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TRANSCRIPT
India Logistics: Connecting the dots Vikram Suryavanshi
INSTITUTIONAL EQUITY RESEARCH
Page | 2 | PHILLIPCAPITAL INDIA RESEARCH Please see penultimate page for additional important disclosures. PhillipCapital (India) Private Limited. (“PHILLIPCAP”) is a foreign broker-dealer unregistered in the USA. PHILLIPCAP research is prepared by research analysts who are not registered in the USA. PHILLIPCAP research is distributed in the USA pursuant to Rule 15a-6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities Inc, an SEC registered and FINRA-member broker-dealer.
Logistics Connecting the dots
INDIA | LOGISTICS | Sector Update
20 July 2020
The Indian logistics sector is witnessing significant changes because of: (1) supportive regulatory policies, (2) government focus on modal shift and transparency, (3) evolving customer requirement for cost-effective solutions with an outsourcing model, (4) increasing dominance of MNCs, retail, and e-commerce – with standardization, (5) higher focus on efficiency, consistency, and time-bound solutions, and (6) automation and internet of things (IOT) and disruptions from start-ups. India’s logistics sector is likely to grow at 10-12% over the next five years, despite short-term impact from COVID-19.
Trade is moving towards transparency and fair play: GST implementation has rationalized tax rates, individual state administrative borders have become irrelevant, and the country has become one market. The movement of goods is now driven by costs and operational efficiency, rather than tax-driven, which was the case pre-GST. The logistics industry is moving towards operational rationalization, standardization, and larger scale – using technology. The E-way Bill has brought self-compliance for transporters and already helped improve turnaround time by 15-20%. Based on ease of compliance and scale of operations (that support automation) organised players will gain market share from here.
Modal shift is not all about costs: In our earlier report, we were positive on a modal shift to water and railways. Since then, water ways (coastal) saw limited success while railways failed to snap up volumes from roads. While waterways are still promising, they will take a long time to develop. The situation improved for railways with Covid-19 disturbing road transport, but it could be a short-term change. For a long-term transition to railways, their infrastructure inefficiency and transit time need to improve significantly. The development of dedicated freight corridors (DFCs, an efficient, safe, and faster option) should help improve railways’ freight market share. DMICDC (Delhi-Mumbai Industrial Corridor Development Corporation Limited) and multimodal logistics parks (MMLP), with common user facilities, will give a second chance to private container rail operators for expanding their business on a more level playing field. These operators will benefit significantly due to better rail network with an increase in asset turnaround.
The government is focused on reducing logistics costs to c.10% of GDP by 2025 from current 13-14% – to increase business competitiveness. Some recent initiatives towards this: (1) Direct Port Delivery (DPD) and Direct Port Export (DPE) in exim trade. (2) Online services; lower on paper work. (3) DFCC and inland waterways; improving port connectivity with Sagarmala and Bharatmala. The logistics sector has become a priority for the government, who has appointed a separate logistics secretary in the Ministry of Commerce for the first time to address sector issues and bring about transparency and efficiency. The government has proposed a National Logistics Policy for improve supply chain efficiency and transparency; it should lead to lower logistics cost and improved competitiveness in international trade.
In the early-stage growth cycle are 3PL, express, container logistics and cold chain: With a shift from bulk cargo to containerisation, container traffic has remained one of the highest growing cargoes in India with a GDP multiplier of c.1.5x. Increased scale of operations and consolidation of warehousing through MMLPs, and standardization of operations and handling equipment will help secular growth in container trade. The outsourcing of logistics services is increasing after GST, which has brought in benefit of scale for players such as Mahindra Logistics, TCI, and Future Retail. These companies are able to generate high returns with asset-light models. The high growth potential in 3PL is promising. Cold chain is evolving from a nascent stage in India, with increased consumption of processed food and improvement in the agri supply chain. While it provides a long-term investment opportunity, players will continue to earn suboptimal returns in the short term.
