February 27, 2008| Logistics

Initiating coverage
Current price Target price
Shreyas Shipping & Logistics (SHRSHI) Rs 80 Rs 130
Potential upside Time Frame
62.5% 12 months
Set to sail higher on multi-modal operations...
OUTPERFORMER
Shreyas Shipping & Logistics, a leading coastal shipping operator, is
transitioning from a pure shipping company to an integrated logistics Analysts’ Names
player. In a bid to de-risk its business from volatile international freight
and charter rates, the company has diversified into domestic logistics. It is Siddhartha Khemka
siddhartha.khemka@icicidirect.com
aggressively adding capacities and now services both the Indian coasts. It
has further set up five warehouses and also has more than 4,000 Ember Pereira
ember.pereira@icicidirect.com
containers which are used for domestic multi-modal transportation.

ƒ Transitioning from pure shipping to logistics player Sales & EPS trend
In order to hedge against the cyclical feature of the shipping sector, three 350 12
300 10
years back Shreyas chalked out a business model focusing on logistics 250 8
business, and forayed into related segments in the maritime sector to create 200

Rs .
Rs cr
6
150
a value chain. It now transports cargo within India using a multi-model 100 4

methodology (a combination of land, sea, and land network). 50 2

0 0
FY06 FY07 FY08E FY09E
ƒ Integrated logistics provider Net Sales EPS (RHS)
Shreyas is a dominant container ship operator, owning eight container
vessels. It provides end-to-end logistics solutions for exporters and Stock metrics
importers. It operates coastal container ships, provides multi-modal logistics Promoters holding 73.29%
and feeder services, aggregation and de-aggregation of cargo, handling, Market Cap Rs 280 crore
consolidation, warehousing and distribution services. 52 Week H/L 158 / 65
Sensex 17,806
ƒ Vessel addition to enhance capacity Average volume 53,660
The company plans to spend around Rs 210 crore over the next two years,
including Rs 155 crore in FY09 on acquisition of two vessels and containers.
This will increase its TEU (Twenty-foot equivalent unit, standard size of a Comparative return metrics
container) capacity by 23.55% (from 5,927 TEUs in FY07 to 9,048 TEUs in Stock return 3M 6M 12M
FY09E). We expect this enhanced capacity to boost revenue at a 28.71% Shreyas Shipping -19% -13% -21%
CAGR over FY07-09E. TCI -17% 1% 67%
Gateway Distriparks -17% -6% -16%
Valuations Varun Shipping 4% 29% 30%
At the current price of Rs 80, the stock trades at 10.81x its FY08E EPS of Rs Mercator Lines -30% 62% 133%
7.40 and 8.63x FY09E EPS of Rs 9.27. On an EV/EBIDTA basis, the stock is
available at 9.40x FY08E earnings and 7.47x FY09E earnings. As it
transforms into a logistics company, we believe the stock should see as a
major re-rating. We rate the stock an OUTPERFORMER with a price target of
Rs 130, at 14x FY09E earnings.
Exhibit 1: Key Financials Price trend
300
Year to March 31 FY06 FY07 FY08E FY09E
Revenue (Rs crore) 141.36 179.11 221.39 290.56 250
Absolute Sell
Net Profit (Rs crore) 35.23 31.19 25.87 32.40
Share Price (Rs)

200
EPS (Rs) 10.08 8.92 7.40 9.27
150 Target Price
P/E (x) 7.94 8.97 10.81 8.63
Price/Book (x) 1.58 0.87 0.77 0.64 100
EV/EBIDTA (x) 6.93 11.02 9.40 7.47 50
Absolute Buy
NPM (%) 24.28 16.88 11.21 10.95
0
RoNW (%) 23.39 19.07 14.12 15.47
Apr-06

