IPO Note | LLogistics

ogistics
January 22, 2010

Aqua Logistics AVOID

Issue Open: January 25, 2010
Expensive `Aqua’sition Issue Close: January 28, 2010
Aqua Logistic (ALL) is primarily engaged in freight forwarding services with agents
Issue Details
to provide end-to-end solution to its clients. In order to extend its scope of services,
ALL ventured into the Project Cargo and Contract Logistic Segments in FY2007. Face Value: Rs10
The company delivers specific logistic requirements to different industry verticals
Present Eq. Paid up Capital: Rs13.6cr
such as Power, Heavy Engineering, Pharmaceutical, Telecom, Retail, Sports and
Events. ALL is gung ho about India's emergence as a global outsourcing hub where Post-Issue Eq. Paid up Capital: Rs20.1cr
the country's trade would post a CAGR of 8-10% over the next five years.
Issue size (amount): Rs144-150cr**
Lacks Integration Solutions: ALL has been in the low-margin freight forwarding
business since 1999 and has since not scaled up its operations or achieved sectoral Issue Price: Price Band of Rs220-230*
diversification, the way some of its peers have managed. This is evident from the
Promoters holding Pre-Issue: 65.6%
fact that ALL posted Top-line of mere Rs213cr in FY2009 primarily coming from
the MTO Segment. Lack of presence in the entire Logistic value chain and low Promoters holding Post-Issue: 44.3%
global exposure in the MTO Segment compared to its peers will prevent ALL to Note: *Rs5 discount to the issue price for Retail
offer 3PL customised services to the large MNCs and expose it to the unorganised Individual Investor; **at Lower and Upper price
MTO market which is rife with competition and low on Margins. band

Banking on high-Margin PProject

roject Cargo and Contract LLogistic
ogistic Segments: To provide Book Building
value-added services as well as diversify its portfolio, in 2007, ALL ventured into QIBs At most 50%
the high-Margin Project Cargo and Contract Logistics Segment. During FY2009
Non-Institutional At least 15%
and 1HFY2010, ALL derived around 10% of its Income from this Segment. The
company intends to scale up these Segments and expects to garner 20% Revenue Retail At least 35%
contribution over the next two-three years. On the macro front, the Eleventh Five-
Year Plan has earmarked a substantial US $500bn for the Infrastructure Sector,
which will lend a boost to the Logistics Segment pertaining to the Project Cargo. Post Issue Shareholding Pattern

Premium V aluations to listed players: The company has been on high growth
Valuations Promoters Group 44.4%
trajectory since the last three years due to its low base. However, this may not be MF/Banks/Indian
the case going forward especially in the MTO Segment. Nonetheless, we have FIs/FIIs/Public & Others 55.6%
assumed 50% Earnings CAGR over FY2009-12E on account of Margin expansion
due to higher contribution from the Project Cargo and Contract Logistic Segments
and overall improvement in the trade scenario. At the lower price band, the IPO is
available at 13.4x FY2012E EPS, which is in line with Allcargo, but at a premium to
GDL on our estimated FY2012E EPS. We believe ALL should trade at a discount to
Allcargo and GDL given that these players have a proven track record, diversified
portfolio of services and stronger balance sheets. Hence, we recommend an Avoid
on the IPO
IPO..

Objects of the Issue

Particulars Amount (Rs cr)
Purchase of Specialized Equipment 30.5
Expansion and Establishment of Offices 17.1
Proposed Acquisitions 35.0 Param Desai
Additional Working Capital Requirement 45.0 +91 22 4040 3800 Ext: 310
Email: paramv.desai@angeltrade.com
Public Issue Expenses 12.0
General Corporate Purposes 10.4 Mihir Salot
+91 22 4040 3800 Ext: 307
Total 150.0
Email: mihirr.salot@angeltrade.com
Source: Company RHP, Angel Research

Please refer to important disclosures at the end of this report

 Aqua Logistics | IPO Note

Company Background
Aqua Logistics was established in 1999 as a freight forwarding company in Mumbai,
with a range of services including Multimodal Transportation, Contract Logistics,
Regulatory Compliance, Warehousing, Value Added Services and Project Logistics.
Over the years, ALL has graduated from a plain logistics service provider to a full-
scope 3PL (third-party logistics service provider), delivering end-to-end solutions in
the Logistics and Supply Chain domain. The company now focuses on high-end supply
chain consulting, logistics execution and project logistics.

