Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A+/Stable/CRISIL A1’ ratings on the bank loan facilities of Allcargo Terminals Limited (ATL).

 

On October 01, 2024, ATL’s board approved purchase of 7.6% equity stake in Haryana Orbital Rail Corporation Ltd (HORCL), from Allcargo Logistics Ltd, a promoter group company, for Rs 115 crore. It also entered into financing agreement with Aseem Infrastructure Finance Limited for Rs 140 crore term loan to fund the investment which includes Rs 22.8 crore of additional equity investment that may be required to be done in next 1-2 years. HORCL is implementing a project which includes development, financing, planning, operation of Haryana Orbital Rail Corridor (HORC), a new electrified double broad gauge rail line from Palwal to Sonipat (Haryana) which shall connect to both DFC Corridor and Indian Railways. HORC is expected to connect to ATL’s proposed ICD at Farrukhnagar in Haryana to create direct rail connectivity between ATL’s proposed ICD & Mundra, JNPT ports through the Dedicated Freight Corridor (DFC); attracting volumes to ATL’s ICD and earning freight income to ATL.

 

ATL’s capital structure has been strong given its asset-light business model with low debt of Rs 37 crore and gearing of 0.17 times as of March 31, 2024 and cash surplus of Rs 83 crore. However, debt-funding of HORCL investments will result in gearing moderating to ~0.50 times, albeit, steady operating performance, self-funded moderate capex, and modest term debt repayments should lead to gradual improvement, over the medium term; which is our key monitorable.

 

The ratings continue to reflect the established market position of the company in the container freight station (CFS) business, wherein the company operates 7 facilities (Including joint venture) pan-India, showcasing healthy addressable market share in key ports. The ratings also reflect the strong parentage of the Allcargo Group, and the comfortable financial risk profile, supported by steady cash generation, modest external debt, and comfortable cash reserves. These strengths are partially offset by the moderate albeit improving scale of operations, exposure to intense competition in the CFS business, and susceptibility to regulatory changes and volatility in export-import (EXIM) trade volumes.

 

In fiscal 2024, while ATL registered 8% year-on-year volume growth (~613 thousand TEUs, as against 567 thousand TEUs handled last year), the growth in revenues was modest at ~4% due to contraction in realisations on account of reduction in tariffs and higher rebates; as a result, revenues during the said period came in at Rs. 733 crore as against Rs. 706 crore during the previous fiscal. Further during the first quarter of fiscal 2025, volume growth of 8% led the revenue growth of 5% to Rs 190 crore- despite modest realisations.

 

Operating profitability (operating profit before depreciation, amortization, interest and tax) margins in fiscal 2024 contracted by around 461 basis points (bps) to 10.5% on account of higher cost of operations and lower fixed overheads absorption due to lower volumes in the subsidiary, Speedy Multimodes Ltd (SML). However, operating margins remained steady at 10.4% during the first quarter of fiscal 2025 given steady performance.

 

Volumes are expected to grow 9-10% over the medium term, which will be in line with container traffic growth at major ports. Steady realisations owing to peaking direct port delivery (DPD) volumes followed by healthy growth in volumes resulting in better fungibility of direct overheads, and lease rental cost savings of around Rs. 4-6 crore in fiscal 2025 on the back of re-negotiation of lease rental contract at JNPA under SML, shall translate into improvement in operating margin to around 11-12%.

 

The financial risk profile is comfortable owing to steady cash generation, despite the debt-funded investments in HORCL given the asset light model followed by ATL. Net cash accruals of Rs 70-80 crore over the medium term will sufficiently cover debt repayment obligations of Rs. 14-15 per annum, and yearly capex of Rs. 30-45 crore. While gearing is expected to moderate post the debt-funding of HORCL investments to ~0.50 times, healthy profitability should aid accretion to networth leading an improvement over the medium term, which is the key monitorable. ATL continues to have material financial leases paying about Rs 35-40 crore in annual lease payments.  