Companies
Aegis Logistics - Initiating Reco BUY
CMP, Rs 182 Target Price, Rs 265
Mahindra Logistics Limited – Initiating Reco BUY
CMP, Rs 316 Target Price, Rs 370
Transport Corporation of India - Initiating Reco BUY
CMP, Rs 167 Target Price, Rs 235
Allcargo Logistics Reco Neutral CMP, Rs 93
Target Price, Rs 95
Container Corporation Reco BUY CMP, Rs 448
Target Price, Rs 525
Gateway Distriparks Reco BUY CMP, Rs 89
Target Price, Rs 122
Navkar Corporation
Reco Neutral CMP, Rs 28
Target Price, Rs 27
VRL Logistics
Reco BUY CMP, Rs 153
Target Price, Rs 195
Blue Dart Reco Not Rated
CMP, Rs 1963
Future Supply Chain Solutions Reco Not Rated CMP, Rs 164
TCI Express Ltd Reco Not Rated
CMP, Rs 672
Vikram Suryavanshi, Research Analyst (+ 9122 6246 4111) [email protected]
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LOGISTICS SECTOR UPDATE
What we have covered?
Indian Logistics - an Era of Priority and Focus 8
India Logistics in Key Charts 10
Section-I: Impact of Policy Change 15
Government focus on logistics cost reduction for the country 17
Trade moving towards transparency – GST, E- way bill 16
Direct port delivery, AEO, Axle loading, and Logistics databank 20
Section – 2 Improvement in physical infrastructure 24
Improvement in road infrastructure 24
Rail infrastructure and DFCC, DMICDC 26
Focus on coastal and inland waterways 35
Technology disruptions 41
Emerging opportunities 45
Companies Section Stock Initiations 1. Aegis Logistics (AGIS IN): Leader in liquid and gas logistics. 59 2. Mahindra Logistics (MAHLOG): Play on growing outsourcing and 3PL opportunities. 68 3. TCI Limited (TRPC IN): Multimodal opportunities with road, rail and coastal and supply chain logistics. 81
Company Update 1. Allcargo Limited (AGLL IN): Less than container (LCL) consolidator with global presence, CFS, Contract logistics 91 2. Container Corporation (CCRI IN): Market leader in container rail and expanding in bulk 3PL 93 3. Gateway Distriparks (GDPL IN): Play on Container rail operation and CFS 95 4. Navkar Corporation (NACO IN): Play on Container rail and CFS. 97 5. VRL (VRLL IN): Leading less than truck load player with own fleet. 99 Not rated companies 1. Blue Dart (BDE IN): Largest player in e-commerce, express and air cargo. 101 2. Future Supply Chain (FSCSL IN): Leader in retail and fashion supply chain and 3PL. 103 3. TCI Express (TCIEXP IN): Play on express road parcel services. 107
Logistics player financial analysis: Diversity in unity 52
Covid-19 impact on Indian logistics players 3
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LOGISTICS SECTOR UPDATE
Covid-19 impact on Indian logistics players The Covid-19 has shocked economic activity in India, hurting cargo movement across the country as well as the globe. Sharp correction in stock prices have made valuations attractive from a historical perspective, though it is not yet clear how long economic activity will remain subdued, and to what extent. We believe companies with low-risk balance sheets and unique advantages would be safe havens, compared to the attractive valuations of leveraged players. Logistics is an essential service to support economic activity in a lockdown Cargo movement in India started declining after the nationwide lockdown began on 24th March. The impact was significant for road transport in the first week, due to strict restrictions on goods vehicle movement, limiting cargo to only essentials. Since then, the government opened things up significantly in the following ways: (1) Allowing all types of cargo movement; in most cases, officers and drivers were not in a position to differentiate between essential and non-essential cargo, particularly for intermediate products, creating chaos. (2) Worker movement stopped/impacted at ports (particularly at JNPT) was started by issuing curfew passes and COVID-19 checks. (3) Port and customs officials continued to work 24x7 to support cargo movement. (4) Haulage charges for movement of empty containers and empty flat wagons from 24 March to 30 April 2020 were reduced to zero. (5) CFS/ICD ground rent for April and May 2020 were waived off, to address congestion of cargo for exim players. The total cargo volume for Indian railway has recovered sharply and was down only 7.7% yoy to 93.6mn tonne in June 2020. For rail container movement the domestic container volume has recovered fully and in fact was up 3% yoy to 1mn tonne while exim container volume was down 20% to 3.28mn tonne in June 2020. Road transport remains affected; no material benefit from lower oil prices As per our industry interactions, a sizable number of employees (including drivers) have gone back to their hometowns, and bringing them back to work was challenging in the first 2-3 months. By July, c.70% of India’s total road transport fleets were thought to be operational, but at lower utilisations. Road transporters cannot benefit from a fall in crude prices, as: (1) the government has actually hiked taxes on diesel and (2) there is lower cargo availability, which has increased the cost of operations. However, rail and air cargo players are able to get relatively better cargo bookings.
