Detailed Rationale

CRISIL Ratings of 'CRISIL AA-' on the long-term bank facilities and non-convertible debentures of Allcargo Logistics Limited (Allcargo; a part of the Allcargo group) continue to be on 'Rating Watch with Developing Implications, (RWDI)'. The rating on the short-term bank facilities are reaffirmed at ‘CRISIL A1+’.

 

The rating action was done following the Dec-2021 announcement that the company's board of directors have approved a scheme of de-merger, wherein the container freight stations (CFS)/inland container depot (ICD) business will be de-merged into a new company Allcargo Terminals Limited (ATL) while the equipment rental, logistics parks and other real estate assets into TransIndia Realty & Logistics Parks Limited (TRL). Under the scheme, all the three companies will have mirror shareholding. Each shareholder of Allcargo would be issued shares of the two new companies viz ATL and TRL in 1:1 ratio, in consideration for the demerger.

 

As per the proposed scheme, the Allcargo (post demerger) will house the flagship and globally leading LCL consolidator in the international supply chain business (under multi-modal transport operations (MTO) segment), express logistics (under subsidiary Gati Limited), contract logistics (under 61% JV, ACCI), and project management (aggregate revenue of Rs 14,059 crore or 95% share of Allcargo group's consolidated revenue for the first nine months of fiscal 2022, ~84% of earnings before interest, taxes, depreciation and amortization (EBITDA) at 6.3% margin. Allcargo (post demerger) will hold ~54% share of total capital employed with debt primarily comprising of working capital debt and majority of cash and equivalents held at ECU Worldwide.

 

CRISIL Ratings notes that credit risk profile of Allcargo (post demerger) will continue to benefit from its leadership position in the MTO business, last-mile connectivity provided by Gati and the contract logistics business. On the other hand, the credit risk profile of ATL and TRL would be marked by relatively lower revenues and operating profits, and established market position in the respective business segments. The financial risk profile post demerger would depend on bifurcation of assets and liabilities amongst the three companies as well as conclusion of Blackstone deal.

 

The group (excluding ACCI) achieved revenue of Rs 14,296 crore in the first nine months of fiscal 2022, alongwith earnings before interest, tax, depreciation, and amortisation (EBITDA) of Rs 1,023 crore at 7.2% margin. The growth was led by strong performance in the MTO segment with revenue almost doubling to Rs 12,521 crore in the first nine months of this fiscal, supported by continued strong volume growth alongwith higher realisation on the back of high freight costs. The MTO segment performance is expected to benefit from the acquisition of 65% stake in Nordicon group in July-2021 at an enterprise value of EUR 32 million.

 

In the CFS/ICD segment, the group achieved revenue of Rs 406 crore in the first nine months of this fiscal supported mainly by volume growth. The group also announced acquisition of Speedy Multimodes for Rs 102 crore in November 2021, which has become become accretive from second half of this fiscal. Gati’s performance improved with healthy volumes while improvement in utilization supported project and engineering (P&E) segment. ACCI JV continued to do well in the contract logistics business.

 

With debt-funded acquisition and higher working capital funding requirement this fiscal, the group’s debt (excluding leases) increased to Rs 1,765 crore as of December 31, 2021 as compared to Rs 1,652 crore as of March 2021. The construction of 4 million square feet warehouses as part of Blackstone deal has been completed and pre-leased to marque clients along with Lease Rental Discounting debt on the books. The deal is expected to be completed in next 3-4 months pending certain approvals from the local authorities and is expected to result in inflows of Rs 250 crore which will be used for debt reduction. The company’s deleveraging plan with monetisation of completed, leased warehouses to Blackstone, sale of non-core assets alongwith improvement in working capital debt will be critical for improvement in debt metrics in the near term and would remain the key monitorables.

