Afcom Holdings - A Growing Player in the Air Cargo Industry

Company Overview

Afcom Holdings was founded in 2013, initiated market research in 2016, and began operations using a quasi-chartered model in September 2021, focusing on cargo flights to ASEAN countries with Singapore as its hub.

In November 2024, the company inducted two Boeing 737-800 aircraft on an eight-year dry lease. These aircraft are expected to be operational by December 2024, at which point Afcom will transition from its quasi-chartered model to full-fledged scheduled operations.

Business Model & Key Partnerships

Afcom operates on an airport-to-airport cargo model, utilizing General Sales and Service Agents (GSSAs) in India and the Far East.

India Representation: The company has signed an agreement with Taylor Logistics Private Limited (a part of the TTK Group) to represent its airline operations in India.
Far East Representation: Afcom has partnered with Air Logistics Group (a division of World Freight Company) as its GSSA for operations in Far Eastern countries.

General details

• Afcom has agreements with General Sales and Service Agents (GSSAs), with regional exclusivity. GSSAs provide a minimum guaranteed return (MGR) of 50% revenue or load factor for each flight. These confirmations are in place for the entire term of the contract, irrespective of fleet size
• Afcom chose non-scheduled operations initially for flexibility in operating multiple routes. While scheduled operations are cheaper from a cost perspective, non-scheduled operations offer more flexibility. The company plans to transition to scheduled operations once the fleet size increases.
• Scheduled operations have marginally cheaper landing parking and better fuelling contracts
• The company has demonstrated strong financial growth, with 74% CAGR
  in total income, 92% in EBITDA, 122% in PAT and consistent growth in
  EPS from FY22 to FY24 indicating robust profitability and stability.

Industry opportunities

• The air cargo market is growing with a CAGR of 5-6% estimated by aviation leaders, and 6-7% in the regions of Afcom’s focus
• Air Cargo has traditionally carried 35% of trade by value, even as it carries less than 1% of all traded commodities.
• Increased demand for air cargo due to conflicts and turbulent sea routes
• E-commerce is revolutionizing customer expectations and air cargo logistics.
• In addition, the pricing ratio between air cargo and maritime containership cargo transport has decreased to historically low levels since early 2022, making the advantages that air cargo offers even more attractive
• Limited availability of pure charters in India, contributing to high cargo volume and huge scope for growth
• Pure freighters offer specific advantages over passenger aircrafts, including:
  Larger cargo doors for diverse shipments, including heavy machinery.
  No dependency on passenger baggage, maximizing cargo capacity.
  Ability to transport dangerous goods such as lithium batteries, electronics, and perishables with dry ice.

Competitive edge for Afcom

• It is operating in a Highly Regulated Industry with Significant Entry Barriers – Operating an air cargo airline requires extensive regulatory clearances, infrastructure, and industry expertise, making entry difficult for new players.
• Afcom has Early-mover advantage with clearances, infrastructure, and operational background
• There is large entry barrier to new players entering this business as it takes time to get all the compliance requirements in place and acquiring aircraft often requires a 12 to 18 month waiting period.
• The company doesn’t foresee major competition for at least the next couple of years, as no other entity has started the process of forming an NSOP(Non Scheduled Operating Permit) for freighters in the country.

Expansion plans:

• Currently two planes are already operational since December 2024, and Company plans to add 3 more airplanes before end of FY2025, out of which 2 aircrafts have only four more steps pending before the plane can be brought to India.
• Once the plane is ready, it just takes around 7 days to start the operation as all the organizational permits are already available.
• To summarize Company targets to have 5 fully operational airplanes for FY2026
• In FY26, Afcom intends to add two wide-body aircraft (mostly 777s)

Pre-operative expenses for new fleets

• The company has capitalized around INR 31 crores as pre-operative expenses for the two dry lease planes. ((So Need to check these Pre-Op expenses for the three newly proposed airplanes.))
• The pre-op expenses are being depreciated over 8 years, which is the life of the lease term, and 5 years for IT purposes

Working Capital and Interest Costs

• The company’s working capital cycle is roughly 60 days, and they plan to use institutional borrowings at an interest rate between 9.5% to 10.5%
• The company estimates a working capital requirement of INR 50 crores and annual interest costs of INR 4.5 to 5 crores
• Depreciation is estimated at INR 1.75 to 2 crores on a full year basis

Guidance from management:

• Management has mentioned that with the new leased planes on a conservative basis.
• Each plane can generate 18-20 crore revenue per month
• Expected EBIDTA margin is 30-34%
• With Above estimates, Management is confident of 1000 crore+ topline in FY26 with 30-34% EBIDTA margins
• Cost of borrowings (for working capital) is roughly anywhere between 9.5% to 10.5%.
• For FY26 with new fleet addition company expects
• The interest cost to be around 5-6 crores
• Depreciation cost is expected to be around 1.75-2 crores

Valuations

• With TTM PAT of 32 crores and current market cap of 1900 crores the stock is currently trading at 59x TTM PE which seems highly stretched.
• But if we consider the potential revenue of FY26 if everything pans out as guided by company could be doing a PAT 85 crores even with just two operational aircrafts, the stock will be trading at FY26 forward PE of 22x which seems reasonable.
• If we consider potential expansion of fleets to 5 aircrafts the valuation becomes even more attractive.

Risks

• It operates in a highly regulated environment and there is increased regulatory oversight on aircraft loading
• Trade protectionism: Turbulent environments in Global trade as trade tarrifs, import/export duties, and protectionist policies that disrupt global air cargo flows.
• The air cargo industry is dominated by big players who often often lock in customers with long-term contracts, premium service offerings, and better pricing due to economies of scale.
• Jet fuel is the largest operating cost for air cargo airlines (around 30-40% of total expenses). Fuel prices fluctuate due to geopolitical issues, OPEC production limits and global demand-supply imbalances.
• It operates in an industry that demands a highly skilled workforce to execute operations efficiently, while also navigating an intensely competitive labor landscape, where attracting and retaining top talent remains a significant challenge.
• Airport congestion & ground delays reduce efficiency, increasing costs for cargo operators especially for smaller players like Afcom with less bargaining power due to the scale.
• All of the figures and analysis mentioned above are derived from the Investor Concall and management guidance. However, the actual execution of these plans remains to be seen, posing an inherent risk as it depends on the management’s ability to effectively implement their strategies

Recent developments

• Company has entered into a long-term contract with Ethihad to operate regular schedule flights between Chennai-Male sector to move their cargo. (Source)

• TT Group and AFCOM Cargo have announced a significant expansion of
  their strategic partnership, originally established in 2022, now extending across multiple domestic and international destinations. Under this agreement, TT Group will oversee global sales and marketing, while AFCOM Cargo will manage operational activities, ensuring seamless cargo movement across key trade lanes. (Source)

• As part of its market expansion strategy, New Routes Launching in 2025:

  1. Chennai-Colombo-Male-Chennai (MAA-CMB-MLE-MAA) – From February 16, 2025.
  2. Chennai-Bangkok-Chennai (MAA-BKK-MAA)
  3. Chennai-Singapore-Chennai (MAA-SIN-MAA)
  4. First domestic freighter route: Chennai-Mumbai-Delhi-Chennai (MAA-BOM-DEL-MAA).

Disc: I am relatively new to fundamental analysis, and there is a possibility that I may have overlooked certain aspects in the above assessment. I welcome any suggestions or insights on areas I might have missed. I am still in the process of researching this company and will continue to update my analysis as I gather more concrete information.

I have invested in this company with a small quantity (the minimum buyable quantity of 240 shares, as it is an SME-listed stock) at ₹750 levels.

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