Detailed rationale

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

 

Revenue grew 28% year-on-year in fiscal 2022 supported by addition of new customers and movement of business from smaller transporters. Demand from steel industry also remained strong, important end-user segment CJ Darcl, which added to the overall performance. Contribution from rail freight increased with services such as RoRo (roll-on, roll-off) providing better connectivity. Apart from strong growth in core segments, the company is also expanding into new segments such as air freight, sea freight (on the eastern seaboard), less-than truck load (LTL), warehousing and distribution (W&D) and freight forwarding, these segments contributed nearly Rs 100 crore in fiscal 2022 and contribution is expected to improve further in medium term. Operating profitability also improved to 3.9% in fiscal 2022 from 3.5% in fiscal 2021 but remained below pre-Covid level of ~4.5%. The increase in profitability can be attributed to substantial rise in fuel prices, which get passed on with a lag, and maintenance of market share at the cost of higher margin.

 

Revenue and operating margin are expected to increase over the medium term owing to orders from the steel, pharmaceutical and FMCG (fast-moving consumer goods) sectors. The company is expected to incur capital expenditure (capex) of about Rs 100 crore towards addition of vehicles and containers, which will contribute to revenue growth. The operating margin is likely to recover aided by renegotiation of contracts with better pricing and higher gross margin

 

Total debt increased to Rs 540 crore in fiscal 2022 from Rs 417 crore in fiscal 2021, and is expected to increase further over the medium term owing to moderate capex requirement and higher working capital requirement. Nevertheless, the financial risk profile and debt protection metrics are likely to remain healthy, with gearing expected below 1.2 times and interest coverage ratio above 2 times.

 

The ratings continue to reflect the company’s leading position in the full-truck-load (FTL) segment of the logistics industry, healthy operating efficiency and adequate financial risk profile. The ratings also factor in the operational, financial and managerial support received from the parent, CJ Logistics Corporation (CJL, owns 50% stake). These strengths are partially offset by exposure to intense competition in the road freight industry, policy changes in the container trains business and large working capital requirement.

Analytical approach

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’) as these companies are in the same business and have common promoters and strong business and financial linkages.

 

Also, CRISIL Ratings has applied its criteria for notching up standalone ratings of companies based on parent support given expectation of strong support from parent, CJ Logistics Corporation (CJL), both on an ongoing basis and in the event of distress.

 

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

Key rating drivers and detailed description

Strengths:

• Leading position in the FTL segment

CJ Darcl is the largest player in the domestic FTL segment, with pan-India presence and access to over 10 lakh trucks through a network of vendors. It has a large and diversified clientele and longstanding relationships with clients across industries.

 

The company operates on an asset-light model. Its owned fleet of over 850 vehicles meets less than 10% of the requirement, and the remaining is met by hiring trucks on a need-based system, leading to operating efficiency. The operating margin was 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 on account of pandemic-related disruptions and economic slowdown. Operating margin improved to 3.9% in fiscal 2022, and is likely to improve further over the medium term.

 

• Adequate financial risk profile

The financial risk profile, specifically the capital structure and debt protection metrics, improved post infusion of funds by CJL. Gearing reduced to around 1.1 times as on March 31, 2022, from 1.91 times as on March 31, 2017. The total outside liabilities to tangible networth (TOLTNW) ratio improved to 1.5 times from 2.3 times during this period.

 

The company is expected to incur capex of about Rs 100 crore in the current fiscal to add new vehicles and containers. The capex is expected to be funded mainly through debt 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. Extent of future capex, its funding and impact on the financial risk profile will remain key rating sensitivity factors.

 

• Support from the parent, CJL

CJL has provided stand-by line of credit (SBLC) as security for debt raised through consortium. In addition, CJL has provided corporate guarantee against debt raised by the company. The extent of SBLC and corporate guarantees is expected to increase in line with increase in the company’s debt

 

In addition to financial support, CJL is involved in strategic decision-making and reviews performance on an ongoing basis. Given CJL operates in the same industry, there are also operational synergies in terms of CJ Darcl getting access to CJLs international customers, IT systems, among others

 

Weaknesses:

• Exposure to intense competition in the road freight transport segment

The domestic road freight transport industry is highly fragmented because of 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.

 

• Changes in the policies of the Indian Railways in the container trains business

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

 

• Large working capital requirement

Receivables, at 59 days as on March 31, 2022, constituted 71% of current assets and 47% of total assets. However, the company has strong collection efficiency owing to its initiatives such as close monitoring of receivables through credit control managers, due diligence before acquisition of 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 and enters new segments will be a key rating sensitivity factor.

Liquidity: Adequate

Expected cash accrual of Rs 80-120 crore per annum will comfortably cover yearly debt obligation of Rs 25-50 crore over the medium term. Cash and equivalent were around Rs 31 crore as on March 31, 2022. Unutilised bank lines also support liquidity. Fund-based bank lines of Rs 515 crore were utilised 64% on average over the 12 months through March 2022, while average utilisation of Transrail’s bank lines of Rs 1 crore was low ~5% on average.

Outlook: Stable

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

Rating sensitivity factors

Upward factors:

• Substantial growth in revenue coupled with maintenance of margin at 4.2%
• Considerable improvement in the financial risk profile through deleveraging or equity infusion
• Significant improvement in credit risk profile of parent, CJL

 

Downward factors:

• Sustained increase in the debt / EBITDA (earnings before interest, tax, depreciation and amortisation) ratio to over 4.5 times, because of a decline in profitability, large, debt-funded capex, or a significant increase in receivables
• A considerable decline in revenue and profitability
• Significant deterioration in credit risk profile of parent, CJL

About the company

CJ Darcl was set up in 1975 as a family-run concern to provide 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 as a public limited company in 1988. It was renamed Darcl Logistics Ltd (DLL) in 2010.

 

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

 

CJ Darcl is the largest player in the FTL segment in India with a fleet of 850 vehicles, including trucks, trailers and tankers. It has nearly 200 branches and leases around 2,000 vehicles per day. The company has a diversified clientele.

 

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

About CJL

Set up in 1930, CJL is the largest logistics company in South 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 re-branded recently from CJ Korea Express Corporation and is among the top 10 logistics player in the world. It is part of the CJ group (South Korea) with diversified interests in food, pharmaceuticals, infrastructure and entertainment.

Key financial indicators (consolidated)^

As on / for the period ended March 31		2022*	2021
Revenue	Rs crore	3694	2891
Profit after tax (PAT)	Rs crore	62	32
PAT margin	%	1.7	1.1
Adjusted debt / adjusted networth	Times	1.07	0.93
Interest coverage	Times	4.77	3.01

   ^CRISIL Ratings-adjusted financials

   *Based on provisional numbers

Any other information:

The company wishes to raise money through an IPO. The proceeds are expected to be utilised towards capital expenditure and working capital requirements. In the event of a successful filing, financial risk profile is expected to improve with realization of IPO proceeds.

Annexure - Details of instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity Level	Rating assigned with outlook
NA	Cash Credit*	NA	NA	NA	395	NA	CRISIL A-/Stable
NA	Standby line of credit	NA	NA	NA	15	NA	CRISIL A-/Stable
NA	Working Capital Demand Loan	NA	NA	NA	45	NA	CRISIL A-/Stable
NA	Bank Guarantee	NA	NA	NA	110	NA	CRISIL A-/Stable
NA	Proposed Short Term Bank Loan Facility	NA	NA	NA	35	NA	CRISIL A2+
NA	Fixed Deposits	NA	NA	NA	45	Simple	CRISIL A-/Stable

*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 Ltd	Full	Strong managerial, operational and financial linkages