Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A-/FA/Stable/CRISIL A2+’ ratings on the bank facilities and fixed deposits of CJ Darcl Logistics Ltd (CJ Darcl).

 

Revenue grew at 20% in fiscal 2021 over fiscal 2020, despite the lower demand in the first quarter of fiscal 2021 in the wake of the Covid-19 pandemic. The growth was driven by acquisition of new customers as well as pent up demand in the economy. However, operating profitability declined by around 100 basis points mainly on account of disruptions due to the lockdown imposed to contain the pandemic and the inordinate rise in diesel prices.  Healthy growth in revenue along with improvement in the operating margin is expected over the medium term owing to recovery in the economy and industrial growth, as well as securing new orders from the steel, pharmaceutical and FMCG (fast-moving consumer goods) sectors. An asset-light model with minimal fixed costs should help maintain stable profitability even during low growth phases.

 

The ratings continue to reflect a leadership position in the full-truck-load (FTL) segment of the logistics industry, healthy operating efficiency and an improving financial risk profile. These strengths are partially offset by exposure to intense competition in the road freight industry, and large working capital requirement.

Analytical Approach

For arriving at its ratings, CRISIL Ratings has combined the business and financial risk profiles of CJ Darcl and its wholly owned subsidiary, Transrail Logistics Ltd (Transrail; ‘CRISIL BBB+/Stable/CRISIL A2’). The two companies have strong business and financial linkages.

 

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

Key Rating Drivers & Detailed Description

Strengths

Leadership position in the FTL segment

The company is the largest player in the domestic FTL segment, with a pan-India presence and access to over 10 lakh trucks through a network of vendors. It has a large and diversified client base with a longstanding relationship across the industry. It also benefits from the established brand and client relationships of CJ Logistics Corporation, Korea (CJL).

 

Healthy operating efficiency

The company operates on an asset-light model. Its own fleet of over 800 vehicles meets less than 10% of the requirement, and the remaining is met by leasing trucks on a need-based system, leading to above-average operating efficiency. The operating margin has been sustained at 3.5-5.5% across economic cycles over the past decade and is expected at a similar level over the medium term. The margin declined to 3.5% in fiscal 2021 from 4.4% in fiscal 2020, mainly on account of pandemic-related disruptions and the economic slowdown. It should improve in fiscal 2022, supported by recovery in economic growth.

 

Improving financial risk profile

The financial risk profile, specifically the capital structure and debt protection metrics, has improved post infusion of funds by CJL, following its acquisition of 50% stake. CJL infused Rs 325 crore, of which Rs 110 crore was through issue of fresh equity with the remaining being paid to the promoters against sale of their shares. Consequently, the gearing has progressively reduced to around 0.9 time as on March 31, 2021, on a provisional basis, from 1.91 times as on March 31, 2017. The total outside liabilities to tangible networth (TOLTNW) ratio improved to 1.3 times from 2.3 times over this period.

 

There is no large, debt-funded capital expenditure (capex) planned as of now. Any capex is expected to be funded prudently, and is unlikely to impact debt protection metrics, which should remain adequate, given the healthy cash accrual expected over the medium term. Furthermore, all capex continues to be backed by long-term contracts. CRISIL Ratings will continue to monitor the extent of capex, its funding and its impact on the financial risk profile.

 

Weaknesses

Exposure to intense competition in the road freight transport segment and to any change in policy of the Indian Railways in the container trains business

The domestic road freight transport industry is highly fragmented because of a low entry barrier. Although the company is the market leader in the FTL segment, its market share in the domestic road freight transport industry is less than 1%. The competition has intensified in recent times with the entry of new-age start-ups, which are leveraging their advanced technological capabilities to garner market share.

 

Furthermore, Indian Railways levies rail haulage charges on container train operators for using infrastructure; these charges are subject to periodic revision. While the railway business is currently performing well, high haulage charges and low revenue per tonne due to benign diesel prices had, in the past, impacted profitability. The railway business is now also functioning on an asset-light model and the company has not undertaken any capex in this segment since fiscal 2010. Sustenance of healthy operating efficiency amid intense competition and pricing pressures remains a key monitorable.

 

Large working capital requirement

Receivables, at 56 days as on March 31, 2021, constituted around 70% of current assets and 45% of total assets. However, the company has one of the best collection efficiencies in the industry with initiatives such as close monitoring of receivables through credit control managers, due diligence before acquisition of new clients, electronic proof of delivery, and adoption of SAP (Systems Applications and Products) software for accounting and other needs. Maintaining an efficient working capital cycle as the business expands will be a key rating sensitivity factor.

Liquidity: Adequate

Expected cash accrual of Rs 80-120 crore, should amply cover debt obligation of Rs 45-50 crore, per fiscal over the medium term. Cash equivalents were around Rs 35 crore as on March 31, 2021. Unutilised bank lines also support liquidity. For fiscal 2021, average utilisation of CJ Darcl’s bank lines of Rs 465 crore was 63%, while Transrail’s bank lines of Rs 8 crore remained unutilised.

Outlook Stable

CJ Darcl’s business and financial risk profiles should remain healthy over the medium term supported by longstanding business relationships, CJL’s expertise, and sustained cash accrual.

Rating Sensitivity factors

Upside factors:

• Significant improvement in operating performance with sustained revenue growth of over 20% per fiscal while maintaining a stable operating margin
• Considerable improvement in the financial risk profile through deleveraging or equity infusion

 

Downside factors:

• Weakening of the financial risk profile, leading to a sustained increase in the debt/Ebitda (earnings before interest, tax, depreciation and amortisation) ratio  to 4 times, because of a decline in profitability, large, debt-funded capex, or a significant increase in receivables
• A considerable decline in revenue and profitability

About the Company

CJ Darcl was set up in 1975 as a family-run concern and initially provided road transport services between New Delhi and Assam. In 1986 the firm was reconstituted as a private limited company (Delhi Assam Roadways Corporation Pvt Ltd) and in 1988 as a public limited company. It was renamed Darcl Logistics Ltd (DLL) in 2010.

 

In August 2017, CJL acquired 50% stake in DLL for Rs 325 crore. The existing four promoters along with their affiliates continue to hold the remaining stake. The company got its present name in September 2017.

 

CJ Darcl is the largest player in the FTL segment in India with a fleet of around 800 vehicles, including trucks, trailers, and tankers. It has nearly 200 branches and leases around 2,000 vehicles per day for its operations. The company has a diversified customer profile.

 

Transrail, a wholly owned subsidiary of CJ Darcl, was set up in 2008 and operates in the same line of business.

About CJL

Founded in 1930, CJL is the largest logistics company in Korea and has operations in 22 countries. It provides a diverse range of logistics services, including supply chain management, shipping, express logistics, and warehousing and distribution. The company changed its name from CJ Korea Express Corporation recently to reflect its intention to penetrate the global market. CJL aims to be among the five largest logistics players by 2025. It is a part of the much larger CJ Group based in Korea with diversified interests in food, pharmaceuticals, infrastructure and entertainment.

Key Financial Indicators(consolidated)

As on / for the period ended March 31		2021*	2020
Revenue	Rs crore	2890	2405
Profit after tax (PAT)	Rs crore	35	45
PAT margin	%	1.2	1.9
Adjusted debt/Adjusted networth	Times	0.93	1.03
Interest coverage	Times	3.11	3.37

*Provisional

Any other information: Not applicable

Annexure - Details of Instrument(s)

*Fully convertible with working capital demand loan and foreign currency loan

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
Transrail Logistics Limited	Full	Strong managerial, operational, and financial linkages