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of ATL and its operating subsidiary, SML. These entities are collectively referred to as ATL and are under common management and engaged in related businesses. CRISIL Ratings has not included lease liabilities as recognized under IndAS116 in debt and thereby has adjusted EBITDA (earnings before interest, tax, depreciation, and amoritsation) by excluding lease rental components in depreciation, finance costs, and profits.

 

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 market position in CFS operations with plans to diversify in multi-modal logistic solutions: ATL at current operates six CFS and an inland container depot (ICD) facility in India with consolidated TEU capacity of around 839,000 per annum. The company operates in all major ports in India, namely, Jawaharlal Nehru Port Authority (JNPA, rated ‘CRISIL AAA/Stable’; Maharashtra), Mundra (Gujarat), Kolkata, and Chennai. JNPA is the largest Indian port handling over 50% of the overall container traffic, and ATL has around 15% non-DPD addressable market share.  Also, its operating subsidiary, SML, is the sole player in ‘Cluster 1’, which is closest to the port, thereby having locational advantage.

 

The company shall foray into rail-linked ICD operations and shall commercialise its first rail-linked ICD in Farukhnagar, Haryana in early fiscal 2027. ICD operations with multi-modal logistical solutions have relatively higher margins due to lower competitive intensity, thereby resulting in higher pricing power.

 

• Parentage of the Allcargo Group: ATL was formed out of a business restructuring process carried out at Allcargo Logistics Ltd (ALL, rated ‘CRISIL AA/Rating Watch with Negative Implications/CRISIL A1+/Rating Watch with Negative Implications’, ‘CRISIL AA-/Rating Watch with Developing Implications), announced in fiscal 2022. Despite the demerger from ALL, ATL continues to enjoy the benefits of being associated with the Allcargo Group, which has presence across the entire logistics value chain, such as international supply chain, express logistics, contract logistics, among others. In addition, TransIndia Real Estate Limited (TREL), which was also demerged from ALL in fiscal 2022, has the same parentage as that of ATL.

 

Common parentage supports the sustenance of the asset light business model of ATL, which entails capital allocation flexibility. For instance, ATL’s standalone CFS facilities at JNPA and Chennai are leased from TREL; and in addition, the initial land acquisition investment for the ICD project at Jhajjar has also been made by TREL.

 

• Comfortable financial risk profile: The company follows an asset-light, financial lease model to conduct its operations, and hence has lower actual capex spends, resulting in minimal dependance on long-term borrowings. Despite the debt-funded investment in HORCL which has moderated gearing to ~0.5 times, gearing is expected to improve gradually over the medium term, in absence of any large debt-funded investments, and is the key monitorable. In addition, steady growth in profitability on the back of volume growth shall enable healthy cash generation, which will sufficiently cover fixed obligation requirements comprising of annul debt re-payments of Rs. 14-15 crore and yearly capex of Rs. 30-45 crore.

 

Weaknesses:

• Moderate scale of operations and exposure to intense competition in the CFS business: ATL was initially a part of the ALL wherein it contributed to around 3% of revenues and about 10% of operating profits. The company was demerged from ALL in fiscal 2022 and began to operate as a separate entity in fiscal 2023. Furthermore, during fiscal 2022, ATL acquired 85% stake in SML for Rs. 102 crore, which enhanced its TEU capacity from 530,000 TEUs to 830,000 TEUs.

 

Despite an established market position followed by capacity augmentation through the acquisition of SML, the scale of operations is moderate, as reflected in the revenue of Rs. 706 crore in fiscal 2023. While revenue is expected to grow at a healthy rate, the scale of operations is expected to remain at moderate levels.