Exhibit 1: Aqua Logistics & Supply Chain Solutions

IT Solutions
Offers IT services and Systems
Implementation across Supply
Chain domain

Contract Logistics Project & Heavy- Lift Logistics

End-to-End solutions involving Covers Odd & Over-sized cargo and

order management, shipment
management, customs
management, warehouse and
inventory management, sales order
management and reverse logistics.
offers Technical transportation planning,
Aqua Logistics feasibility studies through route surveys,
last mile connectivity. Pan-India reach
covering difficult terrains

Supply Chain Consulting

Consulting services for SCM,

Planning & Cost optimization
solutions

Source: Company RHP, Angel Research

Asset Light Model

Until now, ALL followed the strategy of tie-ups with vendors in India as well as globally
for the required machinery and equipment, which are project/assignment specific.
This enabled the company to work on a lighter capital centric model, while keeping
Revenues consistent. However, going forward, it intends to build an asset bank of
critical specialised equipment, which is necessary to qualify and bid for larger projects
in Power & Heavy Engineering space. The company has already invited quotations
worth approx Rs30cr as on September, 2009 for various equipment.

Global Expansion

ALL has an established and strong network of liaisons with international 3PL players
across the globe. These agents have helped ALL to achieve scale without requiring it to
commit substantial capital, as generally witnessed among the global logistics players.
The company, however, has expansion plans of opening four offices in India and an
office in Dubai at a total cost of Rs17cr. The company also intends to raise funds for
proposed acquisitions of companies in South-East Asia. The organic as well as inorganic
expansion would enable ALL to build scale across geographies and bid for critical
and high-Margin supply chain projects globally.

January 22, 2010 2

 Aqua Logistics | IPO Note

Aqua's IPO details

At the upper price band, ALL is planning to raise Rs150cr by issuing around 0.65cr
shares in the price band of Rs220-230 a share. The company is also offering a discount
of Rs5 to Retail Individual investors on the Issue price. The Issue proceeds would be
utilised for construction of facilities for buying specialized equipment, office expansion,
acquisitions and to meet working capital requirements.

Exhibit 2: Shareholding Pattern

PPre
re -Issue
re-Issue Post-Issue
ost-Issue
No. of shares % No. of shares %
Promoters & PPromoters
romoters Group 8,939,967 65.6 8,939,967 44.3
Employees 182,000 1.3 182,000 0.9
Total Public 4,503,303 33.1 11,025,042 54.7
Enam Shares & Securities 1,497,066 11.0 1,497,066 7.4
Carwin Mercantiles 555,000 4.1 555,000 2.8
Shubhkam Ventures 500,000 3.7 500,000 2.5
Supersonic Trading 435,000 3.2 435,000 2.2
Others 1,516,237 11.1 8,037,976 39.9
Total 13,625,270 100.0 20,147,009 100.0
Source: Company, Angel Research

MTO Industry Overview

The Multimodal Transportation of Goods Act, 1993 (MMTG) provides for the regulation
of multimodal transportation of goods from any place in India to any place outside
India involving two or more modes of transport on the basis of a single multimodal
transport contract. Increase in containerisation has resulted in demand for MTO services
due to a number of advantages like reduction in overall transport cost, reduction in
delays, less documentation, smoother and quicker movement and improvement in
quality of services. MTO is a highly fragmented market largely dominated by
unorganised players with less capital intensive and neutral working capital requirements.
There are more than 300 MTOs in India of which 120 are registered with Association
of Multimodal Transporters of India (AMTOI). The process for a typical export activity
flow is where an MTO agent collects cargo from various Custom House Agents (CHA)
or Freight Forwarders appointed by an exporter. The MTO agent then transports the
cargo to the ICD/CFS where loading and unloading of goods takes place. The cargo
is then handed over to shipping line, which is then shipped to the destination port by
shipping line.