Feb-07

Apr-07

Feb-08
Jun-06

Aug-06

Oct-06

Dec-06

Jun-07

Aug-07

Oct-07

Dec-07

RoCE (%) 21.64 10.83 11.25 11.86

Source: ICICIdirect Research
ICICIdirect | Equity Research
1|Page
Company Background Share holding pattern
Share holder % holding
Shreyas Shipping & Logistics is a multi-modal logistics and Promoters 73.29
shipping company. Set up in 1994 to own and operate vessels Institutional investors 2.58
for containers feeder operations between Indian ports and
Other investors 6.21
international container trans-shipment ports, it has now
diversified into providing logistics, transportation, warehousing, General public 17.92
distribution and small parcel services. Shreyas Relay Systems
Ltd, a wholly-owned subsidiary, takes care of the landside Promoter & Institutional holding trend
operations. Shreyas is a part of Transworld Group, which has 25
years of experience in the shipping industry. It is the first Indian 80 73.3 73.3 73.3 73.3
private sector container feeder operator and first Indian 70
shipping company to be accorded the ISO 9002 certification for 60
container ship and feeder service management. The company 50

(%)
currently owns and operates eight container vessels. 40
30
20 11.8
10 3.0 3.0 2.6
0
Q4FY07 Q1FY08 Q2FY08 Q3FY08
Promoters Institutional investors

Exhibit 2: Revenue model – Consolidated (FY07)

Shreyas Shipping & Logistics

Total Revenues: Rs 179.11 crore

Shipping Logistics
46.43% 53.57%

Charter Feeder Domestic Land-sea-

land transport

PBIT margins PBIT margins

20.26% 12.72%

Net profit margins

9.0%
Source: Company, ICICIdirect Research

2|Page
INVESTMENT RATIONALE

Transitioning from pure shipping to logistics player

Revenues from shipping are driven by international markets (the Baltic freight
index and the international market supply and demand economics of container
vessels). The shipping business is cyclical in nature. In order to hedge against
Shreyas’ transitioning from
this cyclical feature, three years back Shreyas chalked out a business model shipping to logistics will de-risk
focusing on logistics business, and forayed into related segments in the its business
maritime sector to create a value chain. Currently, apart from shipping, the
company is involved on transportation, handling and distribution of cargo from
the northern and the southern regions of India using an inter-modal
methodology (a combination of land, sea, and land network).

Exhibit 3: Change in revenue mix from FY07 to FY09E

100%

28.03
80% 39.65 37.95 34.98

18.40 8.02
60%
10.53

31.47
40%
Contribution from logistics to
53.57 51.52 57.00 increase from 28.88% in FY06 to
20% 55.81% in FY09E
28.88

0%
FY06 FY07 FY08E FY09E
Logistics Charter Feeder
Source: Company, ICICIdirect Research

As a result of this transformation, the revenue contribution from logistics

increased from 28.88% in FY06 to 53.57% in FY07. The contribution to overall
profit also increased to 52.64% from 27.04% over the same period. We expect
revenue contribution from logistics to further increase to 55.81% by FY09E.
The company expects the logistics division to contribute around 75% of the
total operating income in future.

Shreyas has been able to use the unutilised capacity on the feeder services to Revenues from coastal shipping
develop its coastal shipping business. While charters help lock in revenues, are higher and stable compared
they move in line with global freight rate movements. Feeder services provide to feeder and charter services
relatively higher revenues but carry the risk of non deployment. Coastal
shipping is currently a small but fast growing business and offers stable and
significantly higher revenues per TEU day. (TEU: Twenty-foot equivalent unit,
standard size of a container).

[Feeder vessels are ships of small sizes with an average capacity of carrying
500-1000 TEUs. A feeder ship calls at less busy ports or ports inaccessible to
deep-sea vessels and carries cargo to major loading port for transhipment.
Feeders collect containers from different ports and transport them to central
container terminals where they are loaded to bigger vessels. In that way the
smaller vessels feed the big liners, which carry thousands of containers.]

3|Page
Integrated logistics provider
Shreyas provides end-to-end logistics solutions for exporters and importers. It
operates coastal container ships, provides logistics and feeder services,
aggregation and de-aggregation of cargo, handling, consolidation,
warehousing and distribution services. Shreyas Relay Systems is dedicated
towards offering focused terrestrial logistics services including mid-size parcel
services. The subsidiary carries on business of domestic multi-modal
transportation, international liner services and supply chain management.