 

The scale of operations is constrained by the exposure to high competition (especially in JNPA) and low pricing power. Low entry barrier has led to an increase in CFS facilities near ports, resulting in intense competition and margin pressure, as evidenced by the contraction in operating margin from 33% in fiscal 2019 to around 10.5% in fiscal 2024. That said, the company plans to de-risk its operations by entering into multi-modal logistics solutions such as rail-linked ICDs, which offer a stable revenue profile along with higher profitability margins. The company had also purchased a land parcel admeasuring 59.48 acres in Mundra in March-2024 besides firming up expansion plans for Chennai and JNPT markets which is expected to aid volumes over the medium-term.

• Susceptibility to regulatory changes and volatility in EXIM trade volumes: The CFS business is directly linked to Indian trade and hence remains exposed to risks arising from fluctuations in shipping rates, trade volumes, EXIM and custom policies. Furthermore, regulations such as the introduction of DPD and centralised parking plaza at JNPA have further impacted profitability. DPD was introduced in 2016 and at JNPA, port DPD volumes increased from 30% in August 2017 to 41% in July 2018 to 58% in October 2020 and to 72% in December 2023.

 

As 48% of ATL’s volumes accrues from JNPA, the increase in DPD volumes resulted in contraction in the company’s realisations to around Rs 11,882 per TEU in fiscal 2024 (Rs. 12,450 per TEU in fiscal 2023) from Rs 14,965 per TEU in fiscal 2016. Hence, despite volumes increasing from 282,000 TEUs in fiscal 2016 to 566,900 TEUs in fiscal 2023, the decline in realisation resulted in fall in absolute operating profitability, excluding lease rental payments, to Rs. 144 crore from Rs. 158 crore during the same period.

Liquidity: Adequate

Expected net cash accrual of Rs 80-100 crore per annum will sufficiently cover yearly debt obligation of Rs 14-15 crore and annual capex spend of Rs 30-45 crore. The company had healthy cash reserve of around Rs 83 crore as on March 31, 2024 (Rs 65 crore as of March 31, 2023)

Outlook: Stable

ATL will continue to benefit from its established market position in the logistics industry, especially at key ports where it conducts its CFS operations. In addition, plateauing of realisation pressure, resulting in stable gross profitability per TEU, followed by steady volume growth, shall result in the sustenance of healthy operating efficiency. Further, the financial risk profile shall also remain comfortable, driven by limited external debt, steady cash generation, and comfortable cash reserves.

Rating sensitivity factors

Upward Factors:

• Sustained double-digit revenue growth over the medium term followed by diversification in revenues, while operating margins improving above 13-15%.
• Sustenance of strong financial risk profile and build-up of cash surplus.

 

Downward Factors:

• Weakening of business performance or sharp decline in profitability, resulting in operating margins contracting to below 8-9% on a sustained basis.
• Weakening of financial risk profile due to any large debt-funded acquisitions, or change in business plant / strategy, or higher than anticipated increase in exposure to subsidiary companies constraining liquidity.

About the Company

ATL operates CFS and ICD across the country. The company operates facilities in Mumbai, Chennai, Kolkata, Mundra and Dadri, having total installed capacity of 839,000 TEUs. Currently, the company operates six CFS and an ICD facility and will be opening an ICD in Jhajjar, Haryana. It is predominantly a CFS player, and operations include import / export cargo stuffing and de-stuffing, customs clearance, and other ancillary services.

ATL was formed post demerger from ALL. The National Company Law Tribunal, vide order dated January 5, 2023, approved the scheme of demerger, which became effective from April 1, 2023. As on December 31, 2024, the promoters, Mr. Shashi Kiran Shetty, and his family members, as well as trusts controlled by the promoter family held 69.9% stake in ATL, foreign portfolio investors 7.1%, bodies corporate 1.8%, while the balance was held by public and others.

For the first quarter of fiscal 2025, the company reported revenue of Rs 190 crore and profit after tax (PAT) of Rs 10 crore (Rs 181 crore and Rs 9 crore, respectively, in the corresponding period of the previous fiscal).

Any other information: Not Applicable