Detailed Rationale

CRISIL Ratings has placed its ratings on Rs 875 crore of bank facilities and Rs 150 crore of non-convertible debentures of Allcargo Logistics Ltd on 'Rating Watch with Negative Implications'.

 

The rating action follows expectations of moderation in business and financial risk profile of Allcargo Logistics Limited (herein referred to as new ACL), considering the implications of the company’s demerger plans. On December 21, 2023, the company's board of directors approved a composite scheme of arrangement (demerger) whereby its international supply chain (ISC) business, comprising global supply chain and domestic supply chain, as well as its support functions (~85% of Allcargo group’s revenues and ~88% of pre Ind AS EBITDA in first half of fiscal 2024), will be de-merged into a new company - Allcargo ECU Ltd (AEL) while the express and contract logistics business  will continue under new ACL.

 

This de-merger, which will be made effective in steps with appropriate allocation of shares to respective entities involved, will also result in merger of subsidiary, Allcargo Gati Ltd (housing the express distribution business) into new ACL. New ACL, which will house the relatively smaller express and contract logistics business, has reported revenues of Rs 1,017 crore (~15% share of the Allcargo group's revenue) for the first six months of fiscal 2024 and Rs 16 crore (~11% of pre-Ind AS earnings before interest, taxes, depreciation and amortisation (Ebitda) with operating margin of ~1.5%. While complete details on split of outstanding debt between new ACL and AEL is awaited, new ACL is expected to hold mainly working capital related debt related to express and contract logistics, the Gati KWE acquisition loan and portion of general corporate loan, total constituting to ~45-50% share of consolidated group’s debt of Rs 856 crore as of September 30, 2023. Cash and equivalent could be marginally higher than Rs 100 crore. Accordingly, factoring these aspects, the overall business as well as financial risk profile of new ACL will be moderate compared with the  existing Allcargo.

 

The ISC’s operating performance, which will operate under AEL, post de-merger, is also facing headwinds, impacted by the overall slowdown seen in global trade volumes and freight rates. For the first half of fiscal 2024, ISC revenues de-grew by ~42% on-year to Rs. 5,618 crore, with a decline in reported post Ind AS EBITDA to 3.1% as compared to 6.5% in the previous fiscal. While freight rates are not expected to reach the highs that were seen in the previous two fiscals, recovery to pre-2021 levels would help sustain the business risk of the company, pace of recovery would however be closely monitored. That said, AEL’s overall credit risk profile takes comfort from its leading market position in the global LCL (less than container load) consolidation business and from net debt free balance sheet.

 

This demerger is expected to take about 12-15 months, subject to receiving the required approvals from the Securities and Exchange Board of India (SEBI), National Company Law Tribunal (NCLT), Mumbai, equity shareholders, other regulatory authorities and the Income Tax authorities. CRISIL Ratings is in discussion with Allcargo’s management to better understand bifurcation of its assets and liabilities and will resolve the watch once there is better clarity and the key regulatory approvals are received.

 

Also, the long-term rating on Rs 200 crore of bank loan facilities continues at ‘CRISIL AA-‘ with ‘Rating Watch with Developing Implications’ as this facility too in parts will move out of Allcargo, as part of demerger announced in December-2021. CRISIL Ratings here too continues to engage with the management and lenders for receipt of required documents as well as to understand the business, financial risk profile, bifurcation of debt, cash and other assets and liabilities moving out to Transindia Realty & Logistics Parks Ltd (TRL), and Allcargo Terminal Ltd (ATL), AEL; post which the watch will be resolved.

Analytical Approach

• Prior to announcement on this demerger, CRISIL Ratings had been combining the business and financial risk profiles of Allcargo and its 133 subsidiaries (which mainly represent the international supply chain business) as well as Gati Limited. This is because the entities, collectively referred to as the Allcargo group, are under a common management and have strong financial and operational linkages. CRISIL Ratings has also combining the business and financial risk profiles of contract logistics business operated through its now 100% subsidiary (w.e.f. May 17, 2023), Allcargo Supply Chain Private Limited (ASCPL, formerly Avvashya Supply Chain Private Limited), as it is in a similar business with operational linkages and under the same management. Post completion of demerger, only the performance of Gati Limited and the contract logistics business would be considered while assessing new ACL’s performance.
• CRISIL Ratings has also amortised goodwill on acquisitions made by the group, over five years from the date of each acquisition. For Gati Ltd, goodwill of Rs 224 crore has been amortised beginning fiscal 2020 while for Nordicon and Speedy, Rs 92 and Rs 33 crore has been amortised beginning fiscal 2022.
• CRISIL Ratings has adjusted EBITDA by excluding lease rental components with depreciation and finance costs to comply with IndAS116 on lease accounting. Accordingly, CRISIL Ratings has not included lease liabilities in debt.

