Rating Rationale
June 29, 2020 | Mumbai
CJ Darcl Logistics Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.500 Crore
Long Term Rating CRISIL A-/Stable (Reaffirmed)
Short Term Rating CRISIL A2+ (Reaffirmed)
 
Rs.45 Crore Fixed Deposits FA/Stable (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL A-/FA/Stable/CRISIL A2+' ratings on the bank facilities and fixed deposits of CJ Darcl Logistics Limited (CJ Darcl).
 
The demand for freight was impacted during the first quarter of fiscal 2021 due to the lockdown imposed to contain the spread of Covid-19. CJ Darcl is expected to record around 70-75% of sales in the first quarter as compared to the same period of fiscal 2020. Recovery of demand from June as well as securing new orders from the pharmaceutical and FMCG (fast-moving consumer goods) sectors are expected to help maintain revenue in fiscal 2021 argely in line with that in the previous fiscal. An asset-light model with minimal fixed costs  should help maintain stable profitability even during low growth phases.
 
The ratings continue to reflect a leadership position in the full-truck-load (FTL) segment of the logistics industry, above-a-erage operating efficiency, and an improving financial risk profile. These strengths are partially offset by exposure to intense competition in the road freight industry, and large working capital requirement.

Analytical Approach

For arriving at its ratings, CRISIL 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'). The two companies have strong business and financial linkages.
 
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
* Leadership position in the FTL segment
CJ Darcl is the largest player in the domestic FTL segment, with a pan-India presence and access to over 10 lakh trucks through a network of vendors. The company has a large and diversified client base with longstanding relationships across the industry. It also benefits from the established brand and client relationships of CJ Logistics Corporation, Korea (CJL).

* Above-average operating efficiency
The company operates on an asset-light model. Its own fleet of over 800 vehicles meets less than 10% of its requirement, and the remaining is met by leasing trucks on a need-based system, leading to above-average operating efficiency. The operating margin has been sustained at 4-5% across economic cycles over the past decade and is expected at a similar level over the medium term.

* Improving financial risk profile
The financial risk profile, specifically the capital structure and debt protection metrics, has improved post infusion of funds by CJL's acquisition of 50% stake (CJL infused Rs 325 crore, of which Rs 110 crore was through issue of fresh equity with the remaining was paid to the promoters against sale of their shares). Consequently, the gearing has progressively reduced to around 1 time as on March 31, 2020 on a provisional basis, from 1.91 times as on March 31, 2017. The total outside liabilities to tangible networth (TOLTNW) ratio improved to 1.2 times from 2.3 times over this period.

There is no large, debt-funded capital expeniture (capex) planned as of now. Any capex is expected to be funded prudently, and ia unlikely to impact debt protection metrics, which should remain adequate, given the healthyCcash accrual expected over the medium term. Furthermore, all capex continues to be backed by long-term contracts. CRISIL will continue to monitor the extent of capex, its funding, and impact on the inancial risk profile.

Weaknesses
* Exposure to intense competition in the road freight transport segment and to any change in policy of the Indian Railways in the container trains business
The domestic road freight transport industry is highly fragmented because of a 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.

Furthermore, Indian Railways levies rail haulage charges on container train operators for using infrastructure; these charges are subject to periodic revisions. While the railways business is currently performing well; in the past, high haulage charges and low revenue per tonne due to benign diesel prices had, in the past, impacted profitability. This railway business is also now functioning on an asset light model and the company has not underatken any capex in this segment since fiscal 2010. The sustenance of healthy operating efficiency amid intense competition and pricing pressures remains a key monitorable.
 
* Large working capital requirement
Receivables, at 60 days as on March 31, 2020, constituted around 70% of current assets and 45% of total assets. However, the company has one of the best collection efficiencies in the industry with initiatives such as close monitoring of receivables through credit control managers, due diligence before acquisition of new clients, electronic proof of delivery, and adoption of SAP for accounting and other needs. It has also taken an insurance policy that covers around 75% of its receivables exposure. While receivables may stretch in the interim due to the challenges posed by the lockdown, maintaining an efficient working capital cycle as the business expands will be a key rating sensitivity factor.
Liquidity Adequate

Expected cash accrual of Rs 80-100 crore should amply cover debt obligation of Rs 45-50 crore, per fiscal over the medium term. The company had cash equivalents of around Rs 25 crore as on March 31, 2020. Unutilised bank lines also support liquidity. For fiscal 2020, average utilisation of CJ Darcl's bank lines of Rs 480 crore was 53%,while Transrail's bank lines of Rs 8 crore remained unutilised.
 

