February 27, 2008| Logistics

Initiating coverage

Shreyas Shipping & Logistics (SHRSHI)
Set to sail higher on multi-modal operations...
Shreyas Shipping & Logistics, a leading coastal shipping operator, is transitioning from a pure shipping company to an integrated logistics 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 aggressively adding capacities and now services both the Indian coasts. It has further set up five warehouses and also has more than 4,000 containers which are used for domestic multi-modal transportation.

Current price Rs 80 Potential upside 62.5%

Target price Rs 130 Time Frame 12 months

OUTPERFORMER
Analysts’ Names

Siddhartha Khemka Ember Pereira

siddhartha.khemka@icicidirect.com ember.pereira@icicidirect.com Sales & EPS trend
350 300 250 200 150 100 50 0 FY06 FY07 Net Sales FY08E EPS (RHS) FY09E Rs cr 12 10 6 4 2 0 Rs . 8

Transitioning from pure shipping to logistics player
In order to hedge against the cyclical feature of the shipping sector, three years back Shreyas chalked out a business model focusing on logistics business, and forayed into related segments in the maritime sector to create a value chain. It now transports cargo within India using a multi-model methodology (a combination of land, sea, and land network).

Integrated logistics provider
Shreyas is a dominant container ship operator, owning eight container vessels. It provides end-to-end logistics solutions for exporters and importers. It operates coastal container ships, provides multi-modal logistics and feeder services, aggregation and de-aggregation of cargo, handling, consolidation, warehousing and distribution services.

Vessel addition to enhance capacity
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 container) capacity by 23.55% (from 5,927 TEUs in FY07 to 9,048 TEUs in FY09E). We expect this enhanced capacity to boost revenue at a 28.71% CAGR over FY07-09E.

Stock metrics Promoters holding Market Cap 52 Week H/L Sensex Average volume Comparative return metrics Stock return 3M Shreyas Shipping -19% TCI -17% Gateway Distriparks -17% Varun Shipping 4% Mercator Lines -30%

73.29% Rs 280 crore 158 / 65 17,806 53,660

Valuations
At the current price of Rs 80, the stock trades at 10.81x its FY08E EPS of Rs 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 Year to March 31 Revenue (Rs crore) Net Profit (Rs crore) EPS (Rs) P/E (x) Price/Book (x) EV/EBIDTA (x) NPM (%) RoNW (%) RoCE (%) FY06 141.36 35.23 10.08 7.94 1.58 6.93 24.28 23.39 21.64 FY07 179.11 31.19 8.92 8.97 0.87 11.02 16.88 19.07 10.83 FY08E 221.39 25.87 7.40 10.81 0.77 9.40 11.21 14.12 11.25 FY09E 290.56 32.40 9.27 8.63 0.64 7.47 10.95 15.47 11.86
300 250 Share Price (Rs) 200 150 100 50 0 Apr-06

6M -13% 1% -6% 29% 62%

12M -21% 67% -16% 30% 133%

Price trend

Absolute Sell Target Price

Absolute Buy
Apr-07 Feb-07 Feb-08

Jun-06

Aug-06

Jun-07

Aug-07

Oct-06

Dec-06

Oct-07

ICICIdirect | Equity Research

Source: ICICIdirect Research

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Dec-07

Company Background
Shreyas Shipping & Logistics is a multi-modal logistics and shipping company. Set up in 1994 to own and operate vessels for containers feeder operations between Indian ports and international container trans-shipment ports, it has now diversified into providing logistics, transportation, warehousing, distribution and small parcel services. Shreyas Relay Systems Ltd, a wholly-owned subsidiary, takes care of the landside operations. Shreyas is a part of Transworld Group, which has 25 years of experience in the shipping industry. It is the first Indian private sector container feeder operator and first Indian shipping company to be accorded the ISO 9002 certification for container ship and feeder service management. The company currently owns and operates eight container vessels.

