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The uptrend in stock prices of logistics companies since the past month seems here to stay. A gradual pick-up in India’s export-import (exim) trade, along with a bullish economic growth outlook for the country, are cited as the key factors to drive this rally.
The International Monetary Fund and World Bank have estimated an identical 5.6 per cent growth rate for India this year and 6.4 per cent in 2015, on the back of renewed confidence in the market due to a series of economic reforms by the new government. Investment banking firm Goldman Sachs also feels India is at the beginning of a new growth cycle, driven by reduced macro imbalances, benign global conditions (lower commodity prices) and structural reforms.
“If economic growth is seen higher in the coming year, naturally the Exim trade is seen picking up further. This hints at an increased volume visibility for logistics companies, something that is going to lend support to the stocks,” said Ronald Siyoni, an analyst with Sharekhan.
India's April-October (first seven months of this financial year) exports have grown six per cent from the corresponding period last year. Imports have risen nearly four per cent, shows data on the ministry of commerce and industry website.
Among logistics companies, the stock price of Blue Dart Express has moved up 18 per cent in the past month, while Gati has gained 23 per cent. Shares of Gateway Distriparks have risen six per cent, with its recently listed subsidiary, Snowman Logistics, gaining by a similar percentage. AllCargo shares have moved up eight per cent.
Ahead
Noting the growth opportunity for the country, analysts said the domestic logistics sector is set to mature. At present, the sector is unorganised and underutilised.
“This time, the demand (for logistical services) is real and is seen sustaining. Due to this, small players might not be able to handle the volume, while large players will need additional leg to take advantage of the opportunity. This could lead to consolidation or partnership deals in the sector in the coming months,” said S Krishnakumar, head of equity with Sundaram Mutual Fund.
Mahindra Logistics, an unlisted company and one of India's leading third-party logistics companies, with annual revenue close to Rs 2,000 crore, recently partnered with much smaller Indian Vehicle Carriers to form a new entity. This would allow the former to have a pan-India presence, linking clusters of production and consumption of automobiles. The new entity would design car carriers to serve automobile and two-wheeler original equipment makers, said Mahindra.
"The main reason behind this partnership was that Mahindra Logistics would get direct access to assets. It will help us enhance our services," said Sushil Rathi, senior vice-president. Funding is another key element to help the sector expand. Fund managers say buoyant stock prices could augur well for the listed entities, as these would be in a better position to approach the market to raise money or even seek bank debt to scale up their businesses to meet the expected demand.
"Given the positive outlook for the economy and expected increase in industrial activity, there certainly might be a pick-up in loan exposure to this sector," said R K Bansal, executive director at IDBI Bank. "Currently, banks do not have much exposure here, as it is an underutilised sector. Though the amount of business growth will vary among companes, depending upon reach and services for the market, technological advancement is something the sector is poised for, said sectoral officials.
“ There is also a strong possibility of more foreign investment in the sector, more for the technological side. That might entail joint ventures or even technological collaboration agreements,” said Krishnakumar of Sundaram MF.
Logistics cannot be discussed without mentioning e-commerce, one of the catalysts for growth here. Sector officials feel e-commerce will continue to witness growth, given the internet penetration and spending power in urban areas, along with customer willingness to experience shopping online, pushing existing logistics companies to explore this new arena of business.
“We are getting into a dedicated arm for e-tailing sometime early FY16. Discussion for this is on at the board level. We are new in this segment and so are going to invest in all resources like technology, people and back-end, and will be raising funds in a combination of debt and equity,” said Areef Patel, vice-chairman of 50-year old Patel Integrated Logistics. One of the oldest entities in this sector, it had Rs 550 crore of revenue last year. The cold chain business is another area where not many have a presence. With its importance for reduction in agricultural waste, this is seen as a high-growth area in the coming months, said sectoral.
Newly listed Snowman, the country's largest cold storage warehousing chain, plans to raise capacity to 90,000 pallets from about 61,000 at present.
Other factors
Some near-term glitches are expected to be company-specific. Indian Railways have announced an increase of 25-41 per cent in haulage charges on container trains. This took effect from Friday. The Rail business of Gateway Distriparks will be affected by this. Rail haulage charges are 75-80 percent of the company's overall cost, said analysts. Probability of the much-awaited goods and services tax Bill being introduced in the ongoing session of Parliament have helped push these up. Finance Minister Arun Jaitley is meeting state finance ministers on Thursday to garner support for a Constitution amendment Bill in this regard.
Meanwhile, the high valuations for logistics companies have also been a recent concern. The price-earnings ratio for Gati has more than doubled to 65.42 in the trailing twelve-month (TTM) measure as against the 10-year average price to earnings ratio. Similarly, the P/E ratio of Concor has moved up by 50 per cent to 29.83 in TTM when compared with the 10-year average P/E ratio.
"Given the volume visibility in this sector, valuations may be high but it is surely not a concern. Investors can continue to invest in select stocks like Concor and Gateway Distriparks. We recommend buying in these two stocks,” said Siyoni, the analyst with Sharekhan.
