CRISIL's ratings on the non-convertible debenture programmes and long-term bank facilities of Allcargo Logistics Ltd (Allcargo; a part of the Allcargo group) continues to be on 'Rating Watch with Developing Implications'; the short-term rating has been reaffirmed at 'CRISIL A1+'.
 
The rating action followed the December-2019 announcement that Allcargo's Board of Directors had approved purchasing about 45% stake in Gati Ltd (Gati) for approximately Rs416 crore. The transaction included acquiring 8% stake at Rs 75 per share from some of the existing members of the promoter and promoter group entities of Gati - Mr Mahendra Kumar Agarwal, Mahendra Investment Advisors Pvt Ltd - and TCI Finance Ltd (TCI); followed by a preferential share issue for acquiring additional 11% stake, and an open offer for acquiring up to 26% stake at Rs 75 per share. Allcargo has completed the preferential share issue, stake purchase from the promoter and promoter group entities and achieved full subscription in open offer taking its shareholding in Gati to 45%. However, few Securities and Exchange Board of India compliance and documentation is pending which should be completed by end of April 2020.
 
The acquisition has been funded by a combination of debt (Rs 375 crore) and liquid surpluses by Allcargo. Post the acquisition, the combined financial risk profile of Allcargo and Gati is expected to remain adequate despite some moderation in credit metrics; peak debt-to-earnings before interest, tax, depreciation and amortization (EBITDA) is projected at 2.3-2.5 times.
 
The acquisition is expected to strengthen Allcargo's business risk profile, with established presence in land, air and ocean resulting in end-to-end transportation services and revenue diversity. Allcargo should also benefit from Gati's strong distribution network along with its dedicated support services and established information technology infrastructure, which provides access to remote location and customers in India.  The acquisition is also expected to solidify Allcargo's relationship with the Japanese freight forwarder, Kintetsu World Express (owns 30% stake in Gati's subsidiary, Gati-Kintetsu Express Pvt Ltd), which is a key customer of ECU Worldwide (Allcargo's wholly-owned global subsidiary). Allcargo plans to turnaround Gati's operations through cost-control measures and market share expansion, and thereby improve operating efficiency over the medium term. 
 
CRISIL is in discussion with Allcargo's management to better understand the business synergies expected, impact of lockdown measures to contain the Novel Coronavirus (Covid-19) outbreak on Gati and Allcargo's business and will also monitor the impact of the acquisition on the financial risk profile.  CRISIL will remove the ratings from watch, once there is better clarity on the above aspects.
 
In January 2020, Allcargo had entered into a definitive transaction with BRE Asia Urban Holdings Ltd, an entity controlled by The Blackstone Group Inc. (Blackstone) to monetise about 5 million square feet (sq ft) of completed, leased warehouse asset and equipment sale (by the end of fiscal 2021). Blackstone would invest Rs 380 crore over the next 12 months through a combination of equity, and compulsorily and optionally convertible debentures in the warehousing asset subsidiaries gaining majority control. As on date, Blackstone has already invested Rs 230 crore and the transaction would conclude in a phase wise manner over the next 12 months. Proceeds from the warehousing asset monetisation plans may deleverage Allcargo's balance sheet and thereby strengthen the credit metrics; this will remain a key monitorable.
 
The ratings reflect a belief that the Allcargo group's revenue will steadily grow at 7-9%, while improving the operating margin to more than 7.0% (6.4% in fiscal 2019) from fiscal 2020 onwards, driven by high margins on sale of warehouses. Business risk profile will continue to benefit from the strong growth in the contract logistics business (under Avvashya CCI Logistics Ltd [ACCI]), support from new container freight station (CFS) in Kolkata, and sustained volume growth and profitability in the non-vessel owning common carrier (NVOCC) business.
 
