Time to spot multibaggers in logistics sector? Top 5 stocks to look at

by Kshitij Anand (Senior Research Analyst, SMC Global Securities Ltd) Most of the stocks in the infrastructure sector have given positive returns of up to 200 percent. Topping the charts is Arshiya which rose 220 percent so far in the year 2017, followed by Transport Corporation which gained 92 percent, and Balurghat Technologies rallied 68 percent in the same period.

Logistics sector was in limelight ahead of the implementation of the goods & services tax (GST) but pared some gains soon after it was implemented in July, but there are plenty of stocks which can strike gold for investors especially after infrastructure status was given to logistics sector.

Earlier this week, the government has given infrastructure status to logistics sector, covering cold chain and warehousing facilities.

The government has been working on ways to attract more investments into transport and logistics as part of efforts to bolster infrastructure development in the country.

Most of the stocks in the infrastructure sector have given positive returns of up to 200 percent. Topping the charts is Arshiya which rose 220 percent so far in 2017, followed by Transport Corporation which gained 92 percent, and Balurghat Technologies rallied 68 percent in the same period.

It is definitely a step in the right direction from the government to boost infrastructure which would in turn aid economic growth. Infrastructure status would allow companies in the sector to access cheaper credit.

“With the Logistics sector being accorded with infrastructure status, cheaper credit will now be made available from banks. This, in turn, will help drive the expansion plans, thereby easing the supply chain bottlenecks that are currently plaguing the sector,” Nitasha Shankar, Sr. Vice President and Head of Research, YES Securities told Moneycontrol.

“We believe this would be a positive for all logistics sector stocks, including Allcargo Logistics, Snowman Logistics, etc.,” she said.

Roads and bridges, ports, shipyards, inland waterways, airport, railway track, tunnels, viaducts, terminal infrastructure including stations and adjoining commercial infrastructure are all part of the transport and logistics classification. Urban public transport and logistics infrastructure are also part of it.

According to experts, cost of funding will come down considerably which would help the companies in pushing their capital expenditure plans. The infrastructure status would also help firms in reducing logistics cost which is very high, especially for exports.

Since logistics sector requires huge investments to boost the country’s trade granting infrastructure status would help the industry attract investments.

“Cost of funding could come down by up to 50 basis points; those going for external commercial borrowing could get it even cheaper,” Siddharth Sedani, Vice President – Equity Advisory, Anand Rathi told Moneycontrol.

“Logistics costs of exports are very high in India and due to this Indian goods are less competitive in global markets. This status would help the sector get credit at competitive rates and on a long-term basis as rising logistics cost impacts the global competitiveness of exporters,” he said.

Currently, logistics account for 13 percent of GDP which is higher than many other countries like US (9 percent) and Germany (8 percent). Analysts expect the cost of logistics to reduce by at least 200 bps thus making Indian goods more competitive in domestic as well as exports market.

“Granting Infrastructure status to the logistic sector will enable the sector to get access to longer tenor loans at competitive rates (saving of approximately 50 bps) and also give access to external commercial borrowings (ECB),” Atish Matlawala, Senior Analyst, SSJ Finance & Securities told Moneycontrol.

“We like Gati, VRL Logistics and Allcargo due to its leadership position in the segment they operate and its pan India presence,” he said.

We have collated a list of top five stocks which are likely to benefit the most in the logistics sector:

Navkar Corporation: Target Rs217

Navkar Corporation Limited is engaged in Container Freight Station (CFS) operations and related activities. The Company is focused on capitalizing the available opportunities in the logistics space in western India.

Its principal products/services that it manufactures/provides include Cargo Handling, Cargo Storage, and Maintenance and Repairs of Containers.

“The installation of six RTGCs at Panvel has increased Navakar’s capacity to over 500,000 TEUs. We expect profitability to register a 35% CAGR over FY17-19 largely on account of volume ramp-up at Vapi,” said Sedani.

“With capex to be fully completed in FY18, and revenue from expanded operations to kick in gradually in FY18 (and fully in FY19), the company is set to report a leap in revenue and profitability,” he said.