Share holding pattern Share holder Promoters Institutional investors Other investors General public Promoter & Institutional holding trend
80 70 60 50 40 30 20 10 0 73.3 73.3 73.3

% holding 73.29 2.58 6.21 17.92

73.3

(%)

11.8

3.0 Q1FY08
Promoters

3.0 Q2FY08

2.6 Q3FY08

Q4FY07

Institutional investors

Exhibit 2: Revenue model – Consolidated (FY07)

Shreyas Shipping & Logistics
Total Revenues: Rs 179.11 crore

Shipping 46.43%

Logistics 53.57% Domestic Land-sealand transport

Charter

Feeder

PBIT margins 20.26%

PBIT margins 12.72%

Net profit margins 9.0%
Source: Company, ICICIdirect Research

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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 this cyclical feature, three years back Shreyas chalked out a business model focusing on logistics business, and forayed into related segments in the 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% 80% 60% 40% 20% 0% FY06
Source: Company, ICICIdirect Research

Shreyas’ transitioning from shipping to logistics will de-risk its business

39.65

28.03

37.95

34.98

18.40 31.47 53.57 28.88

10.53

8.02

51.52

57.00

Contribution from logistics to increase from 28.88% in FY06 to 55.81% in FY09E

FY07 Logistics Charter

FY08E Feeder

FY09E

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 develop its coastal shipping business. While charters help lock in revenues, they move in line with global freight rate movements. Feeder services provide 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.] Revenues from coastal shipping are higher and stable compared to feeder and charter services

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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 container vessels. It has an impeccable record of 15 years during which it has built relationships with main line operators (MLO), which gives it a strong competitive advantage in the coastal feeder services.

It is a dominant coastal container ship operator with over 15 years of experience

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

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 OEL Patriot * 1074 OEL Vision # 349 OEL Aishwarya 513 513 Orient Independence 513 513 OEL Victory 569 569 OEL Strength 1152 1152 OEL Shreyas 1208 OEL Trust 1050 OEL Express 922 New ship New ship New ship Total Capacity (TEU) 4170 5927
Source: Company, ICICIdirect Research

FY08E

FY09E

513 513 569 1152 1208 1050 922 1021

6948

513 513 569 1152 1208 1050 922 1021 1050 1050 9048

Fleet addition to increase TEU carrying capacity at 23.55% CAGR over FY07-09E

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

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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, and New Delhi. It plans to add similar facilities in Mumbai, Bangalore, Chennai 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.

Warehousing capacity to supplement logistics revenues

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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 containerisation in India is still low. According to INSA (Indian National Shipowners Association), about 70% to 80% general cargo is transported through 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 TEUs in million 10 8 6 4 2 0 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY12E
16% CAGR

Growth in movement of containerised cargo in India to benefit Shreyas

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.

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RISK & CONCERNS
Delay in acquisition or loss of vessel
Any delay in acquisition of ships as planned could impact the revenues and profitability of the company. The vessels, when plying in water, are subject to 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. Delay in acquisition or loss of vessel to impact revenue adversely

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

Fluctuations in international charter hire rates to affect revenues

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.

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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 (Rs crore) 200 150 100 50 0 100.40 40.78 FY06
Source: Company, ICICIdirect Research

124.94 107.33 83.16 95.95 FY07
Logistics

Revenues to grow at 27.36% CAGR over FY07-09E on back of vessel additions

114.06

165.61

FY08E
Shipping

FY09E

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 35 (Rs crore) 30 25 20 15 FY06 FY07 Net profit FY08E NPM (%) (RHS) FY09E 30 25 20 (%) 15 10 5 0

Net profit margin is expected to decrease due to cost pressure from high fuel prices and lower capacity utilisation on the eastern coast

Source: Company, ICICIdirect Research

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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 available at 9.40x FY08E earnings and 7.47x FY09E earnings. We believe that the company is likely benefit from the increased domestic trade and cargo movement through the coastal shipping route. As Shreyas transforms into a logistics company, we believe the stock should see as a major re-rating. Given 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. Logistics companies have higher valuations (P/E of 1430x) as compared to pure shipping companies (P/E of 3-6x)

Exhibit 9: One-year forward rolling P/E Band
300 250 Share Price (Rs) 200
22x

150 100 50 0 Apr-06 Apr-07 Feb-07 Jun-06 Aug-06 Jun-07 Aug-07 Dec-06 Dec-07 Feb-08 Oct-06 Oct-07