Exhibit 4: Domestic multi-modal logistics model (land-sea-land)

A multi-model transportation
model to provide faster and
cheaper logistics solutions

Source: Company, ICICIdirect Research

Shreyas is the dominant container ship operator in India, owning eight It is a dominant coastal
container vessels. It has an impeccable record of 15 years during which it has container ship operator with
built relationships with main line operators (MLO), which gives it a strong over 15 years of experience
competitive advantage in the coastal feeder services.

4|Page
 ƒ Haytrans acquisition to augment logistics business
Shreyas Shipping acquired a controlling stake in Haytrans Ltd in September Acquisition of Haytrans will
2007. It picked up 51% of the shareholding from the promoters, Hayleys Group increase reach and provide a
of Sri Lanka, while the remaining shareholding is with Shreyas’ parent flip to logistics business
Transworld.

Haytrans has a presence in international freight forwarding with a worldwide

network of about 20 offices including China and Russia. The company also has
a presence in sea freight and customs house brokerage, besides warehousing
and distribution. It had a turnover of over Rs 50 crore and a PAT of around Rs
2 crore in FY07. We believe that this acquisition will compliment Shreyas’
logistics business resulting in synergy in operations apart from allowing it to
spread its wings to international locations.

• Vessel addition to increase capacity by 23% in 12 months

Shreyas plans to spend around Rs 210 crore over the next two years, including
Rs 155 crore in FY09 on acquisition of two vessels and containers. This will
increase its TEU capacity by 23.55% (from 5,927 TEUs in FY07 to 9,048 TEUs
in FY09E). We expect this to drive revenue by 28.71% CAGR over FY07-09E.

The company currently owns eight vessels with size ranging from 513 TEUs to
1,208 TEUs with a total capacity of around 6,948 TEUs. Out of these, two have
been given on fixed charter while the balance are operational on freight
services i.e. feeder and domestic logistics. Of these, Shreyas has deployed
four vessels in the Western coast and the other two on the Eastern coast of
India.

Exhibit 5: Shreyas fleet chart (TEU capacity)

Vessel Name FY06 FY07 FY08E FY09E
OEL Patriot * 1074
OEL Vision # 349
OEL Aishwarya 513 513 513 513 Fleet addition to increase TEU
Orient Independence 513 513 513 513 carrying capacity at 23.55%
OEL Victory 569 569 569 569 CAGR over FY07-09E
OEL Strength 1152 1152 1152 1152
OEL Shreyas 1208 1208 1208
OEL Trust 1050 1050 1050
OEL Express 922 922 922
New ship 1021 1021
New ship 1050
New ship 1050
Total Capacity (TEU) 4170 5927 6948 9048
Source: Company, ICICIdirect Research

The key advantage which Shreyas enjoys is that depending on the market
scenario, it has the flexibility to interchange its vessel deployment.

5|Page
Aggressive expansion into warehousing space
Shreyas has also forayed into warehousing business, with over 50,000 sq
metres of covered and 50,000 sq metres of open warehousing space. The
company further plans to exploit opportunities in cold storage services,
logistics of agro-products, break-bulk cargo and liquid logistics. It has set up
warehousing and logistics facilities at Kandla, Ahmedabad, Cochin, Tuticorin, Warehousing capacity to
and New Delhi. It plans to add similar facilities in Mumbai, Bangalore, Chennai supplement logistics revenues
and Calcutta. With these additions, we believe the company would become a
pan-India player and would be able to service cargo almost on every location
in India.

The company currently has more than 4,000 containers which are used for the
domestic multi-modal transportation. Of these it owns around 60% while the
rest are leased. Shreyas has also made investments in new containers to cater
to the growing domestic trade.

These logistic parks will enable it to create a synergy to its domestic logistics
business and avoid using the high-cost third party-owned facilities. These
warehouses will help it expand its multimodal logistics operations which
includes, among other things, aggregation, consolidation and segregation of
cargo and value addition. This will enable the company to provide end-to-end
and transform itself from shipping to logistics.

