CRISIL has removed its rating on the long-term bank facilities and non-convertible debentures of Allcargo Logistics Limited (Allcargo; a part of the Allcargo group) from 'Rating Watch with Developing Implications' and reaffirmed the rating at 'CRISIL AA-' with a 'Stable' outlook. The rating on the short-term bank facilities is reaffirmed at 'CRISIL A1+'.
 
Earlier, on December 12, 2019, CRISIL had placed the long term ratings on 'watch with developing implications', after Allcargo's Board of Directors had approved the purchase of at least 45% stake in Gati Ltd (Gati; now a part of the Allcargo group) for approximately Rs 416 crore. Allcargo has recently completed the acquisition of ~46.8% stake in Gati and also appointed its representatives on Gati's Board of Directors.
 
The acquisition of Gati is expected to strengthen the Allcargo group's business risk profile, with an established presence in 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 provides access to remote location and customers in India. While Gati's operating profitability was impacted in fiscals 2019 and 2020, its operating performance is expected to improve over the medium term, through focused cost optimisation measures and implementation of an asset light strategy. The acquisition was funded by debt of Rs 375 crore and liquid surpluses.
 
In January 2020, Allcargo entered into a definitive transaction with BRE Asia Urban Holdings Ltd, which is controlled by The Blackstone Group Inc. (Blackstone) to monetise about 4 million square feet (sqft) of completed, leased warehouse assets (by the end of fiscal 2021) with gross proceeds of about Rs 800 crore.
 
As part of the deal with Blackstone, 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 warehousing SPV subsidiaries to about 10%. As on date, Blackstone has already invested Rs 237 crore and the transaction would be conclude in a phased manner. Allcargo has completed the handover of 2.5 million sqft of warehouses and the remaining is expected to be completed in fiscal 2021. Further it has secured long term lease agreements with tenants for all these warehousing assets. Allcargo is expected to receive about Rs. 570 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 ~47% stake in Gati as well as for the warehouses, has led to the Allcargo group's debt rising sharply and peaking at just over Rs.2000 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 monetization 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 12-18 months; this will remain a key monitorable.
 
Revenue (excluding Gati) grew by 7% in fiscal 2020 over the previous fiscal, supported by continued strong volume growth of 8% in multi-modal transport operations (MTO) business and, improved utilisation in the project and engineering (P&E) segment.  The 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 Allcargo group (including Gati) reported operating income of Rs 9,429 crore and an operating margin of 5.9% in fiscal 2020, but was largely impacted due to lower business volumes and operating margin in the Gati business.
 
The global trade slowdown amid the Covid-19 pandemic and the nationwide lockdown impacted cargo movement at Indian ports in the first quarter of fiscal 2021, thereby resulting in moderation in full-container-load (FCL) and throughput volumes for players including the Allcargo group. However, resilience in the less than container load (LCL) volumes and increased dwell-time at container freight stations (CFS)/ Inland Container Depot (ICD) segment is expected to provide support, limiting material moderation in operating performance in fiscal 2021.
 
The business risk profile will continue to benefit from the enhanced reach within India/world given the strength in land, air and ocean segments with enhanced portfolio of services, reach and customers in the MTO business providing volume growth and profitability. The operating performance amidst global trade slowdown due to the pandemic containment measures, and turnaround of Gati's operations will remain key monitorables. 
 
The ratings continue to reflect the Allcargo group's diversified operations and an 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, largely due to steady annual cash generating ability, though debt metrics are moderate. 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 the ratings, CRISIL has combined the business and financial risk profiles of Allcargo and its 140 subsidiaries. That's 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' has been considered as debt by CRISIL.

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

Strengths
* Established position in the global NVOCC, domestic CFS, and courier service businesses: The group is India's largest, and a leading global operator, in the NVOCC business, backed by a strong network. It is the second-largest player in the LCL freight-forwarding industry globally. Despite challenging global trade conditions, the volume in this business grew at a cumulative rate of 13% over the three fiscals through 2020, due to an established global network and longstanding relationships with customers.

Global seaborne trade growth is estimated to slow down in fiscal 2021. Focus on LCL cargo, which is a higher-margin lower-volume market, which is expected to exhibit resilience and volume growth even during the current slowdown compared with FCL cargo, would support profitability.  The group will be leveraging on its existing global network which should help the NVOCC business grow steadily without significant investments in the medium term.

