Allcargo Logistics Ltd’s shares have gained 8% since Wednesday morning, a surprising reaction to a relatively unexciting set of second quarter earnings. The BSE 500 index during this period was up just 0.1%. A favourable comparison with its peers may explain why investors drove up the stock.
Its results held out little cheer. Revenue fell 3% from a year ago. Low freight rates and a weak projects and engineering solutions business weighed on the company’s overall performance. Its Ebitda (earnings before interest, tax, depreciation and amortization) fell by 6% but low interest rates and high other income contributed to a 7% increase in net profit.
Analysts tracking Allcargo Logistics have pared their earnings estimates in response to a weak business environment for freight and global trade. Add to that the company’s second consecutive quarter of subdued results. “We trim EPS estimates by 5%/6% for FY17e/FY18e as we build in lower topline assumptions, and also introduce FY19 estimates," Antique Stock Broking Ltd said in a note. EPS is earnings per share. Another broking firm Prabhudas Lilladher Pvt. Ltd also reduced its earnings estimates for the company.
Still, these cuts in estimates did little harm to its shares. Allcargo Logistics’s performance was much better than that of its peers, Container Corp. of India Ltd (Concor) and Gateway Distriparks Ltd, which may explain the rise in its share price. Concor’s revenue fell by 8% while profit dropped by 32%, due to flat volumes and pressure on realizations. Gateway Distriparks’ profit also declined from a year ago.
In comparison, volumes at Allcargo Logistics’s multimodal transport business, which contributes to 85% of revenue, grew by 8%. “Growth was aided by the key markets of India, China and South East Asia," Prabhudas Lilladher said in a note.
Compared to Concor, the pressure on profitability is less severe at Allcargo Logistics, whose Ebitda margins were down by just 26 basis points compared to Concor, and whose margin declined by almost five percentage points. A basis point is 0.01%.
Allcargo Logistics’s management is trying to reduce the company’s exposure to global trade by increasing its presence in India. It recently acquired an e-commerce logistics firm.
Further, it is doing due diligence to set up a logistics park at Jhajjar in Haryana, adds Prabhudas Lilladher. The company’s strong balance sheet—with low debt and steady cash flows—gives it the leeway to invest in expanding capacity. While stock valuations are not expensive at 13 times one-year forward estimates, the earnings trajectory is uncertain.
Most analysts expect the expansion to bear fruit from next fiscal year. But a lot depends on a recovery in local freight trade and global trade. Analysts are also unclear how the goods and services tax-related opportunities will pan out. There is a near-term worry as well. If demonetisation impacts local trade for a prolonged period, then the much-awaited recovery in local freight trade may get pushed further down the road.