6|Page
Containerised traffic on a high growth trajectory
India's increasing international trade has lead to a 10% growth in export-import
volumes over FY02-07. Simultaneously container traffic has increased at a
faster pace (14.5% CAGR over the same period). However, the level
Growth in movement of
containerisation in India is still low. According to INSA (Indian National Ship-
containerised cargo in India to
owners Association), about 70% to 80% general cargo is transported through benefit Shreyas
containers. In India, the figure still hovers around 50%, which leaves ample
scope to enhance container traffic in India. The IPA (Indian Port Association)
expects an 18% CAGR in container cargo from 5.4 million TEUs in FY07 to 12.5
million TEUs in FY12. This growth is expected to benefit players like Shreyas
that specialise in container logistics.

Exhibit 6: Growth in containerised cargo in India

14

12

10
16% CAGR
TEUs in million

0
FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY12E

Source: IPA, ICICIdirect Research

On account of geographical spread of India and restrictions due to lower draft

at other ports, 90% of the container trade depends on feeder services.
Container traffic needs to be transported from small ports to major ports which
are well connected to mainline operators. Bigger shipping lines call only the
large ports and depend on feeder services to connect to other smaller ports,
thus promising a huge market for Shreyas.

7|Page
RISK & CONCERNS

Delay in acquisition or loss of vessel

Any delay in acquisition of ships as planned could impact the revenues and Delay in acquisition or loss of
profitability of the company. The vessels, when plying in water, are subject to vessel to impact revenue
adversely
a number of risks including need for emergency repairs, damage to
machinery. Also, the vessel is subject to the risk of drowning and / or getting
severely damaged due to marine perils or acts of nature.

Rising fuel prices

Fuel expenditure constitutes a significant portion of the total cost of operation
of a ship. In case of coastal services for logistics, the competition from road
and rail segments will have greater impact of increasing fuel costs. Any
significant increases in fuel costs could result in a potential drop in demand for
services which in-turn can impact revenues and profit margins. In the event of
a fuel supply shortage or higher fuel prices, certain services may have to be
curtailed affecting revenues.

Fluctuations in charter rates Fluctuations in international

Charter revenues may fluctuate from one contract to another depending on charter hire rates to affect
supply and demand of similar tonnages at the time of renewal. Decline in revenues
global charter rates and market conditions could affect Shreyas’ revenues
under this head.

Delay in infrastructure development plans

The railways, road network and ports play a major role in the logistic chain.
Bottlenecks in the infrastructure system if continued to exist on account of
delay in implementing the proposed development plans including the
development of ports (major & minor ports) would reduce efficiency and
therefore hamper the company’s profitability.

Governmental regulations
The shipping industry in India is subject to extensive regulation. Changes in
regulations imposing additional restrictions on operations could increase the
operating costs and result in service delays and disruptions. The Director
General of Shipping regulates the owning and operation of vessels in the
country. Any changes in guidelines issued by it may affect the company’s
ability to generate revenues and profits. Also, any increase in charges such as
port charges, and other charges imposed by Tariff Advisory for Major Ports
(TAMP), etc. could have an adverse impact on the profitability margins.

8|Page
FINANCIALS

Vessel additions to drive revenue growth

Shreyas added one container vessel in the current year and plans to add two
more in FY09. With these additions, its total container capacity will increase
from 5,924 TEUs at the end of FY07 to 9,048 TEUs, a 23.55% CAGR increase.
On back of this capacity expansion, we expect a 27.36% CAGR in revenues
from Rs 179.11 crore in FY07 to Rs 290.56 crore in FY09E.

Exhibit 7: Robust growth in revenues

350

300

250
124.94
Revenues to grow at 27.36%
(Rs crore)

200
107.33
CAGR over FY07-09E on
150
83.16
back of vessel additions
100 100.40 165.61
50 95.95 114.06
40.78
0
FY06 FY07 FY08E FY09E
Logistics Shipping
Source: Company, ICICIdirect Research

Net profit to stabilise, but margins to decline

The company started the coastal feeder services on the eastern route in FY08
with 2 vessels of smaller capacities (513 TEUs). This operation is likely to
stabilise within 2-3 years of operations. Currently this service is witnessing
only 40% capacity utilisation compared to around 70% - 75% utilisation in the
western coast. We expect this to impact profitability as cost of running the
service remains same, while the revenues booked will be low. As a result the
net profit is likely to dip to Rs 25.87 crore in FY08E, down from Rs 31.19 crore
in FY07. We further expect the margins to decrease as the fuel cost, which
accounted for around 20% of net sales in FY07 is likely to increase given the
current hike in global oil prices.