 

The group has streamlined Gati’s operations along with divestment of non-core assets and subsequent deleveraging. Consequently, Gati’s debt has decline to Rs 188 crore as of December 31, 2021 as compared to Rs 397 crore as of March 31, 2020. Gati is expected to facilitate end-to-end transportation services for the group’s clientele and provide business synergies over the medium term and would remain the key monitorable.

 

Earlier, operating income grew by 17% in fiscal 2021 to Rs 10, 929 crore over the previous fiscal while adjusted EBITDA grew to Rs 589 crore at 5.4% margin despite the pandmeic. The improvement was supported by continued strong volume and realisation growth of 7% and 20% respectively in the MTO business, improved realisation in the CFS/ICD segment, and improved performance in the logistics park business and at ACCI.

 

According to the management, the objective of this demerger is to accelerate growth across businesses by creating independent business undertakings, improve access to capital, streamline operations, reduce costs and thereby unlock value in each of these business segments.

 

The demerger is likely to take about 12-15 months subject to necessary statutory and regulatory approvals from Stock Exchanges, National Company Law Tribunal (NCLT), Income Tax Authority, and equity shareholders. Company has received approval from majority lenders.

 

CRISIL is in discussion with Allcargo’s management to better understand the division of its assets, liabilities and the bifurcation of debt facilities; and will remove the ratings from watch, once there is better clarity, and announce it's the final action once key regulatory approvals are obtained.

 

The ratings continue to reflect the Allcargo group’s diversified operations and established position in the global non-vessel owing common carrier (NVOCC), domestic CFS and courier service businesses. The ratings are also supported by an adequate financial risk profile because of steady annual cash-generating ability, though debt metrics are moderate. These strengths are partially offset by susceptibility to risks inherent in the logistics industry arising from volatility in export-import (EXIM) trade volumes, and delays in execution of projects impacting the performance of the P&E business.

Analytical Approach

• For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of Allcargo and its 149 subsidiaries including recently acquired Gati Limited. 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 its 61% joint-venture, ACCI, as it is in a similar business and has operational linkages with the group.
• 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.
• CRISIL Ratings has also treated the optionally convertible debentures (received as a part of Blackstone deal) as equity-like given full convertibility within one year.
• 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 - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Established position in the global NVOCC, domestic CFS, and courier service businesses: The group is India’s largest, and a leading global operator, in the NVOCC business, backed by a strong network. It is the largest player in the Less than Container Load (LCL) freight-forwarding industry globally. Despite challenging global trade conditions in fiscal 2021 owing to the pandemic, the volume in this business grew 7%, by gaining market share due to an established global network and longstanding relationships with customers. With recovery in global trade environment this fiscal as well support from Nordicon acquisiton, volumes have grown at a healthy 32% on-year in the first half of this fiscal.

 

The group is expected to continue witnessing healthy volume growth and realisation this fiscal which would support overall revenue growth and profitability. The group will be leveraging on its existing global network and bolt-on acquisitions that should help the NVOCC business grow steadily over the medium term.

 

Besides, the group is a leading player in the CFS segment, with stations at four major ports of India, an ICD at Dadri (Uttar Pradesh) alongwith recently acquired CFS at Speedy Multimodes. Gati is one of the largest courier companies having extensive coverage in India and offers transportation solutions, e-commerce, trade inventory management, freight forwarding, and cold chain solutions; besides running fuel stations. Any substantial change in freight rates or EXIM volume may impact overall growth and will be a key monitorable.

 

• Integrated logistics player with presence across diversified segments: The Allcargo group has a diversified business risk profile with six major segments ' NVOCC, CFS, P&E, warehousing, and contract logistics and Gati — contributing 77%, 4%, 3%, 1%, 4% and 11%, respectively, to the total group revenue in fiscal 2021.