 

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 position in the global international supply chain and express logistics business: The company is India’s largest, and a leading global operator, in the international supply chain container consolidation business, backed by a strong global network. It is the largest player in the LCL consolidation industry holding about 15% market share globally having achieved higher than global trade volume growth through market share gains and improved efficiencies over the years. It connects 2,500 direct trade lanes providing value to small and large freight forwarders. The segment benefitted from healthy volume growth and improved realisation during pandemic years which continued till the first half of fiscal 2023 but moderated subsequently impacting Allcargo’s operating performance.

 

Besides, the company is a leading player in the express logistics segment in India, through its subsidiary, Gati. Gati is one of the largest express logistics companies having extensive coverage in India and offers transportation solutions, e-commerce, trade inventory management, freight forwarding, and cold chain solutions. The company increased its stake in Gati KWE, the express logistics JV by buying-out the remaining 30% stake for Rs 406.5 crore in May-2023. It also operates a healthy contract logistics business through ASCPL, in which it acquired the remaining ~39% stake in May-2023 for Rs 163 crore and exited the freight forwarding business by selling off its 61% stake in Avvashya CCI Logistics Private Limited for Rs 39 crore.

 

• Integrated logistics player with presence across diversified segments: The Allcargo group has a diversified business risk profile with three major segments ― ISC, express logistics, and contract logistics — contributing 89%, 9%, and 2%, respectively, to the total revenue in fiscal 2023. The group earlier had presence in domestic CFS/ICD, warehousing, project and equipment business which has now been de-merged into other two new entities.

 

Gati’s extensive reach provides vertical integration to the international supply chain business which, along with the contract logistics businesses, enhances the group’s ability to offer integrated transportation and logistics solutions to its diversified clientele, thus enhancing the business risk profile.

 

• Healthy financial risk profile:  Continuing Allcargo’s financial risk profile remains healthy as of March 31, 2023, with gross debt of Rs 709 crore and cash surplus of Rs 1,456 crore with healthy cash accruals, and favourable movement of working capital items. Gearing stood at about 0.25 times with adjusted interest cover of ~18 times for fiscal 2023 with debt-to-pre-Ind AS EBITDA of 0.70 times.

 

Liquid surplus has moderated to Rs 736 crore with debt rising to Rs 856 crore as of September-2023 following payment of Rs 406.5 crore in May-2023 for acquisition of remaining 30% stake in Gati KWE (part funding it through Rs 200 crore term loan), payment of Rs 124 crore (net of sale of ACCI stake) in May-2023 for acquiring the remaining stake in ASCPL, and payment of  Rs 174 crore in August-2023 for acquiring additional 25% stake in Nordicon AB. Financial risk profile and liquidity should improve over the near-to medium term with release in working capital,  and only maintenance capex being undertaken.

 

Weaknesses

• Volatility in EXIM trade: The international supply chain business is directly linked to global EXIM trade and hence a significant reduction could weaken the business by constraining profitability per twenty-foot equivalent unit. Sluggishness in EXIM trade, in case of a steep fall in global trade, has impacted freight volumes, freight rates and profitability of the company in the first six months of fiscal 2024 with Allcargo’s aggregate volumes falling by 5% to 477,240 TEUs while average realisation rates have fallen by ~39% impacting revenue and EBITDA. CRISIL Ratings expects moderate industry conditions to persist over the medium term before meaningful improvement begins.

 

• Intense competition in ISC and surface transport business: The ISC business is exposed to intense competition from large carriers as well as aggregators like Allcargo who have strong local presence. Also, the surface transport business in India too faces stiff competition from new entrants who enjoy strong financial backing as well as established players in the industry. While the company’s global presence and strong experience in operating the logistics business provides comfort, it continues to be impacted by the stiff competition in the industry.

Liquidity: Strong

Liquidity is supported by substantial cash generation and asset-light business, cash surplus of Rs 736 crore as on September 30, 2023, and average bank limit utilisation (average utilisation of the fund-based limit for the group was 15% during the six months through June-2023). Healthy liquidity, strong cash accrual, nominal capex and debt repayments (Rs. 129 crores in fiscal 2024, and Rs. 192 Crore in fiscal 2025) should keep liquidity strong over the medium term.

 

ESG Profile

CRISIL Ratings believes that Allcargo’s Environment, Social, and Governance (ESG) profile supports its already strong credit risk profile.

 

The logistics sector has a relatively higher impact on the environment because of the inherent nature of assets utilized for the physical delivery of goods. However, given Allcargo is a leading LCL consolidator, its direct impact on the environment is limited vis-à-vis its partners and customers who might have higher impact. The company though has a social impact because of its large and diverse workforce. Allcargo has continuously focused on mitigating its environmental and social impact. 

 

Key ESG highlights:

• ESG disclosures of the company are evolving, and it is in the process of further strengthening the disclosures going forward.
• Allcargo began releasing its ESG report from fiscal 2020 setting out qualitative parameters of the ESG emphasizing its commitment to creating a better world.
• Through its CSR arm, Avashya Foundation, it is working to bring about inclusive development in six focus areas: Health, Education, Environment, Women Empowerment, Sports and Disaster Relief, through its network of reliable partner NGOs who are doing incredible work on the ground.
• Company has planted more than 710,000 trees through Avashya Foundation’s Maitree initiative
• Company has 50% women in the workforce in its global subsidiary, ECU Worldwide and endeavours to achieve similar levels in other group companies
• It has adequate governance structure with 50% of its board comprising independent directors and extensive disclosures.

