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• 15 Jan 2013                          CMP: Rs 56.9                        Small Cap – Mkt Cap 352 crores. 
• Advice:  There is more pain to come. Exit.

Executive Summary

• Arshiya International is a small cap Logistics and Transportation firm. It has a distinct business model and has a good business potential in a large and mostly unorganized sector. Consolidated Revenues, EBITDA and PAT have gained by 27%, 48% and 28% CAGR over 5 years.
• But it has seen a 53% drop in share price in the last 5 trading days. The current woes are due to high debt, Pledged Promoter shares, and worsening bank credit. Following a slowdown in the logistics/ Ex-Im business, the company decided to rationalize employees, but it resulted in a strike and bad headlines.
• It’s a ‘falling knife’, and the share may continue to fall for a few days.
• Investors are advised to stay away from this stock until the stress in the balance sheet is repaired and Free Cash Flows turn positive.

Arshiya International is a Mumbai based small cap Logistics and Transportation firm.

Business Snapshot:

• The consolidated turnover is 1057 crores and Profits 118 cr (FY12). Promoters hold 45%.
• The CMD is Ajay S Mittal, who set up this firm in the year 1999.  It has about 1700 employees.
• The service offerings include freight forwarding, two Free Trade & Warehousing Zones (FTWZ), first and last mile road transportation, a dedicated rail freight infra network, and well located distribution hubs.
• The main business revenue segments can be seen in Fig 1:

•  The two FTWZ are located at – Panvel near Mumbai and Khurja, UP near New Delhi. Deemed foreign territory, the FTWZs offer 24X7 customs clearance and services for imports, exports and re-exports.

Pricing Snapshot

The available 3-year view of the share price of Arshiya shows us:

• Share price has fallen by an annual average of 30% for 3 years.
• The share has been very volatile, as from a initial price of 160, it rose to a high of 362 in Dec 2010; then was at 121 in early Jan 2013, till it started the current sharp fall of 53% in the last 5 days!!

Financial Snapshot

• Consolidated Revenues, EBITDA and PAT have gained by 27%, 48% and 28% CAGR over 5 years.
• P/E has moved in a range of 6-25 times, before the recent crash to the current 2.8 times.
• Dividend has been increasing steadily, and the current 70%, indicates a dividend yield of 2.5%.

Opportunities and Concerns

Opportunities

• In India spending on logistics is at 14% of GDP, much higher than in developed countries where it is 8-9 % of GDP. This presents a massive market opportunity for Arshiya (Source Management Discussion in Annual report) .
• Logistics in India is highly fragmented, and mostly from unorganized sector. So if Arshiya can attract the business by offering better services, stable pricing, multimodal efficiencies and performance guarantees, it can win customers from the unorganized sector and command a price premium.
• In transportation in India, the main pillars are Ships, Rail, Trucks and Airlines. However the integration among these pillars is poor, so a big opportunity is in multi modal infrastructure and door to door delivery services for business.
• Arshiya has certainly executed on a vision of build Infra deliver Value Added Services, and get a good client base. The challenge in logistics is to achieve critical mass and business volumes.

Concerns and Current Crisis

• Overall the import/ export outlook is flat to negative today, as imports & exports are falling.
• Arshiya has built on this business vision, and created good infra by investing heavily in facilities, but is not yet earning much from current operations. The cash flows of the company are poor. See Fig 3.

• The total debt of the company at end of FY12 was 2,195 cr., Debt-Equity was 2.53 times (FY12).
• Promoter shares are encumbered – as of last quarter they held 44.5% of shares. Of this 72% are encumbered/ pledged against loans, i.e. of the entire share capital 32% are pledged by Promoters.
• All this makes the company very fragile financially. If they pay interest on time then it is OK. But the news is that they failed to raise a loan of 80 cr. recently. Now they have decided to stop all further capital investments for 12 months in order to salvage the debt condition.
• Another recent bad news is about employee retrenchments and a company strike. A news article reported that the company is letting go 290 of its 1,700-people workforce mainly on grounds of performance. The move will bring down the company’s wage bill by about 30% to Rs 7 crore from the current Rs 10 crore.
• Some of these sacked employees made public allegations about a ‘Satyam type scam’ in Arshiya. This caused a fall in share prices, which may have triggered a sale of pledged shares. Some FIIs are also pulling out, and a Security firm which had Arshiya on their Model Portfolio, has abruptly stopped coverage.
• From 122 on 8th Jan, it has fallen 53% in 4 days, hitting trading limits every day to fall to today’s 57.

Opinion, Outlook and Recommendation

• The Arshiya stock is collapsing today, and in the short-term the share can keep falling till strong hands like promoters or bargain hunter supporter steps in. One can’t say how much it will fall.
• Once the fall stops, the stock will be very cheap and oversold. It will then be a high risk/ high gain purchase opportunity. But the share recovery period thereafter is also difficult to predict.

• Arshiya is in a terrific industry, has a vision and has shown good growth in the last 5 years. However, its financial plans have not worked out, as Free Cash Flow has been consistently negative.
• The Infrastructure sector is notorious for debt and cash flow issues, and Arshiya is another such situation.
• Investors need to stay away from this stock until the company is able to repair the stressed Balance Sheet, and the debt and Free Cash Flow levels revert to sustainable levels.

Learnings

In investing, once other parameters are in place, and before you invest, look out for two signs of trouble in a company. Both these are available in public reports and websites.

• Are there free cash flows? Corporate profits are no use unless supported with FCF.
• Are some of the  Promoter shares Pledged/ encumbered? This is another sign of financial stress.

JainMatrix Knowledge Base

See other useful reports

• Make Equity Investing less tricky: the JainMatrix Eleven – Link to Report
• Yes Bank: The Brave Warrior of Indian Banks – Link to Report
• Bharti Airtel: This is a year of consolidation – Link to Report
• Adani Port – The Great Australian Adventure – Link to Report
• JainMatrix Large Cap Model Portfolio 2013 – Link to Report

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