Covid impact on road transport: % cargo booking on roads vs. pre-covid levels; Rail recovery is better
Source: PhillipCapital India Research, Industry, Indian Railways
0
20
40
60
80
100
120
Pre
-Co
vid
Ap
ril
May
Jun
e
Q2
FY2
1E
Q3
FY2
1E
Q4
FY2
1E
Road cargo booking recovery
40
50
60
70
80
90
100
110
120
Jan
-20
Feb
-20
Mar
-20
Ap
r-2
0
May
-20
Jun
-20
Railway monthly volume (mn tonne) FY20 Avg
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LOGISTICS SECTOR UPDATE
Key feedback on Covid-19 from logistics players
Around 70% of the fleet is back on the road, while actual loading was 40-50% by June 2020. While normal truck running is 7-9,000km per month, current running is at about c.4,000km.
Cargo booking was around 10-15% of normal in April, 25-30% in May, and c.50% in June. All payers expect recovery from August and cargo to touch 75-80% of pre-covid levels. Seasonally, August to December is good for cargo movement, because of the festive seasons. The market expects a full recovery by 4QFY21.
Demand is mainly from these sectors – agriculture, food processing, chemicals, FMCG, and pharma. Steel, cement, textile and auto are facing higher impact.
E-commerce and omni-channel has started accelerating. As more cities are going under lockdown, nonessential businesses are being ordered to close, and customers are generally avoiding public places. There is limited shopping; people buying only essentials is becoming the new normal.
The warehousing segment is doing very well. Demand will increase as customers might want to maintain a ‘safety’ stock. Consolidation of warehouses will increase as customers try to cut costs with increased modernisation and try to minimise contact by using pallets and technology.
Some customers will permanently shift to multimodal transport – rail and coastal. Cargo volume through railways is back to 60-65% of pre Covid-19 levels.
All players are focused on digitization now, and use e-POD and e-billing etc. Increased budget for IT spending and reduction in excess manpower will ensue.
Freight rates are under pressure due to lower demand and supply-chain players are taking contracts at 3-5% lower prices. However, freight on some routes has increased due to no return loads where trucks may have to wait for 3-5 days to get return cargo. Truck operators continue to face challenges of labour shortage, difficulty in obtaining food and services on the way for drivers, and services for vehicles when they breakdown.
Transporters will delay new purchases of commercial vehicles while activities in the second-hand market will increase. Demand for new vehicles will remain low due to: (1) COVID impact on demand and supply chain, (2) recent increase in axle load norms, and (3) increase in prices of vehicle by 10-12% due to BS-6 even as freight rates remain under pressure, which would make it hard for operators to justify the higher costs of new vehicles.
Factory closures in the past two months and lower imports from China could disturb the supply chain in the coming 1-2 months.
For larger operators, moratorium benefits are a big relief, and will help them to survive. In fact, transporters are comfortable even if they earn around Rs 45-50,000 per month as they don’t have to pay EMI (which is normally around Rs 45-50,000 per month) and are hopeful of generating cash flows of Rs 120,000 to 150,000 by September 2020. To re-start operations and generate cash, they are calling back their drivers by offering some joining bonuses (Rs 3-5,000). The driver shortage issue has largely resolved, and most cargo trucks that found themselves stuck during the lockdowns have reached their destinations.
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LOGISTICS SECTOR UPDATE
Financial impact of Covid-19 on logistics companies We expect diverse impact on logistics companies based on dominance of mode of transport, the sector that they service, and models – asset-heavy or asset-light.