 

There is growing importance of ESG among investors and lenders. Allcargo’s commitment to ESG principles will play a key role in enhancing stakeholder confidence, given its high share of market borrowings in its overall debt and access to both domestic and foreign capital markets.

Rating Sensitivity factors for facilities rated CRISIL AA/Watch Negative

Upward factors

• Strong and sustained revenue growth and robust operating margin above 8-8.5% resulting in healthy cash accruals
• Substantial improvement in debt metrics while maintaining strong liquidity

 

Downward factors

• Continuing moderation in the business risk profile, including due to weak operating performance owing to slowdown in trade volumes, impacting cash flows
• Large, debt-funded capex or acquisition, resulting in sustained and significant weakening in net debt/pre-Ind AS EBITDA above 1-1.25 times on a sustained basis
• Any large cash outflow in the form of dividend or share buyback or large acquisition affecting liquidity

 

Rating sensitivity factors for facilities rated CRISIL AA-/Watch Developing

Upward factors

• Strengthened business risk profile comprising large portfolio of lease generating assets with high occupancy rates and rentals, resulting in higher cashflows
• Substantial improvement in debt metrics with sustained debt/ pre-Ind AS EBITDA below 0.5 times and adequate liquidity
• Movement of debt facilities to the entity having a stronger credit profile

 

Downward factors

• Lower operating performance and cashflows due to lower rentals or occupancy in leased assets
• Weakening of debt metrics with debt/pre-Ind AS EBITDA consistently above 1.5 times, on account of lower operating performance or higher debt-funded expansion plans or delay in deleveraging plan
• Exposure to implementation or leasing risk related to new assets under development.
• Movement of debt facilities to the entity having a weaker credit profile

About the Company

The Allcargo group including the businesses now moved to de-merged entities, promoted by Mr Shashi Kiran Shetty, provides logistics services such as container consolidation, express logistics, CFS, ICD, warehousing, coastal shipping, project logistics and equipment leasing.

 

Post the de-merger, Allcargo houses the container consolidation business (under international supply chain segment), express logistics (under subsidiary Gati Limited), and contract logistics (under 61% JV, ASCPL) businesses. The group is a leading global operator in the international supply chain container consolidation business and has grown over the years through various acquisitions. Since the acquisition of the Belgium-based ECU Line in 2006, the Allcargo group emerged as a leading LCL consolidator in the world and further solidified its position in September 2013 through the acquisition of Econocaribe Consolidators to increase its presence in the US and its focus on FCL cargo.

 

In April 2020, Allcargo completed acquisition of 46.8% stake in Gati entering the express logistics business which complements its international supply chain business. Gati was founded in 1989, is one of India’s leading express distribution and supply chain solutions provider, with a strong presence in the Asia Pacific region and SAARC countries. It has an extensive network across India, covering 99% (672 out of 676) districts and operating more than 5402 scheduled routes. It possesses an 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 six months of fiscal 2024, Continuing Allcargo reported consolidated net profit of Rs 135 crore (including Rs 122 crore of exceptional profit) on revenue of Rs 6,628 crore, against Rs 455 crore and Rs 10,572 crore, respectively, in the corresponding period previous fiscal.

Key Financial Indicators*

Particulars	Unit	2023	2022
Operating income	Rs crore	18392	19062
Profit after tax (PAT)	Rs crore	598	947
PAT margin	%	3.2	4.6
Adjusted debt/adjusted networth	Times	0.25	0.51
Adjusted interest coverage	Times	18.12	16.20

*For continuing Allcargo including ASCPL

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of Instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue Size (Rs.Cr)	Complexity Level	Rating Assigned with Outlook
NA	Buyers Credit*	NA	NA	NA	34	NA	CRISIL AA/Watch Negative
NA	Term Loan-2	NA	NA	Oct-25	192	NA	CRISIL AA/Watch Negative
NA	Term Loan-3&&	NA	NA	30-Sep-26	200	NA	CRISIL AA-/Watch Developing
NA	Proposed Term Loan	NA	NA	NA	169.83	NA	CRISIL AA/Watch Negative
NA	Bank Guarantee**	NA	NA	NA	83.2	NA	CRISIL A1+/Watch Negative
NA	Cash Credit#	NA	NA	NA	368	NA	CRISIL AA/Watch Negative
NA	Stand By Letter of Credit	NA	NA	NA	27.97	NA	CRISIL AA/Watch Negative
NA	Non-convertible debentures^	NA	NA	NA	150	Simple	CRISIL AA/Watch Negative

#Fully interchangeable with overdraft facility/inland bills discounting/working capital loan

*Fully interchangeable with letter of credit

** Fully interchangeable with WCDL/inland LC

^Not placed yet

&& Rs 80.0 crore has been repaid till September 30, 2023