Detailed Rationale

CRISIL Ratings on Rs 875 crore of bank facilities and Rs 150 crore of non-convertible debentures of Allcargo Logistics Ltd (a part of the Allcargo group) continues on 'Rating Watch with Negative Implications'.

 

The negative view factors in the muted performance of the ECU business that contributes ~85% of the group’s revenue, with gradual improvement expected only after the second half of fiscal 2025 that will remain monitorable. It also follows the expected moderation in the business and financial risk profiles of Allcargo Logistics Ltd (herein referred to as new ACL), as per the company’s demerger plans.

 

On December 21, 2023, the company's board of directors approved a composite scheme of arrangement (demerger) whereby its international supply chain (ISC) business, comprising global supply chain and domestic supply chain, as well as its support functions (~85% of the Allcargo group’s revenue of fiscal 2024), will be demerged into a new company -- Allcargo ECU Ltd (AEL) while the express and contract logistics business will continue under new ACL.

 

This demerger, 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 revenue of Rs 2007 crore (~15% share of the group's revenue) in fiscal 2024 and loss of Rs 1 crore (~-1% of pre-Ind AS [Indian accounting standard] earnings before interest, taxes, depreciation and amortisation [Ebitda]). 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 ~40-42% share of consolidated group’s debt of Rs 967 crore as on March 31,2024. Cash and equivalent could be marginally higher at around Rs 200 crore. Accordingly, factoring these aspects, the overall business and financial risk profiles of new ACL will be moderate compared with the existing Allcargo Logistics Limited.

 

The ISC’s operating performance, which will operate under AEL, post demerger, is also facing headwinds, impacted by the overall slowdown seen in global trade volumes and freight rates. ISC revenue de-grew by ~31% on-year to Rs 11,259 crore, with a decline in reported post Ind AS Ebitda to 3.5% as compared to 6.3% in fiscal 2023. In the first quarter of fiscal 2025 the company achieved revenue of Rs 3,813 crore supported by increase in freight rates for the international multimodal business, with post Ind AS Ebitda remaining at 3.5%. CRISIL Ratings understands that volumes are expected to revive from the second quarter of fiscal 2025, in line with expectation of macroeconomic recovery, which coupled with the ongoing freight rates should help the company in improving its operating performance on a year-on-year basis. Further, the company has undertaken several cost-optimisation measures which are likely to reflect in improved profitability in the second half of fiscal 2025. However, the pace of that recovery will remain monitorable. That said, AEL’s overall credit risk profile takes comfort from its leading market position in the global LCL (less than container load) consolidation business.

 

This demerger is expected to take about 6-9 months, subject to receiving the required approvals from the Securities and Exchange Board of India (SEBI), National Company Law Tribunal (NCLT), Mumbai, equity shareholders, other regulatory authorities and the Income Tax authorities. Allcargo has filed the scheme with the stock exchanges; and SEBI; the same is under review for approvals. CRISIL Ratings is in discussion with Allcargo’s management to better understand bifurcation of its assets and liabilities 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 ~120 crore as on March 31, 2024) of bank loan facilities continues at ‘CRISIL AA-‘with ‘Watch developing’ as this facility too in parts will move out of Allcargo, as part of demerger announced in December 2021. 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 to Transindia Realty & Logistics Parks Ltd and Allcargo Terminal Ltd and AEL; 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 135 subsidiaries including Allcargo Gati Ltd. 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 Ratings has also combined the business and financial risk profiles of contract logistics business operated through its now 100% subsidiary (w.e.f. June 01, 2023), Allcargo Supply Chain Pvt Ltd (ASCPL, formerly Avvashya Supply Chain Pvt Ltd), 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 and Rs 33 crore have been amortised for Nordicon and Speedy, respectively, beginning fiscal 2022. Rs 269 crore has been amortised for acquisition of ASCPL and Rs 33 crore for additional stake acquired in Nordicon beginning fiscal 2024.
• CRISIL Ratings has adjusted Ebitda by excluding lease rental components with depreciation and finance costs to comply with Ind AS116 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 ISC and express logistics business: The company is India’s largest, and a leading global operator, in the ISC 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. The segment benefitted from healthy volume growth and improved realisation during the pandemic years, which continued till the first half of fiscal 2023 but moderated subsequently impacting Allcargo’s operating performance.

 

Besides, the company is a leading player in the express logistics segment in India, through its subsidiary, Gati Ltd. Gati Ltd is one of the largest express logistics companies having extensive coverage in India and offers transportation solutions, electronic-commerce, trade inventory management, freight forwarding, and cold chain solutions. The company increased its stake in Gati KWE, the express logistics joint venture (JV) by buying-out the remaining 30% stake for Rs 406.5 crore in May 2023. It also operates a healthy contract logistics business through ASCPL, in which it acquired the remaining ~38.87% stake in May 2023 for Rs 163 crore and exited the freight forwarding business by selling off its 61.13% stake in Avvashya CCI Logistics Pvt Ltd 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 the first quarter of fiscal 2025. The group earlier had presence in domestic container freight station/inland container depot (CFS/ICD), warehousing, project and equipment business which has now been demerged into other two new entities.