An MTO agent delivers cargo to the consignee as per the agreed terms of delivery.
Principal activities of an MTO operator include consolidation and transportation of
cargo as less than container load (LCL) and full container load (FCL). LCL is combination
of collection of cargo from various exporters or importers, whereas FCL is collection of
cargo from one exporter or importer. LCL enjoys better margins than FCL due to
involvement of more customers, which gives better bargaining power to the MTO. In
fact, in the current economic slowdown, there has been a transition of freight from
FCL to LCL as people had started buying in smaller quantities. Success of an MTO
agent depends on its geographical presence and network, strong relationship with
shipping lines, CHA and Freight Forwarders and being present in most parts of the
value chain in the entire logistic chain.

January 22, 2010 3

 Aqua Logistics | IPO Note

Exhibit 3: Export MTO flow

CHA

Exporter Shipping Importer

MTO ICD/CFS
line

Freight CHA/FF/
forwarder MTO

Source: Industry, Angel Research

Other Investment Concerns

Slowdown in trade

Slowdown in the global economy had impacted the entire Logistics Sector in 1HFY2010.
Exports were on a downtrend through a major part of FY2010 on account of sluggish
demand in the West. We, however, expect it to recover towards 2HFY2011E. If the
revival in global trade takes longer than our expectation, it would pose a downside
risk to our Earnings estimates.

Revenue skewed towards top-five clients

The lack of presence in entire logistic value chain and low global exposure in the MTO
Segment compared to peers will prevent ALL from offering 3PL customised services to
large MNC and also expose them to the unorganised MTO market where competition
is high and margins are low. Further, ALL's Top-five clients contributed around 30% of
Revenues in FY2009. Any loss of business from one or more of them may adversely
impact Profitability.

January 22, 2010 4

 Aqua Logistics | IPO Note

Outlook and Valuation

Bullish on Industry…

We believe that with India's GDP growth expected at 7-8% over the next few years as
well as emergence of the country as a global outsourcing hub, India's trade is set to
register high growth. In the current decade so far, cargo traffic has registered 9%
CAGR at major ports. We expect this trend to continue and estimate cargo traffic to
register 8-10% CAGR over the next five years. Further, with GST implementation,
enhanced focus on development of logistics parks and free trade warehousing zones
and the move towards a hub and spoke model in the Infrastructure space are some of
the factors that would facilitate growth of the 3PL industry in India.

Exhibit 4: Cargo traffic at Major Ports

1,200 14

1,000 11.9 12
11.3

9%
10.0 10.4 10
800 9.5

GR
9.0

CA
8

(%)
600
6
400
4
3.4
200 2.3 2.2 2

0 0

FY14E
FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09
Mn Tonnes (LHS) YoY Growth (RHS)
Source: Company, Angel Research

…but, IPO richly priced

The company, which has been on high growth trajectory since the last three years on
a low base, may not extend such growth going forward, especially in the MTO Segment.
However, we have assumed 50% Earnings CAGR over FY2009-12E on account of
Margin expansion due to higher contribution from Project Cargo and Contract Logistic
Segment and overall improvement in the trade scenario. At the lower price band, the
ALL IPO is available at 13.4x FY2012E EPS, which is in line with Allcargo, but at a
premium to GDL on our estimated FY2012E EPS. We believe ALL should trade at a
discount to Allcargo and GDL given that these players have a proven track record,
diversified portfolio of services and stronger balance sheet. Hence, we recommend
an Avoid on the IPO
IPO..

