Allcargo Logistics Limited (ALLCARGO) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Allcargo Logistics Limited Q3 FY '21 Earnings Conference Call hosted by Antique Stockbroking Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Prateek Kumar from Antique Stockbroking. Thank you, and over to you, Mr. Kumar.

Good morning. This is Prateek. Thanks, Nirav. This is Prateek from Antique Stockbroking. I welcome you all on behalf of Antique Stockbroking. Today, we have management of Allcargo Logistics to discuss their third quarter results. We have Mr. Ravi Jakhar, Chief Strategy Officer; and Mr. Deepal Shah, CFO of -- from the management side. Without wasting much time, I'll hand over the call to the management for opening remarks, and then we'll move to question-and-answer session. Over to you, sir.

Thank you. This is Ravi Jakhar here. Good morning, everyone, and welcome to today's earnings conference call to discuss the performance for the third quarter and the 9 months ended December 2020. Along with me, I also have my colleague, Deepal. So to start with, I would request Deepal to first take you through the quarterly financial highlights. Over to you, Deepal.

Thank you, Ravi. Let me now take you through the key consolidated quarterly financial highlights. Total revenue from operations stood at INR 2,735 crores for the third quarter as compared to INR 1,787 crores for the corresponding quarter last year, which is an increase of approximately 53.1%. EBITDA for the quarter was at INR 147 crores as against INR 126 crores during the corresponding period last year, which is an increase of 16.8% on Y-o-Y basis. Profit after tax was reported at INR 1.4 crores for the quarter. Let me also highlight the performance for 9 months of the financial year FY '21. The total revenue from operations stood at INR 7,149 crores for the 9 months of the year as compared to INR 5,475 crores for the corresponding period last year, which is an increase of approximately 30.6% on a Y-o-Y basis. EBITDA for the first 9 months of the year ended -- stood at INR 4,441 crores (sic) [ INR 441 crores ] as against INR 3,000 -- sorry, INR 397 crores during the corresponding period last year, which is an increase of 11% on a Y-o-Y basis. Profit for the -- profit after tax for the first 9 months of the year ended was reported at INR 89 crores as against INR 180 crores during the corresponding period last year, which is a decrease of 50.5% on a Y-o-Y basis. Just like to inform you that this year onwards, we have -- from April onwards, we have consolidated Gati in our results. So that is what you have to take into account while looking at these results. Now I would like to hand over to Ravi to take you through the key business segment highlights for the quarter. Over to you, Ravi.

Thank you, Deepal. Coming to the business highlights for the quarter. Let me start with the MTO segment. The shortage of containers and supply constraints on the shipping side continue to exist and that are driving the freight rates higher, which creates challenges on the procurement front. But on the good side, it's also an indication of overall economic environment, which continues to improve across the globe, and therefore, provides a good opportunity to the business. At ECU Worldwide, our global subsidiary on MTO business, we continue to drive innovation through products such as XLERATE, which is a combination of sea and air. And we also continue to significantly focus on digitization through products such as ECU 360. On the financial side, there has been a marginal decrease in the return on capital employed, primarily on account of higher working capital, which is naturally driven by higher freight rates. On an overall basis, the Multimodal Transport Operations clocked a total volume of over 207,000 TEUs for the third quarter of the financial year. The total revenue for the third quarter ended was INR 2,147 crores as against INR 1,615 crores for the corresponding period last year, which is an increase of about 32.9%. This is primarily, as I mentioned, driven by higher freight rates prevalent across the globe. On the EBIT side, we achieved INR 57.9 crores for the quarter as against INR 57.5 crores for the corresponding period last year, which is a marginal increase of 0.69%. EBIT margin stood at 4.3%. Coming to our Projects & Engineering Solutions business. The total revenue for the third quarter stood at INR 82 crores as against INR 70 crores for the corresponding period last year, with a growth of 17.1%. Project Logistics EBIT reported at INR 1.8 crores for the quarter. The segment has seen relatively limited growth in order book, but business continues to be steady. Focus on infrastructure growth and development of new metro projects announced in this year's budget is likely to provide good opportunity in the future. We believe that the government will continue to focus on infrastructure expenditure to revive economy. And therefore, there would be more capital projects, more infrastructure projects, which should lead to greater opportunity for crane business as well as for the Project Logistics business. On the crane utilization side, we have seen steady improvement since May. And now we are almost at par or even better sometimes when you do a year-on-year comparison. Company, as we have mentioned in the past also, is focused on rationalizing its fleet to make the overall fleet younger. And just to highlight, in this business, we generally see a lower ROC, which is primarily driven by significant amounts of depreciation on the equipments, which drive EBIT to a much lower number. Coming to our Logistics Park business. The total revenue for the third quarter ended was at INR 17.8 crores as against INR 11.8 crores for the corresponding period last year, with a growth of 50.8%. This is primarily driven by new warehouses, which got developed and ready and leased out to various tenants. The development and construction of Logistics Park is going on schedule. There was a minor disruption in the early couple of months of COVID pandemic. But since then, we have been steady in whatever new construction was happening across various sites. Lease income from warehouses naturally continues to rise, and the trend will continue as more and more warehouses get developed. As we have informed in the past, for this vertical, we also have got into an agreement for a definitive transaction, which will reduce our shareholding to a strategic minority holding of 10%. That transaction has seen some delays due to COVID-led delays in certain approvals, which were part of condition precedent. However, the work is in progress now, and we are confident that it should get concluded with some delays. Coming to our CFS and ICD business segment, the total volumes for the third quarter of financial year 2021 were 81,666 TEUs. The total revenue for the third quarter ended stood at INR 108.8 crores, marginally lower than INR 111.3 crores for the corresponding period last year. However, efficiencies on the operations side helped us improve the EBIT, which stood at INR 31.3 crores as against INR 27.8 crores for the corresponding previous period last year. There has been a recovery in volumes across all locations over the past several months. Port volumes have registered good growth in the EXIM segment. And on the challenges side, the same thing, which we spoke about on the shipping, shortage of containers, some blank sailings and higher freight rates have impacted the trade and which does impact the CFS/ICD business as well. The ROC for the business continues to be healthy. This is a quick update from our side on all the businesses. Thank you very much, and we are open for any questions. Thank you.