Out of the logistics players we track, we believe Aegis will see less impact of Covid-19 on revenue and profitability due to resilience of demand for LPG consumption as this is mainly used for household cooking gas in India.
Road transport and supply chain players like TCI, VRL, and Gati will be hit significantly due to a decline in factory output and consumption.
Post Covid-19, long-distance cargo booking has shifted to railways and companies with storage facilities are able to manage de-congestion at ports by evacuating the cargo and storing at their warehouses/ICDs, thus gaining market share. Concor, Allcargo, GDPL and Navkar will see higher impact of lower exim container trade.
Asset-light models of MLL and TCI Express will reduce the stress on profits while VRL’s asset-heavy business model will lead to a sharp impact on its bottom line.
Revenue change over FY19-21 for key logistics players (%)
Source: PhillipCapital India Research estimates
PBT change over FY19-21 for key players (%)
Source: PhillipCapital India Research estimates
-35 -30 -25 -20 -15 -10 -5 0 5 10 15
Allcargo
Concor
Gateway
VRL
Navkar
TCI
TCI Express
Gati
Blue Dart
Mahindra Logistics
Future Supply Chian
Aegis
-140 -120 -100 -80 -60 -40 -20 0 20 40
Allcargo
Concor
Gateway
VRL
Navkar
TCI
TCI Express
Gati
Blue Dart
Mahindra Logistics
Future Supply Chian
Aegis
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LOGISTICS SECTOR UPDATE
India Logistics: Era of priority and focus
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LOGISTICS SECTOR UPDATE
Indian Logistics: Era of priority and focus The logistics industry in India is evolving rapidly, and its interplay of infrastructure, policy changes, technology and new type of service-providers provide significant investment opportunities. India has the second-largest population in the world with 1.38bn people and a GDP of US$ 2.9tn. The domestic logistics market is growing higher than the economy at 8-10% CAGR and will maintain this annual growth rate, excluding the impact of Covid-19 in the short term. Logistics has become a priority sector for the government, that has appointed a separate Logistics Secretary (a first) in the Ministry of Commerce to address the sector’s problems and bring in transparency and efficiency. It has also appointed a Special Secretary – Logistics in the Department of Commerce in November 2018. Infrastructure developments under Sagarmala, Bharatmala, DFCC, and DMICDC will bring cost and time efficiency in this sector.
Paradigm shift in the Indian logistics sector
Source: PhillipCapital India Research
Transparency Policy changes and infrastructure development are transforming the logistics sector, which is seeing new opportunities and changing business models. We have tried to map the evolving opportunities in the sector, and businesses and players that are likely to benefit the most:
We believe logistics outsourcing will continue to increase, triggered by implementation of GST in 2017; it has already brought scale benefits for players such as Mahindra Logistics, TCI, and Future Retail.
Cold chain, evolving because of increased consumption of processed food, growth in pharma, healthcare and organised food retail sectors, and focus on the agri supply chain, provides long-term investment opportunities; however, players will continue to earn suboptimal returns in the short term in this segment.
We see secular growth opportunities in container supply chain because of an increasing shift to standardization, safety, tracking & tracing, and improvement in supporting infrastructure.
Road, Rail & Water Sagarmala,
Bharatmala projects
One country one market Lower transaction cost
Containerization Ware housing
SpeedCost
ReductionTransparency
Road Rail Water
Infrastructure status DPD/DPE/AEO Logistics Policy
Ease of doing business Transparency in data reporting
3 PL outsourcing | E commerce | Express delivery I Waterways
Modal
Shift
GST
Standariza
tion
GST
Policy
E Way BillDifferen-
ciation
Inventory
cost
Integrated
solution
Ability to provide multimodal solutions
Last mile capability
Inventory remains major cost in supply chain, focus on leaner and faster inventory cycle
Buyer experience and competition on deliver time. i.e one day delivery etc
N E W O P P O R T U N I T I E S
The government is taking a special interest in developing India’s logistics infrastructure. Working on National Logistics Policy, Logistics data bank etc.