Sedani further added that rail operations at Vapi are expected to commence soon which will lead to greater utilisation. We value the stock at a P/E of 20x FY19e, lower than the multiple commanded by the sector leader.

TCI Express: BUY| Target Rs660

Indian organized logistic market is miniature with only a handful of large organized players but the logistics sector was among most underperforming sector for last three years despite most awaiting GST bill came into play.

TCI Express is a market leader, in value terms, in the Indian express delivery market. With a fleet of over 4000 (contracted) containerised vehicles and about 550 own branches, TCI serves over 40,000 locations.

“TCI Express is a leading company with low debt in its book as it is asset light company and after this move by the government, it will be able to explore opportunity using the low cost of debt. If we compare stock price movement then it also outperformed its peers in last one year,” Santosh Meena, Sr Research Analyst, Swastika Investmart told Moneycontrol.

The company adopts a unique hub-and-spoke model fulfilling 2,500 feeder routes through its 400 express routes and 28 sorting centres. TCI scheduled cargo pick-up service from over 3000 points enables it to offer definite express delivery solutions to its customers.

“We believe TCI, with its leadership position, would be the most preferred third-party logistics (3PL) player. TCIEL has charted an aggressive growth strategy and intends to make a capex spend of Rs300 crore over the next four or five years,” ICICIdirect said in a report.

“Majority of the asset allocation (50%) is towards increasing its handling capacity of sorting centres (current capacity utilisation at 85%),” it said. The domestic brokerage firm values TCI at 30x P/E on an estimated EPS of Rs22/share (FY20E) with a target price of Rs660.

GATI: BUY| Target Rs155

The GST regime is expected to be a significant factor for growth and profitability for logistics companies. Businesses across several industries in India are expected to make their storage and transportation decisions on the basis of logistical efficiencies instead of their tax efficiency, which is likely to result in significant business opportunities for large, integrated logistics solutions providers like Gati.

“Benefits of GST would challenge current operations of unorganised players and shift larger volumes to organised players having a nationwide presence,” ICICIdirect said in a report.

FCCB issue led to a dilution of promoter’s stake to the extent of 7.3 percent. Post this, the revised promoter holding is now at 29.8%. “The resultant impact of the same could now lead Gati to bring in a strategic investor/partner, raise funds for future expansion or demerge its business into separate entities (like TCI),” it said.

The domestic brokerage firm is of the view that the strategy may lead to a multiple re-rating due to which we maintain our BUY rating on the stock with a revised target price of Rs155.

VRL Logistics: BUY| Target Rs422

VRL Logistics 2QFY18 results were largely in line with estimates with revenue at Rs4.5bn (up 0.4% YoY), EBITDA margins at 12.3% vs. 11.1% YoY & PAT at Rs216m (up 55.8%YoY).

Dolat Capital maintains an Accumulate rating with a target of Rs422. Visibly increased tonnage realisation from increased distance travelled by goods post-GST implementation with the expected rise in demand from e-commerce and FMCG sector.

“The buyback of share adds value to the shareholders. We expect the company to clock revenue growth of 4-7 percent YoY. At current price, it is trading at P/E 27.7x FY19E and EV/EBITDA 13.3x FY19,” said the report.

Allcargo Logistics: BUY| Target Rs190

Allcargo Logistics (AGLL) reported subdued results in 2QFY18. Topline growth was 10 percent YoY primarily led by 15 percent YoY growth in MTO segment, while CFS/P&E segment reported a decline of 10%/29 percent YoY.

“Despite lower operating profit PAT was flattish YoY at INR638mn on lower depreciation and taxes. We have trimmed our estimates to reflect lower profitability assumption. We lower our Mar-18 target to Rs190 (earlier Rs195) based on 15x FY19e EPS,” Antique Stock Broking Limited said in a report.

“The management is actively looking for opportunities in contract logistics business and expects full benefits of GST rollout to be visible in the 1-year time frame,” it said. While MTO segment remains strong, revival in CFS volumes, a pick-up in overall domestic order execution cycle and sustained higher asset utilisation, will add to growth of Indian businesses of CFS and P&E respectively.