Friday, June 02, 2006
Heavy on the wallet
Allcargo Global Logistics (AGL) is a logistics service provider involved in multimodal transport operations (MTO), owning and operating Container Freight Station (CFS) and handling project cargo. Currently, AGL owns and operates one CFS 18 kms from Jawaharlal Nehru Port Trust (JNPT), India's largest container port, with a capacity of 120,000 twenty feet equivalent unit (TEUs), after the completion of Phase III of the development plan by June 2006.
The total container traffic in JNPT has increased by 12% to 2.67 million TEUs during the year 2005-06 from 2.37 million TEUs. One of the major container terminals is operated by the JNPT itself, which has handled 1.34 million TEUs of the total container traffic and the other major container terminal in Mumbai port, the Nhava Sheva International Container Terminal (NSICT) had handled 1.32 million TEUs.
The margins on the handling import TEUs is approximately double that of export TEUs. The mix of import to export was 24:76 for the nine months ended December 31, 2004, which marginally improved to 26:74 for the nine months, ended December 31, 2005. The company can increase its margins in the CFS business, if it is able to improve the import-export mix.
Container traffic is witnessing a CAGR of 20% in India in the last decade from 0.68 million TEUs in 1990-91 to 3.9 million TEUs in 2003-04. For the year 2006-07 the volume is estimated at 7 million TEUs. The National Maritime Development Program envisages a CAGR growth in traffic at all ports from 2003-04 to 2013-14 of 7.69% and the container traffic is being estimated at 18.31%. The company already has 10-11% market share in the CFS business, which will be further strengthened with its plans to set up a CFS, one each in Chennai (to add 60,000 TEUs p.a. from October 2006) and Mundra port (adding 54,000 TEUs p.a. from December 2006) and to set up an ICD in NCR.
The joint venture with TLSS for the USA market will help through their own office which will facilitate control of operations in the USA as also will give local customers a greater level of comfort.
The strategic acquisition of 49.99% stake in Ecu Hold NV and in the coming months the acquisition of the balance 50.01% stake will give it a strong base in the international markets. Also it will strengthen the financials of AGL, as Ecu Group is five-folds of AGL with revenues of Eur 185.8 millions for the year ended December 31, 2004.
The MTO and CFS businesses are highly competitive with no restriction on the entry of private, public and foreign players. As competition intensifies, under-cutting can become the norm, thereby putting pressure on margins.
In the MTO business, the revenue earned from LCL (less than container load) cargo is higher than FCL (full container load) cargo primarily on account of consolidation. With AGL focusing on FCL, the margins will be adversely affected.
AGL has yet to apply for regulatory approvals for the CFS at Mundra and ICD at NCR. Failure to obtain these approvals will impact the growth plans and be detrimental to the business.
Though the operational cash flow remains positive, the company can end up in negative cash flows as it requires investments to be made for rapidly expanding and investing funds in TransIndia Logistic Park and for increasing its equity stake in Ecu Hold NV
In January 2006, the company obtained private equity at an effective price of Rs.548.70 per share.
The annualized EPS for the nine months ended December 2005 is Rs 21 per share. At the asking price band of Rs. 625-725, the multiples are 30x to 35x. Gateway Distripark with EPS Rs 7.9 is discounted 27 times and Concor with EPS of Rs 77.3 is discounted by mere 22 times. There's nothing much left on the table.
If foreign institutional investors (FIIs) led the rise in the Indian stock markets, they are perceived to be behind the steep fall as well. FIIs have sold close to $2.7bn (or Rs 11,500 crore) since May 12, almost 50% of their investments during '06. The possible redemption pressure back homecould be forcing the FIIs to book profit in India.
That's in the cash market. But FIIs, who were aggressive buyers in the F&O (futures and options) market till this Monday, have now started selling. The change in their behaviour in the derivatives market signals selling bias in the near term. FIIs' net investment in '06 stands at $2.5bn as of May 31.
To a question whether FIIs are exiting India, a senior analyst with JP Morgan, New York, responded with a yes and a no. "If you analyse the data correctly, FIIs are just booking profits across emerging markets and would definitely invest back at appropriate levels," he said. Other US-based analysts concurred.
But negatives exist too. A Citigroup report states, "While down from its lofty peak, our sentiment indicator remains in the euphoria zone. Most at risk are India and Korea; sentiment is average in Taiwan and Hong Kong."
Citigroup report further states that historically, returns have been negatively correlated to sentiment. When the sentiment indicator has been in euphoric territory, returns have been poor to negative, and when investors are despondent, returns have been positive.
So, are FIIs increasing their cash exposure or are they allocating money into other markets or other asset classes? One factor that seems at play is the redemption pressure, on account of rising interest rates back home, which is prompting investors to move money back into safer asset classes in their home countries.
Said the JP Morgan analyst, "At this point, no re-allocation is happening. Yes, some money is definitely moving out as investors book profits and start investing into less risky assets."
Rising interest rate concerns in the US, weaker rupee and weaker metal prices seem to be the chief worries for FIIs. Easy money was one of the reasons for sustained equity inflows to emerging economies such as India, even when valuations seemed getting out of sync with fundamentals.
"Emerging markets were the biggest gainers with rising liquidity on account of foreign inflows. Now when the liquidity is tightening, emerging markets will tend to suffer," said Brad Durham, managing director, emerging portfolio fund research. The MSCI emerging market equities index has shed nearly 13% in the previous two weeks.
The other conclusion is that a downturn is inevitable after years of a sustained bull run. "Emerging markets are following global cycles, which is largely a four year cycle.
No doubt, India is in a secular upward movement, but we have entered the fourth year of the bull run, and some sell-off is expected. India might see levels of sub-9000 before the secular uptrend starts moving almost unilaterally upwards," said Robin Griffiths, head of asset allocation, Rathbone Investment Management.
The large retail bias and weak domestic institutions are the key to a steep fall in Indian markets said Martin Graham, director of market services, London Stock Exchange.
"Therefore, whenever FIIs sell there seems to be no buying support." The case is similar when FIIs were buying. Domestic institutions did not have the strength to sell at higher levels to keep markets at realistic levels