18x 14x 10x

Transformation from shipping into logistics should see a major re-rating and increase valuations

Source: ICICIdirect Research

Exhibit 10: Peer comparison (Estimates for FY09E) PAT Price Market Cap Revenue (Rs) (Rs cr) (Rs cr) (Rs cr) Company Shreyas Shipping 80 280 291 32 TCI 106 716 1391 28 Gateway Distriparks 110 1016 354 93 Varun Shipping 76 1140 890 332 Mercator Lines 87 1646 1682 353
Source: ICICIdirect Research Estimates

EPS (Rs) 9.3 3.6 8.1 22.1 14.6

P/E EV / (x) EBITDA 8.6 7.5 29.1 11.7 13.6 8.9 3.4 5.0 5.9 7.2

ROE ROCE (%) (%) 15.5 11.9 8.2 9.5 12.9 13.7 27.7 16.9 28.4 14.3

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

Low interest cost as most of the borrowing done during the end of the financial year

9.32% CAGR in net profit over FY07-09E

Balance Sheet Year to March 31 Sources of funds Equity Share Capital Reserves & Surplus Secured Loans Deferred Tax Liability Current Liabilities & Provisions Total Liability Application of Funds Net Block Capital WIP Investments Cash Trade Receivables Loans & Advances Total Asset 190.02 343.01 394.97 FY06 34.96 115.63 26.47 0.22 12.74 190.02 88.25 25.18 43.22 6.63 14.28 12.45 FY07 34.96 128.64 158.93 0.51 19.97 343.01 217.56 51.10 20.97 10.31 21.27 21.80 FY08E 34.96 148.29 178.93 0.91 31.88 394.97 262.08 50.00 16.47 17.68 29.72 19.01

(Rs Crore) FY09E 34.96 174.47 230.93 1.71 38.43 480.50 397.26 0.00 11.97 12.53 39.01 19.73 480.50 Increase in net block due to acquisition and vessel addition

Increase in loans account of high capex

on

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

(Rs Crore) FY09E 17.68 32.40 0.00 -6.22 19.82 0.80 46.81 6.55 10.01 43.34 (105.00) 4.50 52.00 0.00 (5.16) 12.53

Ratio Analysis Year to March 31 EPS (Rs) Book Value (Rs) Enterprise Value (Rs Crore) EV/Sales (x) EV/EBIDTA (x) Market Cap to sales (x) Price to Book Value (x) Operating Margin (%) Net Profit Margin (%) RoE (%) RoCE (%) Debt/ Equity (x) Current Ratio Debtors Turnover Ratio Fixed Assets Turnover Ratio Du Pont Analysis PAT / PBT PBT / EBIT EBIT / Sales Sales / Assets Assets / Equity RoE 0.97 0.84 0.31 0.74 1.26 23.39 1.04 0.77 0.22 0.52 2.10 19.07 0.89 0.62 0.21 0.56 2.16 14.12 0.87 0.56 0.23 0.60 2.29 15.47 12 | P a g e FY06 10.08 50.65 299.50 2.12 6.93 1.98 1.58 30.58 24.28 23.39 21.64 0.18 2.62 9.90 1.60 FY07 8.92 92.26 428.28 2.39 11.02 1.56 0.87 21.70 16.88 19.07 10.83 0.97 2.67 8.42 0.82 FY08E 7.40 103.60 440.91 1.99 9.40 1.26 0.77 21.19 11.21 14.12 11.25 0.98 2.08 7.45 0.84 FY09E 9.27 125.97 498.07 1.71 7.47 0.96 0.64 22.94 10.95 15.47 11.86 1.10 1.85 7.45 0.73

Net profit margin to dip on account of high fuel prices and increase in interest and depreciation of new vessels

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 ICICIdirect Research Desk, ICICI Securities Limited, Ground floor, Mafatlal House, 163, H.T. Parekh Marg, Backbay Reclamation, Churchgate, Mumbai – 400 020 research@icicidirect.com

harendra.kumar@icicidirect.com

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