Rising demand for logistics will drive Sical

With the Indian economy expected to grow at around 8.5%, the logistics sector, which forms an integral part of this growth story, is expected to grow at 15%-20% over the next few years. The government’s initiatives to increase power generation capacity and develop infrastructure added with the increase in exim trade and offshore exploration activities augurs well for the logistics industry. 

Sical Logistics Ltd (Sical) is one of the country’s leading provider of integrated multi-modal logistics solutions for bulk and containerised cargo and offshore logistics.

Business:
Sical’s core business is logistics contributes around 65% to sales turnover. The company offers services under various segments of bulk logistics, container logistics and offshore logistics.

The bulk logistics division covers port handling, customs house agency and ship agency at all major Indian ports. Its inland operations include trucking and warehousing with 3,000 transport vehicles and around 150 warehouses. Sical is the largest bulk cargo handling service provider in the sub-continent by volume. This division contributes 70% to its revenues.

The container logistics division helps in shipping containers between container terminals (CT), inland container depots(ICD) and container freight stations (CFS). Sical Distripacks, its subsidiary, operates and manages CFS at Vizag, Chennai, Ennore, Noida and Tuticorin while PSA Sical, the company’s JV with Port Authority of Singapore manages CT at Tuticorin.

The offshore logistics division contributes 15% to its annual sales. It offers PSV services to oil exploration companies such as ONGC.  Sical acquired Singapore-based Bergen Offshore Logistics in 2006 to get a global presence in the fast growing offshore segment.

The company is planning to acquire more cutter suction dredgers and anchor handling tugs in the next three years to provide dredging solutions and increase its presence in the high margin, high growth segment.

Non-logistics operations: The company’s non-logistics businesses includes manufacturing and trading building materials, refractories, palm oil, auto components, coffee plantations and vehicles spares. These businesses contribute around 38% to its annual revenues while contribution to the company’s operating margins is only 19%. 

The company has been focusing on its core pure logistics business and has hived off the low-margin, non-core businesses of palm oil, refractory and auto components by selling these. It has also hived off its trading and services business to Sicagen, which will is planning to list on the bourses by June 2008.

Sical Infra Assets Ltd (SIAL) : While the services business segments have been the main source of revenues for Sical, the company is now looking at capital intensive ventures with the formation of SIAL. This wholly-owned subsidiary of Sical bundles the parent’s seven different special purpose vehicles (SPVs) for operating asset-heavy, capital-intensive, longer gestation infrastructure-based businesses. The rationale behind forming SIAL was to promote the longer duration, BOT-type infrastructure business separately from the short cycle, services-oriented businesses, which complements its core service businesses by helping it move up the value chain.

Expansion plans:
Sical, through its SPV Sical Iron Ore Terminals Ltd (SIOT), is developing a Rs 514 crore iron ore terminal project at Ennore port on BOT-basis with revenue-sharing contract.

The first phase is expected to be operational by early FY11 and the second will be completed by FY12. Lesser turnaround time for ships and rail connectivity will may see traffic shifting from the Chennai port to Ennore Port. Revenues expected from this project at its peak capacity are around Rs 200 crore by FY12.

Sical, through its SPVs, has started work on road and rail terminals at the Multimodal International Hub Airport at Nagpur (MIHAN), which is expected to be operational by FY11 and will contribute Rs 50 crore to its revenues.

Sical is developing second container terminal at Chennai though its JV with PSA. This terminal would have an initial capacity of 1.05 million TEUS and would contribute around Rs 90 crore to its revenues from FY11 onwards.

SMART, a SPV of Sical, will operate and manage pan-India container train operations developing rail linked terminals with network of ICDs/CFS forming multi-modal hubs. It has obtained a 20-year licence to run container trains across all sectors of the Indian Railways.

Sical is planning to increase the number of rakes from two at present to seven by Q4FY09 and around 45 in the next five years. This segment would generate business of around R. 100 crore in FY09 and around Rs 250 crore by FY10.

Investment rationale:
Increasing exim trade and growth in containerised and bulk traffic is driven by increased demand for oil and coal and exports of steel and iron ore. Also, heightened oil exploration activities will help Sical’s offshore logistics business significantly.

Government initiatives like development of transport infrastructure, allowing private sector participation in ports and container rail business are some of the other growth drivers for Sical. Business restructuring by hiving off low-margin, non-core businesses and long-term contracts with its customers like ONGC, Tamil Nadu Electric Board for Ennore port project and CWC will provide steady revenues from the company’s logistics business. Sical’s presence in different segments of logistics and infrastructure has further helped the company to derisk its business.

Concerns: Any delay in commissioning of expansion projects, slow growth in container train volumes, change in government policies or economic downturn would affect Sical’s revenues and margins.

Valuations:
Sical has good long-term growth prospects backed by development of various infrastructure projects, robust industry scenario and long-term contracts providing sustainable revenue visibility. Its margins are set to rise as it has hived off low-margin businesses and is concentrating on high-margin, offshore services and infrastructure projects.

Since most of the projects are in the investment phase with major revenues expected only after FY10 onwards, its revenues are expected to grow at 18% over FY08E-FY10E. At CMP of Rs 146.25, it trades at a P/E of 14.82x its FY08 earnings and at 12.1x & 8.38x its FY09 & FY10 earnings respectively.

Disclaimer: The author does not hold any share in the company.