[Operator Instructions] The first question is from the line of Vikram Suryavanshi from PhillipCapital.

Can you repeat the volume for MTO business for the quarter?

Yes. So the volume for the MTO business is over 207,000 TEUs.

Okay. And the rates, what we have seen in quarter, freight rates, particularly for MTO? I think there has been further increase in, basically, rates for this quarter also in January, February. So the kind of index we get for the full container load freight rate, it does have similar increase we have seen in LTL (sic) [ LCL ] also or LTL (sic) [ LCL ] the rates would be -- the increase or the quantum of rate hike would be lower than what we have seen in the index -- container index rate?

Yes. Now so what happens is in the LCL space, which is less than container load, naturally, you are -- on the procurement side, we are blocking the same container space from the shipping lines and therefore, we have to pay the same freight rate which you would pay for an FCL. They do not differentiate between an LCL and FCL container in that sense. So naturally, the freight rates, which have gone up, have gone up for all across. Now there are positives and negatives in the freight rates when it comes to impact on our business. Because on one side, like I mentioned, the procurement becomes challenging. But then we are mostly often able to pass on the incremental cost to the end customer as well. So therefore, our gross margins are usually protected. And that is how this business, which always sees, if not globally, which is a trend right now at least on some trade lanes, you always find some volatility in the freight rates. The business fundamentally focuses on the GP when driving the business performance. And therefore, you would notice that the significant increase in freight rates neither leads to a significant downward trend because of higher procurement costs, nor does it lead to incremental benefits because of higher revenue. The only thing which happens is, it skews the percentages in terms of proportions. So that is the way to analyze. You can look at the -- on the EBIT level when you would see -- if we are able to hold on the EBIT, but the revenue rises significantly because of higher freight rates, you would typically find that the EBIT margin appears to be lower. And when the freight rates normalize, our EBIT would remain the same, but the freight rates, and therefore, the revenue would come down, and therefore, the EBIT percentage margins would go up just to explain how to look at the numbers.

Okay. And basically, can you share the absolute utilization level currently in Projects & Engineering? And do we have any order book growth right now? Because I think this time, we could not get the presentation. So if you can share the utilization rate as well as order book?

