Gujarat (42) and Maharashtra (48).

The government had set up NMDP at the start of 11th FYP (FY07‐12) with an

investment outlay of Rs. 550 bn to double the 12 major ports’ capacity to 1 bn MT

(276 projects) by FY12. However, it could only invest 10% of the total fund during

FY07‐10 period. Subsequently, the Government has recently scrapped NMDP

(expiring in Mar’12) and has launched the Maritime Agenda 2010‐2020.

The Maritime Agenda 2010‐2020 has set aside US$110 bn fund size to develop

ports and shipbuilding industry by 2020. It envisages augmenting major ports

capacities to 3.1 bn MT by 2020. The port sector under the new plan would invest

US$66 bn, of which the majority will be from private investors. Two new ports will

be built, one on each coast, while four of the 12 existing major ports (Nhava Sheva,

Cochin, Chennai and Visakhapatnam) will be substantially upgraded.

Exhibit 40: On‐going expansion programs at major ports in India – These

projects are expected to increase major ports capacity by ~30% over

the next four –five years

Major Ports Existing Port

Capacity (Mn MT)

Capex

(Rs mn)

Capacity Expansion

(Mn MT)

Jawaharlal Nehru Port 64 17,000 34

Mumbai Port 51 14,600 10

Mormugao Port 41 2,500 5

Kandla Port 88 12,798 26

Tuticorin Port 27 1,490 11

Visakhapatnam Port 65 3,040 8

Paradip Port 77 5,886 23

Chennai Port 80 9,640 18

Ennore Port 31 11,280 23

Kolkata (HDC) 72 3,301 11

Cochin Port 41 60,330 46

New Mangalore Port 46 2,300 3

Total 681 144,165 218

Source : IPA, Karvy Institutional Research



21

March 22, 2012

Logistics Thematic

3.5 Coastal/ inland waterways can further ease logistics constraints

Though India’s long coastline of ~7,500 km offers opportunities for development of

this mode, it remains unleveraged due to lack of coastal navigation infrastructure.

Comparatively, China utilizes its coastline much more effectively where 30% of

total domestic freight traffic travels over water.

Lack of government focus towards the sector has kept it undeveloped and is

restricted only to barge and lighterage operations of bulk cargo. Recently, the

Indian Government has relaxed Cabotage law to allow foreign shipping lines to

operate feeder services between Indian ports. This should encourage increased

container services between the ports thereby improving logistics flow in India.

India’s navigable inland waterways comprise almost 14,500 km, out of which 5,200

km of major rivers and some 500 km of canals are suitable for mechanized craft. So

far, Inland Waterway Transport (IWT) is limited to only 1% of total inland cargo

transport in India.

3.6 Container ports – new expansions at major ports key to EXIM throughput growth

JNPT, which handles ~60% of Indian container traffic at major ports, is operating at

saturated levels with minimal growth of ~3%. Chennai port handles ~20% of

India’s container traffic and is growing at ~6% and will soon operate at same

utilization levels as that of JNPT. These suggest that the urgent need for new

capacity additions across India to handle growing EXIM container traffic.

Exhibit 41: Container terminal expansions lined up to handle the rising container throughput growth

EXIM Ports Current container

capacity (mn TEUs)

Expansion Planned

(mn TEUs)Time line/ Other Details

JNP, Mumbai 4.2 (3 terminals) 4.8 To be completed by FY15‐16E, expansion contracted to PSA

Chennai 3.5 (2 terminals) 4.0 To be completed by FY18‐19E, Mundra Port was the lone bidder for the project

Kochi 1.0 (1 terminal) 3.01st phase already done in FY11, 3 mn TEUs to be added in 2nd phase by FY15‐

16E, Contracted to DP World




22

March 22, 2012

Logistics Thematic

3.7 Growth of minor ports & private ports brightens up sectoral outlook

Gujarat has been aggressively adding port capacities led by rise in non major

ports’ capacity as well as by commissioning of private ports. Gujarat accounts for

73% of the total non major port capacity of 392 mn MT. It has also commissioned

two private ports – Gujarat Pipavav Port and Mundra Port. These two ports have

gained traction in both container and bulk cargo movements.

Exhibit 42: Mundra port’s hinterland connectivity


Exhibit 43: GPPL’s hinterland rail connectivity


Exhibit 44: GPPL’s hinterland road connectivity


Exhibit 45: While major ports still handle a large chunk, the minor ports’ volume share is expanding

Source: IPA, Crisil, Karvy Institutional Research

Exhibit 46: Private ports have been gaining market shares over the last six years

Source: GMB, Karvy Institutional Research

25.5% 28.6% 28.1% 27.7% 32.2%

0%

20%

40%

60%

80%

100%

120%

FY06 FY07 FY08 FY09 FY10

Major Ports Non Major Ports

25.5%

28.6% 28.1% 27.7%

32.2%

15%

17%

19%

21%

23%

25%

27%

29%

31%

33%

35%

FY06 FY07 FY08 FY09 FY10



23

March 22, 2012

Logistics Thematic

3.8 Multiple tax incentives to attract investment in the sector

The Indian Government has introduced various tax schemes to boost investments

(including FDIs) in the logistics sector. These incentives are in the form of profit

linked tax benefits or capital based deductions. Exhibit 47: Government has provided many tax incentives to attract investment in the logistics sector

Sectors Applicable

sections in IT ActType of Activity Amount of Deductions

Food Processing 80‐IB

Processing, preservation & packaging of fruits &

vegetables or meat & meat products, dairy

products, food grains, etc

100% of profits for first 5 years, 30% of profits for

next 5 years

Cold Chain, CFS

& ICDs 35AD

Setting up & operating cold chain facilities on &

after 1st April 2009; CFS & ICDs included from

FY13E

150% deductions on capex incurred during the year

on other than land acquisition/goodwill/financial

instruments

Warehousing

Facility 35AD

Setting up & operating warehouse facilities for

agricultural produce

100% deductions on capex incurred during the year

on other than land acquisition/goodwill/financial

instruments

FTWZ 80IAB Undertaking engaged in development of FTWZ

100% profits from the business for 10 consecutive

years out of the first 15 years (from start of

notification by Central Govt)

Source: Income Tax Act, KPMG, Karvy Institutional Research

4. Emergence of Private Container Train Operators have brought in Competitiveness

In its bid to augment container penetration in India and bring in efficiency in

container logistics in India, the MoR (in consultation of Ministry of Shipping,

Ministry of Commerce & Industry and Planning Commission) passed a policy in

Jan’06, whereby the private companies were invited to operate container trains

along with the incumbent operator Container Corp using the IR’s existing rail

infrastructure.

Keeping the traffic concentration in perspective, the entire network of IR was

classified into four categories (Category I to IV) based on the existing and

anticipated traffic volumes of ports. 15 private players bought licenses for various

categories as Container Train Operators (CTOs) thereby during 2006‐2008. While

the CTOs would procure their rolling stocks and would construct or lease their

Inland Container Deports (ICD), the IR would provide the locomotives to all the 16

operators (along with Container Corp) on a nondiscriminatory basis.

We believe this is a move in the right direction as private participation should

facilitate faster penetration of containerized trade in India, as the private players

who have entered in this business are also present in other related services. This

paves the way for rise in integrated logistics in India in the long haul.

Exhibit 48: License Categories ‐ CTO Operators License

Category Areas of Operation Registration Fee (Rs mn)

I JNP/Mumbai Port ‐ National Capital Region rail corridor and beyond. This category will also

include all domestic traffic.

500 (automatically includes all

four categories)

II Rail corridors serving JNP/Mumbai Port and its hinterland in other than National Capital Region

and beyond. This category will also include all domestic traffic except on category I routes. 100

III

Rail corridors serving the ports of Pipavav, Mundra,

Chennai/Ennore, Vizag and Kochi and their hinterland. This category will also include all

domestic traffic except on category I routes.

100

IV

Rail corridors serving other ports like Kandla, New Mangalore, Tuticorin, Haldia/Kolkata,

Paradip and Mormugao and their hinterland and all domestic traffic routes. This category will

also include all domestic traffic except on category I routes.

100

Source: Indian Railways, Karvy Institutional Research



24

March 22, 2012

Logistics Thematic

4.1 Private CTOs reduce Container Corp’s monopoly while improving competitiveness

Promoters’ profile and their other business segments suggest that most of the

private entrants are serious players. Their presence in related businesses container

shipping, container terminal operations, CFS operations and presence of

international related companies suggest these CTOs would continue to invest in

the sector and would further ramp up their operations.

Exhibit 49: Container Train Operators’ Profile – Promoters’ profile and their other businesses imply most of them are serious longterm investors

Category I Rakes Other Details Promoter Details

1 Container Corporation 240 (210 old rakes 30 high speed wagons), 61 terminals

(18 EXIM, 13 Domestic, 30 both) Indian Railways, PSU

2 Gateway Rail Freight Ltd 21 Three ICDs ‐ Garhi (Delhi), Sanewal (Ludhiana),

Kalamboli (Mumbai)

Gateway Distriparks; Blackstone

major share holder, CFS

3 Arshiya International 18 Primarily domestic (EXIM route Chennai Bangalore)

4 Hind Terminals 12 Links four ICDs in North to JN PT, Mundra and

Pipavav

MSC Group – a major container

shipping line

5 India Infrastructure Logistics Pvt Ltd

(APL) 9

Links four ICDs in North to Mumbai, Mundra and

Pipavav

APL India (Subsidiary of NOL

Singapore) – Container Shipping

Line

6 Container Rail Road Services 7 Tie ups with various CFS/ ICD operators DP World – Container Terminal

Operator, Ports

7 ETA Freightstar 7 Links four ICDs in North‐West regions to Mumbai,

Mundra and Pipavav

ETA (Dubai); Multimodal

transport, Shipping, Port services

8 SMART 7 Has Three CFS (Chennai, Tuticorin & Vizag); Tie up

with CFS/ICD operators & private sidings

Sical Logistics, CFS, Container

terminals

9 Adani Logistics 6 Service from NCR & Rajasthan to Mundra and JNPT Adani Group of Industries ‐

Container Terminal, Ports

10 Central Warehousing Corp (CWC) 0 Has several ICDs and CFSs of its own PSU, Warehousing

11 Reliance Infrastructure Leasing 0 NA Reliance (ADAG)

12 Kribco 0 NA PSU, Commodity manufacturer

Category II‐IV Rakes Other Details Promoter Details

13 Innovative (B2B) Logistics Solution 15 Kalamboli (JNPT); Tie ups with CFS/ ICD operators Cat IV License, Agency

14 Boxtrans 12 Connects Vizag, Jaipur, Loni, Kolkata, Guwahati,

Gujarat ports; Tie ups with CFS/ ICD operators

Cat III, JM Baxi & Co – Container

terminal, CFS, Stevedoring

15 TransRail Logistics 2 Domestic ‐ Mumbai Kolkata mainly ‐ Surat, Silvasa

and Haldia

Delhi Assam Roadways Corp ‐

Trucking

16 Pipavav Rail Corporation (PRCL) 0 Does not own trains, has built rail tracks in JV with

WR and shares 50% of the revenues with WR

JV between Gujarat Pipavav Port

Ltd & Indian Railways


4.2 Growth opportunities abound for CTOs even on a conservative basis

Our base case analysis suggests that the demand for container trains should

grow by 10% CAGR in FY12‐17E period. This implies addition of >220 container

trains by FY17E. Our bear case assumptions forecast need for >120 container

trains. We have based demand projections at lower rates than that envisaged by

IPA, as we see port and rail infrastructure growth to remain constrained. Further,

we have only factored in EXIM container traffic for major ports. Additional

demand should come in from private ports that have come in Gujarat and

Vishakhapatnam.



25

March 22, 2012

Logistics Thematic

Exhibit 50: Container train demand projections – even the bear case scenario projects additional demand for >120 rakes by FY17E

Bull

Case

Base

Case

Bear

Case Comments

EXIM Container CAGR assumptions for FY12‐17E 12% 8% 4% FY06‐12 CAGR 10%, FY01‐06 CAGR 14%, Lower

growth factored in to factor in port capacity and rail

capacity expansion (Bull case CAGR =IPAʹs projected

CAGR for FY08‐26E)

FY12E throughput (mn TEUs) 7.84 7.84 7.84

EXIM Container TEUs in FY17E (mn TEUs) 13.8 11.5 9.5

Rail share of EXIM Container movement 35% 35% 35% Railways carried ~44% EXIM throughput in FY05 before

private CTOs came in since 2006; Hence our estimates

are conservative EXIM Container moved by Rail (mn TEUs) 4.84 4.03 3.34

Annual rakes’ capacity in TEUs 8,640 8,640 8,640

Trips per month (nos.) 4.0 4.0 4.0 Assumed 7.5 days for one round trip each month, 100%

utilisation To and Fro capacity per trip (TEUs) 180 180 180

Rakes required to handle FY17E EXIM Targets 560 467 386

EXIM trains (% of total) 80% 80% 80% As of FY12E, 80% of ~350 rakes are servicing EXIM

traffic Total Rakes demand in FY17E (nos.) 700 583 483

Current Fleet Size (nos.) 356 356 356

Rakes Additions required (nos.) 344 227 127 Even the bear case scenario projects demand for

additional 120+ rakes over the next five years Rakes Demand CAGR 14% 10% 6%


4.3 Economics of a CTO/ICD operator

As shown below, we have worked out the profitability of a model CTO operator,

which owns four ICDs and 40 rakes. At 80% utilisation, RoCE stands at 10%. With

a pick‐up in container services, the utilisation levels are expected to remain > 80%

and the operators would be able to sweat the assets effectively on both up‐haul

and down‐hauls. The sector being capital intensive, as utilisation and demand pick

up, higher leverage should result in large expansion in the return ratio.

Exhibit 51: Model Profitability of a CTO with four ICDs and 40 rakes

Rakes (nos) 40 Average time per trip (days) 7.0

Cost/ rake 120 Average trip/year/rake (nos) 52.1

Cost all rakes 4,800 Rake capacity (to & fro) 180

Setting cost for 1 ICD 1,500 Capacity (TEUs) 375,429

Setting cost for 4 ICD 6,000 Utilisation 80%

Equip costs & FA 1,000 Volume handled (TEUs) 300,343

Registration cost 500 Realisation (Rs/TEU) 24,790

Capital Employed (Rs mn) 12,300 Revenue (Rs mn) 7,445

Gearing (X) 1.5 Opex (%) ‐75%

Debt 7,380 EBITDA (Rs mn) 1,861

Interest Cost (%) 11.0 Interest cost (Rs mn) (812)

Depreciation rate (%) 5.0 Depreciation (Rs mn) (615)

PBT (Rs mn) 435

Tax @20% (87)

PAT (Rs mn) 348

RoE (%) 7%

RoCE (%) 10%




26

March 22, 2012

Logistics Thematic

4.4 Operational issues impacting CTOs need to be addressed

The entrants CTOs have incurred high capital costs towards license fees and

infrastructure building making the business highly capital intensive and with a

long gestation period. Amongst the operational cost for a CTO, haulage charges by

the IR accounts for 70‐75% of the operational cost. The IR has increased the

haulage charges by at least five times since Jan ’06.

Haulage charges by Indian Railways: While the haulage revenue accounts for

~3% of IR total revenues, it is a significant cost for the CTOs. When the wagons/

containers have to be moved empty on their return journey, the CTOs margins are

further compressed. Empty container movement is charged at 65% and empty

container wagon at 60% of the loaded container haulage charge.

Exhibit 52: Indian Railways raised the haulage charges by >15% with three year of operations by private CTOs. In 2010, it furtherraised haulage charges for select commodities by ~100%‐200% thereby impacting operators’ growth & profitability

Distance Haulage in 2006 (Rs) % Rise in Haulage (2006 ‐10) Distance

(Kms)

Cement Stone

other than

marble (Rs)

Iron & Steel

(Rs)

POL

(Rs)(kms) < 20 MT 20‐26 MT > 26 MT < 20 MT 20‐26 MT > 26 MT

1001‐1050 9,734 12,222 13,556 11 14 15 951‐1000 23,174 27,809 30,897

1501‐1550 13,796 17,267 19,236 14 16 17 1451‐1500 34,209 41,050 45,612

2001‐2050 18,089 22,304 24,908 14 18 19 1951‐2000 42,923 51,510 57,232

2501‐2550 22,405 27,362 30,600 14 19 20 2951‐3000 54,912 65,894 73,217

3001‐3050 26,720 32,391 36,265 13 20 20 3451‐3500 60,706 72,848 80,942

Source: IIM‐A Research Paper, Industry Data, Karvy Institutional Research

4.5 Haulage charge hike impacted domestic handling for rail operators

The hikes in commodity specific haulage charge by the IR severely impacted the

demand for container rails in the domestic segment. The IR lost its market share to

the truck operators over the next few quarters.

Exhibit 53: Container Corporations’ domestic container handling growth got impactedafter Indian Railways increased commodity specific haulage charges in

Dec2010

Source: Container Corporation of India, Karvy Institutional Research

However, in the long run, the railways will continue to be the preferred mode for

long haul cargo movements as it costs ~one third (Rs. 1.25 per KM per MT)

compared to road transportation.

143

152

127 132 145 139

111 113 120

(20)

(10)

‐

10

20

30

40

‐

50

100

150

200

Dec‐09

Mar‐10

Jun‐10

Sep‐10

Dec‐10

Mar‐11

Jun‐11

Sep‐11

Dec‐11

Domestic Throughput (ʹ000 TEUs) YoY Growth (%) RHS



27

March 22, 2012

Logistics Thematic

Additional railway surcharge, rising empty rake parking charges, restricting

commodity basket for CTOs have further compounded the cost pressure on the

CTOs.

Other issues which need to be handled include better and efficient maintenance

facility by IR to CTOs, better clarity on development and use of private sidings to

increase penetration. Further, while the IR has leased out land to Container Corp

at low rates, the private CTOs have to incur high costs to set up its ICD/ CFS. This

contradicts the level‐playing field suggested by the policy.

5. FDI Policy related to Logistics Sector has Encouraged Foreign Players/ PEs to invest in the Sector

In India, 100% FDI is allowed in the logistics sector. Almost all major global

logistics players have their presence in India.

100% FDI under the automatic route is permitted for all logistics services

except in services mentioned in points II and III

FDI up to 100% subject to FIPB approval is permitted for courier services

FDI up to 49% under the automatic route is permitted for air transport

services, including air cargo services.

Exhibit 54: M&A deals have been a popular route of entry in India

Segment Acquirer/ Investor Target Year

Express cargo Brekman Grp Courcan Cargo 2006

Freight Fwddg CH Robinson Triune Freight 2006

Express cargo FedEx Prakash Air Freight 2006

Transportation TNT Associated Road Carriers 2006

Freight Fwddg Kerry Logisitcs Reliable Freight Forwarders 2006

Freight Fwddg Phoenix International Freight Services Eastern Logisitcs 2006

Ports Sembcorp Marine Gujarat Pipavav Port 2007

Ports Tropical Dimension Kakinada Seaports 2007

Ports DP World Chennai Container Terminal 2008

Shipping Oxbow Corporation United Shippers 2009

Bulk Cargo Handling Louis Dreyfus Armateurs ABG LDA Bulk Handling 2009

Transportation Toll Group BIC Logistics 2009

Transportation Blackstone Gateway Rail Freight 2009

Freight Fwddg Blackstone Allcargo Logistics 2009

Ports PSA International Chennai Container Terminal 2010

Transportation Hitachi Transportation System Flyjac 2010

Transportation NYK Line Tata Martrade International Logisitcs 2010

Warehousing Warburg Pincus India Continental Warehousing Corporation 2011

Freght Fwddg Fidelity Growth Partners India Transpole Group 2011

Transportation Coffee Day Resorts Sical Logistics 2010

Express cargo FedEx AFL 2010

Express cargo Kintetsu World Express Gati 2012

Source: KPMG, Industry, Karvy Institutional Research



28

March 22, 2012

Logistics Thematic

Exhibit 55: PE investors interest in India’s logistics has risen by a sharp drop in 2009

Source: Venture Intelligence, Karvy Institutional Research (2010 data is for Jan‐

Oct2010 period)

Exhibit 56: PE Investment profile during Mar’06 – Oct’10

periods

Source: Venture Intelligence, Karvy Institutional Research (Data is for Jan’07 to

Oct’10 period)

6. Impending GST – Another Booster for the Industry

In the absence of a unified tax structure, the companies have to invest in

warehousing operations in every state to avoid multiple taxations. This raises the

total fixed costs for the operators, while preventing the implantation of latest

technologies as fragmentation prohibits economies of scale.

The recent move by the Government to implement GST in FY13 would address

this issue to a large extent. Unified taxation should reduce ambiguity and costs for

various service providers. This in turn will boost the modern warehouse industry

and also help increase penetration of integrated logistics concepts of 3PL, 4PL and

7PL.

Modern warehousing segment to be a large beneficiary of GST

The Indian warehousing industry is highly fragmented with only ~10% with

organised players. Again, the size of the warehouses is mostly less than 10,000

square feet and these warehouses lack modern infrastructure capabilities. As per

industry estimates, the warehousing segment (including CFS, ICD, cold storage,

modern warehousing, etc) comprises 20% of the logistics industry and is valued at

~US$30 bn in FY10. GST implementation would lead to significant reorganization

of warehousing in India, as the companies move towards unified and large

warehouses at centralized locations coupled with modern infrastructure. The

demand for modern warehousing would increase, as these are critical elements in

evolution of the logistic supply chain.

0

5

10

15

20

25

30

35

0

200

400

600

800

1000

2007 2008 2009 2010

(US$ mn) No. of Deals

Logisitcs

Services

47%

Port

12%

Warehousin

g

7%

Aviation

8%

Shipyard

11%

Railway

Logistics

4%

CFS

10%

Others

1%



29

March 22, 2012

Logistics Thematic

7. Value Added Services ‐ 3PL & above – to Provide the Next Level of Growth for Logistics Industry

As discussed earlier in the report, logistics in India is at the nascent stages. Market

share of 3PL logistics in India is ~10% vs. 40% in Europe, ~60% in the USA and 80%

in Japan. Hence, there remains strong growth potential for logistics service

providers in the segment.

Exhibit 57: Various classes of logistics service providers


As the companies increasingly focus on their operational efficiencies through

better cost controls and on asset returns, the management focus would shift to core

business. Hence, non‐core business of handling logistics supply chain would move

to 3PL (and above) service providers. However, the success of these providers

would require long term relationships with customers as well as asset providers,

customized industry specific solutions, highly qualified manpower and enhanced

usage of technology etc.

Third Party logistics (3PL) is an outsourcing concept in which a company

outsources its logistics needs to some third party player who takes cares of all

their logistics needs. The general functions which are outsourced under the

concept are transportation, warehousing, cross‐docking, inventory

management, packaging and freight forwarding.

Fourth Party Logistics (4PL) can be defined as a service of designing supply

chain solutions for its clients. The service providers under the category are

basically non asset based, who organize the logistics needs of their clients. The

main distinguishing factor between a 3PL and 4PL is the ability of 4PL to

generate revenues from non‐asset base. 4PL player is a consultant, whereas

3PL is the actual operator, who executes the logistics functions. 4PL in some

cases also co‐ordinates the functions of 3PL.

Seven Party Logistics (7PL = 4PL + 3PL) is a recent concept and it combines

the consulting and co‐coordinating functions of 4PL with operational functions

of 3PL, thus offering a total outsourcing of logistics division. 7PL concept is yet

to take its grounds in India.



30

March 22, 2012

Logistics Thematic

Key Risks

As discussed, the growth of Indian logistics sector is very much dependant on

government willingness to relax logistics infrastructure constraints. There

have been inadvertent delays in developing rail, road, ports and coastal

shipping capabilities. Whilst we expect things to move in the positive

directions, further delays will distract serious investors in the segment, who

have been investing in transportation assets and in developing high end

logistics services.

Delay in streamlining taxation policy is another key risk that will impact the

sectors’ profitability and the future capex capability.

Land acquisition in India has become complex recently due to various socio‐

political issues. Any delay in streamlining the land acquisition process would

severely impact the profitability of the incumbent as well as the and new

entrants.



31

March 22, 2012

Logistics Thematic

Companies Section

ALLCARGO GLOBAL

ARSHIYA INTERNATIONAL

CONCOR

GATEWAY DISTRIPARKS



Logistics March 22, 2012

Allcargo Logistics

Bloomberg: AGLL INReuters: ALGL.BO BUY

Institutional Equities

India Research

INITIATION REPORT

Recommendation

CMP: Rs138

Target Price: Rs213

Upside (%) 54%

Stock Information Market Cap. (Rs bn / US$ mn) 18/350

52‐week High/Low (Rs) 190/115


Beta 0.8

Sensex/ Nifty 17,316/5,275

Share outstanding (mn) 131

Stock Performance (%) 1M 3M 12M YTD

Absolute (5) 9.7 (14) 5.1

Rel. to Sensex 0.3 (3.9) (11.2) (6.2)

Performance


1 Year Forward EV/EBITDA


Analysts Contact

Rajesh Kumar Ravi 022 6184 4313

[email protected]

Prasun Kumar

022 6184 4325

[email protected]

120

140

160

180

200

15,500

17,500

19,500

21,500

Mar‐11

May‐11

Jun‐11

Jul‐11

Aug‐11

Oct‐11

Nov‐11

Dec‐11

Feb‐12

Mar‐12

Sensex (LHS) Allcargo Logistics (RHS)

0

5

10

15

20

25

Jun‐06

Dec‐06

Jul‐07

Jan‐08

Jul‐08

Jan‐09

Jul‐09

Feb‐10

Aug‐10

Feb‐11

Aug‐11

Mar‐12

A Global Player on Growth PathMTO segment buoyed by ECU Line growth: Globally, AGLL is the 2nd

largest LCL consolidator (Multimodal Transport Operations) post acquisition

of ECU Line. This segment accounts for 80% of total revenues. With ECU

Line’s increasing presence in the high growth Asian countries, we expect the

MTO revenues to grow at 14% CAGR in FY12‐14E period.

Expanding CFS/ ICD Capacities to Boost Profitability: AGLL has three CFS

at three major EXIM hubs ‐ JNPT, Mundra and Chennai. It is the number one

operator at Chennai and Mundra ports with major concentration towards

high realisation import cargo handling. Currently, this segment contributes

~7% to AGLL total sales and ~30% of consolidated EBIT as this is the highest

margin segment for AGLL (~48‐57% OPM during the last eight quarters).

AGLL is incurring capex of Rs. 1.3 bn to double its JNPT capacity to 288K

TEUs and Chennai capacity by ~10% in FY13E. Further, AGLL is augmenting

its ICDs’ and Warehouses’ capacities by incurring a capex of Rs. 0.7 bn.

Rising presence in another niche business – Project logistics and

Equipment hiring: AGLL has increased its fleet of cranes and engineering

equipment to capitalise on strong demand related to infrastructure

development activities. With a strong capex of Rs. 4 bn during FY12‐13E, we

expect revenues to grow at 18% CAGR during FY12‐14E.

Capex results in doubling of gross debt but within control: The ongoing

expansions have doubled AGLL’s gross debt in FY12E to Rs. 7.9 bn and we

expect the same to increase further to Rs. 8.6 bn by FY14E. However, in our

view AGLL’s balance sheet does not appear stretched as net DER stands in

the range of 0.26‐0.37x during FY12‐14E.

Initiate coverage with “BUY” recommendation: We expect AGLL net profits

to grow by 20% CAGR during FY12‐14E period led by expansions across all

the three business segments AGLL is present in – MTO, CFS/ICD and Project

& Engineering. We value AGLL at 10.5x (25% discount to five year median

P/E 13.8x) it’s mid FY13‐FY14E EPS of Rs. 20.2. We initiate coverage on the

stock with “BUY” recommendation with a target price of Rs. 213 per share.

Key Financials

Year to Dec/ Mar (Rs mn) CY09 CY10 FY12E FY13E FY14E

Net Sales 20,609 28,613 43,325 40,391 43,169

EBITDA 2,185 2,698 4,927 4,667 5,320

EBITDA (%) 10.6 9.4 11.4 11.6 12.3

PAT 1,327 1,656 2,765 2,446 2,845

EPS (Rs) 10.6 12.7 16.9 18.7 21.8

RoE (%) 16.4 15.1 16.6 15.5 15.6

RoCE (%) 14.8 13.4 14.2 12.9 12.9

P/E (x) 12.7 10.7 8.0 7.2 6.2

EV/EBITDA (x) 8.1 7.1 5.7 4.7 4.1

Source: Company, Karvy Institutional Research *FY12 EPS is annualized, Change of accounting year



33

March 22, 2012

Allcargo Logistics

Shareholding pattern (%)


Consolidated Revenue breakup (%)


Promoters,

69.81DII, 0.81

FII, 11.15

Public &

Others,

18.23

ECU Line

69%

Domestic

MTO

6%

CFS / ICD

7%

Project &

Engg.

9%

Others

9%

Company Background

Allcargo Logistics (AGLL) is the second largest LCL (Less

than Container Load) consolidator globally. Its business

segments include Multi‐modal Transport Operations (MTO),

Container Freight Stations, Project Logistics, Equipment

Hiring &, Coastal Shipping.

Incorporated on August 18, 1993 as a private limited

company under the leadership of Shashi Kiran Shetty, AGLL

has taken a long stride growing organically as well as

inorganically since then.

In 2006, it acquired the Belgium‐based ECU Hold NV

thereby becoming the 2nd largest LCL operator globally. Its

CFSs are located at major cargo hubs such as JNPT, Chennai

& Mundra and has ICDs at Pithampur and Indore.

Company Financial Snapshot Profit & loss

Rs mn FY12E FY13E FY14E

Net sales 43,325 40,391 43,169

EBIDTA 4,927 4,667 5,320

Depreciation 1,160 1,015 1,223

Interest Expense 740 705 673

PBT 3,637 3,246 3,755

Tax 727 649 751

Adj. PAT 2,765 2,446 2,845

EPS (Rs)* 16.9 18.7 21.8

DPS (Rs) 1.0 1.9 2.2

Profit and Loss Ratios

EBIDTA Margin % 11.4 11.6 12.3

Adj Net Margin % 6.4 6.1 6.6

Valuation Multiples

P/E (X) 8.0 7.2 6.2

EV/EBIDTA (X) 5.7 4.7 4.1

P/BV (X) 1.2 1.0 0.9

*FY12 EPS is annualized

Cash Flow


PBT 3,637 3,246 3,755


Interest 740 705 673

Tax (727) (649) (751)

Change in Wkg Cap (1,470) 327 (755)

CF from Operations 3,339 4,644 4,144

Capex (5,100) (3,500) (3,000)

Investments 177 (7) (7)

CF from Investing (4,923) (3,507) (3,007)

Change in Equity 0 ‐ ‐

Change in Debt 4,040 391 410

Dividends & others (840) (892) (906)

CF from Financing 3,199 (501) (496)

Change in Cash 1,615 636 641

Balance Sheet


Total Assets 27,755 31,496 35,360

Net Fixed Assets 16,413 18,897 20,675

Current Assets 10,786 12,042 14,129

Other Assets 557 557 557

Total Liabilities 27,755 31,496 35,360

Networth 14,384 16,543 19,055

Debt 7,817 8,208 8,618

Current Liabilities 4,646 5,586 6,269

Other Liabilities 908 1,159 1,418

Balance Sheet Ratios

RoE % 16.6 15.5 15.6

RoCE % 14.2 12.9 12.9

Net DER (x) 0.3 0.3 0.2

Asset Turnover (x) 1.4 1.4 1.3



34

March 22, 2012

Allcargo Logistics

Valuation & Recommendation We expect AGLL net profits to grow at 20% CAGR during FY12‐14E period led by

expansions across all the three business segments AGLL is present in – MTO,

CFS/ICD and Project & Engineering. While debt levels will increase to fund this

growth, AGLL balance sheet remains fairly stable in our view (Net DER of ~0.3x

during FY13‐14E). We value AGLL at 10.5x (25% discount to its five year median

P/E 13.8x) it’s mid FY13‐FY14E EPS of Rs20.2 per share. The 25% discount to its

long term average factors in risks to earnings growth that may emanate from

delays in infrastructure commissioning which in turn will impact growth for all

the logistics providers. We initiate coverage on the stock with “BUY”

recommendation with a target price of Rs. 213 per share.

Exhibit 1: AGLL is trading at the lower end of its long term 1 yr fwd P/E median of 13.8x (1SD 7x)


AGLL’s long term median EV/EBITDA (1 yr fwd) of 8x (1

SD 2.9x)


Exhibit 2: Long term P/B median at 1.9x (1SD 1.1x)


Exhibit 3: Return Ratios to stabilise during FY13‐14E


0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

Jun‐06

Dec‐06

Jul‐07

Jan‐08

Jul‐08

Jan‐09

Jul‐09

Feb‐10

Aug‐10

Feb‐11

Aug‐11

Mar‐12

0

5

10

15

20

25

Jun‐06

Dec‐06

Jul‐07

Jan‐08

Jul‐08

Jan‐09

Jul‐09

Feb‐10

Aug‐10

Feb‐11

Aug‐11

Mar‐12

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Jun‐06

Dec‐06

Jul‐07

Jan‐08

Jul‐08

Jan‐09

Jul‐09

Feb‐10

Aug‐10

Feb‐11

Aug‐11

Mar‐12

23.5

17.3 18.2

14.8 13.4

14.2 12.9

12.9

17.0

20.2

16.4 15.1

16.6

15.5 15.6

10

12

14

16

18

20

22

24

CY06 CY07 CY08 CY09 CY10 FY12E FY13E FY14E

RoCE RoE RoIC



35

March 22, 2012

Allcargo Logistics

Investment Rationale Our investment thesis is based on following premises:

1. LCL / MTO segment buoyed by ECU Line’s growth

2. CFS capacity expansion to boost profitability

3. ICDs and Warehouses would further boost earnings in long‐run

4. Project Logistics and Equipment hiring to gain from growing demand from

infrastructure space

5. We expect 15% revenue CAGR during FY12‐14E

6. Expect EBITDA CAGR of 26% during FY12‐14E as margins expand

7. PAT CAGR to moderate to 20% on account of high interest costs

1. LCL / MTO segment buoyed by ECU Line’s growth

AGLL became the 2nd largest LCL consolidator globally after it acquired ECU Line.

This subsidiary along with Indian MTO operations contributes ~80% of

consolidated revenues of AGLL (India ~10%). With its strong presence across the

globe, ECU Line MTO volume throughput has been growing by 18% CAGR over

the last two years. ECU Line has slowly diversified into non European countries –

into the Far East nations to continue its growth momentum. It recently acquired

companies in Hong Kong and China to mark its presence in growing Asian

economies. Additionally, as container trade increases amongst the Asian countries,

AGLL should benefit from its rising presence in Asia. Going forward, we expect

total MTO revenues to grow by 13% CAGR during FY12‐14E periods.

Exhibit 4: ECU Line volume has grown at 18% CAGR during the last two years


Exhibit 5: ECU Line’s revenue trend during the last two years


2. CFS capacity expansion to boost profitability

AGLL has three CFS at three major EXIM hubs ‐ JNPT, Mundra and Chennai. It is

the number one operator at Chennai and Mundra ports with major concentration

towards high realisation import cargo handling. Currently, this segment

contributes ~7% to AGLL total sales and ~30% of consolidated EBIT as this is the

highest margin segment for AGLL (~48‐57% OPM during the last eight quarters).

Going forward, the CFS’ contribution to top‐line and EBIT should increase as

AGLL is about to double its CFS capacity at JNPT by 1HFY12 to 288K TEUs. This

will be a major revenue driver as currently, JNPT CFS is operating at >90%

utilisation. The management plans to increase its export handling on the

incremental capacities in its bid to gain overall EXIM market share at JNPT.

Similarly, to maintain its leadership position at Chennai where utilisation has

‐20

‐10

0

10

20

30

40

0

10

20

30

40

50

60

70

Jun‐09

Sep‐09

Dec‐09

Mar‐10

Jun‐10

Sep‐10

Dec‐10

Mar‐11

Jun‐11

Sep‐11

Dec‐11

ECU Line Volumes (K TEUs) Growth YoY (%) RHS

‐40

‐20

0

20

40

60

80

100

0

1000

2000

3000

4000

5000

6000

7000

8000

Mar‐10

Jun‐10

Sep‐10

Dec‐10

Mar‐11

Jun‐11

Sep‐11

Dec‐11

Revenue (Rs mn) Growth YoY (%) RHS



36

March 22, 2012

Allcargo Logistics

moved up to 80% levels, AGLL is planning to augment its capacity through

introduction of better stacking facilities using Rubber Tyre Gantry Cranes (RTGs).

Going forward, we expect moderate fall in EBIDTA margins as new capacities in

JNPT pick‐up mainly on account of change in EXIM mix. However, we expect the

additional revenue generated from added capacities to more than compensate for

the margin decline. Total capex of Rs. 1.3 bn is being spent towards CFS segment

during FY12‐13E period.

Exhibit 6: AGLL’s JNPT CFS volumes have declined recently…


Exhibit 7: …While it continues to grow at its Chennai CFS…


Exhibit 8: …and at its Mundra CFS


3. ICDs and Warehouses would further boost earnings in long‐run

It also has two ICDs operational at Dadri and Pithampura. Currently, these are

small units and AGLL is infusing capex to increase throughput at these units as

well as is investing in another ICD at Hyderabad. Additionally, AGLL is also

investing into warehousing capacity at Goa and Hosur. AGLL is spending ~Rs. 0.7

bn towards these expansions.

4. Project Logistics and Equipment hiring to gain from growing

demand from Infrastructure space

AGLL offers project integrated projects, engineering and equipment logistics

solutions. The growth in this business is closely related with infrastructure

development activities in India. The industry is currently facing acute demand

supply gap for availability of equipments as well as one stop solution provider to

meet the industry demand.

Exhibit 9: AGLL’s Cranes fleet growth trends


Exhibit 10: AGLL’s Trailers fleet growth trends


Exhibit 11: Segment‐wise deployment of AGLL’s cranes


AGLL currently has a strong fleet of 62 forklifts, 36 reach stackers, 488 trailers and

145 cranes. It added 44 cranes (~40% increase YoY) during CY11 which is the main

‐40%

‐20%

0%

20%

40%

60%

‐

10,000

20,000

30,000

40,000

Mar‐09

Jun‐09

Sep‐09

Dec‐09

Mar‐10

Jun‐10

Sep‐10

Dec‐10

Mar‐11

Jun‐11

Sep‐11

Dec‐11

JNPT Vol Growth YoY%

‐50%

0%

50%

100%

‐

10,000

20,000

30,000

Mar‐09

Jun‐09

Sep‐09

Dec‐09

Mar‐10

Jun‐10

Sep‐10

Dec‐10

Mar‐11

Jun‐11

Sep‐11

Dec‐11

Chennai Vol. Growth YoY%

‐50%

0%

50%

100%

150%

‐

5,000

10,000

15,000

Mar‐09

Jun‐09

Sep‐09

Dec‐09

Mar‐10

Jun‐10

Sep‐10

Dec‐10

Mar‐11

Jun‐11

Sep‐11

Dec‐11

Mundra Vol. Growth YoY%

74

101

145

0

50

100

150

200

Mar‐10

Jun‐10

Sep‐10

Dec‐10

Mar‐11

Jun‐11

Sep‐11

Dec‐11

365423

488

0

100

200

300

400

500

600

Mar‐10

Jun‐10

Sep‐10

Dec‐10

Mar‐11

Jun‐11

Sep‐11

Dec‐11

Wind

Energy

, 33%

Power,

20%

Cement

‐Steel ,

2%

Oil &

Gas ,

8%

Port &

CFS ,

2%

Engg &

Infra. ,

30%

Ship

buildin

g, 3%

Logistic

s , 3%



37

March 22, 2012

Allcargo Logistics

revenue driver for the equipment hiring division. With strong EBIT margins of

~25%, growth in the segment should boost PAT growth. Current project order

book stands at Rs 2.3 bn, out of which company expects to execute Rs~1.3‐1.4 bn in

FY13E, which should help the segmental revenue growth 20% in FY13. The

management is incurring capex of Rs 4 bn during FY12‐13E to augment fleet

strength in the segment.

5. We expect 15% revenue CAGR during FY12‐14E

We have factored in 14%, 26% 18% revenue CAGR in the MTO division, CFS

division and Project & Equipment division respectively during FY12‐14E periods.

This should lead to 15% revenue CAGR during FY12‐14E period.

Exhibit 12: Key volumes and realisation assumptions

CY09 CY10 FY12E FY13E FY14E

ECU Line MTO Vol (TEUs) 175,051 211,678 306,221 259,179 267,590

YoY Growth (%) 20.9 15.7 5.8 3.2

ECU Line MTO Realisation (Rs/ TEU) 86,717 97,459 97,743 102,619 103,853

YoY Growth (%) 12.4 0.3 5.0 1.2

Indian MTO Vol (TEUs) 24,882 25,875 35,261 30,047 32,187

YoY Growth (%) (16.7) 4.0 9.0 6.5 7.1

Indian MTO Realisation (Rs/ TEU) 95,003 86,232 84,807 86,462 87,429

YoY Growth (%) (14.2) (9.2) (1.7) 2.0 1.1

CFS Volumes (TEUs) 173,851 226,797 314,431 286,283 325,459

YoY Growth (%) (2.7) 30.5 10.9 13.8 13.7

Realisation (Rs/TEU) 8,717 8,609 11,149 11,671 11,984

YoY Growth (%) 5.0 (1.2) 35.6 4.7 2.7


Exhibit 13: Revenue share increasing from the high margins CFS and Project & Engineering divisions


Exhibit 14: We expect AGLL to deliver 15% revenue CAGR

during FY12‐14E


6. Expect EBITDA CAGR of 26% during FY12‐14E as margins

expand

Aided by higher realisation and increased operational efficiencies, we expect OPM

to expand by >200bps YoY during FY12E and to further improve by 90bps during

FY13‐14E. This should result in EBITDA CAGR of 26% during FY12‐14E period.

0%

20%

40%

60%

80%

100%

CY08

CY09

CY10

FY12E

FY13E

FY14E

CFS Project Engg. MTO

‐20

‐10

0

10

20

30

40

50

‐

10,000

20,000

30,000

40,000

50,000

CY08

CY09

CY10

FY12E

FY13E

FY14E

Revenues (Rs mn) YoY growth (%)



38

March 22, 2012

Allcargo Logistics

Exhibit 15: We expect OPM to expand by 300bps over FY12‐14 periods


Exhibit 16: Thereby boosting EBITDA CAGR to 26%

during FY12‐14E


7. PAT CAGR to moderate to 20% on account of high interest costs

The ongoing expansions have doubled AGLL’s gross debt in FY12E to Rs. 7.9 bn

and we expect the same to increase further to Rs. 8.6 bn by FY14E. These will

increase interest outgo in subsequent years thereby moderating PAT CAGR to 20%

during FY12‐14E. However, in our view AGLL’s balance sheet does not appear

stretched as net DER stands in the range of 0.26‐0.37x during FY12‐14E.

Exhibit 17: Higher capital charges to moderate PAT CAGR to 20% during FY12‐14E


Exhibit 18: We expect return ratios to stabilise by FY14E


Key Risks

ECU Line revenues: ECU Line growth assumes its continued penetration in the

far‐East Asian countries and in the USA. Hence, revenue growth and profitability

can get impacted if these expansions do not go as per plans.

Delays in JNPT CFS expansion: AGLL’s CFS capacity expansion by 144 K TEUs at

JNPT is scheduled to be commissioned in Q2FY13. If the same gets delayed

significantly, overall profitability will get impacted.

0

2

4

6

8

10

12

14

CY08

CY09

CY10

FY12E

FY13E

FY14E

OPM (%) NPM (%)

‐10

0

10

20

30

40

50

60

‐

1,000

2,000

3,000

4,000

5,000

6,000

CY08

CY09

CY10

FY12E

FY13E

FY14E

EBIDTA (Rs mn) YoY Growth (%)

0

10

20

30

40

50

60

‐

500

1,000

1,500

2,000

2,500

3,000

CY08

CY09

CY10

FY12E

FY13E

FY14E

Adj PAT (Rs mn) YoY Growth (%)

23.5

17.3 18.2

14.8 13.4

14.2 12.9 12.9

17.0

20.2

16.4 15.1

16.6

15.5 15.6

10

12

14

16

18

20

22

24

CY06 CY07 CY08 CY09 CY10 FY12E FY13E FY14ERoCE RoE RoIC



39

March 22, 2012

Allcargo Logistics


Exhibit 19: AGLL ‐ Impact of changes in volumes & realization across CFS andNVOCC (ECU Line) verticals on the earnings metrics and target price

estimates (FY14E)

EPS (%) RoE (bps) RoCE (bps) TP (%)



1% lower ECU Line realization (10) (142) (96) (5)

10% lower ECU Line volumes (6) (90) (60) (3)


Karvy vs. Consensus

In Feb’12, AGLL announced and moved to March ending (FY) accounting from its

current practice of December ending (CY), our FY12E estimates include five

quarters of financials. Hence, our estimates are not comparable to consensus

estimates which are yet to adopt it.



40

March 22, 2012

Allcargo Logistics

Financials

Exhibit 20: Profit and Loss (Consolidated)

Year to December / March (Rs mn) CY09 CY10 FY12E FY13E FY14E

Net Sales 20,609 28,613 43,325 40,391 43,169

% growth (11) 39 21 17 7

Operating expenditure 18,424 25,915 38,398 35,724 37,849

EBITDA 2,185 2,698 4,927 4,667 5,320

% growth (1) 23 46 18 14

Depreciation 545 550 1,160 1,015 1,223

EBIT 286 286 610 300 330

Interest expenditure 1,926 2,434 4,377 3,951 4,428

Exceptional items 232 194 740 705 673

PBT 1,695 2,240 3,637 3,246 3,755

Tax 260 484 727 649 751

Minority Interest 108 100 144 151 159

PAT / Net profit ‐ reported 1,327 1,656 2,765 2,446 2,845

Adjusted PAT / Net profit 1,327 1,656 2,765 2,446 2,845

% growth 19 25 34 11 16


Exhibit 21: Balance Sheet (Consolidated)

Year to December/ March (Rs mn) CY09 CY10 FY12E FY13E FY14E

Cash & liquid investments 2,075 2,192 3,183 3,827 4,475

Debtors 2,354 2,528 3,571 3,231 3,454

Inventory ‐ ‐ ‐ ‐ ‐

Loans & advances 2,164 3,172 3,891 4,914 6,130

Other Current Assets 29 72 140 70 70

Long term investments 510 557 557 557 557

Gross block 9,241 13,871 18,971 22,471 25,471

Net block 7,189 11,483 15,423 17,907 19,685

CWIP 750 543 990 990 990

Total assets 15,070 20,546 27,755 31,496 35,360

Current liabilities & provisions 2,900 4,308 4,646 5,586 6,269

Debt 2,044 3,778 7,817 8,208 8,618

Other liabilities 179 408 652 752 852

Total liabilities 5,124 8,494 13,115 14,546 15,739


Shareholdersʹ equity 250 261 261 261 261

Reserves & surpluses 9,561 11,528 14,122 16,282 18,794

Total networth 9,811 11,789 14,384 16,543 19,055

Total equity and liabilities 15,070 20,546 27,755 31,496 35,360




41

March 22, 2012

Allcargo Logistics

Exhibit 22: Cash Flow Statement (Consolidated)

Year to December/ March (Rs mn) CY09 CY10 FY12E FY13E FY14E

PBT 1,695 2,240 3,637 3,246 3,755

Depreciation 545 550 1,160 1,015 1,223

Interest 193 117 740 705 673

Tax (424) (653) (727) (649) (751)

(Incr) / decr in net working capital 10 291 (1,470) 327 (755)

Others (144) 123 (0) ‐ ‐

Cash Flow from Operations 1,874 2,668 3,339 4,644 4,144

(Incr) / decr in capital expenditure (1,707) (4,913) (5,100) (3,500) (3,000)

(Incr) / decr in investments (636) 380 177 (7) (7)

Others 47 85 (0) (0) 0

Cash Flow from Investments (2,296) (4,448) (4,923) (3,507) (3,007)

Incr / (decr) in borrowings (386) 1,707 4,040 391 410

Issuance of equity 1,120 1,047 0 ‐ ‐

Dividend paid (56) (62) (194) (286) (333)

Others (332) (331) (646) (605) (573)

Cash Flow from Financing 346 2,361 3,199 (501) (496)

Net change in Cash (76) 581 1,615 636 641


Exhibit 23: Ratio Analysis

Year to December / March (%) CY09 CY10 FY12E FY13E FY14E

EBITDA margin 10.6 9.4 11.4 11.6 12.3

EBIT margin 9.3 8.5 10.1 9.8 10.3

Net profit margin 6.4 5.8 6.4 6.1 6.6

Dividend payout ratio 11.0 27.7 7.0 11.7 11.7

Net debt: equity (x) 0.0 0.2 0.37 0.31 0.26

Working capital turnover (x) 0.1 0.1 0.1 0.1 0.1

RoCE 14.8 13.4 14.2 12.9 12.9

RoIC 18.6 16.5 17.1 15.5 15.5

RoE 16.4 15.1 16.6 15.5 15.6


Exhibit 24: Valuation Parameters

Year to December / March CY09 CY10 FY12E FY13E FY14E

Adjusted EPS (Rs) ‐ Annulised 10.6 12.7 16.9 18.7 21.8

Non Annulised EPS (Rs) 10.6 12.7 21.2 18.7 21.8

DPS (Rs) 1.0 3.0 1.0 1.9 2.2

Book value per share (Rs) 79.6 92.2 111.9 129.6 150.1

P/E (x) 12.7 10.7 8.0 7.2 6.2

P/BV (x) 1.7 1.5 1.2 1.0 0.9

EV/EBITDA (x) 8.1 7.1 5.7 4.7 4.1

EV/Sales (x) 0.9 0.7 0.6 0.5 0.5





Arshiya International

Bloomberg: ARST INReuters: ARST.BO BUY


India Research

INITIATION REPORT

Recommendation

CMP: Rs140

Target Price: Rs227

Upside (%) 62%




Beta 0.8




Absolute (12.7) 17.9 (33.1) 11.5

Rel. to Sensex (7.8) 3.3 (31) (0.5)

Performance




Analysts Contact Rajesh Kumar Ravi

022 6184 4313

[email protected]

Prasun Kumar

022 6184 4325

[email protected]

100

150

200

250

15,500

17,500

19,500

21,500

Mar‐11

May‐11

Jun‐11

Jul‐11

Aug‐11

Oct‐11

Nov‐11

Dec‐11

Feb‐12

Mar‐12

Sensex (LHS)

Arshiya International (RHS)

(10)

0

10

20

30

Apr‐07

Sep‐07

Mar‐08

Sep‐08

Mar‐09

Sep‐09

Mar‐10

Sep‐10

Mar‐11

Sep‐11

Mar‐12

FTWZ Expansion to Lead Growth

FTWZ expansion boost earnings growth in FY12‐14E period: Arshiya

International (ARST) is the pioneer of Free Trade Warehousing Zones

(FTWZ) concept in India. Currently, it has an operational FTWZ at Panvel

Mumbai and its Khurja (UP) FTWZ is expected to be operational in Q4FY12.

Further, ARST plans to ramp up its warehouses at both the FTWZ by tenfold

to 35 warehouses by FY14E. Based on these expansions, we expect revenues

of this high margin (EBIT margins of >55%) segment to grow by >100%

CAGR during FY12‐14E.

Rail Business (Third largest operator) on expansion spree: ARST is the third

largest container train operator in India with 16 operational rakes and plans

to add another eight rakes during FY13‐14E. It has major concentration in the

domestic segment where it works on long‐term contract basis. We expect

these additions to boost the segmental revenues by 38% CAGR and EBITDA

CAGR of 28% during FY12‐14E.

3PL Business’s revenue share to decline: ARST specializes in providing

integrated logistics solutions. It offers supply chain management solutions,

project logistics and freight forwarding under its 3PL business. In FY12E, the

segmental revenue would decline by 3.5% YoY after the sale of the Qatar and

Oman units to increase focus on India focus. However, we expect the same to

grow at 6% CAGR during FY13‐14E.

High debt to stretch balance sheet in near‐term; return ratios to improve in

long‐term: The ongoing expansion plan across FTWZ and rail divisions

would require a capex of Rs. 32.5 bn with a DER of 70%. This would stretch

ARST’s net DER to 2.1 in FY13E vs. 0.7 in FY10. However, as these

expansions get commissioned and ramp up, return ratios should expand by

>700 bps during FY11‐14E.

Initiate coverage with “BUY” recommendation: We value ARST at 7x (35%

discount to five year median EV/EBITDA of 11x) its FY13‐14E average

EBITDA of Rs. 4.87 bn. We initiate coverage on the stock with “BUY”

recommendation with a target price of Rs. 227 per share. Our fair value

multiple is at 40% discount to ARST five year average P/E of 10x and 10%

discount to its five year average P/B of 1.38x.

Key Financials

Year to Mar (Rs mn) FY10 FY11 FY12E FY13E FY14E

Net Sales 5,259 8,215 10,326 13,886 19,404

EBITDA 861 1,592 2,497 3,686 6,045

EBITDA (%) 16.4 19.4 24.2 26.5 31.2

PAT 980 815 1,079 1,378 2,988

EPS (Rs) 16.7 13.8 18.3 23.4 50.8

RoE (%) 15.4 11.7 14.0 15.7 27.8

RoCE (%) 10.7 7.1 7.7 9.0 13.3

EV/EBITDA (x) 15.4 13.3 9.9 7.7 4.9




43

March 22, 2012


Shareholding pattern

Source: Company

Consolidated Revenue breakup (%)

Source: Company

Promoters,

43.23

DII, 2.23FII, 16.17

Public &

Others,

38.37

Logistics

and related

Services,

59.3

CFS/FTW

Operation ,

15.3

Rail

Transport

Operations

, 25.2

Others/

Software,

0.2

Company Background

Arshiya International (ARST) was incorporated in the year

1981 as IID Forgings, and in Sept’07, it changes its name to

Arshiya International.

ARST has been the pioneer in introducing concept of FTWZ

with its Panvel FTWZ spanning 165 acres. It is in process of

commissioning another at Khurja in UP.

ARST currently operates in Free Trade Warehousing Zones,

Container rail, 3PL, 4PL, Trucking, Warehousing & IT

enabling services. It has a fleet of 16 container rakes serving

primarily in the domestic segment

ARST has been adding several value added services (VAS)

in the FTWZ segment, which should be amongst the key

drivers for ARST’s profitability.



Net sales 10,326 13,886 19,404

EBIDTA 2,497 3,686 6,045

Depreciation 332 668 989

Interest Expense 1,001 1,514 1,626

PBT 1,306 1,660 3,600

Tax 227 282 612

Adj. PAT 1,079 1,378 2,988

EPS (Rs) 18.3 23.4 50.8

DPS (Rs) 1.5 2.0 5.0



Adj Net Margin % 10.4 9.9 15.4

Valuation Multiples

P/E (X) 7.7 6.0 2.8

EV/EBIDTA (X) 9.9 7.7 4.9

P/BV (X) 1.0 0.9 0.7

Cash Flow

(Rs mn) FY12E FY13E FY14E

PBT 1,306 1,660 3,600


Tax (231) (280) (598)

Change in Wkg Cap (452) (530) (241)

Interest cost (141) (155) (171)

Others 1,001 1,514 1,626


Capex (4,440) (5,000) (5,000)

Others 136 155 171

CF from Investing (4,304) (4,845) (4,829)

Change in Debt 5,000 2,000 1,000

Dividends & others (1,086) (1,621) (1,791)

CF from Financing 3,914 379 (791)

Change in Cash 1,424 (1,589) (415)

Balance Sheet


Total Assets 30,157 34,253 39,365

Net Fixed Assets 23,138 27,471 31,482

Current Assets 6,868 6,633 7,734

Other Assets 150 150 150


Networth 8,167 9,409 12,055

Debt 19,421 21,421 22,421


Other Liabilities 47 47 47


RoE % 14.0 15.7 27.8

RoCE % 7.7 9.0 13.3

Net DER (x) 2.0 2.1 1.8




44

March 22, 2012


Valuation & Recommendation

ARST’s expansion in the high margin FTWZ business along with increased

penetration in the container rail operations should drive ARST’s 56% EBITDA

CAGR and 59% PAT CAGR during FY12‐14E period.

We value ARST at 7x (35% discount to five year median EV/EBITDA of 11x) its

FY13‐14E average EBITDA of Rs 4.87 bn. We initiate coverage on the stock with

“BUY” recommendation with a target price of Rs. 227 per share. Our fair value

multiple is at 40% discount to ARST five year average P/E of 10x and 10% discount

to its five year average P/B of 1.38x.

The valuation discount of 35% to its long term EV/EBITDA and 40% to its long‐

term P/E multiples is to factor in the risks to earnings emanating from the delays in

infrastructure commissioning thereby impact overall revenue growth for logistics

operators. The 40% valuation discount to ARST is higher compared to 25%

discount we have ascribed to AGLL and GDPL. This is account for takeoff risks

associated with the FTWZ business. Despite these discounts, the stock looks

attractive and is poised for further re‐rerating as execution picks up in this

segment.

Exhibit 1: 1 Yr fwd P/E trend – trading at the lower end of its five year median of 11x (1SD 7.1x)


Exhibit 2: 1 Yr Fwd EV/EBITDA trend – five year median of 11x (1SD 6x)


Exhibit 3: 1 Yr Fwd P/B trend – Five year median of 1.38x (1SD 0.7x)


Exhibit 4: Return ratios to benefit as FTWZ earnings grow during FY12‐14E


0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

Jan‐06

Jul‐06

Jan‐07

Aug‐07

Feb‐08

Aug‐08

Feb‐09

Aug‐09

Feb‐10

Aug‐10

Feb‐11

Aug‐11

Mar‐12

0.0

5.0

10.0

15.0

20.0

25.0

Apr‐07

Sep‐07

Mar‐08

Sep‐08

Mar‐09

Sep‐09

Mar‐10

Sep‐10

Mar‐11

Sep‐11

Mar‐12

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Jan‐06

Jul‐06

Jan‐07

Aug‐07

Feb‐08

Aug‐08

Feb‐09

Aug‐09

Feb‐10

Aug‐10

Feb‐11

Aug‐11

Mar‐12 ‐

5.0

10.0

15.0

20.0

25.0

30.0

FY08 FY09 FY10 FY11 FY12E FY13E FY14E

RoE (%) RoIC (%) RoCE (%)



45

March 22, 2012


Investment Rationale

Our investment thesis is based on following premises:

1. FTWZ expansion to boost earnings growth in FY12‐14E period

2. FTWZ revenues & EBIT to grow >100% CAGR during FY12‐14E

3. Rail Business (Third largest operator) on expansion spree

4. 3PL Business should continue to deliver strong margins even though we

expect its share to profits to decline

5. On‐going capex will strain balance sheet in near term

6. Return Ratios to surge on commissioning of on‐going capex

7. Revenue CAGR of ~39% during FY11‐14E as ARST expands in FTWZ and Rail

Businesses

8. Higher EBITDA CAGR of 56% led by high margin FTWZ business expansion

1. FTWZ expansion to boost earnings growth in FY12‐14E period

ARST is the pioneer of Free Trade Warehousing Zones (FTWZ) concept in India.

An FTWZ (treated as foreign land) helps reduce working capital requirements for

the importer as the cargo can be kept at FTWZ and the duty is payable only when

the cargo moves out of the FTWZ. Additionally, lot of Value Added Services

(VAS) can be accomplished at an FTWZ thereby adding to the normal rental

earnings.

ARST’s first FTWZ became operational at Panvel, Mumbai (Phase‐I) in Q3FY11. It

started off with three warehouses and subsequently added one more warehouse

during Q2FY12. It also launched another FTWZ at Khurja in Uttar Pradesh, which

is expected to be operational in Q4FY12 with one warehouse each for its Khurja

FTWZ and Khurja Domestic Distripark.

So far it has achieved financial closures to add four warehouses each at Panvel and

Khurja during FY13E as part of its expansion plans. In FY14E, ARST expects to add

five FTWZ at Panvel. Subsequently, it is awaiting financial closures for additional

14 warehouses at Khurja facility. These expansions will increase its total

warehousing capacity tenfold to 35 units by the end of FY14E, as against 3

warehouses by end of FY11.

Exhibit 5: ARST’s cumulative warehouses at Mumbai and Khurja as planned


Exhibit 6: The FTWZ share in total profitability has swelled during FY12


3 59

14 14

01

5

1014

01

6

11

14

0

5

10

15

20

25

30

35

40

45

FY11 FY12E FY13E FY14E FY15E

Mumbai FTWZ Khurja FTWZ Khurja Distriparks

‐3.1

15.3

(0.4)

9.8

50.0

(10.0)

‐

10.0

20.0

30.0

40.0

50.0

60.0

FY10 FY11 9M‐FY12

Revenue Share EBIT Share



46

March 22, 2012


2. FTWZ revenues & EBIT to grow >100% CAGR during FY12‐14E

We have factored in expansion delays in the warehouse capacities as financial

closures for most of the expansions have not been achieved. Nonetheless, we

expect segmental revenues to grow by >100% CAGR during FY12‐13E.

Exhibit 7: Key assumptions for the FTWZ segment

(Rs mn) FY11 FY12E FY13E FY14E

Avg Warehouse available (Nos.) 4.7 11.0 20.0

VAS Ratio (x) 1.2 1.5 2.0

FTWZ Revenues 257 1,582 3,853 8,190

% YoY Growth 514.8 143.5 112.6

FTWZ EBIT 140 998 2,236 4,595

% YoY Growth 610.6 124.1 105.5

EBIT margins (%) 54.5% 63.0% 58.0% 56.1%


3. Rail Business (Third largest operator) on expansion spree

ARST holds Category‐I license to operate container rails in India. It is the third

largest Container Train Operator (CTO) with 16 rakes in operations after Container

Corp and Gateway Distriparks. ARST generally operates in the domestic segment

with only one rake operational in the EXIM route (Chennai‐Bangalore). It plans to

further expand its presence in the segment as it plans to add another eight rakes

during FY13‐14E. ARST operates mostly on long‐term contract basis with clients

and hence its revenues and margins are fairly insulated, as the Company does not

have to scout for cargo on its own. We have factored in rising competitions in the

segment and have also accounted for further haulage charges hikes by Indian

Railways.

Exhibit 8: Key assumptions for the Rail segment

FY11 FY12E FY13E FY14E

No of Rakes 16 20 24

Nos. of loadings per month 3.5 3.4 3.4

Total trips per annum 672 816 979.2

Revenue per loading per month (Rs mn) 4 4.5 4.5

Rail Revenues (Rs mn) 1,692 2,688 3,672 4,406

% YoY 250.4 58.8 36.6 20

EBITDA margins (%) 23% 21% 18% 18%

Rail EBITDA (Rs mn) 382 564 661 793

% YoY 220.8 47.8 17.1 20


4. 3PL Business should continue to deliver strong margins even

though we expect its share to profits to decline

ARST specializes in providing integrated logistics solutions. It has strong

relationship with many international logistics companies, which help ARST to

deliver 3PL solutions to its customers. It offers supply chain management

solutions, project logistics and freight forwarding under its 3PL business. During

FY07‐11, the 3PL revenues grew by ~38% CAGR. During these periods, the

segment has contributed 75‐90% of ARST’s topline and >70% of its EBIT profits. At

the end of FY11, ARST sold off its 3PL overseas segment at Qatar and Oman to

increase the management’s focus on the India’s 3PL operations. In the absence of



47

March 22, 2012


business from Qatar and Oman, the 3PL revenues should decline by 3% YoY in

our view. Going forward, we expect the segment’s revenues to grow at 6% CAGR

during FY13‐14E.

Exhibit 9: While revenue growth has slowed down, 3PL’s EBIT margins havestabilized at higher levels


5. On‐going capex will strain balance sheet in near‐term

ARST has a capex target of Rs. 32.5 bn to be achieved until FY13E to raise its

capacity across both the FTWZ segment and rail business. ~80% of the total capex

is to be deployed in the FTWZ segment. Out of the total capex of Rs. 32.5 bn, ~70%

would be funded through debt and the remaining would be from internal accruals.

High debt levels would strain the balance sheet over the next two years and as the

capacities gets commissioned, interest costs should increase thereby moderating

the profitability. Timely commissioning of these projects would however reduce

the balance sheet strain in the long‐run.

6. Return ratios to surge on commissioning of the on‐going capex

With the commissioning of the FTWZ warehouses (high margin business) and of

the new rakes in the rail division, we expect return ratios should improve further.

Exhibit 10: OPM growth led by increasing share of FTWZ; NPM growth moderated by rising debt levels


Exhibit 11: Subsequently, we expect profitability metrics to expand


1,694

3,642

4,603 4,598

6,207

4,411

175 387 643 825 1,385

929

‐

5.0

10.0

15.0

20.0

25.0

‐

1,000

2,000

3,000

4,000

5,000

6,000

7,000

FY07

FY08

FY09

FY10

FY11

9M‐FY12

Revenues (Rs mn) EBIT (Rs mn) EBIT margins (%)

12.9 14.7 16.4

19.4

24.2 26.5

31.2

11.4 13.1

18.6

9.9 10.4 9.9

15.4

‐

5.0

10.0

15.0

20.0

25.0

30.0

35.0


OPM (%) NPM (%)

‐

5.0

10.0

15.0

20.0

25.0

30.0


RoE (%) RoIC (%) RoCE (%)



48

March 22, 2012


7. Revenue CAGR of ~39% during FY11‐14E as ARST expands in FTWZ

and rail businesses

We estimate revenues to grow at a 39% CAGR during FY11‐14E led by expansion

of the FTWZ business and the rail business during FY12‐14E periods. Going

forward, the FTWZ business share will expand, while the 3PL business’ share

should shrink.

Exhibit 12: ARST’s Net sales Break‐up (Rs mn) trend


Exhibit 13: Revenue CAGR of ~39% during FY11‐14E


8. Higher EBITDA CAGR of 56% led by high margin FTWZ

business expansion

We expect EBITDA and PAT to grow at 56% and 59%, respectively during FY12‐

14E period. The profitability growth leads revenue growth on account of rising

share of FTWZ business which should boost OPM expansion by >1,000 bps and

NPM expansion by >550 bps during FY12‐14E period.

Exhibit 14: EBITDA CAGR of 56% during FY12‐14E


Exhibit 15: PAT CAGR of 59% during FY12‐14E


Key Risks Delays in commissioning of the FTWZs: The aggressive expansion in FTWZ

segment would get impacted if ARST is not able to achieve financial closures as

per schedule. We have already factored in 20% lower capacities in the warehouse

expansion for FY14E thereby minimizing impact on top‐line.

VAS multiple expansion: We have factored in VAS multiple of 1.5x and 2.0x for

FY13‐14E, respectively. While these are significantly lower than global average of

8‐9x, ARST’s multiple expansion can remain lower than these if its customers do

3,642 4,608 4,591 6,203

6,014 6,315

6,757

‐‐

‐

256 1,582

3,853 8,190

‐21 482 1,692 2,688 3,672 4,406

370 405 186 63 42 46 51

0%

20%

40%

60%

80%

100%


3PL Logistics Services FTWZ Operations Rail Business Others

4,012 5,034 5,259

8,215 10,326

13,886

19,404

0

20

40

60

80

100

120

140

‐

5,000

10,000

15,000

20,000

25,000


Net Sales YoY Growth (%)

517 740 861

1,592

2,497

3,686

6,045

0

20

40

60

80

100

120

140

160

‐

1,000

2,000

3,000

4,000

5,000

6,000

7,000


EBITDA (Rs mn) Growth YoY (%)

455 660

980 815

1,079 1,378

2,988

‐50

0

50

100

150

200

‐

500

1,000

1,500

2,000

2,500

3,000

3,500


PAT (Rs mn) Growth YoY (%)



49

March 22, 2012


not subscribe for these services in additions to the normal rental usage at the

FTWZ.

Rail business expansion: Delays in ramping up rakes capacity by another 8 rakes

during FY13‐14E can reduce the profit growth subsequently.

Sensitivity Analysis Exhibit 16: Impact of changes in VAS multiple (FTWZ), volumes & realisation

across FTWZ and Rail verticals on the earnings metrics and target

price estimates (FY14E)


10% lower VAS multiple (FTWZ) (6) (148) (53) (6)

10% lower FTWZ volumes (11) (279) (98) (12)

10% lower FTWZ realisation (17) (427) (150) (18)


10% lower Rail realisation (12) (285) (100) (12)


Karvy vs. Consensus Exhibit 17: Our estimates v/s consensus estimates

(Rs mn) Karvy Consensus Diff (%)

Revenue

FY12E 10,326 10,209 1.2

FY13E 13,886 14,751 (5.9)

EBITDA

FY12E 2,497 2,664 (6.3)

FY13E 3,686 4,499 (18.1)

Net Profit

FY12E 1,079 1,209 (10.8)

FY13E 1,378 1,616 (14.7)

Source: Bloomberg, Karvy Institutional Research



50

March 22, 2012


Financials


Year to March (Rs mn) FY10 FY11 FY12E FY13E FY14E

Net Sales 5,259 8,215 10,326 13,886 19,404

% growth 4 56 26 34 40


EBITDA 861 1,592 2,497 3,686 6,045

% growth 16 85 57 48 64

Depreciation 96 180 332 668 989

EBIT 1,184 1,441 2,307 3,174 5,226

Interest expenditure 131 474 1,001 1,514 1,626

Exceptional items 367 (6) ‐ ‐ ‐

PBT 1,053 967 1,306 1,660 3,600

Tax 74 152 227 282 612

PAT / Net profit ‐ reported 612 821 1,079 1,378 2,988

Adjusted PAT / Net profit 980 815 1,079 1,378 2,988

% growth 48 (17) 32 28 117




Cash & liquid investments 718 1,518 2,943 1,354 939

Debtors 2,714 2,291 2,891 3,888 4,851

Inventory 0 1 2 2 3

Loans & advances 547 708 1,033 1,389 1,940

Long term investments 5 150 150 150 150

Gross block 2,657 6,757 18,757 25,757 30,757

Net block 2,532 6,470 18,138 24,471 28,482

CWIP 7,292 12,560 5,000 3,000 3,000

Other Current Assets ‐28 0 0 0 0

Total assets 13,780 23,699 30,157 34,253 39,365


Debt 5,715 14,421 19,421 21,421 22,421

Other liabilities ‐12 47 47 47 47


Shareholdersʹ equity 118 118 118 118 118


Total networth 6,699 7,196 8,167 9,409 12,055





51

March 22, 2012


Exhibit 20: Cash Flow Statement (Consolidated)


PBT 1,053 962 1,306 1,660 3,600

Depreciation 108 176 332 668 989

Interest 121 451 (141) (155) (171)

Tax (111) (81) (231) (280) (598)

(Incr) / decr in net working capital (774) 868 (452) (530) (241)

Others (185) 11 1,001 1,514 1,626

CF from operating activities 213 2,387 1,814 2,877 5,206


(Incr) / decr in investments (5) (145) ‐ ‐ ‐

Others 19 21 136 155 171

CF from investing activities (4,385) (9,511) (4,304) (4,845) (4,829)

Incr / (decr) in borrowings 4,405 8,720 5,000 2,000 1,000

Issuance of equity ‐ 16 ‐ ‐ ‐

Dividend paid (55) (69) (85) (107) (165)

Others (118) (743) (1,001) (1,514) (1,626)

CF from financing activities 4,232 7,924 3,914 379 (791)

Net change in cash 61 800 1,424 (1,589) (415)



Year to March (%) FY10 FY11 FY12E FY13E FY14E

EBITDA margin 16.4 19.4 24.2 26.5 31.2

EBIT margin 22.5 17.5 22.3 22.9 26.9



Net debt: equity 0.7 1.8 2.0 2.1 1.8

Working capital turnover 0.4 0.1 0.1 0.1 0.1

RoCE 10.7 7.1 7.7 9.0 13.3

RoIC 11.5 7.7 8.6 9.8 13.8

RoE 15.4 11.7 14.0 15.7 27.8



Year to March FY10 FY11 FY12E FY13E FY14E

EPS (Rs) 16.7 13.8 18.3 23.4 50.8

DPS (Rs) 1.0 1.2 1.5 2.0 5.0

Book value per share (Rs) 115 122 139 160 205

P/E (x) 8.5 10.2 7.7 6.0 2.8

P/BV (x) 1.2 1.2 1.0 0.9 0.7

EV/EBITDA (x) 15.4 13.3 9.9 7.7 4.9

EV/Sales (x) 2.5 2.6 2.4 2.0 1.5





Container Corporation

Bloomberg: CCRI INReuters: CCRI.BO BUY


India Research

INITIATION REPORT

Recommendation

CMP: Rs879

Target Price: Rs1,115

Upside (%) 27%

Stock Information Market Cap. (Rs bn / US$ mn) 113/2,251

52‐week High/Low (Rs) 1,332/801


Beta 0.7




Absolute (10.6) 5.6 (26.5) 4.0

Rel. to Sensex (5.6) (7.5) (24.1) (7.2)

Performance




Analysts Contact Rajesh Kumar Ravi

022 6184 4313

[email protected]

Prasun Kumar

022 6184 4325

[email protected]

8009001,0001,1001,2001,3001,400

15,500

17,500

19,500

21,500

Mar‐11

May‐11

Jun‐11

Jul‐11

Aug‐11

Oct‐11

Nov‐11

Dec‐11

Feb‐12

Mar‐12

Sensex (LHS) Container Corp. (RHS)

0

5

10

15

20

Apr‐07

Oct‐07

May‐08

Nov‐08

Jun‐09

Dec‐09

Jul‐10

Jan‐11

Aug‐11

Mar‐12

Strong pricing power to outsmart competitionLargest container train operator in India: Container Corporation of India

(CCRI) is India’s largest Container Train Operator (CTO) with container train

fleet strength of 240 container trains and 61 terminals spread across India.

Currently, CCRI has ~68% of total container fleet operational in India.

Strategic tie‐ups with competitors and customers to support revenue

growth: CCRI has formed various JVs across India partnering with its

customers as well as competing CTOs to support its revenue growth. This is

a strategic move as expansions by private CTOs have impacted CCRI’s EXIM

volume growth. In the domestic train handling, CCRI’s FY11‐12E volume

growth got impact after the IR announced hike in commodity‐specific

haulage charges in Dec’10 for domestic cargoes. However, the quarterly

volume trends suggest a bottom‐out situation in FY12E. Subsequently, we

expect revenues to grow at 12% CAGR during FY12‐14E.

Depreciated asset book and no debt provides pricing power: CCRI being in

operations since 1988 has assets that were acquired at significantly lower

costs compared to its competitors and most of these assets are fully

depreciated. Further, with a net cash of Rs. 28 bn (22% of its market cap)

CCRI enjoys higher pricing power in case of aggressive competition from the

private counterparts.

Greater focus on increasing VAS to insulate margin pressure: CCRI is

increasing VAS in addition to rail transportation to attract customers as well

as to protect its margins against competition and haulage charge increases.

The management expects its VAS to sales ratio to increase by 200bps to 27%

during FY13‐14E after increasing it by 200bps during FY12E. These initiatives

should lead to PAT CAGR of 11% during FY12‐14E period.

Initiate coverage with “BUY” recommendation: While CCRI has been the

pioneer in container rail operations in India, amidst rising competition from

private operators, we expect CCRI’s PAT to grow at modest 11% CAGR. We

value CCRI at 13.2x its FY13‐14E average EPS of Rs. 84.6. Our target multiple

is at 15% discount to its long‐term median P/E of 15.5x. We initiate coverage

on the stock with “BUY” recommendation with a target price of Rs. 1,115 per

share. Our fair value estimate for CCRI implies 25% discount to CCRI’s long‐

term EV/EBITDA median multiple of 10.6x.

Key Financials

Year to Dec (Rs mn) FY10 FY11 FY12E FY13E FY14E

Net Sales 37,057 38,281 41,471 47,374 54,129

EBITDA 9,616 10,014 10,821 12,321 14,077

EBITDA (%) 26.0 26.2 26.1 26.0 26.0

PAT 7,872 8,785 8,878 10,185 11,813

EPS (Rs) 60.6 67.6 68.3 78.4 90.9

RoE (%) 19.4 18.9 16.6 16.6 16.8

RoCE (%) 18.5 18.0 16.0 16.0 16.2

P/E (x) 14.4 12.9 12.8 11.2 9.6

EV/EBITDA (x) 9.8 9.1 7.8 6.3 5.0




53

March 22, 2012



Source: BSE, Karvy Institutional Research

Segmental Revenue (%)


Promoters,

63.09

DII, 7.17

FII, 26.31

Public &

Others,

3.43Exim, 76.9

Domestic,

21.5

Others,

1.7

Company Background

CCRI commenced operations after it acquired seven ICDs

from the Indian Railways in 1988. Over the years, CCRI has

emerged as leader in the CTO space with its vast network of

61 ICDs/CFS’ connected by its railway network enriched by

its fleet of 240 rakes.

CCRI is accredited with introducing mass containerization

in India, and has been the on the forefront for promoting

container trade in India. CCRI introduced Asiaʹs biggest ICD

at Dadri in 2003. Through its numerous JVs and strategic

alliances it has been enriching the logistics sector in India.

While privatization of container haulage by rail since 2006

has exposed it to competition, CCRI maintains its market

dominance by way of its vast network of CFS/ICDs and

extensive rail infrastructure.


Rsmn FY12E FY13E FY14E

Net sales 41,471 47,374 54,129

EBIDTA 10,821 12,321 14,077


PBT 11,759 13,580 15,751

Tax 2,881 3,395 3,938

Adj. PAT 8,878 10,185 11,813

EPS (Rs) 68.3 78.4 90.9

DPS (Rs) 10.0 10.0 10.0



Adj Net Margin % 21.4 21.5 21.8

Valuation Multiples

P/E (X) 12.8 11.2 9.6

EV/EBIDTA (X) 7.8 6.3 5.0

P/BV (X) 2.0 1.7 1.5

Cash Flow Rsmn FY12E FY13E FY14E

PBT 11,759 13,580 15,751


Interest Income (2,535) (3,010) (3,576)

Tax (2,843) (3,395) (3,938)

Change in Wkg Cap 200 (416) (486)


Capex (2,109) (3,300) (3,300)

Investments (500) (500) (500)

Int Income & Others 2,535 3,010 3,576

CF from Investing (73) (790) (224)

Dividends & others (1,453) (1,713) (1,713)

CF from Financing (1,453) (1,713) (1,713)

Change in Cash 6,652 6,006 7,717

Balance Sheet

Rsmn FY12E FY13E FY14E

Total Assets 65,710 74,647 85,269

Net Fixed Assets 26,973 28,522 29,920

Current Assets 35,001 41,775 50,370

Other Assets 3,736 4,349 4,979


Networth 56,943 65,415 75,515

Debt ‐ ‐ ‐


Other Liabilities 2,286 2,286 2,286


RoE % 16.6 16.6 16.8

RoCE % 16.0 16.0 16.2

Net DER (x) (0.5) (0.5) (0.6)




54

March 22, 2012



CCRI has been the pioneer in container rail operations in India. However, with

rising competition from private operators, we expect CCRI’s PAT CAGR at a

modest 11%. We value CCRI at 13.2x its FY13‐14E average EPS of Rs. 84.6. Our

target multiple is at 15% discount to its long term median P/E of 15.5x. We initiate

coverage on the stock with “BUY” recommendation with a target price of Rs. 1,115

per share.

The 15% valuation discount to its long‐term average P/E is to factor in the risks to

earnings emanating from the delays in infrastructure commissioning thereby

impacting overall revenue growth for the logistics operators. However, we have

factored in lower discount compared to other companies (AGLL & GDPL 25%

discount, ARST 40% discount), as CCRI is better positioned due to its pan‐India

presence and its strong balance sheet.

Exhibit 1: CCRI’s 1 yr Fwd P/E trends – long term median P/E of 15.5x with a +/‐ 2.9x one std deviation


Exhibit 2: CCRI’s 1 yr Fwd EV/EBITDA trends – long term median of 10.6x with a +/‐ 2.6x one std

deviation


Exhibit 3: CCRI’s 1 yr Fwd P/B trends – long term median P/B of 3.2x with a +/‐ 0.7x one std deviation


Exhibit 4: Return Ratios trends


0.0

5.0

10.0

15.0

20.0

25.0

Apr‐05

Oct‐05

Apr‐06

Nov‐06

May‐07

Dec‐07

Jun‐08

Dec‐08

Jul‐09

Jan‐10

Aug‐10

Feb‐11

Aug‐11

Mar‐12

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0 Apr‐05

Oct‐05

Apr‐06

Nov‐06

May‐07

Dec‐07

Jun‐08

Dec‐08

Jul‐09

Jan‐10

Aug‐10

Feb‐11

Aug‐11

Mar‐12

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Apr‐05

Oct‐05

Apr‐06

Nov‐06

May‐07

Dec‐07

Jun‐08

Dec‐08

Jul‐09

Jan‐10

Aug‐10

Feb‐11

Aug‐11

Mar‐12

‐

10.0

20.0

30.0

40.0

50.0

‐

5.0

10.0

15.0

20.0

25.0

30.0

35.0

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

RoCE RoE RoIC (RHS)

(%)



55

March 22, 2012



1. Largest container train operator in India

2. Loss in EXIM market share as competition intensifies

3. Domestic volume growth decline in FY12E on haulage increase

4. Strategic tie‐ups with competitors and customers support revenue growth

5. Revenue CAGR of 12% during FY12‐14E

6. Depreciated asset book and no debt provides pricing power

7. Greater focus on increasing VAS to insulate margin pressure

8. EBITDA CAGR of 12% led by stable margins and revenue growth

9. PAT CAGR of 11% during FY12‐14E

1. Largest container train operator in India

CCRI is India’s first and the largest Container Train Operator (CTO). The

government owned PSU started operations in 1988 and today has a fleet strength

of 240 container trains and 61 terminals (spread across India out of which 18

handle EXIM cargoes and 13 domestic cargoes and remaining 30 handle both

EXIM and domestic cargoes. Until 2006, it was the only container train operator

and had complete monopoly in the containerized cargo rail movement. Even since

the government opened up the segment for private players, CCRI’s market share

has reduced. Currently, it owns ~68% of total container fleet operational in India.

Exhibit 5: Largest CTO in India – it owns and operated ~68% of total container train in India


Exhibit 6: 80% of its rail handling is dedicated to EXIM trade


2. Loss in EXIM market share as competition intensifies

With the arrival of private train operators after the IR opened up the segment for

private players, CCRI has faced competition and its EXIM market share has

declined. Even on the domestic container handling, it is facing competition from

the private players, as Arshiya operates 15 out of its 16 rakes in the domestic route

and other CTOs also operate some of their rakes in the domestic segment.

240

21

16

15

12

9

0 100 200 300

Concor (CCRI)

Gateway Distriparks

Arshiya international

Inlogistics (B2B)

Hind Terminals

India Infra Logistics (APL)

1,377 1,557 1,716 1,977 1,855 1,882 2,019 1,600

351 374 390 470 453 539 544 343

0%

20%

40%

60%

80%

100%

FY05

FY06

FY07

FY08

FY09

FY10

FY11

9M‐FY12



56

March 22, 2012


Exhibit 7: CCRI EXIM growth has been lagging Industry growth since the sectoropened up for private operators thereby intensifying competition

Source: Company, IPA, Karvy Institutional Research

Going forward, we have factored in 6% EXIM throughput CAGR for CCRI during

FY12‐14E. The CCRI management expects trade volumes should pick up in FY13E,

as against ~4% EXIM throughput growth expected in FY12E.

3. Domestic volume growth decline in FY12E on haulage increase;

quarterly data suggest it has bottomed out

In the domestic train handling, volume growth got impact after the IR announced

commodity‐specific haulage charges hike for domestic cargoes in Dec’10, which

impacted cargo volumes of all train operators – both CCRI and others. This

resulted in CCRI’s domestic volume to decline by ~9‐17% YoY during the last four

quarters. This led to higher availability of rakes in the EXIM trade thereby muting

EXIM realisation growth YoY during the last four quarters.

However, the domestic handling has improved sequentially over the last two

quarters and we expect a 10% volume growth to kick in during FY13‐14E thereby

restoring domestic throughput closer to FY11 levels. Domestic growth in turn

should reduce competition on the EXIM route.

Exhibit 8: Domestic throughput growth impacted after IR hiked commodity specific haulage charges


Exhibit 9: We have factored in 6% & 10% volume growth in the EXIM & domestic segment respectively


(10.0)

‐

10.0

20.0

30.0

FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11

CCRI Exim Growth (%) EXIM Traffic Growth (%)

(20)

(10)

‐

10

20

30

40

‐

50

100

150

200

Dec‐09

Mar‐10

Jun‐10

Sep‐10

Dec‐10

Mar‐11

Jun‐11

Sep‐11

Dec‐11

Domestic Throughput (Mn TEUs) YoY Growth (%) RHS

15

(6)

1

7 5 6 6

21

(4)

19

1

‐11

10 10

(15)

(10)

(5)

‐

5

10

15

20

25


EXIM Growth YoY (%) Domestic Growth YoY (%)



57

March 22, 2012


4. Strategic tie‐ups with competitors, customers support revenue growth

CCRI has formed JVs in the CFS and ICDs segments with its competitors as well

as its customers in the shipping line to ensure steady volumes. Further, it has

terminals across India and it has allowed its competitors to use its facilities for

their rakes operations. This helps CCRI increase utilisation for its infrastructure

assets.

Exhibit 10: CCRI has formed various JVs with its competitors as well as its customers JV companies JV Partners Operations CCRI Stake

Star Track Terminals Pvt. Ltd Maersk India CFS at Dadri UP 49%

Trident Terminals Pvt. Ltd. Transworld group CFS at Dadri UP 49%

Albatross CFS Pvt. Ltd. Transworld group CFS at Dadri UP 49%

Gateway Terminals India Pvt. Ltd. Maersk A/S JN Port, Mumbai 26%

CMA‐CGM Logistics Park (Dadri) Pvt. Ltd Ameya Logistics Pvt. Ltd CFS at Dadri, UP 49%

India Gateway Terminal Pvt. Ltd. Dubai Port International Container Terminals at Cochin 15%

Integrated Infra Log Pvt. Ltd. IL&FS Infrastructure Development Corporation Logistic Infrastructure 50%

Hind CONCOR Terminals (Dadri) Pvt. Ltd. Hind Terminals Pvt. Ltd CFS at Dadri UP 49%

Infinite Logistics Solutions Pvt. Ltd. TCI, India Logistics freight terminals &

integrated logistics 49%

Container Gateway Ltd. Gateway Rail Freight Pvt. Ltd Container terminal at Garhi

Harsaru, Gurgaon 49%

Allcargo Logistics Park Pvt. Ltd. Allcargo Global Logistics Ltd. CFS at Dadri UP 49%


5. Revenues CAGR of 12% during FY12‐14E

Based on a 5% total throughput CAGR and net realisation CAGR of 7% during

FY12‐14E, we expect net revenues to grow at 12% CAGR.

Exhibit 11: Realisation growth (YoY) trends across EXIM and Domestic segments (%)


Exhibit 12: We estimate revenue CAGR of 12% during FY12‐14E periods


Exhibit 13: Key assumptions across various business verticals FY10 FY11 FY12E FY13E FY14E

Exim Volumes (TEUs) 1,882,277 2,018,551 2,119,479 2,246,647 2,381,446

Growth (%) 1.5 7.2 5.0 6.0 6.0

Realisation/TEU (Rs) 15,399 14,820 15,842 16,951 18,138

Growth (%) 4.8 (3.8) 6.9 7.0 7.0

Domestic Volumes (TEUs) 538,970 543,746 483,934 532,327 585,560

Growth (%) 18.9 0.9 (11.0) 10.0 10.0

Realisation/TEU (Rs) 14,977 15,387 16,310 17,452 18,674

Growth (%) (1.8) 2.7 6.0 7.0 7.0


(7)

10

5

(4)

6.9 7 7

(3)

2

(2)

3

67 7

(10)

(5)

‐

5

10

15


EXIM Growth YoY (%) Domestic Growth (%)

0

2

4

6

8

10

12

14

16

‐

10,000

20,000

30,000

40,000

50,000

60,000

FY08 FY09 FY10 FY11 FY12E FY13E

Revenue (Rs mn) YoY Growth (%)



58

March 22, 2012


6. Depreciated asset book and no debt provides pricing power

CCRI is in operations since 1988. Hence, most of the assets are owned by CCRI are

at significantly lower costs and are fully depreciated. These positions CCRI at

strong advantage compared to its new competitors who have to acquire assets at

significantly higher costs. Further, CCRI is sitting on net cash position of ~Rs. 28 bn

(~Rs. 215 per share, 22% of its market cap) which provides the Company pricing

power (in terms of volume discounts) in case of aggressive competition from the

private operators.

Exhibit 14: CCRI enjoys extremely lower capital charges compared to itscompetitors, thereby reducing its PAT margin volatility to

realisation


7. Greater focus on increasing VAS to insulate margin pressure

In its bid to attract customers and also insulate operating cost pressure (mainly

haulage charge increases) on its EBITDA margins, CCRI is focusing on increasing

VAS’ share to total revenues through higher rental income and through increased

integrated services offerings. During the 9MFY12, rail handling share to total

revenues has come down by ~200 bps to 75%. The management expects VAS share

to further increase by 200 bps over the next two years to 27%. In this regard, CCRI

is investing in logistics parks in Andhra Pradesh and Gujarat.

8. EBITDA CAGR of 12% led by stable margins, revenue growth

Subsequently, we estimate stable OPM at 26% during FY12‐14E thereby leading to

12% EBITDA CAGR.

Exhibit 15: We expect stable OPM & NPM during FY12‐14E


Exhibit 16: Thereby resulting in EBITDA CAGR of 12% during FY12‐14E…


3.1

6.0

‐

8.3

2.4

2.8

‐ 2.0 4.0 6.0 8.0 10.0 12.0

Gateway Distriparks


CCRI

Int (% of Sales) Dep (% of Sales)

22.4 23.2

21.2

22.9

21.4 21.5 21.8

26.6 27.2

26.0 26.2 26.1 26.0 26.0

15

17

19

21

23

25

27

29


NPM (%) OPM (%)

0

5

10

15

‐

5,000

10,000

15,000


EBIDTA (Rs mn) YoY Growth (%)



59

March 22, 2012


9. PAT CAGR of 11% during FY12‐14E

We believe that lower depreciation and no interest costs should help PAT to grow

at 11% CAGR (in‐line with EBITDA growth) during FY12‐14E period.

Subsequently, the return ratios should also improve going forward.

Exhibit 17: … PAT CAGR of 11% during FY12‐14E


Exhibit 18: Return ratios to remain healthy


Key Risks Increasing competition can impact revenue growth: Faster pace of rakes

additions by private CTOs can further reduce CCRI’s market share from 68% and

hence its volume growth across both EXIM and domestic routes. These new CTOs

can also compete with CCRI on pricing front to gain market share, thereby

impacting CCRI’s revenue and PAT growth.

VAS improvement: CCRI has been increasing its VAS to total sales ratio in its bid

to protect revenues and margins. This strategy would require sustained capex in

developing logistics parks and offering integrated solutions to its customers. Even

though it is sitting with enough cash on hand, capex can be delayed in case the

government does not clear its projects on time.

Sensitivity Analysis Exhibit 19: Impact of changes in realization and volumes on the earnings

metrics and target price estimates (FY14E)


10% lower volume (7) (110) (107) (4)

10% lower realization (34) (566) (549) (18)


Karvy vs. Consensus

Exhibit 20: Our estimates v/s Bloomberg consensus data (Rs mn) Karvy Consensus Diff (%)

Revenue

FY12E 41,471 41,107 0.9

FY13E 47,374 44,557 6.3

EBITDA

FY12E 10,821 10,806 0.1

FY13E 12,321 11,489 7.2

Net Profit

FY12E 8,878 9,199 (3.5)

FY13E 10,185 9,824 3.7

Source: Bloomberg, Karvy Institutional Research

‐5

0

5

10

15

20

‐

2,000

4,000

6,000

8,000

10,000

12,000

14,000


PAT (Rs mn) Growth YoY (%) RHS

‐

10.0

20.0

30.0

40.0

50.0

‐

5.0

10.0

15.0

20.0

25.0

30.0

FY08 FY09 FY10 FY11 FY12 FY13 FY14

RoCE RoE RoIC (RHS)

(%)



60

March 22, 2012


Financials

Exhibit 21: Profit and Loss (Standalone)


Net Sales 37,057 38,281 41,471 47,374 54,129

% growth 8 3 8 14 14


EBITDA 9,616 10,014 10,821 12,321 14,077

% growth 3 4 8 14 14

Depreciation 1,351 1,452 1,597 1,750 1,903

EBIT 10,066 10,583 11,759 13,580 15,751

Interest expenditure ‐ ‐ ‐ ‐ ‐

Exceptional items 5 26 ‐ ‐ ‐

PBT 10,066 10,583 11,759 13,580 15,751

Tax 2,194 1,798 2,881 3,395 3,938

PAT / Net profit ‐ reported 7,867 8,760 8,878 10,185 11,813

Adjusted PAT / Net profit 7,872 8,785 8,878 10,185 11,813

% growth (1) 12 1 15 16


Exhibit 22: Balance Sheet (Standalone)


Cash & liquid investments 19,895 22,957 29,609 35,615 43,332

Debtors 176 173 187 214 244

Inventory 70 63 68 77 89

Loans & advances 4,798 4,743 5,138 5,869 6,706

Long term investments 2,405 2,440 2,940 3,440 3,940

Gross block 29,889 32,862 36,162 39,462 42,762

Net block 21,639 23,270 24,973 26,522 27,920

CWIP 2,064 3,191 2,000 2,000 2,000

Others assets 784 735 796 909 1,039

Total assets 51,832 57,571 65,710 74,647 85,269


Debt ‐ ‐ ‐ ‐ ‐

Other liabilities 2,109 2,286 2,286 2,286 2,286


Shareholdersʹ equity 1,300 1,300 1,300 1,300 1,300


Total networth 43,364 49,778 56,943 65,415 75,515





61

March 22, 2012


Exhibit 23: Cash Flow Statement (Standalone)


PBT 10,066 10,583 11,759 13,580 15,751

Depreciation 1,351 1,452 1,597 1,750 1,903

Interest (1,484) (1,527) (2,535) (3,010) (3,576)

Tax (3,685) (2,225) (2,843) (3,395) (3,938)

(Incr) / decr in net working capital 170 (216) 200 (416) (486)

Others 7 16 ‐ ‐ ‐

CF from operating activities 6,425 8,083 8,178 8,509 9,654


(Incr) / decr in investments (375) (34) (500) (500) (500)

Others 1,428 1,624 2,535 3,010 3,576

CF from investing activities (2,058) (2,672) (73) (790) (224)

Incr / (decr) in borrowings ‐ ‐ ‐ ‐ ‐

Issuance of equity ‐ ‐ ‐ ‐ ‐

Dividend paid (2,129) (2,349) (1,453) (1,713) (1,713)

CF from financing activities (2,129) (2,349) (1,453) (1,713) (1,713)

Net change in cash 2,238 3,062 6,652 6,006 7,717




EBITDA margin 26.0 26.2 26.1 26.0 26.0

EBIT margin 27.2 27.6 28.4 28.7 29.1



Net debt: equity (x) (0.5) (0.5) (0.5) (0.5) (0.6)

RoCE 18.5 18.0 16.0 16.0 16.2

RoIC 36.6 35.2 33.3 36.8 39.9

RoE 19.4 18.9 16.6 16.6 16.8




EPS (Rs) 60.6 67.6 68.3 78.4 90.9

DPS (Rs) 8.0 8.0 10.0 10.0 10.0


P/E (x) 14.4 12.9 12.8 11.2 9.6

P/BV (x) 2.6 2.3 2.0 1.7 1.5

EV/EBITDA (x) 9.8 9.1 7.8 6.3 5.0

EV/Sales (x) 2.5 2.4 2.0 1.6 1.3





Gateway Distriparks

Bloomberg: GDPL INReuters: GATE.BO BUY


India Research

INITIATION REPORT

Recommendation

CMP: Rs149

Target Price: Rs204

Upside (%) 37%




Beta 0.7




Absolute 4.5 22.1 40.5 14.4

Rel. to Sensex 10.4 7.0 45.1 2.1

Performance




Analysts Contact

Rajesh Kumar Ravi 022 6184 4313

[email protected]

Prasun Kumar

022 6184 4325

[email protected]

90

110

130

150

170

15,500

17,500

19,500

21,500

Mar‐11

May‐11

Jun‐11

Jul‐11

Aug‐11

Oct‐11

Nov‐11

Dec‐11

Feb‐12

Mar‐12

Sensex (LHS)

Gateway Distriparks (RHS)

0

10

20

30

Apr‐05

Dec‐05

Aug‐06

Apr‐07

Jan‐08

Sep‐08

May‐09

Feb‐10

Oct‐10

Jun‐11

Mar‐12

Firing on All Cylinders

CFS business is the cash cow; expanding capacities to fuel growth: We

expect Gateway Distriparks’ (GDPL) CFS volumes to grow at 3% and 7%

during FY13‐14E vs. 3% during FY12E, as new capacities get commissioned

at JNPT and Kochi. Strong relationship with shipping lines should boost the

growth as it the shipping lines, which notify which CFS to do business with

(and not the cargo owners). Further, CFS is a cash cow for the Company as it

has very high OPM of ~54% and the segment generates >80% of total PAT.

Leadership position in the container train business: GDPL currently

operates 21 rakes (2nd largest after Container Corp) with >85% of its capacity

being deployed in the EXIM container transportation. It plans to add another

6‐8 rakes during FY13E. We expect GDPL’s rail volumes to grow by 15% and

10% during FY13E and FY14E, respectively. With its rising penetration and

higher utilisation, rail margins should expand going forward and we expect

this segment to post EBITDA CAGR of > 25% during FY13‐14E period.

Cold chain business – small but niche play: This segment currently

contributes 8% to net revenues and the management plans to increase its

pallet strength by ~150% to 46 K pallets during FY13‐14E.

Capex of Rs. 2.6 bn in FY12‐13E: We expect the Company to meet its capex

requirement of Rs. 2.6 bn mostly through its internal accruals and hence

remain a net cash flow Company.

Initiate coverage with “BUY” recommendation: GDPL’s return ratios should

expand during FY11‐14E period by ~800 bps led by revenue growth and

higher utilisation. We estimate PAT CAGR of 29% during FY12‐14E period.

We value GDPL at 12x (25% discount to its six year median P/E 16x) its FY13‐

14E average EPS of Rs. 17. We believe that, as the return ratios expand

toward the previous levels seen during FY05‐08, the valuation multiple will

follow suit as has been the case in the past. We initiate coverage on the stock

with “BUY” recommendation with a target price of Rs. 204 per share.

Key Financials

Year to Mar (Rs mn) FY10 FY11 FY12E FY13E FY14E

Net Sales 5,166 5,991 7,712 8,813 10,103

EBITDA 1,249 1,597 2,593 3,051 3,590

EBITDA (%) 24.2 26.7 33.6 34.6 35.5

PAT 791 968 1,423 1,652 2,029

EPS (Rs) 7.3 9.0 13.2 15.3 18.8

RoE (%) 11.2 10.9 13.0 13.6 14.9

RoCE (%) 10.7 10.6 12.3 12.7 14.0

P/E (x) 20.6 16.9 11.5 9.9 8.0

EV/EBITDA (x) 14.0 9.9 6.0 5.0 3.9




63

March 22, 2012

Gateway Distriparks



Segmental Revenue breakup (%)


Promoters,

40.45

DII, 15.45

FII, 27.73

Public &

Others,

16.37

GDL &

CFS

Subsidiari

es, 42.6

Gateway

Rail

Segment,

49.6 Snowman

Frozen

Foods,

7.7

Company Background

Gateway Distriparks (GDPL) was incorporated on April 6,

1994.

Presently, GDPL operates in three segments – CFS/ICDs,

Container train operations and Cold chain logistics.

In the CFS space, GDPL has a JV with Punjab Conware to

operate one of their CFS at Nhava Sheva. In its rail

subsidiary – Gateway Rail, Blackstone has invested Rs 3 bn

through issue of CCPS in 2009.

In the Cold chain business (Snowman Frozen Foods),

International Finance Corp bought 20% stake in 2009 for Rs

250 mn while Mitsubishi Logistics and Nichirei Logistics

owns ~26% stake and GDPL remaining 53%.


FY12E FY13E FY14E

Net sales 7,712 8,813 10,103

EBIDTA 2,593 3,051 3,590


Interest Expense 200 215 218

PBT 1,951 2,282 2,812

Tax 488 571 703

Adj. PAT 1,423 1,652 2,029

EPS (Rs) 13.2 15.3 18.8

DPS (Rs) 3.5 3.5 3.5



Adj Net Margin % 18.5 18.7 20.1

Valuation Multiples

P/E (X) 11.5 9.9 8.0

EV/EBIDTA (X) 6.0 5.0 3.9

P/BV (X) 1.4 1.3 1.1 Cash Flow

FY12E FY13E FY14E

PBT 1,951 2,282 2,812


Interest 200 215 218

Tax (488) (571) (703)

Change in Wkg Cap (504) 171 (93)

Others (182) (192) (226)


Capex (801) (1,800) (1,000)

Investments (100) ‐ ‐

Others 142 132 146

CF from Investing (760) (1,668) (854)

Change in Debt 746 150 30

Dividends & others (587) (583) (566)

CF from Financing 159 (433) (536)

Change in Cash 961 491 1,324

Balance Sheet

FY12E FY13E FY14E

Total Assets 14,585 16,356 18,047

Net Fixed Assets 10,048 11,162 11,457

Current Assets 4,537 5,194 6,590


Networth 7,875 9,099 10,701

Debt 1,900 2,050 2,080


Other Liabilities 3,748 3,808 3,888


RoE % 13.0 13.6 14.9

RoCE % 12.3 12.7 14.0

Net DER (x) (0.1) (0.1) (0.2)




64

March 22, 2012

Gateway Distriparks


We expect GDPL profitability to expand across all the three business segments it is

present in. As GDPL is capable to meeting its capex requirements through its

internal accruals (a net cash flow company), we do not see any major delay in

expansion plans across the three businesses. As these expansions get

commissioned over the next two years, GDPL’s return ratios should remain

buoyant.

We value GDPL at 12x (25% discount to six year median P/E 16x) its FY13‐14E

average EPS of Rs17. We believe as the return ratios expand toward the previous

levels seen during FY05‐08, the valuation multiple will follow suit as has been the

case in the past. We initiate coverage on the stock with “BUY” recommendation

with a target price of Rs. 204 per share.

The 25% valuation discount to its long‐term P/E is to factor in the risks to earnings

emanating from the delays in infrastructure commissioning thereby impact overall

revenue growth for logistics operators.

Exhibit 1: GDPL is trading at ~33% discount to its six year

median fwd (1 Yr) P/E of 16x,(+1SD 6.8x) …


Exhibit 2: ...and at ~47% discount to its six year median

fwd (1 Yr) EV/EBITDA of 9x, (+1SD 5.8x) …


Exhibit 3: …and Trading at ~7% discount to its six year

median fwd (One Yr) P/B of 1.8x, (+1SD 0.7x) …


Exhibit 4: …While return ratios continue to be on an

uptrend, closer to FY07 levels


0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

Apr‐05

Oct‐05

Apr‐06

Nov‐06

May‐07

Dec‐07

Jun‐08

Dec‐08

Jul‐09

Jan‐10

Aug‐10

Feb‐11

Aug‐11

Mar‐12

0.0

5.0

10.0

15.0

20.0

25.0

30.0

Apr‐05

Oct‐05

Apr‐06

Nov‐06

May‐07

Dec‐07

Jun‐08

Dec‐08

Jul‐09

Jan‐10

Aug‐10

Feb‐11

Aug‐11

Mar‐12

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Apr‐05

Oct‐05

Apr‐06

Nov‐06

May‐07

Dec‐07

Jun‐08

Dec‐08

Jul‐09

Jan‐10

Aug‐10

Feb‐11

Aug‐11

Mar‐12

10.0

14.0

18.0

22.0

26.0

30.0

FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY14E

RoE (%) RoIC (%)



65

March 22, 2012

Gateway Distriparks


1. CFS Business is the cash cow; expanding capacities to fuel growth

2. Leadership position amongst private CTOs will further improve growth

prospects

3. The fourth ICD ‐ Faridabad to be operational in FY13E

4. Cold Chain business – a small but niche play

5. Sales CAGR of 19% led by traction across all the three business segments

6. Expect EBITDA CAGR of 33% during FY12‐14E

7. Return ratios to improve significantly going forward

1. CFS Biz is the cash cow; expanding capacities to fuel growth

GDPL has CFS presence at the leading container ports of India – Mumbai and

Chennai. This is a high margin business, as GDPL recorded >50% OPM in the last

four quarters. Currently, this segment accounts for ~40% of topline and 80% of

PAT. Recently, with a decline in container volumes at JNPT, GDPL’s overall

volume growth has been impacted. However, container volume handled at its

other CFS i.e. Chennai & Vizag has remained stable thereby moderating the

impact of volume decline at its JNPT CFS.

