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.
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.
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.
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.
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.