January 22, 2010 5

 Aqua Logistics | IPO Note

Exhibit 5: Key Financials

Y/E March (Rs cr) FY2009 FY2010E FY2011E FY2012E
Net Sales 213.4 309.6 418.6 521.3
% chg 153.3 45.1 35.2 24.5
Net PProfit
rofit 9.8 19.3 27.1 33.0
% chg 74.8 96.3 40.5 21.5
EPS (Rs) 4.9 9.6 13.5 16.4
EBITDA Margin (%) 10.5 12.0 12.7 13.2
P/E (x) 45.1 23.0 16.3 13.4
P/CEPS (x) 40.4 20.4 13.0 9.8
RoE (%) 20.6 16.4 11.7 13.1
RoCE (%) 29.6 19.3 16.8 18.0
P/BV (x) 5.1 2.0 1.8 1.6
EV/Sales (x)* 2.2 1.1 1.0 0.9
EV/EBITDA (x)* 21.1 9.4 7.9 6.6
Source: Company, Angel Research; Note: * Projected valuations are at the lower-end of the price band

Exhibit 6: Relative Valuation

Price Mkt cap RoE (%) EPS (Rs) P/E (x)
Rs/share Rs cr FY11E FY12E FY10E FY11E FY12E FY10E FY11E FY12E
Allcargo# 189 2,493 16.1 17.5 11.4 12.1 14.7 16.5 15.6 12.8
GDL 134 1,526 15.8 17.2 7.1 10.2 12.5 19.0 13.1 10.7
Concor 1260 16,764 20.5 20.1 64.8 73.5 83.3 19.5 17.2 15.1
TCI* 105 895 14.9 NA 5.8 6.5 NA 18.3 16.2 NA
Arshiya* 197 1,221 11.6 16.2 8.3 13.8 23.3 23.7 14.3 8.5
ALL at upper price band 230 463 11.7 13.1 9.6 13.5 16.4 24.0 17.1 14.1
ALL at lower price band 220 443 12.0 13.5 9.6 13.5 16.4 23.0 16.3 13.4
Source: Angel Research; *Bloomberg Consenus; # December Year End

January 22, 2010 6

 Aqua Logistics | IPO Note

Exhibit 7: Profit and Loss Account

Particulars (Rs cr) FY2007 FY2008 FY2009 1HFY2010
Income from Operations 43.0 109.0 213.4 154.0
Other Income 0.0 0.4 0.7 0.1
Total Income 43.1 109.4 214.1 154.1
Expenditure
Operating Cost 33.3 84.3 175.5 126.4
Staff Costs 2.9 7.6 10.6 5.1
Administrative Cost 2.0 4.3 5.0 3.7
Finance Charges 0.8 3.8 4.7 3.0
Depreciation/Amortization 0.1 0.6 1.1 7.1
Total Expenditure 39 101 197 145
rofit before tax
Net PProfit 3.8 8.8 15.8 13.7
Taxation 1.0 3.2 6.0 5.3
Net PProfit
rofit after tax 2.8 5.6 9.8 8.4
Source: Company, Angel Research

Exhibit 8: Balance Sheet

Particulars (Rs cr) FY2007 FY2008 FY2009 1HFY2010
Fixed Assets:
Gross Block 5.5 9.7 14.5 22.6
Less Depreciation 0.3 0.8 2.0 2.7
Net Block 5.2 8.9 12.5 19.9
Capital WIP 0 0 0 0
Net FFixed
ixed Assets 5.2 8.9 12.5 19.9
Investment 0 0 2 5
CA
CA,, LLoans
oans and Advances 19.1 48.6 95.2 97.1
Sundry Debtors 14 33 60 66
Cash and Bank Balances 1 8 11 7
Loans and Advances 5 7 24 24
Liabilities and PProvisions
rovisions 16.0 17.9 54.4 46.8
Secured & Unsecured Loans 9 8 40 33
Current Liabilities and Provisions 7 9 11 9
Deferred tax Liability 0 1 3 5
Net worth 8 40 56 75
Represented by
1. Share Capital 6 11 13 14
2. Reserves 0 22 27 62
Less: P & L Debit Balance 2 6 16 0
Net worth 8 40 56 75
Source: Company, Angel Research

January 22, 2010 7

 Aqua Logistics

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Ratings (Returns) : Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)
Reduce (-5% to -15%) Sell (< -15%)
 Aqua Logistics

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