Allcargo Logistics' Target Price Cut 26% By Jefferies After Spinoff Of Two Units

Allcargo Logistics Ltd.'s target price was cut 26% to Rs 370 apiece by Jefferies to discount the spinoff of its container freight and real-estate segments effective from fiscal 2023.

However, the brokerage maintains a 'buy' rating on the stock as it values the company at 10.6 times the price-to-earnings multiple for fiscal 2025. 

Jefferies estimates 27% earnings per share at a compound annual growth rate for fiscal 2024–26, according to a note on Thursday.

The two demerged segments—container freight and real estate—accounted for 10% and 3%, respectively, of the fiscal 2022 earnings before interest and tax, the brokerage said.

Allcargo's container-freight-station segment is valued at the same multiple as its peer, Gateway Distriparks Ltd., which trades at 16.3 times the price-to-earnings multiple for fiscal 2022 and implies a market cap of Rs 1,600 crore, it said.

Allcargo's real-estate segment has over 100 acres of development potential at Jhajjar, Haryana, according to the brokerage.

Jefferies said the demerger accounts for 45–60% of the change in EPS for fiscal 2024–25. The balance reflects the larger deterioration in the estimated container trade volumes for the current fiscal and represents a 15% reduction in FY25 EPS for the existing business.

Since hitting their high in September 2021, freight rates have corrected by 80% or more and have remained flat over the past couple of months, causing key management of the international shipping companies to seek an increase in freight rates as they are too low, according to Jefferies. 

Jefferies said 37–38% of Allcargo's international volumes are less than load, limiting the impact of the low freight rates, but the remaining volumes are full-container loads, and hence, margins do have a negative impact.

Factoring in these statistics, Jefferies revised its EBIT margin estimates for FY24–25 from 6.4–6.5% earlier to 5–5.5%.

The management plans to turn around its 2020 acquisition of Gati through digitisation, infrastructure, sales acceleration, operations, and talent. The brokerage expects the EBIT margin to break even in the current fiscal from the previous negative margin.

Shares of Allcargo Logistics are trading 1.59% higher at Rs 284.55 apiece as of 12.24 pm, compared to a 0.63% decline in the NSE Nifty 50.

Out of the five analysts tracking the stock, four recommend a 'buy' and one maintains a 'sell', according to Bloomberg. The average 12-month consensus price target indicates an upside of 25.4%.