Investment update - Patel Integrated Logistics

I recently picked up a few shares of a logistics company based out of Mumbai - Patel Integrated Logistics. At the current market price of Rs.63, the company is valued at a Mcap of Rs.100 crore (on a fully diluted basis). This for a company that possibly has the widest presence in India, so far as logistics and transportation are concerned.

Patel Integrated Logistics operates a fleet of around 1000 trucks and boasts of a pan-India presence. However, unlike many of the other leading players in the logistics space which provide all kinds of transport facilities - surface, air and sea-based, Patel offered only surface transport services.

It was more of a truck operator.

However, things seem to be changing for the good. The company is taking a lot of initiatives to offer full-fledged logistics services. These include - warehousing, FTL (full truck load), LTD (less than truck load), express delivery services (i.e. door-to-door, godown-to-door pick up and delivery, etc.), among others.

The company recently tied with Ashok Leyland to replace some of its old trucks and further induct new ones (225 trucks in toto). Further, it is also looking to fit vehicle tracking systems in all its trucks, thereby allowing it to track its fleet on a real time basis and optimally utilize trucks, in terms of route deployment and manpower. Each of these initiatives is likely to result in lower costs for the company in the years to come.

The single most important risk with Patel Integrated Logistics is the "Management's ability to Deliver".

However, given its reach and the scalability in the logistics space, Patel Integrated Logistics is an ideal takeover candidate. If the print media is to be believed, two major business houses (Mukesh Ambani-led RIL and the Future Group) were quite keen to takeover this company and the valuations on offer were in the vicinity of Rs.125-150 crore, a good 25-50% above the current levels.

Stock details:

CMP - Rs.63
Mcap - Rs.100 crore (on a fully diluted basis)
TTM Sales - Rs.282 crore
TTM PAT - Rs.5.1 crore
Trailing P/E - 20 times.
Dec'07 sales (y-o-y % change) - 8%
Dec'07 PAT (y-o-y % change) - 38%

While on a relative basis the stock is not inexpensive, it does offer significant upside from current levels, provided the management delivers or sells out to someone like RIL or the Future Group. Even if neither happens, and the company continues to operate at current levels of profitability, the downside could be in the range of 20-25%.

Imp Links:

Patel Integrated Logistics [link]
Patel Retail [link]
Patel Roadways [link]
Quarterly performance [link]

Sector outlook:

- India has one of the largest road networks in the world, carrying nearly 80% of the passenger traffic and 65 % of freight traffic throughout the country.

- Growth in demand for logistics services is directly correlated to the growth of the economy.

- Further, expenditure on logistics services in India amounts to about 13 per cent of the GDP against less than 10 per cent in most developed nations.

- This is largely on account of a grossly underdeveloped infrastructure. With Government's thrust on Infrastructure and development of Roads, the expenditure in this segment is expected to remain robust.

- In its bid to improve this scenario, Government of India has chalked out plans to invest about USD 350 billion in upgrading and creating infrastructure in India.

- This augurs well for logistics service providers in India.

Banks take the hit, say both Chidrambram and Bernanke

Ben Bernanke, the Fed Chairman, made a surprising statement the other day. It reads something like this -

"In my view, we could also reduce preventable foreclosures if investors acting in their own self interests were to permit servicers to write down the mortgage liabilities of borrowers by accepting a short payoff in appropriate circumstances . For example, servicers could accept a principal writedown by an amount at least sufficient to allow the borrower to refinance into a new loan from another source. A writedown that is sufficient to make borrowers eligible for a new loan would remove the downside risk to investors of additional writedowns or a re-default. This arrangement might include a feature that allows the original investors to share in any future appreciation, as recently suggested, for example, by the Office of Thrift Supervision. Servicers could also benefit from greater use of short payoffs, as this approach would simplify the calculation of expected losses and eliminate the future costs and risks of retaining the troubled mortgage in the pool."

Source: [http://bigpicture.typepad.com]
Link to the original article [click here]

This sounds so similar to what Mr.Chidambaram proposed in his Budget Speech for 2008-09. However, in this case, unlike the US, it is the taxpayers money that will be used to make good bank's losses.

