CRISIL has reaffirmed its ratings on the bank loan facilities and non-convertible debentures of Allcargo Logistics Limited (Allcargo; a part of the Allcargo group) at 'CRISIL AA-/Stable/CRISIL A1+'.
 
The group (including Gati) achieved revenue of Rs 4,414 crore in the first-half of fiscal 2021, marginal decline of 3.8% year-on-year, while earnings before interest, tax, depreciation, and amortisation (EBITDA) declined by 5.4% to Rs 293 crore. Despite the impact of the pandemic on global trade volumes in the first quarter, higher realisations in the multi-modal transport operations (MTO) business and increased dwell-time in the container freight stations (CFS)/inland container depot (ICD) segment provided support. With healthy cash accrual and funds realised from The Blackstone Group Inc (Blackstone), the group's net debt (excluding leases) reduced to Rs 1,069 crore as of September 2020 from Rs 1,434 crore as of March 2020.
 
Earlier, revenue (excluding Gati) grew by 7% in fiscal 2020 over the previous fiscal, supported by continued strong volume growth of 8% in the MTO business and, improved utilisation in the project and engineering (P&E) segment. Operating margin improved to 6.9% in fiscal 2020 from 6.4% in the previous fiscal, benefitting from volume growth in the MTO business, high asset utilisation in the P&E business, and improved performance in the logistics park business. The group (including Gati) reported an operating income of Rs 9,429 crore and an operating margin of 5.9% in fiscal 2020, but was largely impacted by lower business volumes and operating margin in the Gati business.
 
The acquisition of Gati is expected to strengthen the Allcargo group's business risk profile, with an established presence in the land, air and ocean segments resulting in end-to-end transportation services and revenue diversity. Once completely integrated, the group will also benefit from Gati's strong distribution network along with its dedicated support services and established information technology infrastructure, which provide access to remote location and customers in India. The operating performance, amid the global trade slowdown due to the lockdowns, and turnaround of Gati's operations will remain key monitorables.
 
In January 2020, Allcargo entered into a definitive transaction with BRE Asia Urban Holdings Ltd, which is controlled by Blackstone, to monetise about 4 million square feet (sq ft) of completed, leased warehouse assets (by the end of fiscal 2021) with gross proceeds of about Rs 800 crore. The company has already received about Rs 300 crore as on November 30, 2020, and the remaining proceeds are expected to be received in a phased manner.
 
As a part of this deal, Allcargo will transfer the debt taken for construction of warehouses to different special-purpose vehicles (SPVs), which will initially be subsidiaries of the company. Subsequently, it will reduce its stake in the warehousing SPV subsidiaries to about 10%. Allcargo has completed the handover of 2.75 million sq ft of warehouse space and the remaining is expected to be completed in fiscal 2021. It has also secured long-term lease agreements with tenants for all these warehousing assets. Allcargo is expected to receive about Rs 100 crore from lease rental discounting loans at SPVs (90% stake in which will ultimately be taken over by Blackstone) and from Blackstone for the remaining assets in fiscal 2021. 
 
The debt raised for the acquisition of about 47% stake in Gati as well as for the warehouses has led to the Allcargo group's debt (including Rs 284 crore of lease debt) rising sharply and peaking at just over Rs 2,000 crore as on March 31, 2020 (Rs.625 crore on March 31, 2019). This along with a rather flat operating profitability margin of around 6% has led to moderation in debt metrics. As on March 31, 2020, the debt/earnings before interest, tax, depreciation and amortization (debt/EBITDA) was 3.63 times (1.41 times a year earlier), and the total outside liabilities (TOL)/Tangible Net worth (TNW) ratio was 2.02 times (1.08 times). The interest coverage ratio was 4.90 times in fiscal 2020 (12.68 times in fiscal 2019).
 
The management is attempting to streamline operations at Gati and could consider divestment of non-core assets as well. The company's deleveraging plan with monetisation of completed, leased warehouses to Blackstone and sale of non-core assets in Gati will be critical for reduction in debt and improvement in debt metrics over the next 12 months; this will remain a key monitorable.
 
Earlier, on August 27, 2020, Allcargo announced that its board has considered the delisting proposal from the promoter group ('promoter group' comprising Mr. Shashi Kiran Shetty and Talentos Entertainment Pvt Ltd). The promoter group would either individually or collectively acquire all fully paid-up equity shares of the company held by the public shareholders (comprising 30% stake); and thereafter de-list Allcargo from the Bombay Stock Exchange and National Stock Exchange of India Ltd, in accordance with the SEBI (Securities and Exchange Board of India) delisting regulations. All requisite approvals are received and transaction is expected to be completed within 4-6 months. This transaction is not expected to have any material impact on Allcargo's capital structure and other debt metrics, as the acquisition is likely to be funded by promoters in their personal capacity. CRISIL will continue to monitor the developments in this regard.  
 