Yes. So we'll be -- we'll upload the presentation today so you can get all the details there. But just to broadly highlight, the utilization levels over the last couple of months have varied from 68%, 69% to about 78%, 79%. So on an overall basis, these numbers have been higher than where we were, not just in the preceding month, but also in the previous year. What we have also done is, as we continue to rationalize our fleet, what you typically find is the number of cranes would reduce, but these are typically younger, better, more in demand kind of cranes. And we also hire some cranes from outside to meet our client requirements because people prefer to take services from Allcargo, given our focus on safety and service standards. So therefore, we are moving towards a situation wherein, let's say, 80%, 85% of our crane is our own, but maybe we have 15%, 20% of capacity supplied from outside as well so that we can maintain higher utilization of cranes and make the business more profitable. So that is 1 thing which we are doing, and which has helped us significantly over the last few quarters. Despite the challenges in the COVID pandemic, we have been able to increase our utilization. And also, in comparison to most of the key competitors in the market, our crane utilization levels would be higher.

[Operator Instructions] The next question is from the line of Ashwini Agarwal from Ashmore Investment.

Deepal, a couple of -- I mean, I was just looking at the numbers on a year-on-year and quarter-on-quarter basis, and I accept that the MTO business one has to look at EBIT per container rather than look at it as a percentage of revenue. But there's been a meaningful decline over the September quarter. Can you give us some color as to what happened? Why is this EBIT number down from almost INR 80 crores down to INR 58 crores September versus December?

Ravi, you want to take that, or should I answer that?

Yes. I'll take that, Deepal. Thank you. Yes. So basically -- yes. So basically, what happens in this business is there are 2 things which drive this. First, the business has seasonality. So if you would look at the historic numbers as well, your year-end payments to staff, et cetera, are relatively high, and therefore, your staff cost goes up. And therefore, when you look at the EBIT level, you would find that there's an impact. And this is a seasonality, which comes in because in our global business, ECU worldwide, unlike the India business, which runs on April to March budgeting, the international business runs from January to December budgeting. And therefore, the October to December quarter is the last quarter for the budget year, and which is where some incremental costs are there, which are annualized -- annual in nature. That's 1 reason. Secondly, as we have tried to become more lean and efficient in the business processes, use of -- by use of technology, it means that we have been able to reduce headcount. But as you know, driven by various regulations, the reduction in headcount also comes along with severance costs. And therefore, those severance costs have also impacted the bottom line. And there have been some onetime expenses as well on the transformation initiatives and some technology initiatives. So these are few factors attributing to incremental costs, and therefore, a relative impact on the bottom line.

Ravi, just to add. So what happens is that though the current quarter, because of the severance cost, there could be a little bit of a higher impact on the P&L, but going forward, those savings will add up and will finally be shown in the bottom line. So it's an ongoing exercise where we are trying to reduce our manpower and digitize some of our processes.

Yes. And the other thing, I don't know whether, Deepal, you mentioned it or Ravi mentioned it, but you spoke about higher working capital requirements because of higher shipping freight rates. I mean I was always under the impression that this is a business that kind of has matched cash flows. You pretty much collect when you -- when a customer books a container. And the shipping lines give you a small amount of credit. So there isn't really much working capital involved in the MTO business, but your comment seems to indicate otherwise. Could you help me understand why?

Yes. So basically, what happens is -- so as compared to the other businesses, naturally, there isn't very high amounts of working capital involved in the business, we would like to rightly put it. We get credit from shipping lines and we extend credit to our customers. But there's always a small marginal gap in that, and which is where the working capital comes into play. Now in today's time, when there are historic highs on certain trade lanes on the ocean freight, that has impacted the working capital. But at the same time, so the impact on the working capital -- on the ROC because of working capital would be less than 1%.

And this is transient, I'm assuming?

Yes. So this would change. So we believe that the -- I mean, and of course, nobody knows for sure, but based on our experience and what we gather from our operations and business teams, we believe that over the next 4 to 5 months, the situation should get better. We do not anticipate the freight rates to go back to the old normal. They may continue to remain at a certain delta above the historic rates, but they would certainly soften a bit in the coming 4 to 5 months. And then as the freight rates go down, naturally, the working capital will get released back, and therefore, your capital employed also will again shrink. And naturally, any overdraft facility, et cetera, also get reduced for marginal improvement in interest cost also.

Ravi, it's also a factor of that container shortage, which will get eased out in the coming quarter. So probably the impact of that on the freight rates will subside.

Yes, exactly.

How does the container shortage impact working capital?

So it impacts the freight rates that's what...

It drives the freight rates up. So your working capital gets expanded.

Sure. Sure. Sure. And that was the other question that on the container availability side, are you seeing any respite? Or things continue to be as bad as they were through the October to December period?

No. The things have been improving significantly. Also, the current ongoing period when there's been a bit of -- though it's not been like every year, but there's definitely been a certain break with the Chinese New Year. So a lot of shipping lines are using this window to reposition the containers and remove the imbalances which had occurred. So the situation is certainly improving on the container shortage side also, and also with new containers coming in. So it is definitely not as difficult as it was even 3 months ago to source the containers. So situation is improving well on that front. And in the next 3 to 4 months, we believe that things should be in control.

[Operator Instructions] The next question is from the line of Vikram Suryavanshi from PhillipCapital.

On CFS side, our number -- for volume number, what I have got is 81,616, is that right number? And second thing, are we -- how we are seeing the trend in ground rent, which was quite a significant component during COVID time and trade disruption, how that is now in terms of revenue share? And even we had seen that a lot of DPD cleared containers, which were going back to the CFS, so that proportion was also significantly increased, even trade was disturbed. So how is the share of DPD containers, which are again going back to CFS compared to peak in COVID time? And is it impacting the overall profitability? Or has it normalized? Or structurally, are we seeing that the profitability has now improved compared to pre-COVID time for CFS business?

Yes. So I would say that as far as the DPD containers are concerned, they continue to benefit from the existence of CFSs, and that trend continues. On the ground rental side, naturally, the situation in the month of -- last week of March and through the month of April was very different when there was a very strong lockdown in place, and therefore, containers were not being evacuated. That situation had very well eased by June or July itself. And now from an operations standpoint, it is completely back to normal. There are no visible impacts of pandemic as far as the storage or movement of containers is concerned. So it's pretty much like how it was pre-COVID.

And can you reconfirm the number -- the volume number?

Yes. The volume numbers are 81,666 for the quarter FY '21.

Okay. Okay, sir. And if you can give within CFS, sir, JNPT is running at what capacity utilization? Because I think out of 2 CFS, 1 predominantly we are using for like additional value-added services or in fact into DPD shares. So how is the combined utilization at JNPT? And what kind of recovery we are seeing at JNPT?

So JNPT utilizations have been more or less same as last year. Now we expect the volume should continue to improve over last year, and therefore, the utilization level should go up considering that dwell times remain same. Only for the temporary phase during the early part of pandemic, the utilization levels had increased significantly because the CFS is a chockablock if containers are not moving out. Now they've been normalized. But apart from Kolkata, which is a relatively new facility, and therefore, would only see a steady buildup of business, JNPT and Dadri continue to be at par. In Chennai, we have seen some good traction. So overall, it is, I would say, marginally better than the last year on -- as of today's status, yes.

Okay. And 1 last question on MTO, the kind of volume growth what we have seen, is it large part of that because of full container or LCL was also seeing the similar kind of growth rate?

It is a combination of both. We do not distinguish between the opportunity as we sell both LCL and FCL to our customers.

The next question is from the line of Ashwini Agarwal from Ashmore Investments.

So it's partly related to the previous question. Could you give us a breakup between full container and less than container load in that -- in the number of TEUs that you carried over the quarter?

So we do not share the breakup on the FCL and LCL. We have always treated them as 1 unit. That's how the procurement and the sales to customers also happen. So we have maintained them as 1 common business operating as ECU Worldwide, the MTO will be [indiscernible].

[Operator Instructions] The next question is from the line of V.P. Rajesh from Banyan Capital Advisors.

My question was regarding the delisting process. If you can comment on the delay that we are seeing in process moving forward? And relatedly, the transaction that you mentioned at the beginning of the call, will that impact time line of the delisting as well?

So delisting and the transaction I mentioned about are 2 separate issues, not connected to each other. Delisting is a promoter issue, while the transaction is a company matter. As far as the transaction is concerned, it is under progress. On the delisting side, as a -- from a process perspective, the shareholders' approval had come through. And now the next step is for promoters to arrange the funds and then make a formal application for delisting. It is not possible for the company to comment on where the promoters' fund raise initiatives or funding arrangements are in place, and when they would be able to make an application for the -- formal application for delisting. It is not possible for the company to comment on that.

Fair enough. And my second question is on the business front. Would you say that you're back to 80%, 90% of the pre-COVID levels? Or if you can just give some color on that side, division by division, how are you seeing the near-term trends?