Besides, the group is a leading player in the CFS segment, which is its most profitable business, with stations at four major ports of India, and an ICD at Dadri (Uttar Pradesh). Gati is one of the largest courier companies having extensive coverage in India and offers transportation solutions, e-commerce, trade inventory management, freight forwarding, and cold chain solutions besides running fuel stations. Any substantial change in freight rates or EXIM volume may impact overall growth and will be a key monitorable.

* Integrated logistics player with presence across diversified segments: The Allcargo group has a diversified business risk profile, with six major segments - NVOCC, CFS, P&E, warehousing, and contract logistics and Gati ' contributing 69%, 5%, 4%, 0.3%, 4% and 17.7%, respectively, to the total group revenue in fiscal 2020.

Gati's extensive reach provides vertical integration to the MTO business which along with the diversified businesses enhances the group's ability to offer integrated transportation, logistics and warehousing solutions to its diversified clientele, thus enhancing the business risk profile. The group is setting up built-to-suit pre-leased Grade-A warehousing assets at strategic locations across various cities in India; a part of these will be sold to Blackstone according to pre-agreed terms and the remaining leased out on a long-term basis. Rental income from the unsold and leased warehouses has further diversified the cash flow streams.

* Adequate financial risk profile; debt metrics have moderated but improvement expected in medium term:  The group's financial risk profile has moderated in fiscal 2020, but remains adequate. While the pandemic related environment will constrain significant improvement in operations in fiscal 2021, better integration of operations and cost reduction initiatives are likely to lead to better performance and cash generation in fiscal 2022.

The large debt stock on account of acquisition of Gati and the warehouse assets has resulted in moderation in debt metrics; albeit this is expected to be only temporary ' benefits from integration of Gati's operations, sale of non-core assets and warehouse assets is expected to lead to the group's debt levels reducing by 40-50% by fiscal 2022, benefitting its debt metrics ' Debt/EBITDA is expected to improve to ~2 times and TOL/TNW to ~1.4 times by fiscal 2022. Any delay in receipt of proceeds from Blackstone and sale of non-core assets, and hence deleveraging of balance sheet will remain the key monitorables.

Weaknesses
* Volatility in EXIM trade volume: The NVOCC business is directly linked to global EXIM trade, and hence, a steep fall in in it could weaken the business by constraining profitability per twenty-foot equivalent unit. The CFS business, which is directly linked to the Indian trade, is exposed to risks arising from variations in EXIM trade, and customs policies. Sluggishness in Indian EXIM trade, in case of a steep fall in global trade could impact utilisation levels and profitability. Furthermore, low entry barriers have encouraged implementation of new CFS facilities by new and existing players, leading to build-up of surplus facilities; this will intensify price-based competition in the long term, thereby restricting profitability.

* Vulnerability of the P&E business to delays in project execution: In the P&E business, the group has been executing important projects for reputed clients such as Reliance Industries Ltd ('CRISIL AAA/Stable/CRISIL A1+'), Larsen & Toubro Ltd ('CRISIL AAA/FAAA/Stable/CRISIL A1+'), Bharat Heavy Electricals Ltd ('CRISIL AA/Stable/CRISIL A1+'), and NTPC Ltd ('CRISIL AAA/FAAA/Stable/CRISIL A1+') and has an effective equipment fleet of over 800 units. However, the business is heavily dependent on the domestic economy and the pace of project execution and completion. Around 70% of revenue is derived from power, oil and gas, cement and metals sectors, which are exposed to the vagaries in investment cycles and economic slowdown. While the group intends to make the P&E business asset-light through increase in leased asset proportion and sale of unproductive assets, the resultant benefits to operating performance will remain closely monitored.

Liquidity is supported by substantial cash generation (over Rs.300 crore per fiscal), cash surplus (Rs 302 crore as on March 31, 2020) and moderate bank limit utilisation (average utilisation of the fund-based limit was 31% during the 12 months through June-2020). Cash accruals should comfortably meet debt obligation of Rs 184 in fiscal 2021 and Rs 75 crore in fiscal 2022. The group is not expected to undertake any major capex in fiscal 2021, except for completion of warehouses.

CRISIL believes the group will sustain its strong business risk profile as an integrated logistics player and diversified revenue streams segments over the medium term.

Rating Sensitivity Factors
Upward Factors
* Steady  revenue growth while sustaining the 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, leading to considerable lowering of debt

Downward Factors
* Sustained weakening in the operating margin to 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 capital expenditure (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.

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.

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, along with an extensive network across India, covering 99% (672 out of 676) districts operating 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.

Any other information: Not applicable