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Company’s Business Operation

Accuracy Shipping Ltd. is a logistic solutions provider. Imagine you were a Marble Manufacturer sitting in Gujarat, thinking of ways to export your products to Spain and you were looking to find a logistics partner to meet your shipping requirement. You could call up Mr. Vinay Tripathi, promoter of Accuracy Shipping and he would tell you that he would take care of it. 
  1. Accuracy shipping would pick your cargo from your Manufacturing Facility                                  
  2. Pack the cargo and take it to a 3rd party Warehousing Facility (3rd party, because they don’t own warehouses)                                 
  3. Pick it up from the warehousing facility and then take it to the nearest port                            
  4. There, they help you in clearing customs                                                                                             
  5. They then find space in a Shipping Container or an Airplane (Actually, they buy container space in ships and planes much earlier)
  6. And finally, their partners in Spain would see that the products clear customs again and reach their destination
All in all, if everything went to plan you would be one happy customer. 

POINT OF INTEREST

Accuracy, however does not have any long-term contracts with any of the shipping lines, transporters, custom clearance houses etc.

Which brings us to our next point. Why are we discussing their business operations in such great detail? 

Well, it's mainly because their business model is working. Accuracy Shipping has gone from Rs. 30 Cr. in 2013 to Rs. 266 Cr. as of December 2017. It has found ways to expand its top line by tapping into Marble and Granite Manufacturers in and around Gujarat, Maharashtra and Rajasthan and they have gone from tending to a few handful clients to about 1300 clients since their incorporation in 2008. Apart from this, they also have a pan India presence and are now poised to become a serious player in the logistics sector.

OR ARE THEY?

Well, despite the phenomenal rise in their top line, the company’s margins have remained razor thin (between 0-2%) and herein lies the crux of the story. If Accuracy is to become a serious player in the logistics sector, it has to figure out a way to reduce costs and for that we must ask 2 very important questions.
  1. Where are they spending most of the money?                                                                                    
  2. Can they improve margins with their current business model?                                                              

Revenue - till Dec'17

266 Cr.

Profits- till Dec'17

6.8 Cr.

Most of their spending is categorized as “Other Expenses” which has traditionally accounted for more than 90% of their costs. This other expenses includes everything, from transportation expense to custom clearing fees. And since the breakup of this particular subject is not accounted for in the DRHP, we can’t be sure what their biggest expense is. But we will try to make an educated guess and we will do so while answering the second question 

How will they improve the margins?

75% of their revenue comes from Freight Forwarding (cargo space booking and management) and customs clearance. So we are assuming that this accounts for most of their expense. However, we are more interested in Cargo Space Booking and Management because, we don’t think they’ll be able to improve the margins they earn through customs clearance.

And with Cargo Space Booking and Management, our conversations with the CFO yielded some insights into how they plan to improve margins. According to the CFO, accuracy can command better prices while buying container space if it does bulk buying i.e. buying large spaces at once. The challenge with bulk buying however, is that you will have to generate enough demand to fill these container spaces. So as your ability to generate demand increases, theoretically your margins ought to improve through positive effects of scale. The CFO believes that Accuracy’s margins will improve as they start scaling up.

However, might we also point that that Accuracy’s top line has been on a growth path for the past 5 years; and despite generating more demand every year since 2013, they haven’t yet managed to improve their margins. Maybe these positive effects of scale will start kicking in soon or maybe it won’t. It’s anybody’s guess at this point.

Distribution of Revenue (FY 2016-17)

graph

The second major scope for improvement is in transportation. Accuracy’s inland transportation services brings about 20% of its revenue and according to the CFO, Transportation as an expense accounts for 20-30% of its total costs. The only way to reduce this cost is to make investments in purchasing transport vehicles rather than hiring them on rent. So theoretically a larger fleet size and investments in technology should allow the company to improve margins and here we see the first glimpses of hope.

The company’s term loan on vehicles increased drastically from 7 Cr. to 24 Cr. this financial year and their fixed assets increased as much. So these loans were used to buy vehicles and as of December 2017, their fleet size stands at about 150. The CFO also talked about Route Optimization using GPS and other technological advances that will allow the company to improve its margins going ahead. How much of this will translate to actual results depends on the commitment of the promoters.

The only spoiler here is that fuel prices are on the rise. So if it were to continue on the same path the company’s profitability will be affected despite their efforts to improve margins.

Total Debt

44 Cr.

Long term Debt

31 Cr.

Talking about vehicle loans, the company’s debt levels is slightly intimidating. At about 44 Cr.. and 31 Cr. in long term debts you are thinking their interest cost is going to remain high. As of December 2017, their finance costs have largely remained constant at about Rs. 2.6 Cr. despite their debt levels more than doubling from 18 Cr. to 44 Cr. So their interest expense for the Jan-Mar 18 quarter is bound to be high and their profits wont’t look as good.

But the promoters plan to pay back about 7 Cr. back from the issue proceeds and fund about 15 Cr. of their working capital requirement through the IPO. This means that they will not have to rely entirely on short term loans to meet their working capital requirements and so, we don’t think their interest cost is going to increase disproportionately in the next fiscal year.

POINT OF INTEREST

Also, for some odd reason, Axis bank has imposed a few rather restrictive clauses while extending the Rs. 15 Cr. loan that the company needed to meet its working capital requirement. One specific clause states that that the company cannot engage in any expansion activities including investing in other entities. We are not quite sure if this is the norm, but we thought we would mention it anyway.

Also the promoters have floated multiple group companies that look and feel eerily similar to what Accuracy does. But we further clarified on what these entities did and found out that they indeed served very different purposes and that they were floated at a time when the promoters had no intention of taking the company public.

ANY RED FLAGS??

So all in all the company does not throw up any obvious red flags. Yes, the company has failed to improve margins. Yes, the company’s future relies on large promises and yes, a sustained hike in fuel prices could derail the growth story. But the company does get a few things right. It has managed to increase its top line in a very competitive industry. It has a clear cut business plan to increase margins and the company has never defaulted on a loan despite relying heavily on short term funds to meet its working capital requirement. 

SO SHOULD YOU BUY IT?

Well, for that we must ask if it is priced fairly. Based on our profit estimates for FY 18 and at the issue price of 81-84, our calculation yields a PE of 14, post issue. For an SME IPO, it’s a steep price based on current margins. But hey, if you believe in the growth story of Accuracy, maybe its justified.
So yeah, that’s accuracy’s story for you. Thanks for reading and have a nice Day ☺

OTHER POINT OF INTEREST

In 2016, the company was fined 1.5 Cr. for not paying their taxes on time. They have paid the full penalty
And the promoters Vinay and Rama Tripathi have decided to increase their remuneration from 15 Lpa to about 42 lpa on Jan 2018.


DISCLAIMER
No content on this blog should be construed to be investment advice. You should consult a qualified financial advisor prior to making any actual investment or trading decisions. All information is a point of view, and is for educational and informational use only. The author accepts no liability for any interpretation of articles or comments on this blog being used for actual investments.

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