The ratings continue to reflect the Allcargo group's diversified operations and established position in the global non-vessel owing common carrier (NVOCC), domestic CFS and courier service businesses. The ratings are also supported by an adequate financial risk profile because of steady annual cash-generating ability, though debt metrics are modest. These strengths are partially offset by 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 its ratings, CRISIL has combined the business and financial risk profiles of Allcargo and its 140 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 Allcargo CCI Logistics (ACCI), a 62:38 joint venture (JV) with the promoters of CCI Logistics Ltd (CCI; 'CRISIL BBB/Stable/CRISIL A3+') as it is in a similar business and has operational linkages and synergies with the group. Besides, CRISIL has also combined the business and financial risk profiles of Gati Ltd, post-acquisition, as Allcargo is the single-largest shareholder with about 46.8% stake and has management control over the entity. Also, functional synergies will exist due to similar lines of business. All these companies are collectively referred to as the Allcargo group.
 
* CRISIL has amortised goodwill on acquisitions made by the group over five years from the date of acquisitions and has treated the optionally convertible debentures (received as part of the Blackstone deal) as equity-like given their full convertibility within one year. Pending purchase price allocation and goodwill recognition for Gati by the company, CRISIL has not currently considered goodwill on acquisition of Gati.
 
* Lease liabilities arising from adoption of IndAS 116 'leases' have been considered as debt by CRISIL.

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

Liquidity is supported by substantial cash generation (over Rs 300 crore per fiscal), cash surplus (Rs 518 crore as on September 30, 2020) and moderate bank limit utilisation (average utilisation of the fund-based limit for the group was 54% during the six months through September-2020). Cash accrual should comfortably meet debt obligation of Rs 184 crore in fiscal 2021 and Rs 75 crore in fiscal 2022. The group is not expected to undertake any major capital expenditure (capex) programme in fiscal 2021, except for completion of warehouses. Any large cash outflows from Allcargo in the form of dividend payout or share-buyback as well as any support extended by Allcargo to fund the proceeds for delisting will remain key monitorables.

CRISIL believes the Allcargo group will sustain its strong business risk profile as an integrated logistics player and benefit from diversified revenue streams over the medium term.
 
Rating sensitivity factors
Upward factors
* Steady revenue growth while sustaining operating margin above 7.0-7.5%
* Better-than-anticipated correction in debt metrics by fiscal 2022: debt/EBITDA ratio below 1.25-1.35 times and TOL/TNW ratio below 1.2 times, with sharper recovery in business performance; or equity infusion considerably lowering debt
 
Downward factors
* Sustained weakening of operating margin below 5% because of slowdown in trade volumes or underutilisation of assets in the P&E segment
* Delay in monetisation of assets and deleveraging of the balance sheet or large, debt-funded capex or further acquisition resulting in debt/EBITDA and TOL/TNW ratios remaining above 3.5 times and 2 times, respectively, in fiscal 2021; and above 2.5 times and 1.6 times, respectively, in fiscal 2022
* Any large cash outflow in the form of dividend or share buyback, or support extended to fund the delisting affecting liquidity or capital structure

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 March 31, 2020, the promoter group held 70.01% in Allcargo.
 
The group is an MTO operator and offers logistics services, such as consolidation of LCL and FCL cargo for exporters and importers. In 2003, it 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, it acquired MHTC Ltd to strengthen its position in the P&E solutions business. In 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, and its freight & forwarding and custom clearance business, housed in subsidiary Hindustan Cargo Ltd, on a slump-sale basis to ACCI, its JV with the promoters of CCI. CCI has transferred its warehousing business to the JV. In April 2020, Allcargo completed acquisition of 46.8% stake in Gati.
 
For first six months through September 2020, the group reported net profit of Rs 88 crore on revenue of Rs 4,414 crore, against Rs 123 crore and Rs 4,586 crore, respectively, in the corresponding period previous fiscal.

About Gati
Gati, 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 through September 2020, net loss was Rs 46 crore on revenue of Rs 507 crore, against loss of Rs 9 crore and Rs 898 crore, respectively, in the corresponding period previous fiscal.

Status of non cooperation with previous CRA: Not applicable

Any other information: Not applicable