 

Gati’s extensive reach provides vertical integration to the MTO business which, along with the diversified businesses, enhances the group’s ability to offer integrated transportation, logistics and warehousing solutions to its diversified clientele, thus enhancing the business risk profile. The group is setting up built-to-suit pre-leased Grade-A warehousing assets at strategic locations across various cities in India; a part of these will be sold to Blackstone according to pre-agreed terms and the remaining leased out on a long-term basis. Rental income from the unsold and leased warehouses has further diversified the cash flow streams.

 

• Adequate financial risk profile:  The group’s financial risk profile remains adequate as of September 2021. Group's debt increased marginally to Rs 1,730 crore as of September-2021 as compared to Rs 1,652 crore as of March 2021, mainly due to increased working capital requirement in MTO business on the back of high freight rates and realisations as well as acquisitions of Nordicon and Speedy this fiscal. Strong operating performance in fiscal 2022 is likely to lead to improved cash generation over the medium. With closure of Blackstone deal and receipt of remaining cashflows, improvement in working capital levels and continued healthy cash generation debt, capital structure is expected to improve in the near term, and remains a key monitorable. Debt/EBITDA stood at 1.55 times as on September 30, 2021 as compared to 2.8 times as on March 31, 2021, and is expected to improve in fiscal 2023 with improved operating performance.

 

Weaknesses:

• Volatility in EXIM trade volume: The NVOCC business is directly linked to global EXIM trade, and hence, a steep fall in in it could weaken the business by constraining profitability per twenty-foot equivalent unit. The CFS business, which is directly linked to the Indian trade, is exposed to risks arising from variations in EXIM trade, and customs policies. Sluggishness in Indian EXIM trade, in case of a steep fall in global trade, could impact utilisation levels and profitability. Furthermore, low entry barrier has encouraged implementation of new CFS facilities by new and existing players, leading to build-up of surplus facilities; this will intensify price-based competition in the long term, thereby restricting profitability.

 

• Vulnerability of the P&E business to delays in project execution: In the P&E business, the group has been executing important projects for reputed clients such as Reliance Industries Ltd (‘CRISIL AAA/Stable/CRISIL A1+’), Larsen & Toubro Ltd (‘CRISIL AAA/Stable/CRISIL A1+’), Bharat Heavy Electrical Ltd (‘CRISIL AA+/Stable/CRISIL A1+’) and NTPC Ltd (‘CRISIL AAA/Stable/CRISIL A1+’); and has an effective equipment fleet of over 800 units. However, the business is heavily dependent on the domestic economy and the pace of project execution and completion. Around 70% of revenue is derived from power, oil and gas, cement and metals sectors, which are exposed to uneven investment cycles and economic slowdown. While the group intends to make the P&E business asset-light through increase in leased asset proportion and sale of unproductive assets, the resultant benefits to operating performance will continue to be closely monitored.

Liquidity: Strong

Liquidity is supported by substantial cash generation (over Rs 500 crore per fiscal), cash surplus (Rs 595 crore as on December 31, 2021) and average bank limit utilisation (average utilisation of the fund-based limit for the group was 72% during the eleven months through January-2022). Cash accrual should comfortably meet debt obligation of Rs 343 crore in fiscal 2022 and Rs 236 crore in fiscal 2023. The group is not expected to undertake any major capital expenditure (capex) programme in fiscal 2022, except for completion of warehouses. Any large cash outflows from Allcargo in the form of dividend payout or share-buyback or any large debt-funded acquisitions; would remain the key monitorables.

Rating Sensitivity Factors

Upward factors:

• Steady revenue growth while sustaining operating margin above 7.0%
• Improvement in debt metrics with debt/EBITDA ratio below 1 time by fiscal 2023, with sharper recovery in business performance; or monetisation of assets

 

Downward factors:

• Regulatory issues in demerger or moderation in the business risk profile, impacting profitability and cash flows
• Sustained weakening of operating margin below 5% because of slowdown in trade volumes or underutilisation of assets in the P&E segment
• Delay in monetisation of assets and deleveraging of the balance sheet or large, debt-funded capex or acquisition resulting in debt/EBITDA above 2.0 times in fiscal 2023
• Any large cash outflow in the form of dividend or share buyback or large acquisition affecting liquidity or capital structure

About the Group

The Allcargo group, promoted by Mr Shashi Kiran Shetty, provides logistics services such as NVOCC, CFS, ICD, warehousing, coastal shipping, project logistics and equipment leasing. As on March 31, 2020, the promoter group held 70.01% in Allcargo.