Allcargo's revenue growth stood at 6% in the first nine months of fiscal 2020, supported by continued strong volume growth, recovery in freight rates for MTO business and improvement in logistics park business, improved utilisation in the P&E segment, and volume growth at Mundra (Gujarat), Kolkata, and Chennai CFS. Overall adjusted revenue increased by 16% year-on-year (y-o-y) in fiscal 2019, driven by strong volume growth of about 15% in Multimodal Transport Operations (MTO) business (vis-a-vis global volume growth of about 4%) as the company continued to gain global market share with recovering freight rates. Furthermore, revenue from the CFS segment grew by 12% y-o-y, driven by Kolkata and Chennai operations; revenue growth in the projects and equipment (P&E) segment was driven by increased utilisation from the wind and power sectors.
 
Operating margin during the first nine months of fiscal 2020 stood at 7.2% compared to 6.6% during the same period last year, benefitting from volume growth in MTO and CFS businesses, high asset utilisation in the P&E, improved performance from the logistics park business, and well supported by ACCI. Operating margin declined marginally to 6.4% in fiscal 2019 from 6.8% in fiscal 2018 due to slight dip in profitability in the MTO division (88% revenue share). Also, increase in proportion of slightly lower-margin full container load (FCL) to less than container load (LCL) volumes in MTO division contributed to slight decline in percentage terms. Volume growth as well as positive results from costs-saving initiatives and process optimization techniques have increased profitability in the CFS segment, while growth in asset utilisation in P&E led to an improved margin. Allcargo's operating performance amidst global trade slowdown due to Covid-19 outbreak containment measures and nationwide lockdown will remain the key monitorable.
 
The ratings continue to reflect the group's diversified operations and established position in the global NVOCC and domestic CFS businesses, along with a comfortable financial risk profile. These strengths are partially offset by the 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.

* For arriving at the ratings, CRISIL has combined the business and financial risk profiles of Allcargo and its 127 subsidiaries. This is because the entities, are under a common management and have strong financial and operational linkages. CRISIL has also combined the business and financial risk profiles of ACCI, a 62:38 joint venture (JV) with promoters of CCI Logistics Ltd (CCI; 'CRISIL BBB/Stable/CRISIL A3+') as it is in a similar business and has operational linkages and higher synergies with the group. These are collectively referred to as the Allcargo group.
* CRISIL will also combine the business and financial risk profiles of Gati Ltd, post-acquisition, as Allcargo will be the single largest shareholder with about 45% stake and have management control over the entity. Also, functional synergies will exist, due to similar lines of business.
* CRISIL has amortised goodwill on acquisitions made by the group, over five years from the date of acquisition.

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

Liquidity remains strong, supported by healthy cash generation, and moderate bank limit utilisation (utilisation of the fund-based limit stood at 36% in March-2020). Cash accrual -- projected at Rs 400 crore per annum over the medium term -- should comfortably meet the yearly maturing debt of Rs 80-100 crore. Cash surplus was about Rs 250 crore as on March 31, 2020. Liquidity is expected to remain healthy.

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 September 30, 2019, the promoter group holds 70.01% in Allcargo. The group is a multi-modal transport operator and offers logistics services, such as consolidation of LCL and FCL cargo for exporters and importers. In 2003, the group 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, the group acquired MHTC Ltd to strengthen its position in the P&E solutions business. During 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 business, and its freight & forwarding and custom clearance business, housed in subsidiary Hindustan Cargo Ltd, on slump-sale basis to ACCI, its JV with the promoters of CCI. CCI has transferred its warehousing business to the JV.

For the first nine months of fiscal 2020, net profit was Rs 180 crore on operating income of Rs 5,475 crore, against Rs 165 crore and Rs 5,165 crore, respectively, in the corresponding period of fiscal 2019.
 
About Gati Ltd
Gati, founded in 1989, is India's pioneer in Express Distribution and Supply Chain Solutions, with strong presence in the Asia Pacific region and SAARC countries, along with an extensive network across India providing timely deliveries to 19,000 pin codes, covering 99% (672 out of 676) districts in India operating more than 5402+ scheduled routes. It possesses 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 nine months of fiscal 2020, net loss was Rs 13.7 crore on operating income of Rs 1342 crore, against net profit of Rs 12.4 crore on adjusted operating income of Rs 1404 crore in the corresponding period of fiscal 2019.

Any other information: Not applicable