Shreyas Shipping & Logistics Ltd.

Sector: Logistics CMP: 51.3

Initiating Coverage - STRONG BUY Rating Target: 119.00 Nifty: 5861.10 Date: Oct. 18, 2010

The Company
Shreyas Shipping & Logistics Limited (SSLL) is a logistics company, and part of the Transworld Group of Companies. It is India's first and only container feeder vessel owning and operating company. Its shipping unit comprises charter and feeder services, logistics unit includes shipping part of domestic and regional services and freight forwarding unit includes sea and air services of Haytrans (India) Limited. The Companys business includes ship owning, land transportation, air cargo, feeder services and port agency services. The Companys subsidiaries include Shreyas Relay Systems Ltd (SRSL) and Haytrans (India) Limited. Haytrans (India) Limited, a 51% holding of SSLL is engaged in the field of air cargo freight forwarding. Shreyas Relay Systems Ltd., a 100% subsidiary of SSLL is the surface transport logistics arm of the Company. The company currently provides feeder service in Karachi and on west coast of India and carries EXIM, Domestic and Karachi cargo. The company owns and operates four vessels (one of which is currently chartered) and has plans to buy two more vessels (by end of FY2011) to meet the growing demand.

Risk Return Matrix

Risk

Return

Stock Data
Current Market Cap (mn) 52 week range (`) Bloomberg Reuters BSE NSE No. of Shares (mn) : 1,095 : 59 / 28 : SHREY IN : SRSH.BO : 520151 : SHREYAS : 21.95 mn

Industry Overview
Sea Transportation has several advantages over road. Of the total cargo movement , only 1.5% is carried through coastal transportation and container movement comprise only 0.23%. With northern India identified as major producer and southern India as major consumer, cargo movement along the west coast is expected to boom. Logistic cost in India is almost 13% of the GDP, while cost in developed nations is approximately 7-8%. With road infrastructure growing at a slow pace, sea mode is expected to remain the cheapest mode of cargo movement. The industry also got a shot in the arm with the introduction of the tonnage tax, that is based on vessel tonnage of the company boosting the profits of the company. This gives huge leverage over surface transport to grab market share and makes logistic companies using the land-sea-land model highly attractive. On a macro Level, there is a direct relationship between a countrys GDP and its containerization volume. Indias overall containerization stands at just 28% of that volume. With more private investment in port development expected, companies operating in the coastal business are expected to benefit the most. In fact, it would be key to note that Chinas third largest port throughput is more than the total throughput of all ports operational in India.
Others 25.9%

Shareholding Pattern

FII 0.8%

Promoter 73.3%

Valuation
Price / Earnings for Potential Peer Group (as on 18/10/10) (A) Gati Limited (B) Container Corp. of India (C) Gateway Distriparks Ltd. (D) Average = (A+B+C)/3 (E) Discount = 35% SSL Ltd Net Earnings (FY2011E) M-Cap of SSL Ltd (FY2011E) No. of Shares Potential Price per share (INR) Book Value per share (INR) Current Price per share (INR) Return per share (Potential Upside) : 26.5 : 21.6 : 15.9 : 21.3 : 13.8 : INR 190 mn : INR 2622 mn : 21.95 mn : 119 : 65 : 51.3 : 133%

*Source: Bloomberg, Capitaline, Ideas First Research Analyst: Mayank Saraf mayank.saraf@ideasfirst.in

The Opportunity
Shreyas traditionally had two businesses vessel charter and feeder services. Revenue from these businesses were exposed to fluctuations in international freight and charter rates, which were determined by the Howe Robinson Container Index (HRCI). In late 1990s, when JNPT emerged as a hub port, Shreyas emerged as a premier feeder service provider between JNPT and other smaller ports across India. However, Shreyas Shipping & Logistics Ltd realized the impact of the fluctuation in price realization and formulated a new business model to remain immune to international pricing and generate steady cash flow. It re-positioned itself as a pure Logistics company, in addition to feeder and regional service. The new model is as follows:

Source

Warehouse Client

Land

Trailers Rail

Sea

Container

Land

Trailers Rail

Target

Warehouse Client

At the companys AGM on September 21, 2010 the shareholders approved a capex of Rs.1000 mn for its logistics expansion. Shreyas will acquire two vessels, while SRSL will setup warehouses in 8-10 locations (in India) and acquire trucks and trailers in the next two-three years (10 trailer per quarter). On Rail transport front, Shreyas has a strategic tie-up with Container Corporation of India; a publicly listed Blue-chip Miniratna public sector undertaking under Ministry of Railways; focussing on cargo movement. On Road transport front, the company intends to own over 100 trailers (10 per quarter) to establish complete backward integration. It is also likely to lease additional trailers to meet any shortfall in service. On Air Cargo front, Shreyas subsidiary Haytrans (India) Limited has operations for international air cargo. Two years back, the company entered into strategic tie-up with Hindustan Aeronautical Limited (HAL); a Navaratna Status Public Sector Undertaking under the Ministry of Defence; to utilize its Nasik (Maharashtra) airbase for air cargo movement.

Outlook
Shreyas Shipping and Logistics Ltd., is expected to restructure its business so as to become a fully integrated logistics company, providing door-to-door service to clients for international and domestic cargo. The company has a strong brand recognition and respect among potential clients and peers, because of its leadership in identifying and successfully executing new opportunities. SSLL and SRSL business models complement each other. SSLLs shipping adds value to its logistics business in a way similar to companies using aircrafts for cargo movement. With road transport cost expected to further rise (due to fuel price deregulation) and rail transport (Indian Railways) reaching its capacity bottleneck (due to subsidy on approved goods), coastal transportation seems to be the only cheap alternative available. It cannot be ruled out that, divergence of its shipping and logistics business could help the company unlock the true value of its businesses and maximize shareholders value. On valuation front, the stock is trading at a discount of 27% to its book value. With the company repositioning itself as a logistics firm, we have compared Shreyas Shipping & Logistics earnings against its potential logistics peers to arrive at a fair valuation.

Recommendation
We recommend investors a STRONG BUY for Shreyas Shipping & Logistics Ltd., to benefit from the new business model, which is immune from international shipping prices. The company is likely to unlock shareholder value, once it realigns itself completely as a logistics company and not as a shipping entity. Also, the companys expected capex of Rs.1000 mn to acquire vessels and trailers, so as to establish a completely integrated logistics company, will place it in a strong leadership position in the logistics domain. We expect the vessel order execution to be completed and trailer acquisition to be initiated by Q4FY2011.

Analyst: Mayank Saraf

mayank.saraf@ideasfirst.in

Methodology
Risk Reward Matrix: We use risk reward matrix to recommend companies that are currently a good buy. At times we may find a very good company but it may be trading at very high price, reducing the Reward from investing in it. And at other times we may find an average company available at deep discount, substituting the little risk with higher Reward. We consider the companies risk, potential upside and stocks current market price among others while placing a company in the risk reward matrix. Star Rating: We use star matrix to highlight the inherent strength of the company. We consider the following areas when awarding Star Rating to a company. 1. 2. 3. 4. 5. 6. 7. Investor Friendliness Growth (profit, sales & margins) Management Quality Historical Performance Group Financial Strength Management Aggression and Ability Management Vision

The scale if from 1 to 5 with 5 being the best.

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