The point really is - Are we setting poor precedents, when it comes to public borrowing?

While on this topic you may want to read two insightful articles by Dr.Ajay Shah [link] and Andy Mukherjee [link].

Warren Buffet's Letter to Shareholders (FY2007)

Warren Buffet's Letter to Shareholders for the year ended 2007 is now available. Click here to download. The Iconic investor had yet another year of outperformance. Gain is Berkshire Hathaway's book value amounted to 11.0% in 2007, outperforming the S&P 500 by 5.5%.

Nicco Corporation Scheme of Arrangement

Nicco Corporation released the following announcement to the BSE on 4th Feb.

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Nicco Corporation Ltd informed BSE that the Company has filed a Scheme of Arrangement with the Hon. High Court of Calcutta for transfer of its Cable business, to its wholly owned subsidiary Nicco Cables Ltd. This subsidiary will be convened to a Joint Venture with Prysmian (60% stake in the Joint Venture) a world leader in the energy and telecommunications cables industry with strong market position in higher-added value market segments.

Nicco will retain the remaining 40% in the Joint Venture and will receive a consideration price of Rs 133 crores (subject to adjustments) for the transfer of its cables division. The transaction will also result in, inter—alia, the debt relating to the cables business getting transferred from Nicco to the Joint Venture (subject to Hon. High Court, lenders and CDR approval).

Once the Scheme is implemented, Nicco Corporation Ltd will be a debt-free Company and will be able to employ the consideration from the transaction to aggressively grow its existing Project & Engineering Business in the Infrastructure, Petrochemical and Environmental areas. The current Order Book position of the Project Division is approximately Rs 300 crores and it has more orders in its pipeline, where it has emerged as the preferred L1 Bidder.
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Sounds like a good deal for the existing shareholders. Given that Nicco Corporation, post the Scheme of Arrangement, will have the following characteristics:

- Debt free status
- an EPC business with an order book of over Rs.300 crore
- Cash infusion of Rs.130 crore
- Plenty of 'developable' land in Kolkata, that too are prime locations

Given that most Engg. companies are currently quoting at a Mcap / Sales ratio of anywhere between 2-3 times. If Nicco Corporation were to be quoting at anywhere near that number, the company's mcap could be quoting in the north of Rs.300-350 crore (primarily based on its Engg. business, compared to the current mcap of around Rs.250 crore). In addition, some value will be ascribed to its 40% holding in Nicco Cables (which will be owned and run by Prysmian as per the JV signed between the two companies a few months ago. Personally, I think, the Company is also looking to develop some of the large land it owns in Kolkata. That should provide a further filip to the stock price in the future.

Ofcourse, my argument is based on the following hypothesis:

- the Engg. will be profitable
- the Company will develop its land
- Prysmian will turn around and make Nicco Cables a profitable company

I've written about this company in the past [Link1, Link2 and Link3] and I hold shares of Nicco Corporation, bought at Rs. 24 per share, compared to the CMP of Rs.29.

Indian Mutual Funds sitting on close to Rs.16,000 crore of cash !!

Indian equity mutual funds invested close to Rs.10,000 crore in the last three months ended February 2008 and in all have invested close to Rs.17,000 crore during the first eleven months of the current fiscal.

However, during the comparable period (i.e. Apr'07-Feb'08), they raised assets approximating Rs.33,000 crore.

Result - a net inflow of Rs.16,000 crore. This is a large number considering the fact that equity MFs poured in an equivalent sum over a 11 month period. This provides (hopefully, i.e.) for some sort of cushion to the market on the downside given that global markets (especially the US) are still looking extremely nervous.




Notably, while this figure includes MF's secondary market operations in Feb'08 but does not include funds raised during the month of Feb'08 (by way of NFOs or sale of existing schemes). Further, it also does not include redemption numbers for the month of Feb'08.

I don't the redemption numbers are likely to be significantly large even though NFO figures may surprise on the upside. The NFOs for which data is not yet available are: Lotus Agile Fund, AIG Infrastructure & Economic Reform Fund and Reliance Natural Resources Fund.