Detailed Rationale

CRISIL Ratings has downgraded its long-term rating on the Rs 875 crore of bank facilities and Rs 150 crore of non-convertible debentures of Allcargo Logistics Ltd to ‘CRISIL AA-’ from ‘CRISIL AA’ while continuing the ratings on ‘Rating Watch with Negative Implications’.

 

The downgrade factors a continued muted performance of the international supply chain business (ISC) business that contributes ~85% of the group’s revenues. In fiscal 2024, revenues de-grew by ~30% on-year to Rs 11,259 crore, with Pre-IND AS lease adjusted EBITDA declining to Rs. 194 crore from Rs. 953 crore in the previous fiscal. In the first half of fiscal 2025, revenues reported a 26% on-year growth to Rs. 7,090 crore, largely supported by higher freight rates. The Pre-IND AS adjusted Ebitda has however declined to Rs 114  crore in the first half from Rs 122 crore (in the same period previous fiscal). Here, while there has been a gradual improvement in the gross profits supported by steady recovery in volume sales, EBITDA has however moderated due to high SG&A expenses. Volumes have seen a gradual recovery this fiscal versus previous, with container utilisation has improved by 3% on-year in Oct-24. Nevertheless, the per unit profitability could still be lower when compared to the past fiscals given a slower than expected recovery in USA & Europe trades (geography which has been a major contributor to company’s operating margins) which will continue to be a key monitorable. The rating continues to take comfort from the healthy financial risk of the ISC business. While there has been a gradual increase in working capital requirements since the last fiscal largely on account of higher freight rates, that has resulted in a short-term debt increase to Rs. 868 crore as on September-2024 from Rs 434 crore as on March-2024 to, moderation in overall debt is expected as freight rates remain range bound and with company maintaining an asset light business approach.

 

The ratings continue on ‘negative watch’ as the business and financial risk profile of Allcargo Logistics Limited (herein referred to as new ACL) could further moderate post undertaking the company’s demerger plans.

 

On December 21, 2023, the company's board of directors approved a composite scheme of arrangement (demerger) whereby its ISC business, comprising global supply chain and domestic supply chain, as well as its support functions will be de-merged into a new company - Allcargo ECU Ltd (AEL) while the express and contract logistics business will continue under new ACL. This de-merger, which will be made effective in steps with appropriate allocation of shares to respective entities involved, will also result in merger of subsidiary, Allcargo Gati Ltd (housing the express distribution business) into new ACL.

 

New ACL, which will house the relatively smaller express and contract logistics business, has reported revenues of Rs 1035 crore (~13% share of the Allcargo group's revenue) in H1 FY 25 and post Ind AS adjusted EBITDA of Rs 9 crore. While complete details on split of outstanding debt between new ACL and AEL is awaited, new ACL is expected to hold mainly working capital related debt related to express and contract logistics, the Gati KWE acquisition loan and portion of general corporate loan, total constituting to ~20% share of consolidated group’s gross debt of Rs 1363 crore as of September 30, 2024. Cash and equivalent has been ~Rs. 214 crore as on 31st September 2024 for new ACL. Accordingly, the overall business as well as financial risk profile of new ACL will be moderate compared with the existing Allcargo.

 

This demerger is expected to be completed by April 2025, where the company has already received the required approvals from the Securities and Exchange Board of India (SEBI) and have submitted the proposed scheme to the National Company Law Tribunal (NCLT) who have instructed the company to conduct a shareholder meeting. CRISIL Ratings is in discussion with Allcargo’s management to better understand the exact bifurcation of - the current outstanding debt and will resolve the watch once there is better clarity and the key regulatory approvals are received.

 

Also, the long-term rating on Rs 200 crore (Rs ~34 crore outstanding as on September 30, 2024) of bank loan facilities continues at ‘CRISIL AA-’ with ‘Rating Watch with Developing Implications’ as this facility too in parts will be split into AEL & New ACL, as part of demerger announced in December-2023.

 

CRISIL Ratings understands that the portion of the debt that was moved to Transindia Realty & Logistics Parks Ltd and Allcargo Terminal Ltd has been repaid. CRISIL Ratings continues to engage with the company mainly to seek adequate documents to substantiate bifurcation of debt, cash and other assets and liabilities moving out; post which the watch will be resolved.