Further, we expect GDPL’s EXIM volume to pick up, as its Kochi CFS becomes

operational in Q4FY12 as well as additional capacity of 60K TEUs gets

commissioned at its JNPT CFS in FY13E. We have factored in CFS volume growth

of 2.8%, 3% and 7%, respectively during FY12‐14E period.

Exhibit 5: CFS presence at all the major EXIM container hubs

CFS Land

(acres)

Current Capacity

(TEUs) Capex Details Activities/ Other Details

Mumbai 62 300,000 Adding 60,000 TEUs by

end of FY13E

2 CFS, Adjacent to JNPT, Warehousing for Exports, Imports (LCL)

& Bonded Warehousing; Has a fleet of 140+ trailers

Chennai 20 90,000 Warehousing for Exports, Imports (LCL) & Bonded Warehousing

Vizag 20 50,000 Warehousing for Exports, Imports (LCL) & Bonded Warehousing,

12km from port

Kochi 6.5 50,000 To be operational in Q4FY12, Warehousing for Exports & Imports,

0.5 km from port


Exhibit 6: Near term volume growth impacted due to declining throughput at JNPT


‐25%‐20%‐15%‐10%‐5%0%5%10%15%20%

‐

20

40

60

80

100

Jun‐08

Sep‐08

Dec‐08

Mar‐09

Jun‐09

Sep‐09

Dec‐09

Mar‐10

Jun‐10

Sep‐10

Dec‐10

Mar‐11

Jun‐11

Sep‐11

Dec‐11

JNPT Chennai Vizag YoY growth (%)



66

March 22, 2012

Gateway Distriparks

Despite lower volumes, the CFS segment’s profitability has remained stable. This

is led by higher realisation on account of higher dwell time resulting in higher

rental income. Also, the operational efficiency has improved which have resulted

in higher EBITDA per TEU.

Exhibit 7: Profitability has improved despite lower volumes led by operationalefficiency


2. Leadership position amongst private CTOs will further improve

growth prospects

GDPL’s subsidiary Gateway Rail has Category‐I rail license to operate container

trains. It is the second largest Container Train Operator (CTO) in India after the

largest CTO – Container Corporation of India (owned by Govt of India) and hence

is the largest private CTO in India. In 2009, Blackstone invested Rs. 3 bn in the

subsidiary through cumulative Convertible Preference Shares (CCPS), which

helped the rail division in reducing its debt levels thereby helping the division

report profits (of Rs. 38 mn) in Q4FY11 for the first time in three years of its

operations. GDPL currently operates 21 rakes with >85% of its capacity being

deployed in the EXIM container transportation. It plans to add another 6‐8 rakes in

FY13E. We expect GDPL’s rail volumes to grow by 28%, 15% & 10%, respectively

during FY12‐14E period.

Exhibit 8: Rail volumes growth trend


Exhibit 9: Stable realisation boost EBITDA growth


As GDPL has been able to improve its asset sweating in the rail business, its

EBITDA per TEU has increased despite rise in haulage charges by the Indian

Railways. While the rail business comprises ~50% of total revenues, its PAT

contribution is ~15% of total PAT. This is on account of lower OPM of ~17% v/s

‐

100

200

300

400

500

‐

2,000

4,000

6,000

8,000

10,000

12,000

Jun‐08

Sep‐08

Dec‐08

Mar‐09

Jun‐09

Sep‐09

Dec‐09

Mar‐10

Jun‐10

Sep‐10

Dec‐10

Mar‐11

Jun‐11

Sep‐11

Dec‐11

CFS EBITDA (Rs mn) RHS Realisation (Rs/TEU) EBITDA (Rs/TEU)

0%

20%

40%

60%

80%

100%

120%

140%

160%

0

10

20

30

40

50

Jun‐08

Sep‐08

Dec‐08

Mar‐09

Jun‐09

Sep‐09

Dec‐09

Mar‐10

Jun‐10

Sep‐10

Dec‐10

Mar‐11

Jun‐11

Sep‐11

Dec‐11

Rail Volumes ( 000 TEUs) YoY growth (%)

0

1,000

2,000

3,000

4,000

5,000

0

10,000

20,000

30,000

40,000

Jun‐08

Sep‐08

Dec‐08

Mar‐09

Jun‐09

Sep‐09

Dec‐09

Mar‐10

Jun‐10

Sep‐10

Dec‐10

Mar‐11

Jun‐11

Sep‐11

Dec‐11

Rail Realisation (Rs/ TEU) Rail EBITDA (Rs/ TEU) RHS



67

March 22, 2012

Gateway Distriparks

~55% OPM in the CFS business. Additionally, rail business is capital intensive due

to acquisition of rakes, license fee and ICDs. However, with its rising penetration

and higher utilisation, GDPL’s rail margins should expand going forward and we

expect this segment to post EBITDA CAGR of > 25% during FY13‐14E periods.

3. The fourth ICD ‐ Faridabad to be operational in FY13E

GDPL has three rail linked ICDs at Kalamboli (Mumbai), Garhi (Gurgaon) and

Ludhiana. These ICDs have helped GDPL connect the North‐West hinterland and

hence GDPL has been able to gather high EXIM rail handling. Going forward, the

Asaoti (Faridabad) ICD is expected to be connected by road in Q4FY12 and by rail

in Q2FY13, which will help GDPL to further increase its services on the EXIM

route.

4. Cold chain business – a small but niche play

GDPL currently owns 53.1% stake in Snowman Frozen Foods, which has ~18K

pallets with cold warehousing facilities across India. This is a niche segment with

strong growth potential. Currently the cold chain business accounts for 8% of

GDPL’s total sales and 3% of total PAT. Sales grew by more than 50% YoY during

the last four quarters and the management plans to raise its pallet capacity by

~150% during FY13‐14E to 46 K pallets.

Key Assumptions & Estimates

Exhibit 10: Key Assumptions and Estimates across the three business verticals

FY10 FY11 FY12E FY13E FY14E

CFS Volumes (K TEUs) 304.0 333.4 342.9 353.2 377.9

YoY growth (%) (5.7) 9.7 2.8 3.0 7.0

CFS Realisation (Rs/ TEU) 6,645 7,232 9,606 10,567 11,306

YoY growth (%) (12.5) 8.8 32.8 10.0 7.0

Rail Volumes (K TEUs) 112 131 168 193 213

YoY growth (%) 69.0 16.8 27.9 15.0 10.0

Rail Realisation (Rs/ TEU) 25,797 23,689 22,646 22,646 23,779

YoY growth (%) (6.6) (8.2) (4.4) ‐ 5.0

Cold Chain Sales (Rs mn) 356 470 614 706 777

YoY growth (%) 2.3 32.0 30.7 15.0 10.0


Exhibit 11: Planned capex of Rs 3.2 bn during FY12‐13E

9MFY12 4QFY12‐ FY13E Comments

CFS Business 80 500 Koch and JNPT capacity expansions

Rail Business 330 1,300 6‐8 New rakes additions, Faridabad ICD

Cold Chain Logistics 200 800 Raising pallet capacity from 18K to 46K

Total capex 610 2,600Most of the capex to be met through

internal accruals


5. Sales CAGR of 19% led by traction across all the three business

segments

We expect GDPL revenues to grow at ~19% CAGR during FY12‐14E periods vs.

15% CAGR during FY10 & FY11. All the three businesses are on growth tracks led

by rising capacity additions and increased utilisation.



68

March 22, 2012

Gateway Distriparks

Exhibit 12: Revenues (Rs mn) expand across all the three

segments…


Exhibit 13: …thereby boosting revenue CAGR of 19% during FY12‐14E


6. Expect EBITDA CAGR of 33% during FY12‐14E

GDPL’s operating margins bottomed out during FY10 and has been expanding

thereafter led by improved performance across all the three segments. We expect

OPM to expand from 26.7% in FY11 to ~35% in FY13‐4E, and subsequently its

EBITDA should grow at ~33% CAGR during FY12‐14E.

Exhibit 14: Higher operational efficiency to further boost

EBITDA CAGR to 30%...


Exhibit 15: …and PAT CAGR of 29% during FY12‐14E periods


7. Return ratios to improve significantly going forward

Exhibit 16: Strong sales growth, increased operational

efficiencies to reflect in rising profitability ratios


Exhibit 17: Net cash flow position as internal accruals

sufficient to fund ongoing capex


2,020 2,411 3,294 3,732 4,272 2,900 3,111

3,804 4,375

5,053 356 470

614 706

777

‐

2,000

4,000

6,000

8,000

10,000

12,000

FY10 FY11 FY12E FY13E FY14E

CFS Division Rail Division Cold Chain

‐

10.0

20.0

30.0

40.0

50.0

60.0

70.0

‐

2,000

4,000

6,000

8,000

10,000

12,000

FY09 FY10 FY11 FY12E FY13E FY14E

Revenues (Rs mn) YoY growth (%)

15.0

20.0

25.0

30.0

35.0

40.0

‐

1,000

2,000

3,000

4,000


EBITDA (Rs mn) OPM (%)RHS

(10.0)

‐

10.0

20.0

30.0

40.0

50.0

‐

500

1,000

1,500

2,000

2,500


PAT (Rs mn) YoY growth (%)

12.5

10.7 11.4 11.2 10.9 13.0

13.6

14.9

21.3

13.0 12.8 12.1 12.5

15.4 16.6

19.0

5.0

10.0

15.0

20.0

25.0

FY07

FY08

FY09

FY10

FY11

FY12E

FY13E

FY14E

RoE (%) RoIC (%)

(0.20)

(0.10)

‐

0.10

0.20

‐

500

1,000

1,500

2,000

FY09

FY10

FY11

FY12E

FY13E

FY14E

Capex (Rs Mn) Net D: E (x) RHS



69

March 22, 2012

Gateway Distriparks

Key Risks

CFS revenue growth largely dependent on JNPT expansion: JNPT CFS currently

accounts for ~66% total CFS handled by GDPL during the last four quarters. As

GDPL has strong client relationship at JNPT, timely expansion of 60K TEUs will

result in faster volume growth as against ramping of business at Kochi (lower

EXIM trade currently), where GDPL is adding 50K TEUs capacity in Q4FY12.

Hence, our volume growth assumptions of 3% and 7% during FY13‐14E can be

impacted downwards in case the expansion is delayed.

Haulage charge increase by Indian Railways: GDPL’s rail business is in growth

phase and is trying to gather new business. Hence, GDPL may not be able to fully

pass on the rising haulage charges to its customers thereby impacting its margin

expansion and profit growth.


Exhibit 18: Impact of changes in realisation and volumes across CFS and Rail

verticals on the earnings metrics and target price estimates (FY14E)




10% lower Rail realization (19) (261) (219) (10)



Karvy vs. Consensus

Exhibit 19: Our estimates v/s consensus estimates

(Rs mn) Karvy Consensus Diff (%)

Revenue

FY12E 7,712 7643.6 0.9

FY13E 8,813 8805 0.1

EBITDA

FY12E 2,593 2,423 7.0

FY13E 3,051 2,757 10.7

Net Profit

FY12E 1,423 1296.7 9.7

FY13E 1,652 1476 11.9

Source: Bloomberg , Karvy Institutional Research



70

March 22, 2012

Gateway Distriparks

Financials



Net Sales 5,166 5,991 7,712 8,813 10,103

% growth 14 16 29 14 15


EBITDA 1,249 1,597 2,593 3,051 3,590

% growth (15) 28 62 18 18

Depreciation 455 502 585 686 705

Other Income 125 129 142 132 146

EBIT 919 1,223 2,150 2,498 3,031

Interest expenditure 195 182 200 215 218

PBT 724 1,041 1,951 2,282 2,812

Tax (79) 44 488 571 703


Adjusted PAT / Net profit 791 968 1,423 1,652 2,029

% growth (1) 22 47 16 23




Cash & liquid investments 945 1,636 2,697 3,188 4,512

Debtors 682 624 925 925 925

Inventory 0 0 0 ‐ ‐

Loans & advances 503 706 865 1,026 1,092

Other Current Assets 23 45 50 55 61

Long term investments 0 0 0 ‐ ‐

Gross block 10,036 11,540 12,543 14,443 15,443

Net block 8,186 9,329 9,748 10,962 11,257

CWIP 517 503 300 200 200

Total assets 10,855 12,843 14,585 16,356 18,047


Debt 2,099 1,154 1,900 2,050 2,080


Deferred Tax liability 187 140 140 140 140

Minority Interest 625 3,568 3,608 3,668 3,748

Shareholdersʹ equity 1,079 1,080 1,080 1,080 1,080


Total networth 6,637 6,877 7,875 9,099 10,701





71

March 22, 2012

Gateway Distriparks

Exhibit 22: Cash flow statement (Consolidated)


PBT 724 1,041 1,951 2,282 2,812

Depreciation 444 360 585 686 705

Interest 195 182 200 215 218

Tax (164) (230) (488) (571) (703)

(Incr) / decr in net working capital 396 (409) (504) 171 (93)

Others 34 147 (182) (192) (226)

Cash flow from operating activities 1,628 1,091 1,562 2,591 2,714

(Incr) / decr in capital expenditure (987) (1,639) (801) (1,800) (1,000)

(Incr) / decr in investments 69 (28) (100) ‐ ‐

Others 35 65 142 132 146

Cash flow from investing activities (883) (1,602) (760) (1,668) (854)

Incr / (decr) in borrowings 61 (947) 746 150 30

Issuance of equity 36 2,980 ‐ ‐ ‐

Dividend paid (439) (629) (428) (428) (428)

Others (200) (182) (160) (155) (138)

Cash flow from financing activities (543) 1,222 159 (433) (536)

Net change in cash 202 711 961 491 1,324




EBITDA margin 24.2 26.7 33.6 34.6 35.5

EBIT margin 17.8 20.4 27.9 28.3 30.0


Net debt: equity (x) 0.2 (0.0) (0.1) (0.1) (0.2)

Working capital turnover (x) (0.0) 0.0 0.1 0.1 0.1

RoCE 10.7 10.6 12.3 12.7 14.0

RoIC 12.1 12.5 15.4 16.6 19.0

RoE 11.2 10.9 13.0 13.6 14.9




EPS (Rs) 7.3 9.0 13.2 15.3 18.8

DPS (Rs) 2.0 3.0 3.5 3.5 3.5


P/E (x) 20.6 16.9 11.5 9.9 8.0

P/BV (x) 2.2 1.6 1.4 1.3 1.1

EV/EBITDA (x) 14.0 9.9 6.0 5.0 3.9

EV/Sales (x) 3.4 2.6 2.0 1.7 1.4




Institutional Equities Team Rangachari Muralikrishnan Head – Institutional Equities +91‐22 61844301 [email protected]

Shridhar Iyer Head ‐ Institutional Sales +91‐22 61844302 [email protected]

K. Anant Rao Head ‐ Sales‐Trading & Derivatives +91‐22 61844303 [email protected]

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Disclosures Appendix

Analyst certification

The following analyst(s), who is (are) primarily responsible for this report, certify (ies) that the views expressed herein

accurately reflect his (their) personal view(s) about the subject security (ies) and issuer(s) and that no part of his (their)

compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this

research report.

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contained herein is based on our analysis and upon sources that we consider reliable. We, however, do not vouch for the

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Investors must make their own investment decisions based on their specific investment objectives and financial position and

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