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LOGISTICS SECTOR UPDATE
Logistics: Investment opportunity in India Time Horizon 1-3 year 3-5 year 5+ years
Business model Rail & road transport, 3 PL
outsourcing, express, e-
commerce, CFS/ICD, liquid
& gas logistics
Warehousing, rail
transport, CFS/ ICD, coastal
shipping
Coastal and inland
waterways, cold chain,
MMLP – multimodal
logistics park
Players TCI limited, TCI Express,
Mahindra Logistics, Aegis,
Chain, VRL, FSC, Gati, Blue
Dart
Concor, Navkar, Allcargo,
Gateway, Shreyas Shipping
Concor, Shreyas Shipping,
Snowman logistics, TCI ltd
Note Benefit of policy and
formalization. Bringing
efficiency in small parcel
supply chain.
Model shift and
infrastructure
improvement
Implementation of DFCC,
DMICTC, port and coastal
connectivity projects.
Bringing efficiency in bulk
supply chains. Source: PhillipCapital India Research Note: The Covid-19 effect on logistics players differs, based on the customer segment and modal mix. Road transport is hit due to the lockdown, but rail movement increased due to lower disturbance and better reliability, as passenger trains were not running. CFS players benefited due to the supply-chain disturbance and increased storage requirements. We believe Covid-19 will affect the logistics sector in the short term; we have not factored the effect into medium/long-term analyses.
India: Leading logistics players and their business profiles
Road
transport
Container
rail
Express
Logistics 3 PL
Coastal
Shipping NVOCC CFS FTWZ
Cold
Chain
Project
Engineeri
ng
Equipmen
t Leasing
Blue Dart
Air/road
Concor
Started
Allcargo
Exited
Navkar
Gateway
Snowman
Arshiya In
VRL
Road
TCI
TCI Express
Road
Gati
Road
Aegis
Liquid/gas
Sical
Mahindra Logistics
Future Supply Chain
Shreyas Shipping
Patel Int. Exited
Air
Note: Based on major business activity, NVOCC – non vessel, Aegis Logistics is into liquid and gas storage and transportation
Source: PhillipCapital India Research
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LOGISTICS SECTOR UPDATE
India Logistics: Key Charts
India’s logistics market to see c.11% CAGR (USD bn)
Break up of logistics market by activities
Source: PhillipCapital India Research and Industry
Movement of goods is skewed towards the costliest mode of transport, i.e., roads right now – thereby providing a ‘modal shift’ opportunity in the long term. The government is focusing on increasing its share of waterways to c.12% (from c.6% currently including coastal and inland waterways) and railways to c.40% (from c.31%).
India cargo movement - modal mix
Transportation cost by different model (Rs per tonne/km)
Source: PhillipCapital India Research and Industry
Note: Transportation cost for different mode is for long distance movement, for short distance the cost structure
is distorted significantly.
0
50
100
150
200
250
300
350
400
FY1
0
FY1
1
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8
FY1
9
FY2
0
FY2
1
FY2
2
FY2
3
FY2
4
FY2
5
CAGR 10.9%
Trans-portation
61%
Warehousing 25%
Freight forwarding
10%
Value added logistics
4%
31%
60%
4%
2.0%
1% 1.6%
Railway
Road
Coastal
Inland water
Air
Other
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
Railway Road Coastal Inland water Air
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LOGISTICS SECTOR UPDATE
Opportunity driven by formalization and policy initiatives
Dominated by unorganized players right now
Fragmented road transport: Truck-fleet ownership
Source: PhillipCapital India Research, Industry
Development of railway network India’s rail network is the fourth largest in the world, after US, China, and Russia. It also carries the largest passenger traffic in the world at 8.43bn in FY19. To compare, China’s railway route length is 139,000km, of which c.35,000km is high-speed railways (operational speed is more than 200km/h); India has 67,416km route length, with no high-speed rail. China’s rail network has grown by 6.3x since 1950 while India’s has grown just 25%, i.e. 1.25x. However, now, India is developing a Dedicated Freight Corridor (DFCC) for cargo movement, which will facilitate 3x current average speed of c.27km/h and 2x loading capacity per train. India’s first bullet train project between Mumbai and Ahmedabad is expected by December 2023 with investment of Rs 1tn.