Analytical Approach

• For arriving at the ratings of continuing Allcargo, CRISIL Ratings has combined the business and financial risk profiles of Allcargo and its 133 subsidiaries (as of 31st March 2024). This is because the entities, collectively referred to as the Allcargo group, are under a common management and have strong financial and operational linkages. CRISIL has also combined the business and financial risk profiles of contract logistics business operated through its 100% subsidiary (w.e.f. June 01, 2023), Allcargo Supply Chain Private Limited (ASCPL, formerly Avvashya Supply Chain Private Limited), as it is in a similar business with operational linkages and under the same management.
• Furthermore, CRISIL Ratings has amortised goodwill on acquisitions made by the group, over five years from the date of each acquisition. For Gati Ltd, goodwill of Rs 224 crore has been amortised beginning fiscal 2020, Rs 92 Crore has been amortised for Nordicon beginning fiscal 2022. Rs 269 Cr has been amortized for acquisition of ASCPL & Rs 33 Cr for additional stake acquired in Nordicon beginning fiscal 2024.
• CRISIL Ratings has adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) by excluding lease rental components with depreciation and finance costs to comply with IndAS116 on lease accounting. Accordingly, CRISIL Ratings has not included lease liabilities in debt

 

Please refer Annexure - Details of Consolidation, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Established position in the global international supply chain and express logistics business: The company is India’s largest and a leading global operator in the international supply chain container consolidation business, backed by a strong global network. It is the largest player in the LCL consolidation industry holding about 15% market share globally having achieved higher than global trade volume growth through market share gains and improved efficiencies over the years. It connects 2,500 direct trade lanes providing value to small and large freight forwarders. Besides, the company is a leading player in the express logistics segment in India, through its subsidiary, Gati. Gati is one of the largest express logistics companies having extensive coverage in India and offers transportation solutions, e-commerce, trade inventory management, freight forwarding, and cold chain solutions. The company increased its stake in Gati KWE, the express logistics JV by buying-out the remaining 30% stake for Rs 406.5 crore in May-2023. It also operates a contract logistics business through ASCPL, in which it acquired the remaining ~39% stake in May-2023 for Rs 163 crore and exited the freight forwarding business by selling off its 61% stake in Avvashya CCI Logistics Private Limited for Rs 39 crore.

 

• Integrated logistics player with presence across diversified segments: The Allcargo group has a diversified business risk profile with three major segments ― ISC, express logistics, and contract logistics — contributing 87%, 11%, and 2%, respectively, to the total revenue in H1 of Fiscal 2025. The group earlier had presence in domestic CFS/ICD, warehousing, project and equipment business which has now been de-merged into other two new entities.

 

Gati’s extensive reach provides vertical integration to the international supply chain business which, along with the contract logistics businesses, enhances the group’s ability to offer integrated transportation and logistics solutions to its diversified clientele, thus enhancing the business risk profile.

 

• Healthy financial risk profile:  Allcargo’s financial risk profile remains healthy as of September 30, 2024, with net debt of Rs 553 Crore and gross debt of Rs 1363 crore. Gearing stood at about 0.37 times with adjusted interest cover of ~3.7 times for fiscal 2024. However, net debt-to-pre-Ind AS EBITDA has moderated from -0.75 times in fiscal 2023 to around 2.14 times in fiscal 2024, largely on account of higher working capital debt and moderation seen in operating profits. Short-term debt has increased to Rs 868 crore as of Sep-24 from Rs 434 crore as of Mar-24, primarily due to increase in freight rates.  While the term debt had increased to Rs 533 Crore in fiscal 2024, it was to fund the incremental stake purchase in Gati KWE, ASCPL, Nordicon AB and Fair Trade GmBH. No Further term debt is expected to be raised with the company looking to maintain an asset light business model. Further, the company is also expecting to reduce its net debt position by Rs 70-100 crore through sale of non-core assets and tax related refunds.

 

Weaknesses:

• Volatility in EXIM trade: The international supply chain business is directly linked to global EXIM trade and hence a significant reduction could weaken the business by constraining profitability per twenty-foot equivalent unit. Sluggishness in EXIM trade, in case of a steep fall in global trade, has impacted freight volumes, freight rates and profitability of the company since fiscal 2024. CRISIL Ratings expects moderate industry conditions to persist over the medium term with continued geopolitical uncertainties seen, before meaningful improvement begins.

 

• Intense competition in ISC and surface transport business: The ISC business is exposed to intense competition from large carriers as well as aggregators like Allcargo who have strong local presence. Also, the surface transport business in India too faces stiff competition from new entrants who enjoy strong financial backing as well as established players in the industry. While the company’s global presence and strong experience in operating the logistics business provides comfort, it continues to be impacted by the stiff competition in the industry.

