Balmer Lawrie Ltd: Board this Lorry

Balmer lawrie Ltd is a mini Ratna PSU. It is dealing in the business of Logistics, tour and travels, Ind packaging like steel drums, Lubricants with Balmerol brands. Balmer Lawrie & Company was started by 2 Scotsmen, Stephan Balmer and Alexander Lawrie in 1867. Today it is 148 years old company.

It is maintaining good performance since long and even in difficult times, its diversified revenue streams provided adequate safety and consistency.

Its logistics business will be the biggest growth factor. It is already having 3 CFS             (container Freight Stations) at Mumbai, Kolkata, Chennai and warehouses at Kolkata and Coimbatore. Logistic is the biggest contributor in the profit at net level. It is around 60% at operating level.

Turnover and other data (in crore)
Segment	9m 2014-15	Opr profit for 9 mths	Opr margin %	2013-14, full year	Opr profit 2013-14	Cap employed
Ind packaging	409	26	6	496	34	211
Logistic	386	79	20	472	130	115
Tour	988	15	2	1177	23	183
Grease	296	20	7	430	27	151
others	67	0.72	1	82	0	249
Total	2146	141		2657	214	909
	2010	2014
gross block	674	878
Market value Current	1600 cr
cash in the books	400 cr

Dividend Payout ratio: 3.30%, CMP 550/-

Logistic Business: In India, there are immense opportunities for growth in the area of cold chain logistics, 3PL, Project Logistics and Freight Forwarding. It is foraying into the areas of Cold Chain Logistics and Multi Modal Logistics Hub (MMLH). They are in the process of setting up multi product Temperature Controlled Warehouses (TCW), which will primarily cater to Quick Service Retail (QSR), Multi Retail (MR), Pharma and F&V segments of the market. They are also setting up a first of its kind MMLH at Visakhapatnam in association with Visakhapatnam Port Trust (VPT). Investment in this will be around 220 cr on 50 acres of land. Balmer lawrie will be having 60% and VPT will be having 40%, the land will be provided by VPT. The Hub will comprise rail road linkage, CFS, ICD's and Cold chain warehouses. These warehouses and ports will be available this year and will contribute greatly to the top and bottom line.

I picked Gati and Transport corp of india very early around 30 and 54. However indian logistics is not only about E-commerce. India spends around 14% of GDP on logistics as compared to 7% of developed world. We are inefficient. E commerce is only the user of only one segment and that is door to door delivery. The entry barriers to this type of logistics is very low but as e-commerce companies want to enter tier 2/3/4 cities, these courier companies will face the heat of inadequate infrastructure. their model is only of road transport and warehouse to store the goods, although they don’t need advanced warehouses...as they are dealing in general items only at present. But i feel their scale of operation will not grow much because of intense competition.

However companies like Balmer and redington are much more comprehensive and technically expert. Balmer Is focusing big on cold chain warehouses since wastage of food is the big problem in india and a major factor of food inflation. Also for better movement of goods in the country, we need more local ports. India is having around 4500 sq miles of coastal area but our coastal shipping is only 3% which is very low. Coastal shipping is very cheap as compared to road and rail transport. Modi govt is investing heavily on developing coastal shipping. For this we need many new developed ports. Balmer is investing big amount for port development. So logistics business is not just about e-commerce but much more than that.

Balmer is spending around 165 crore in building seven temperature-controlled multi-product warehouses in two phases. It will invest Rs 65 crore in the first phase of setting up three temperature-controlled warehouses — one in Hyderabad (Andhra Pradesh), another in Rewari (Haryana), and the third in Patalganga (near Mumbai). Each warehouse will have a capacity of 3,000 pallets. In the second phase, it will set up four warehouses in Chennai, Bengaluru and Pune.

Lubricants: For its lubricant business, Balmer is focusing big to establish its brand Balmerol at national level with aggressive marketing and distribution channel. It wants to double its market share. It is having R&D centre for lubricants in india which is one of its kind in india. As per the expansion plan, the company will invest Rs 100 crore in revamping the lubricant business and this will be mainly done at its Kolkata plant.

Tour and Travel Business: Balmer Lawrie has historically been a ticketing company and it has catered mainly to government departments and corporates both in the PSU and non-PSU sector. However its low commission has made it necessary for Balmer to expand in the area of Vacations, Holidays and MICE. Since building skills and capabilities would have taken time, they have recently acquired Vacations Exotica, a leading vacations brand and this has been integrated with their ticketing business. Exotica is mainly into package tours and among top five in india with nine offices accross india and 4 associate offices including one in US.

Balmer is already having a large client base due to its ticketing business, almost 5 lac, so it can leverage this clientele for selling Exotica’s high margin packages. Vacations Exotica brings with it a multi-talented work force and a wide range of holiday packages with a turnover of around 150 crore. Ticketing margins are falling all over due to emergence of online travel sites and competition, so a lot of consolidation will happen in travel sector and stronger player will be able to hold their forte. Balmer is having a long legacy and sufficient resources to charter a new journey into travel business. We can see another high technology acquisition in this space by Balmer.

Final Take: With around 3-4% dividend yield and a PE ratio of 10 which is very low. we should give a normal pe ratio of 20 to its logistic business keeping in view its heavy investments in high margin cold chain and port infra although its current revenue streams are custom and air cargo services, CFS , general ICD and warehousing which are of relatively lower margin. Its after tax logistic profit is around 100 cr, giving it a pe ratio of 20 means, 2000 cr while its current value is just 1600 cr for whole business along with 400 cr cash in books. Also it is having huge land bank in prime locations in india.

But they need to focus on their lubricant, Packaging and travel to justify their high investments in these businesses; however their decision to invest more in logistic business is a right step. Also their investment in Exotica is a great step to move away from commodity business of ticketing.

They are also investing big in brand building for Balmerol brand.                                                                                                                                        Its packaging business is one of its kind in india, it has formed a JV with Van leer of USA for plastic drums and steel drum closures. Balmer has put up a proposal for merging its steel drum business with JV with Van Leer in order to derive the synergy of steel and plastic drums.                                                                                                  

It is giving good results and dividends year after year and now the management wants to squeeze the maximum.

Update 26/12/2016: Balmer has declared  a bonus in the ratio of 3:1, so Bonus adjusted recommended price of 550 is now 137.

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing)