Offshore gains

Investments in creating multimodal hubs and offshore focus could boost the hitherto anaemic numbers of Sical Logistics.

Sical Logistics is targeting the offshore business segment to improve its lacklustre performance and margins.

The reason for the focus on offshore are the 20 per cent gross margins which are higher than the single digit margins for the business as a whole which includes the bulk and container logistics segments.

In line with this goal and to expand into the global offshore logistics market, the company recently acquired a Chinese dredger for Rs 100 crore.

Maiden foray The acquisition of the cutter suction dredger is estimated to add Rs 40 crore to the topline annually.

The company is planning to acquire more cutter suction dredgers and anchor handling tugs in the next three years to provide dredging solutions.

Says Sical Logistics' director R Karthik Menon, "Dredging is a lucrative business and with the market seeing a boom this is a key area of growth for the company."

Why companies such as Sical are keen on buying dredgers is apparent due to the returns that the business generates. On an average, a dredger costs upwards of Rs 50 crore with operating margins of 30 per cent.

After the introduction of tonnage tax, the margins at the net level have improved to 20 per cent. The large scale reconstruction of marine and port infrastructure and the reclamation projects in the Gulf, have pushed up the cost of dredging projects by 30 per cent.

To take advantage of the high prices the company's offshore strategy is to acquire recently built vessels and deploy them across a global customer base.

Due to the two year waiting period of dredgers and manufacturers' order books at an optimum level, new dredgers are hard to come by. The strategy for Indian players be it Mercator or Sical is to buy recently built dredgers and lease it out outside the country or to the Dredging Corporation of India which has a lion's share of the country's dredging projects.

The entry into the dredging market combined with Sical's existing offshore activity in North Sea (platform stabilising vehicle for Peterson Oil) and the operations and maintenance services to the ONGC fleet at Bombay High is expected to contribute over 30 per cent of the company's FY2008 revenues.

In addition to its offshore impetus, the company is also restructuring its operations to better manage its infrastructure expansions.

Managing growth While the services business segments (offshore, bulk and container) have been the sources of revenue for Sical, the company is now looking at capital intensive ventures with the formation of Sical Infra Assets (SIAL).

This 100 per cent asset subsidiary is now running seven joint ventures and subsidiaries.

Of these only PSA Sical and Sical Distriparks which runs a container freight station in Ennore generate revenues of Rs 75 crore and Rs 48 crore respectively. The company was not able to give revenue projections for the projects under implementation.

The setting up of container terminals, logistics hubs and container train operations are part of a strategy to offer multimodal logistics solutions to customers within the country. The new company, believes Menon, will create leverage for Sical's traditional services businesses.

SIAL's listing in the near future will not only bring in funds needed to complete the projects but will also unlock value for shareholders. Funding for the projects will also come from internal accruals and proceeds of non-logistics businesses which Sical intends to sell during this fiscal.

Non-logistics operations The company has been focussing on its core logistics business and has hived off the cytozyme, palm oil, refractory and auto component business garnering Rs 91 crore in the process.

The company sold its automotive business this month (August) to TVS Lucas for Rs 15 crore. The remaining non-logistics businesses are in the process of being hived off and this is expected to be completed by early next year.

Says Menon, "We are in the process of demerging the non-logistics business of Sical and hiving them off to another entity, Sicagen." The company will transfer trading, services and coffee plantation undertakings among other businesses to Sicagen India.

Valuations Lack of focus and diversifications in businesses varying from auto components to specialty chemicals to building materials has had a telling effect on its numbers.

While revenues have hovered around the Rs 1000 crore mark, losses in various businesses has dented net margins which have varied between one and five per cent.

With a focus on logistics and higher margin businesses such as offshore contributing a third of revenues, the net margins which are under 4 per cent in FY07 could see an improvement. The company has an ambitious target of quadrupling its turnover to Rs 4,000 crore by 2012.

This means that it has to grow at an annual rate of 32 per cent over the next five years. While the company is on a growth path with its acquisitions and mega expansion plans many of which will start operations in the next fiscal, a target of a billion dollars seems stiff.

Going by its projections, the company should register revenues of Rs 1706 crore for FY09. The current price of Rs 220 discounts the annualised FY08 earnings by 14 times. If earnings growth in FY08 is sustained in FY09, the stock will get a discounting of 10 times.

This compares well with FY09 multiples of its peers ---Container Corporation (16), Allcargo Global (15), Gateway Distriparks (11) and Balmer Lawrie (7).