Yes. So if I speak about situation as of today, in the MTO business, we are doing as good as last year. I do not see any shortfalls. In some places, we are perhaps doing marginally better. In CFS business, we are -- again, from a business performance standpoint, we are doing better than last year as of today's status if I speak about that. On the Projects & Engineering division, on the crane equipment rental, we are doing better than last year. On the Project Logistics, we believe that things should improve in the coming year. Last 6, 8 months have not been that strong for new projects or -- but we believe in the coming 6 to 9 months, things should improve. So we are definitely below maybe at 70% level in that business on the Project Logistics, but that should revive in the coming few quarters. And -- so overall business, I would say, is at par or stronger than last year on today's basis.

Okay. And on the Crane side, the utilization is pretty low in the industry from what we understand. What is your view on that business?

Yes. So while there is no verified third-party data that we can refer to, our broad understanding is that industry-wide utilization levels vary from 50% to 60%. But in our case, we have been able to keep them north of 70% for most part of the time. And that is primarily driven by our high service levels and significant focus on safety, which is valued by the customers, and therefore, there's a preference for our equipments and -- which allows us to maintain higher utilization levels. We've also, over the last several quarters, been focused on rationalization of fleet, ensuring that we keep the right cranes, which fit our customer requirements well. So keeping customers the center of the business has allowed us to have higher utilization levels in the Crane rental business.

Great. And lastly, on the yield side, in the cranes, what is the yield we are getting? Is it getting better? Is the pricing getting better? Or what's the situation there?

So the yield was -- even, I would say, it was certainly at a significant low 6, 8 months ago, but it has been steadily increasing over the last 5, 6 months. And we expect that there could be another -- maybe about 5% to 10% upside, which may still happen in the coming 6 months or so.

The next question is from the line of Ankit Panchmatia from B&K Securities.

Sir, my question is more to do regarding the CFS business. How are we looking at this business? Because the ground rents are not there, I believe, in this current quarter, and do we see the per TEU metrics to be sustainable at these numbers. And we were kind of providing some value-added services on this side of business, so do we see that this segment has bottomed here, and we would see some better days ahead with respect to the realization on the per TEU profitability, which we are looking at it?

Yes. So I see that your question itself has the answers to the question as well. You spoke about the value-added services. That is the way to go to find more opportunities, see what more can be done, what more can also be permitted. So we'll continue to see the policy also shape up from the government side. Government is working on the national logistics policy. We'll see what CFSs can do more and benefit from the government's outlook towards facilitating trade. In terms of -- you spoke about the per TEU, yes, as the ground rent comes down, you may see marginal decline in per TEU realization. But that is something which you have seen has already kind of bottomed out. And it is likely to only get marginally better. What also we need to recognize is that as the trade continues to grow, the capacity on the port side is significantly available with the new terminals, which are still not fully utilized. While on the CFS/ICD side, the government has taken the right initiatives on zoning various locations, and therefore, ensuring that there's not excess supply, which leads to a situation of discomfort for the economy and traders at large. So therefore, what it means is that the ability to compete better and handle more TEUs goes up. Because if my container yard can hold 4,000 TEUs, for an example, and if the dwell time is 15 days, it can handle 8,000 TEUs. But if the dwell time goes down to 10 days, the same container freight station can now handle 12,000 TEUs. So ability to handle higher TEUs negates out the reduced earning from the ground rent as the dwell time goes down. So on an overall basis, we believe there are good opportunities for growth by attracting higher volume, making use of the reduced dwell time, offering value-added services and trying to see how we can make the operations more efficient.

Right. Sir, just to understand this, this quarter does not have any ground rent, right? So this is the performance without any ground rents in the current quarter?

You mean to say any abnormal ground rents? Yes, there isn't any thing like abnormal...

Any abnormal.

Yes. There aren't abnormal -- yes, so the business has operated in a normal environment for the last 3 months. There haven't been any significant abnormalities in the business operations.

Ravi, just to add here. So a normal -- all CFS billings have ground rent, but these are normal ground rents as per normal dwell time of the containers.

Yes.

Any undue abnormal which you've seen in the first quarter is not there, just to make it amply clear, yes?

Right, right. And on the transaction with the Blackstone, how much amount which you have already received? Is there any amount over this quarter, which we have received? And any clarity on the same would be much helpful?

Yes. So the amount from Blackstone is going to be INR 380 crores, as originally mentioned in the agreement, out of which around INR 238 crores is what we have received. INR 142 crores is due. That amount is expected as and when we close the conditions precedent, which we are about to close in a couple of months from now.

Okay. Okay. And these proceeds are actually focused towards reduction of debt or how would we plan to...