 

The group is an MTO operator and offers logistics services, such as consolidation of LCL and FCL cargo for exporters and importers. In 2003, it forward integrated into CFS operations. Since the acquisition of the Belgium-based ECU Line in 2006, the Allcargo group has emerged as a leading LCL consolidator in the world. In 2011, it acquired MHTC Ltd to strengthen its position in the P&E solutions business. In September 2013, the group acquired Econocaribe Consolidators to increase its presence in the US and its focus on FCL cargo. In May 2016, Allcargo sold its contract logistics, and its freight & forwarding and custom clearance business, housed in subsidiary Hindustan Cargo Ltd, on a slump-sale basis to ACCI, its JV with the promoters of CCI. CCI has transferred its warehousing business to the JV. In April 2020, Allcargo completed acquisition of 46.8% stake in Gati.

 

For first nine months through December 2021, Allcargo reported net profit of Rs 724 crore on revenue of Rs 14,296 crore, against Rs 89 crore and Rs 7,149 crore, respectively, in the corresponding period previous fiscal.

Key Financial Indicators*

Particulars	Unit	2021	2020
Operating income	Rs crore	10929	9371
Profit after tax (PAT)	Rs crore	65	56
PAT margin	%	0.6	0.6
Adjusted debt/adjusted networth	Times	0.64	0.73
Adjusted interest coverage	Times	4.90	12.68

*CRISIL-adjusted numbers including Gati from fiscal 2020

 

About Gati

Gati, 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.

 

For the first six months through September 2021, net profit was Rs 20 crore on revenue of Rs 690 crore, against loss of Rs 46 crore and Rs 492 crore, respectively, in the corresponding period previous fiscal.

 

Key financial indicator*

Particulars	Unit	2021	2020
Revenue	Rs crore	1314	1712
Profit after tax (PAT)	Rs crore	-246	-84
PAT margin	%	-18.7	-4.9
Adjusted debt/adjusted networth	Times	1.55	1.41
Adjusted interest coverage	Times	2.48	0.65

*CRISIL adjusted numbers

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of Instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue Size (Rs.Cr)	Complexity Level	Rating Assigned with Outlook
NA	Buyers Credit*	NA	NA	NA	34	NA	CRISIL AA-/Watch Developing
NA	Term Loan-1	NA	NA	Feb-2023	100	NA	CRISIL AA-/Watch Developing
NA	Term Loan-2	NA	NA	Feb-2024	4	NA	CRISIL AA-/Watch Developing
NA	Term Loan-3	NA	NA	Oct-2025	192	NA	CRISIL AA-/Watch Developing
NA	Term Loan-4	NA	NA	Dec-2026	200	NA	CRISIL AA-/Watch Developing
NA	Proposed Fund-Based Bank Limits	NA	NA	NA	165.83	NA	CRISIL AA-/Watch Developing
NA	Bank Guarantee**	NA	NA	NA	83.2	NA	CRISIL A1+
NA	Cash Credit#	NA	NA	NA	368	NA	CRISIL AA-/Watch Developing
NA	Stand By Letter of Credit	NA	NA	NA	27.97	NA	CRISIL AA-/Watch Developing
NA	Non-convertible debentures^	NA	NA	NA	150	Simple	CRISIL AA-/Watch Developing

#Fully interchangeable with overdraft facility/inland bills discounting/working capital loan

*Fully interchangeable with letter of credit

** Fully interchangeable with WCDL/inland LC

^Not placed yet