Liquidity: Strong

Liquidity is supported by an adequate cash position of Rs 810 crore as on Sep 30, 2024, and average bank limit utilisation (for the group at ~48% for the six months through Sep-2024). Nominal capex and debt repayments (around Rs. 192 crore in fiscal 2025 and Rs 220 crore in fiscal 2026) should keep liquidity strong over the medium term.

 

ESG Profile

CRISIL Ratings believes that Allcargo’s Environment, Social, and Governance (ESG) profile supports its already strong credit risk profile.

 

The logistics sector has a relatively higher impact on the environment because of the inherent nature of assets utilized for the physical delivery of goods. However, given Allcargo is a leading LCL consolidator, its direct impact on the environment is limited vis-à-vis its partners and customers who might have higher impact. The company though has a social impact because of its large and diverse workforce. Allcargo has continuously focused on mitigating its environmental and social impact. 

 

Key ESG highlights:

• ESG disclosures of the company are evolving, and it is in the process of further strengthening the disclosures going forward.
• Allcargo began releasing its ESG report from fiscal 2020 setting out qualitative parameters of the ESG emphasizing its commitment to creating a better world.
• Through its CSR arm, Avashya Foundation, it is working to bring about inclusive development in six focus areas: Health, Education, Environment, Women Empowerment, Sports and Disaster Relief, through its network of reliable partner NGOs who are doing incredible work on the ground.
• Company has planted more than 710,000 trees through Avashya Foundation’s Maitree initiative
• Company has 50% women in the workforce in its global subsidiary, ECU Worldwide and endeavours to achieve similar levels in other group companies
• It has adequate governance structure with 50% of its board comprising independent directors and extensive disclosures.

 

There is growing importance of ESG among investors and lenders. Allcargo’s commitment to ESG principles will play a key role in enhancing stakeholder confidence, given its high share of market borrowings in its overall debt and access to both domestic and foreign capital markets.

Rating sensitivity factors

Upward factors

• Strong and sustained revenue growth, with Pre-IND AS lease adjusted EBITDA upwards of Rs 450 crore (upwards of reported Ebitda of Rs 740 crore)
• Substantial improvement in debt metrics while maintaining strong liquidity

 

Downward factors

• Continuing moderation in the business risk profile, including due to weak operating performance owing to slowdown in trade volumes, impacting cash flows
• Large, debt-funded capex or acquisition, resulting in sustained and significant weakening in net debt/pre-Ind AS EBITDA above 1.5-2.0 times on a sustained basis
• Any large cash outflow in the form of dividend or share buyback or large acquisition affecting liquidity

About the Company

The Allcargo group including the businesses now moved to de-merged entities, promoted by Mr Shashi Kiran Shetty, provides logistics services such as container consolidation, express logistics, CFS, ICD, warehousing and coastal shipping,.

 

Post the de-merger, Allcargo houses the container consolidation business (under international supply chain segment), express logistics (under subsidiary Gati Limited), and contract logistics (ASCPL, wholly owned w.e.f. June 01, 2023) businesses. The group is a leading global operator in the international supply chain container consolidation business and has grown over the years through various acquisitions. Since the acquisition of the Belgium-based ECU Line in 2006, the Allcargo group emerged as a leading LCL consolidator in the world and further solidified its position in September 2013 through the acquisition of Econocaribe Consolidators to increase its presence in the US and its focus on FCL cargo.

 

In April 2020, Allcargo completed acquisition of 46.8% stake in Gati entering the express logistics business which complements its international supply chain business. Gati was founded in 1989, is one of India’s leading express distribution and supply chain solutions provider, with a strong presence in the Asia Pacific region and SAARC countries. It has an extensive network across India, covering 99% (672 out of 676) districts and operating more than 5402 scheduled routes. It possesses an integrated, multi-modal network of surface, air and rail along with warehouses spread across India. The company’s offerings include transportation solutions, e-commerce, trade inventory management, freight forwarding and cold chain solutions operated through various subsidiaries and JVs.

 

Till H1FY25 the company has reported operating income of Rs 8114 Crore with PAT of Rs 42 crore against operating revenues & PAT of Rs 6578 Cr & Rs 135 Crore respectively in the same period last fiscal.

Key Financial Indicators

Particulars	Unit	2024	2023
Operating income	Rs crore	13188	18051
Profit after tax (PAT)	Rs crore	140	653
PAT margin	%	1.1	3.6
Debt/adjusted networth*	Times	0.37	0.26
Adjusted interest coverage*	Times	3.62	18.12

*Crisil Ratings adjusted numbers.

Any other information: Not Applicable