Outlook: Stable

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

Rating Sensitivity factors
Upward Factors
* Significantly improvement in operating performance with sustained revenue growth of over 15% per fiscal and a stable operating margin
* Significant improvement in the financial risk profile through deleveraging or equity infusion

Downward Factors
* Weakening of the financial risk profile with a sustained reduction in interest cover to below 3.5 times because of significant decline in profitability or large, debt-funded capex
* Significant decline in revenue and profitaility.
About the Company

CJ Darcl was set up in 1975 as a family-run concern and initially provided 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 in 1988 as a public limited company. It was named Darcl Logistics Ltd (DLL) in 2010. DLL, for a one-time fee of Rs 10 crore, acquired a licence from the Indian Railways to run its own container trains for 20 years. The licence was transferred to Transrail, which was set up in fiscal 2009 for the container trains business. This business was demerged back into DLL with effect from April 1, 2013.
 
In August 2017, CJL acquired 50% stake in DLL for Rs 325 crore. The existing four Darcl promoters along with their affiliates continue to hold the remaining stake in the company. The company got its present name in September 2017.
 
CJ Darcl is the largest player in the FTL segment in India with a fleet of over 800 vehicles, including trucks, trailers, and tankers. It has nearly 200 branches and leases around 2,000 vehicles per day for its operations. The company has a diversified customer profile.

About CJL
Founded in 1930, CJL is the largest logistics company in 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 changed its name from CJ Korea Express Corporation recently to reflect its intention to penetrate the global market. CJL aims to be among the five largest logistics players by 2025. It is a part of the much larger CJ Group based in Korea with diversified interests in food, pharmaceuticals, infrastructure, and entertainment.

Key Financial Indicators (Consolidated)
As on/for the period ended March 31 Unit 2020* 2019
Revenue Rs crore 2423 2350
Profit After Tax (PAT) Rs crore 47 41
PAT Margin % 1.9 1.7
Adjusted debt/Adjusted networth Times 0.99 1.00
Interest coverage Times 3.72 3.49
*Provisional

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon Rate (%) Maturity Date Issue Size
(Rs.Crore)		 Complexity
Levels		 Rating Assigned with Outlook
NA Cash Credit NA NA NA 360 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 35 NA CRISIL A-/Stable
NA Bank Guarantee NA NA NA 90 NA CRISIL A2+
NA Fixed Deposits NA NA NA 45 Simple FA/Stable
 
Annexure - List of Entities Consolidated
Name of entities Extent of consolidation Rationale for consolidation
Transrail Logistics Ltd Full Strong managerial, operational, and financial linkages
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fixed Deposits  FD  45.00  FA/Stable      06-06-19  FA/Stable  27-06-18  FA/Stable  31-08-17  FA/Stable  FA-/Positive 
Fund-based Bank Facilities  LT/ST  410.00  CRISIL A-/Stable      06-06-19  CRISIL A-/Stable  27-06-18  CRISIL A-/Stable  31-08-17  CRISIL A-/Stable  CRISIL BBB+/Positive 
Non Fund-based Bank Facilities  LT/ST  90.00  CRISIL A2+      06-06-19  CRISIL A2+  27-06-18  CRISIL A2+  31-08-17  CRISIL A2+  CRISIL A2 
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Bank Guarantee 90 CRISIL A2+ Bank Guarantee 90 CRISIL A2+
Cash Credit 360 CRISIL A-/Stable Cash Credit 345 CRISIL A-/Stable
Standby Line of Credit 15 CRISIL A-/Stable Proposed Long Term Bank Loan Facility 10 CRISIL A-/Stable
Working Capital Demand Loan 35 CRISIL A-/Stable Standby Line of Credit 15 CRISIL A-/Stable
-- 0 -- Working Capital Demand Loan 40 CRISIL A-/Stable
Total 500 -- Total 500 --
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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