 

Gati’s extensive reach provides vertical integration to the ISC 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 stood healthy as on June 30, 2024, with net debt of Rs 434 crore and gross debt of Rs 1,260 crore and cash surplus of Rs 826 crore with healthy cash accrual. Gearing stood at about 0.37 time with adjusted interest cover of ~3.7 times for fiscal 2024. However debt-to-pre-Ind AS Ebitda moderated from 0.7 time in fiscal 2023 to around 5.6 times with CRISIL Ratings-adjusted Ebitda adjusting for around ~Rs 291 crore of lease interest and depreciation & ~Rs 71 crore as of the first quarter of fiscal 2025.

 

The company’s utilisation of short-term debt increased as on June 30, 2024 to Rs 730 crore relative to Rs 434 crore as on March 31, 2024, primarily due to increase in freight rates. Increase in term debt was primarily towards incremental stake purchase: Rs 406.5 crore in May 2023 for acquisition of remaining 30% stake in Gati KWE (part funding it through Rs 200 crore term loan), payment of Rs 124 crore (net of sale of ACCI stake) in May 2023 for acquiring the remaining stake in ASCPL, payment of Rs 174 crore in August 2023 for acquiring additional 25% stake in Nordicon AB. In May 2024, the company has also taken remaining 25% stake in Fair Trade GmBH for Euro 2.9 million, making it a 100% owned entity by ACL. While the company is not expected to take any term debt to undertake further large acquisition and is looking to reduce term debt, it remains a key monitorable.

 

Weaknesses:

• Volatility in EXIM trade: The ISC business is directly linked to global EXIM (export-import) 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, impacted freight volumes, freight rates and profitability of the company in fiscal 2024 with Allcargo’s realisation rates down by ~30% impacting revenue and Ebitda. Moderate industry conditions are likely to persist over the medium term 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 such as Allcargo who have strong local presence. Also, the surface transport business in India 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 substantial cash generation and asset-light business, cash surplus of Rs 826 crore as on June 30, 2024, and average bank limit utilisation (average utilisation of the fund-based limit for the group was ~38% during the six months through July 2024). Healthy liquidity and cash accrual with nominal capital expenditure (capex) and debt repayments (around Rs 192 crore for fiscals 2025 and 2026 per annum) 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 utilised 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 emphasising its commitment to creating a better world.
• Through its corporate social responsibility 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 non-government organisations who are doing incredible work on the ground.
• The company has planted more than 710,000 trees through Avashya Foundation’s Maitree initiative
• It 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 borrowing in its overall debt and access to both domestic and foreign capital markets.

Rating sensitivity factors for facilities rated ‘CRISIL AA/Watch negative’

Upward factors:

• Strong and sustained revenue growth and robust operating margin above 8-8.5% resulting in healthy cash accrual
• Substantial improvement in debt protection 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 flow
• Large, debt-funded capex or acquisition, resulting in sustained and significant weakening in net debt/pre-Ind AS Ebitda above 1-1.25 times on a sustained basis
• Any large cash outflow in the form of dividend or share buyback or large acquisition affecting liquidity

 

Rating sensitivity factors for facilities rated ‘CRISIL AA-/Watch developing’

Upward factors:

• Strengthened business risk profile comprising large portfolio of lease generating assets with high occupancy rates and rentals, resulting in higher cash flow
• Substantial improvement in debt protection metrics with sustained debt/ pre-Ind AS Ebitda below 0.5 time and adequate liquidity
• Movement of debt facilities to the entity having a stronger credit risk profile

 

Downward factors:

• Lower operating performance and cash flow due to lower rentals or occupancy in leased assets
• Weakening of debt protection metrics with debt/pre-Ind AS Ebitda consistently above 1.5 times, on account of lower operating performance or higher debt-funded expansion plans or delay in deleveraging plan
• Exposure to implementation or leasing risk related to new assets under development
• Movement of debt facilities to the entity having a weaker credit risk profile

About the Company

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

 

Post the demerger, Allcargo houses the container consolidation business (under ISC segment), express logistics (under subsidiary, Gati Ltd), and contract logistics (ASCPL, wholly owned w.e.f. June 01, 2023) businesses. The group is a leading global operator in the ISC 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 full container load cargo.

 

In April 2020, Allcargo completed acquisition of 46.8% stake in Gati Ltd entering the express logistics business which complements its ISC business. Gati Ltd, 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 South Asian Association for Regional Cooperation countries. It has an extensive network across India, covering 99% (672 out of 676) districts and operating more than 5,402 scheduled routes. It possesses an integrated, multimodal network of surface, air and rail along with warehouses spread across India. The company’s offerings include transportation solutions, electronic-commerce, trade inventory management, freight forwarding, and cold chain solutions operated through various subsidiaries and JVs.

 

For the first quarter ended June 30, 2024, Allcargo reported net profit of Rs 4.3 crore on revenue of Rs 3813 crore as against Rs 119 crore and Rs 3,271 crore, respectively, for the corresponding period of the previous 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	0.25
Adjusted interest coverage*	Times	3.09	18.12

*CRISIL Ratings-adjusted numbers.

Any other information: Not Applicable