Exhibit 8: Net profit and NPM trend

40 30

25 Net profit margin is

35
expected to decrease due to
20 cost pressure from high fuel
30
(Rs crore)

prices and lower capacity

15
(%)

utilisation on the eastern

25 coast
10

20
5

15 0
FY06 FY07 FY08E FY09E
Net profit NPM (%) (RHS)
Source: Company, ICICIdirect Research

9|Page
VALUATIONS
At the current price of Rs 80, the stock trades at 10.81x its FY08E EPS of Rs
7.40 and 8.63x its FY09E EPS of Rs 9.27. On an EV/EBIDTA basis, the stock is
Logistics companies have
available at 9.40x FY08E earnings and 7.47x FY09E earnings. We believe that
higher valuations (P/E of 14-
the company is likely benefit from the increased domestic trade and cargo
30x) as compared to pure
movement through the coastal shipping route. As Shreyas transforms into a shipping companies (P/E of
logistics company, we believe the stock should see as a major re-rating. Given 3-6x)
its leadership position in the container feeder segment, and foray into
domestic logistics business, the recent fall in stock prices have brought the
stock at attractive valuations. We rate the stock an OUTPERFORMER with a
price target of Rs 130, at 14x FY09E earnings.

Exhibit 9: One-year forward rolling P/E Band

300

250
Share Price (Rs)

200
22x
150 18x

100 14x Transformation from shipping

into logistics should see a
10x
50
major re-rating and increase
valuations
0
Apr-06

Feb-07

Apr-07

Feb-08
Jun-06

Aug-06

Oct-06

Dec-06

Jun-07

Aug-07

Oct-07

Dec-07

Source: ICICIdirect Research

Exhibit 10: Peer comparison (Estimates for FY09E)

Price Market Cap Revenue PAT EPS P/E EV / ROE ROCE
Company (Rs) (Rs cr) (Rs cr) (Rs cr) (Rs) (x) EBITDA (%) (%)
Shreyas Shipping 80 280 291 32 9.3 8.6 7.5 15.5 11.9
TCI 106 716 1391 28 3.6 29.1 11.7 8.2 9.5
Gateway Distriparks 110 1016 354 93 8.1 13.6 8.9 12.9 13.7
Varun Shipping 76 1140 890 332 22.1 3.4 5.0 27.7 16.9
Mercator Lines 87 1646 1682 353 14.6 5.9 7.2 28.4 14.3
Source: ICICIdirect Research Estimates

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FINANCIAL SUMMARY (Consolidated)
Profit and Loss Account (Rs Crore)
Year to March 31 FY06 FY07 FY08E FY09E 27.36% CAGR in revenue over
Net Sales 141.36 179.11 221.39 290.56 FY07-09E
Employee cost 13.63 15.01 19.51 23.41
Operating expenses 79.22 116.86 143.91 187.41
General & administrative expenses 5.27 8.38 11.07 13.07
Total expenditure 98.13 140.25 174.49 223.90
EBIDTA 43.24 38.86 46.91 66.66
Other income 3.73 5.71 9.32 5.38
Depreciation 8.66 9.63 15.48 19.82 Low interest cost as most of
Interest 1.93 4.86 11.63 15.01 the borrowing done during
PBT 36.38 30.08 29.12 37.21 the end of the financial year
Taxation 1.15 2.97 3.26 4.80
Extraordinary item 0.00 4.08 0.00 0.00
9.32% CAGR in net profit
Net profit 35.23 31.19 25.87 32.40
over FY07-09E
OPM (%) 30.58 21.70 21.19 22.94
NPM (%) 24.28 16.88 11.21 10.95
Shares O/S (Crore) 3.50 3.50 3.50 3.50
EPS (Rs) 10.08 8.92 7.40 9.27

Balance Sheet (Rs Crore)