Development of rail route km
Share of Indian railways in cargo movement
Source: PhillipCapital India Research, Planning Commission
0
20
40
60
80
100
120
FY19 FY25
Unorganised market Organised market
+500bps to 25% Less than 5
75%
Fleet of 6-10 10%
Fleet of 10-20
6%
More than 10+ 9%
0
20000
40000
60000
80000
100000
120000
140000
160000
1950 1960 1970 1980 1990 2000 2005 2015 2016 2017 2018 2019
China India
India 1.2x
China 6.3x
0
20
40
60
80
100
1950-51 1978-79 1986-87 2007-08 2014-15 2018-19 2029-30
India’s rail development has been at a snail’s pace compared to China’s
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LOGISTICS SECTOR UPDATE
Containerisation of cargo provides secular opportunities in India as penetration levels are very low and trade is moving toward standardization and consolidation.
Container penetration in India is much lower than in China…
…but container handling at Indian ports is rising (mn TEU)
Source: PhillipCapital India Research, IPA, World Bank
After the GST rollout, manufacturing companies are implementing supply-chain outsourcing for cost efficiency and for focusing on core activities. Growth in manufacturing and omni-channel distribution is increasing the need for flexible outsourcing models. Post Covid, companies are increasing domestic sourcing along with integration with global supply-chains and the outsourcing model helps to absorb demand variation better than companies that have their own high-cost logistics set up.
3PL market in India (Rs bn)
Opportunities in emerging segments (Rs bn)
Source: Mahindra Logistics, FSC presentation
0
50
100
150
200
250
2000 2005 2010 2015 2017 2019
India (mn TEU)
China (mn TEU)
0
5
10
15
20
25
FY0
5
FY0
6
FY0
7
FY0
8
FY0
9
FY1
0
FY1
1
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8
FY1
9
FY2
0
FY2
1E
FY2
2E
FY2
3E
FY2
4E
FY2
5E
Total Container volume
Volume at Major Prots
0
20
40
60
80
100
120
0
50
100
150
200
250
300
FY17 FY22
Contract logistics
Express logistics
Cold Chain
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LOGISTICS SECTOR UPDATE
Improving road connectivity (km by NHAI and MoRTH) Road transport competitiveness is increasing due to: (1) improving road connectivity (2) increase in axle-loading norms, and (3) reduction in transit time after GST.
Pick up in road construction since FY14
Source: MORTH, PhillipCapital India Research
The government has announced significant measures to increase the use of waterways for commercial cargo movement. It plans to double the share of waterways in total cargo movement (coastal and inland) to c.12% from current c.6%.
India: Coastal shipping routes
Source: Shreyas Shipping
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
Constructed Awarded
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LOGISTICS SECTOR UPDATE
Se
ctio
n I:
Po
licy
Ch
ange
s
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LOGISTICS SECTOR UPDATE
Section 1: Impact of policy changes
The government is focused on reducing logistics costs India is burdened with high logistics costs at c.15% of the value of goods vs. 6-8% in other developed/developing economies. The country is unique in terms of both opportunities and challenges in logistics. Inadequate infrastructure, created using smaller warehouses to save on state taxes, which resulted in higher costs and increased inventory levels for corporates, has resulted in an inefficient logistics network. Third-party logistics outsourcing is at a nascent stage and provides growth opportunities for organized players. Several initiatives by the government to improve logistics infrastructure in the country – such as Sagarmala, multi-modal logistics parks, and regional airports in small towns/cities – bode well for the sector. The government has given the logistics industry ‘Infrastructure Status’, which will help reduce costs. To make the sector more efficient, it has also formed a department of logistics under the Ministry of Commerce, and appointed a Special Secretary, Logistics. Because of insufficient infrastructure, India ranks a lowly #44 in terms of global competitiveness. Within BRICS economies, it is placed below South Africa (#33) and China (#26), while it is above Brazil (#56) and Russia (#75). Roads dominate, constituting c.60% of India’s total freight traffic. Rail/coastal shipping account for 32%/7% while inland waterways and air are less than 1% each. Logistics cost as percentage of GDP is higher in China than in India due to the former’s higher share of manufacturing.
