While the scope for third-party logistics is robust, maintaining its margins will be a tough act for Aqua Logistics.
Logistic services provider Aqua Logistics is aiming to raise Rs 150 crore from an IPO to fund its expansion plans, working capital requirements and acquisitions. The Mumbai-based company offers multimodal transportation, contract and project logistics primarily to the automotive, pharmaceuticals, retail and heavy engineering segments.
Eyeing the 3PL pie
Aqua Logistics is targeting the third-party (3PL) logistics space which is currently pegged at Rs 5,000 crore and is expected to more than triple to Rs 16,000 crore by 2013-14. The company wants to take advantage of the trend towards the third-party logistics services, where the service provider has the flexibility to mix and match various modes of transport (air, road or sea route) and domain knowledge to maximize efficiency at the lowest cost. In comparison, first party logistics where the manufacturer manages the logistics suffers from high cost operations and lack of knowhow, and second party logistics is driven by truck operators and warehouse owners who are tied to their assets.
Seeking value
A majority of the company’s current revenues are in the multimodal transportation services which offer single-digit margins. However, going ahead, the company hopes that contract and project logistics, which fetch gross margins of 20-25 per cent, will account for about half of its revenues. For example, unlike the plain vanilla multimodal transport services offered by a number of players, the company aims to focus on large, odd-sized, difficult-to-transport orders which can fetch it a higher margin.
| ISSUE DETAILS | |
| Size (Rs cr) | 150 |
| Price band (Rs) | 220-230 |
| Opens on | 40203.0 |
| Closes on | 40206.0 |
| Brickwork Ratings | 40242.0 |
| *excluding discount of Rs 5 per share to retail investors | |
The focus on value-added services, the company believes, will help improve operating profit margins beyond the 12.2 per cent levels achieved in the first half of 2009-10. However, these may not move up in a hurry as the company compromises margins for volumes and revenues—this trend may continue till the time Aqua Logistics achieves a reasonable scale giving it some bargaining power with customers.
| EXPENSIVE LOGISTICS | ||||||
| FY09 in Rs crore | 12 mths ended March 2009 | PE | ||||
| Sales | OPM (%) | NPM (%) | RoNW (%) | FY10E (x) | FY11E (x) | |
| Aqua Logistics | 214.0 | 10.7 | 4.6 | 17.6 | 17.29** | 11.9** |
| Arshiya International | 503.0 | 17.0 | 13.1 | 12.0 | 22.5 | 13.5 |
| Gateway Distriparks | 451.0 | 35.0 | 17.2 | 11.1 | 17.8 | 15.7 |
| Sical Logistics* | 674.0 | 16.0 | 5.3 | 11.0 | – | – |
| Transport Corporation | 1351.0 | 8.1 | 2.5 | 12.1 | 24.6 | 20.5 |
| E: Analysts’ estimates Numbers are consolidated * Sical made losses in June and September quarters ** At the higher end of the price band Source: Capitaline | ||||||
Asset light model
The company is positioning itself as an asset-light third-party logistics provider with a ‘solutions’ approach. Unlike most logistics majors in the country, the company does not own the assets but hires them from various service providers offering it flexibility without the attendant capital costs. However, going ahead the company will be purchasing specialised equipment to the tune of Rs 30 crore from the IPO funds. The management says that the equipment will help the company to meet the bid requirements for logistics services in power projects.
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Conclusion
The company has been grappling with negative cash flow due to unfavourable terms with its suppliers and customers. While debtor days have been hovering over the three month mark, operating cash flows have been in the negative territory between 2004-05 and 2008-09. The company believes that the working capital issues will continue as it is in the growth phase and needs to offer good credit terms to customers to win orders. About a third of the current issue (Rs 45 crore) will be used to fund working capital requirements.
While the scope for 3PL services is good and robust revenue growth for the sector is a given, the company’s ability to scale up its operations to manage large supply-chain projects while competing with Indian and multinational players is a question mark. Even if the company is able to win orders, it will have a difficult time maintaining or increasing margins as larger logistics players such as Allcargo Global are entering the 3PL field.
Though the IPO is priced at a slight discount to much larger peers, there is an element of risk in terms of execution, scale and stiff competition. Investors can skip this one.