Arshiya International: Connecting Business Model & Leverage

This post is basically a writeup to make sense of the significant debt of Arshiya. The common view among Investors is “I like the business model of the company but not the stock due to high leverage”.

Let’s start with the business model of Arshiya. One can refer to this excellent presentation by the company on the same. The company plans to open FTWZ across different parts of the country i.e In Panvel (West), Khurja (North), Nagpur (Central) and Chennai (South). Panvel FTWZ is partly operational (5 warehouses) and expected to be fully operational by June’13. Khurja FTWZ is partly operational (3 warehouses) and expected to be fully operational by the end of FY14. Company is in the process of acquiring land in Nagpur.

Arshiya’s stock price has not gone anywhere this year as earnings have been stable for four consecutive quarters (around Rs 35crs) as Depreciation and Interest expenses increased more than the EBIDTA. But one should look at the QoQ growth in EBIDTA and it has grown by around 16% for past two quarters and margins have grown from 26% to 29%. FTWZs have strong EBIDTA margins of 70%+. Once Panvel and Khurja FTWZs are fully operational, the overall margins can shoot to 35%+ which will ensure earnings increasing more than depreciation and interest expenses. Management is trying to contain expenses wherever possible. For example, they entered into lease agreement with GATX for rakes and conversion of rupee loan of Rs 300crs into dollar loan which acts as a natural hedge since income from FTWZ are in foreign currencies. Link for Q2FY13 Investor updates.

One of the concerns of the investors have been the high equity dilution (23%) recently through issuance of warrants to promoters. The fact that the issuance is not to an ‘outsider’ and the return on equity isn’t diluted mean the concern is unwarranted. Promoters have already converted 22.5% of the total issue. Its a case of promoters being more optimistic on its business than shareholders. Enterprise value stands at Rs 3335 crs with Equity (at current price of Rs 122) being Rs 885 crs (assuming full conversion of warrants) and Debt of Rs 2450 crs. My sense is incremental debt should be minimal going forward as funds raised through warrants and cash generated from ongoing projects once fully operationalized should be sufficient enough for capex of Nagpur FTWZ.

I think at 4x FY14 earnings, debt is discounted more than required. Considering the business model, competitive advantage and growth, Arshiya’s stock should possibly trade atleast 6x earnings or 1x P/BV for a 16% ROE going forward assuming no additional dilution. Such stocks generally does well in a bull market and declining interest rates scenario which hopefully will pan out over the next one year.

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11 responses to “Arshiya International: Connecting Business Model & Leverage

  1. Devesh,

    Nice write up.
    What are the risks to this 35% EBITDA?
    Market probably is seeing some sought of execution, regulatory or competitive risk here or this could be because of current apathy towards future cash flow stocks.

    Regards,
    Excel

  2. 35% margins in FY15 as Khurja FTWZ will be fully operational by end of FY14 or Q1FY15. Don’t see any risks with this.

  3. prabhakarkudva

    Very nice summary.

    There is limited risk at these prices. The question Devesh is trying to tackle is how and when will the returns start coming and as rightly pointed out that should start happening once EBIDTA grows faster than debt and its associated costs. Also IMO on first signs of delevaraging (debt pay back) this one should start moving – the question is when will that happen and in the interim can we earn more money else where.

  4. Don’t see balance sheet being deleveraged for next 2 years. I think if Arshiya manages to incur Capex for Nagpur FTWZ without any significant incremental debt,that would be big positive for the stock.

  5. I am fedup with market’s obsession with current FCF and low leverage. As if companies have to just focus on current cash flows and should not invest in future. This I think is because of scarcity of capital. Once markets are buoyant and capital abundant high leverage and future FCF companies would be back in favour.

  6. Maybe in light of recent events this stock story needs an update ?

  7. Result of growing too fast to manage debt. Don’t think there’s any financial irregularities in books so its not Satyam. Also, there’s no clue who’s selling. I’m told some Swiss Finance has put their stake on the block rather than pledged shares. Will wait for more clarification from Q3 concall.

  8. Institutional Holders Selling.. But if it goes below 35 I suppose there will be margin calls!

  9. Arshiya has more than 10 subsidiaries. Do you think its a cause of concern??

  10. Debt is the concern now considering they’re having a slowdown in business.

  11. Good article, I too believe the high debt was priced in at 120. Also what is coming out is serious cash cruch rather than playing with financials. But somehow stock has entered in strong bear grip.

    Looking forward for further analysis.

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