Year to March 31 FY06 FY07 FY08E FY09E
Sources of funds
Equity Share Capital 34.96 34.96 34.96 34.96
Reserves & Surplus 115.63 128.64 148.29 174.47 Increase in loans on
Secured Loans 26.47 158.93 178.93 230.93 account of high capex
Deferred Tax Liability 0.22 0.51 0.91 1.71
Current Liabilities & Provisions 12.74 19.97 31.88 38.43
Total Liability 190.02 343.01 394.97 480.50
Application of Funds Increase in net block due to
Net Block 88.25 217.56 262.08 397.26 acquisition and vessel
Capital WIP 25.18 51.10 50.00 0.00 addition
Investments 43.22 20.97 16.47 11.97
Cash 6.63 10.31 17.68 12.53
Trade Receivables 14.28 21.27 29.72 39.01
Loans & Advances 12.45 21.80 19.01 19.73
Total Asset
190.02 343.01 394.97 480.50

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Cash Flow Statement (Rs Crore)
Year to March 31 FY07 FY08E FY09E
Opening Cash Balance 6.63 10.31 17.68
Profit after Tax 31.19 25.87 32.40
Misc Expenditure w/off -0.01 0.00 0.00
Dividend Paid -6.72 -6.22 -6.22
Depreciation 9.65 15.48 19.82
Provision for deferred tax 0.29 0.40 0.80
Cash Flow before WC Changes 34.39 35.52 46.81
Net Increase in Current Liabilities 7.23 11.91 6.55
Net Increase in Current Assets 16.32 5.67 10.01
Cash Flow after WC Changes 25.29 41.77 43.34
Purchase of Fixed Assets (164.87) (58.90) (105.00)
(Increase) / Decrease in Investments 22.25 4.50 4.50
Increase / (Decrease) in Loan Funds 132.46 20.00 52.00
Increase / (Decrease) in Equity Capital -11.45 0.00 0.00
Net Change in Cash 3.68 7.37 (5.16)
Closing Cash Balance 10.31 17.68 12.53

Ratio Analysis
Year to March 31 FY06 FY07 FY08E FY09E
EPS (Rs) 10.08 8.92 7.40 9.27
Book Value (Rs) 50.65 92.26 103.60 125.97
Enterprise Value (Rs Crore) 299.50 428.28 440.91 498.07
EV/Sales (x) 2.12 2.39 1.99 1.71
EV/EBIDTA (x) 6.93 11.02 9.40 7.47
Market Cap to sales (x) 1.98 1.56 1.26 0.96
Price to Book Value (x) 1.58 0.87 0.77 0.64
Operating Margin (%) 30.58 21.70 21.19 22.94 Net profit margin to dip on
Net Profit Margin (%) 24.28 16.88 11.21 10.95 account of high fuel prices
and increase in interest and
RoE (%) 23.39 19.07 14.12 15.47
depreciation of new vessels
RoCE (%) 21.64 10.83 11.25 11.86
Debt/ Equity (x) 0.18 0.97 0.98 1.10
Current Ratio 2.62 2.67 2.08 1.85
Debtors Turnover Ratio 9.90 8.42 7.45 7.45
Fixed Assets Turnover Ratio 1.60 0.82 0.84 0.73

Du Pont Analysis
PAT / PBT 0.97 1.04 0.89 0.87
PBT / EBIT 0.84 0.77 0.62 0.56
EBIT / Sales 0.31 0.22 0.21 0.23
Sales / Assets 0.74 0.52 0.56 0.60
Assets / Equity 1.26 2.10 2.16 2.29
RoE 23.39 19.07 14.12 15.47

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RATING RATIONALE

ICICIdirect endeavours to provide objective opinions and recommendations. ICICIdirect assigns ratings to its
stocks according to their notional target price vs. current market price and then categorises them as
Outperformer, Performer, Hold, and Underperformer. The performance horizon is 2 years unless specified and
the notional target price is defined as the analysts' valuation for a stock.

Outperformer: 20% or more;

Performer: Between 10% and 20%;
Hold: +10% return;
Underperformer: -10% or more.

Harendra Kumar Head - Research & Advisory harendra.kumar@icicidirect.com

ICICIdirect Research Desk,

ICICI Securities Limited,
Ground floor, Mafatlal House,
163, H.T. Parekh Marg,
Backbay Reclamation,
Churchgate, Mumbai – 400 020

research@icicidirect.com

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