Rationale

The removal of rating watch follows the completion of GATI Limited's (Gati) acquisition by Allcargo Logistics Limited (ALL). ALL acquired 46.8% stake in Gati at a cost of Rs. 416 crore, which was funded by a mix of debt (Rs. 365 crore) and internal accruals. The transaction was concluded through share purchase from the earlier promoters of Gati, a preferential issue and an open offer. The acquisition of Gati is expected to enhance ALL's presence in land and air, in addition to its established position in ocean freight, resulting in end-to-end transportation services and revenue diversity. The acquisition is likely to improve its strategic relationship with Kintetsu World Express (Japanese freight forwarder that owns 30% stake in Gati's subsidiary Gati-Kintetsu Express Pvt. Ltd.), which is one of the largest customer of ECU Worldwide (ALL's wholly-owned subsidiary). While the acquisition will result in moderation in capital structure, the company is looking to monetise its warehousing assets of logistics parks segment of about 5 million square feet (sq ft). It had entered into a definitive transaction with Blackstone to monetise about 5 million sq ft of completed/under-completion leased warehouse asset and equipment. At present, Blackstone has invested Rs. 238 crore and the transaction would conclude in a phased manner over the next two years, as more warehouses become ready and lease rentals commence. The Negative outlook on the long-term rating considers the slowdown in container trade business, which is likely to affect overall volumes and profit generation. Cargo volumes, at the Indian ports, were already witnessing some slowdown in FY2020 on the back of the US-China trade war and the ongoing economic slowdown. ICRA believes that the Covid-19 pandemic and the resulting Government restrictions exacerbated the woes for cargo movement at Indian ports in the near term, as it will lead to further economic slowdown. This would have an impact on ALL's multimodal transport operations (MTO), container freight stations (CFS) and inland container depots (ICDs) businesses, which accounts for more than 90% of its revenue source. The Negative outlook also factors in the relatively higher time that may be required for Gati's turnaround, considering the economic slowdown and its weakening performance over the last two years, with losses in 9M FY2020. The rating continues to favourably factor in the leadership position of the company (consolidated entity) in the MTO segment, in addition to the strategically located CFS at JNPT, Chennai, Mundra and Kolkata. ICRA notes the healthy financial profile of ALL, as seen from the healthy gearing, interest coverage and robust profitability