Aqua Logistics Limited (ALL) is tapping the capital markets with an issue which opens on Monday the 25th of January and closes on Thursday the 28th of January 2010. The company plans to raise Rs 150 crs in a price band of Rs 220-230. The company had plans to offer 30% of the QIB portion to Anchor investors but probably the sharp fall over the last two days has unnerved investors and they have decided to stay away. Alternatively the fact that this allotment comes with a 30 day lock in from date of listing could make investment uncertain with the Union budget due in roughly a month from now. This probably is the first issue since the Anchor Investor clause was introduced which had made reservations for Anchor Investors and has not gone ahead with the same.

Business

ALL is in the business of 3PL or 3rd party logistics. The current market size of this business was roughly 4800 crs in 2008-2009 and ALL’s turnover in that year was Rs 214 crs. The industry size is expected to increase by about 3.5 times by 2013-2014 and the market is expected to become roughly 16000 cr market. The growth in this sector is likely to be tremendous but the issue is how much of the present activity that ALL does is from 3PL. It appears that about 90-91% of the business of the company is straight freight business and nothing more than that. It says that the remaining is value added and it earns a higher margin in that business. The bulk of revenue earns a mere 5% and this also is a number which is under pressure.

The company does multi-modal transport and provides a one stop shop for it. It provides an integrated warehouse and distribution system. It uses an IT infrastructure for the same. ALL does re-packing, Branding and RFID tagging for its clients and also provides localised data tracking for cargo handled by it.

ALL believes that the comprehensive services provided by it helps in a saving of 13-15% in the Pharmaceutical space and a huge 38-40% in the IT Hardware space. The company has domain knowledge and expertise in the automotive space, pharmaceutical, retail, telecom, heavy engineering, power, sports and events.

The company believes in an asset light model and therefore does not own trucks, warehouses etc. It procures such services from third party service providers and bills its clients on a consolidated basis.

Financials

The company has reported a turnover of Rs 109 crs for the year ended March 2008, Rs 214 crs for March 2009 and Rs 154 crs for the half year ended September 2009. Its profit after tax has been Rs 5.6 crs, Rs 9.8 crs and Rs 8.36 crs respectively. It net margins were 5.1%, 4.6% and 5.4% respectively. The turnover has been growing significantly but margins for a third party logistics company offering a gamut of services including planning, IT infra, etc seem to be missing. The present equity of the company before the IPO is Rs 13.63 crs. If one were to look at the EPS based on these numbers it would be Rs 4.10 for 2008, Rs 7.19 for 2009 and Rs 12.26 for the year 2010 based on half year numbers annualised.

The company seems to have huge sundry debtors. The balance sheet states that as of 31st March 2009 against sales of 213.40 crs, sundry debtors were at Rs 59.73 crs, or roughly 3.5 months. If one were to look at the half yearly numbers the sales were at Rs 154 crs while sundry debtors were at Rs 66.13 crs or a little over 5 months. Against these sundry debtors which are receivables for transporting goods, there is hardly any matching outstanding or dues to sundry creditors. It means that the company pays virtually on presentation of bills and extends credit to their customers varying from 3.5 months to 5 months and earns a mere 5%. This activity amounts to some sort of NBFC (non banking finance company) activity of lending not a freight forwarding business.

Being a basic transporter and over 90% of revenues coming from plain freight activity it is surprising that the company has not made any provision for bad debts or lost any money in bad debts ever. As of 31st March 2009, the company has a figure of Rs 4.57 crs as outstanding for over six months and this figure as of 30th September 2009 is Rs 4.28 crs. Inspite of this amount being there no provision for bad debts is made.

Objects of the issue

One fails to understand why a company which believes in being an asset light company wants to spend 30 crs on acquiring specialized equipments and another 17 crs in establishment of offices. Further as mentioned earlier that activities of this company resemble that of an NBFC are further borne out from the fact that they wish to invest 45 crs or roughly 30% of the amount raised on additional working capital requirement. Also they have set aside a sum of 35 crs for an acquisition. If the business  that ALL is in is valued at Rs 450 crs what is it that they will get in 35 crs or is it that the valuation of this business is so over valued that they need this acquisition to show that they made a good business decision.

Comparison

There are a number of players in the logistic business. Some names of listed players which come to mind include All Cargo Logistics, Arshiya International, TCI Limited which has been in this business for more than 50 years. Third party logistics is a comparatively new activity in India and is yet to take off in a big way as far as local players are concerned. The big international players are here and enjoy a big market share as of now. Going forward they would be looking at not only increasing their market share but also acquisition of existing niche players. The companies EPS on a fully diluted basis assuming a price band of Rs 220 is Rs 4.81 for March 2009 and assuming Rs 230 is 4.88 for the same period. If we were to annualize the half year numbers of September 2009, the annualized profit after tax of Rs 16.73 crs would result in earnings of Rs 8.18 at an issue price of Rs 220 and Rs 8.30 at an issue price of Rs 230. This would translate into an earnings multiple of 26.89 times at Rs 220 and 27.71 times at Rs 230. His is certainly expensive by any standard. This has already assumed that the growth achieved in the first half of this year will continue in the second half as well.

TCI believes in an asset model and has a very large truck base. For the year ended March 2009 it had sales of about Rs 1300 crs and a net profit of Rs 28 crs. It has an equity capital of Rs 14.51 crs and a book value of close to 40 Rs. It has taken TCI 50 years to reach here but it has a base and is a solid company. Having this base it makes it quite easy for this company to offer third party logistics as well. It is better poised to grow from this base.

Conclusion

The opportunity to grow is there which is without doubt. ALL seems very expensively priced, and revenue is not coming from the activity in which it wants to be. The margins for a specialized company are just not there. The company seems to be doing NBFC activity rather than logistics business. There are corporate governance issues and the company has been issuing equity freely. The objects of the issue are for moving from an asset light company to a company with assets, which defeats the purpose of a 3PL player and its proposed acquisition does not make sense. With plenty of choice in the market with a sharp correction having taken place in the last two days and some more likely on Monday, it makes better sense to look at the secondary market for investment. It is best to avoid this issue.

SEBI Disclaimer: – I do not intend to subscribe to the above issue