Comparison of key parameters USA China India
Logistics Performance index (LPI 2018) Score:3.89
(Rank 14 /160)
Score: 3.61
(Rank 26/160)
Score: 3.18
(Rank 44/160)
Agricultural GDP % 1.2 10.1 15.9
Industry DGP % 19.1 46.9 29.7
Service GDP % 79.7 43.0 54.4
Logistics spent as % of GDP 8.5 18.0 14.0
Warehousing as % of GDP 2.8 8.1 4.1
Total container handled (mn TEU) 43.0 180.0 17.5
Road network (mn km) 6.5 4.0 4.8
Rail network (km) 2,40,000 1,25,000 68,525
Coast line (Km) 19,924 14,500 7,500
Source: World Bank, Industry
Logistics Performance Index – LPI global ranking 2018 LPI Rank LPI Score Customs Infrastructure International Shipments Logistics Competence Tracking and tracing Timeliness
Germany 1 4.20 4.09 4.37 3.86 4.31 4.24 4.39
Japan 5 4.03 3.99 4.25 3.59 4.09 4.05 4.25
USA 14 3.89 3.78 4.05 3.51 3.87 4.09 4.08
China 26 3.61 3.29 3.75 3.54 3.59 3.65 3.84
Vietnam 39 3.27 2.95 3.01 3.16 3.4 3.45 3.67
India 44 3.18 2.96 2.91 3.21 3.13 3.32 3.5
Shri Lanka 94 0.6 2.58 2.49 2.51 2.42 2.79 2.79
Bangladesh 100 2.58 2.3 2.39 2.56 2.48 2.79 2.92
Pakistan 122 2.42 2.12 2.2 2.63 2.59 2.27 2.66
Source: World Bank
In the absence of a formal governing regulatory structure, the sector is fragmented, and run by a multitude of individual players
India has a long way to go in terms of bringing in an efficient modal shift in cargo transportation… …however, the government has taken several initiatives to make the sector more efficient
Roads constitute about 60% of India’s total freight traffic
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LOGISTICS SECTOR UPDATE
Trade to move towards transparency and fair play Logistics in India is fragmented with c.80% activities carried out by unorganized players. The transportation sector is more fragmented with c.95% run by unorganized players. Trucks in the country are owned predominantly by small-fleet operators; c.75% of India’s total truck fleet operators own less than 10 trucks. Bookings for transportation are normally done through intermediaries such as commission agents, because they have access to information about preferred routes, availability of vehicles, and demand. Only in 2-3% cases do customers directly access truck owners and books transportation for their goods themselves. Post Covid-19, the warehousing segment is doing very well In warehousing, there is no authentic data on capacity in India and most of the requirement is met through small storage places (called godowns) that are usually booked for captive use. Industry reports peg the total warehousing space in India for industrial purposes at around 210mn sq. ft. in 2019 compared to 104mn sq. ft. in 2015, out of which the share of A-grade warehousing is c.42% at 88mn sq. ft. in FY19 (vs. 29% at c.30mn sq. ft. in FY15). Because of higher outsourcing by big corporates and growth in organised retail and e-commerce, the demand for A-grade warehousing in the country is rising. Post Covid-19, the warehousing segment is doing very well. Demand is increasing for warehousing, as customers want to maintain a ‘safety’ stock due to the disturbance in supply chains and increased uncertainty. Parameter Grade A Grade B
Height (mtr) 13 8
Floor Strength (tons/sq. mtr) 5 3
Construction cost (Rs /sq. ft) 1500 1000
Rentals (Rs /sqft/month) 20 15
Effective rent / pallet position (Rs /month) 57 87
Source: Industry, PhillipCapital India Research
The share of 3PL and cold chain is miniscule We believe the formalisation of logistics would create opportunities for scale and efficiency for players. Government initiatives such as e-way bill, DPD, ease of doing business, and AEO (Authorized Economic Operator) accreditation of service providers (with higher benefits to those who follow compliance and maintain service standards) will increase the market share of an organised players.
Moving towards transparency, compliance, and facilitation
Source: PhillipCapital India Research
GST - one country one market,
Natioanl logisitcs policy
E-way bill - seamless
movement, compliance
DPD- AEO Esae of doing
buisness
Less than 5 75%
fleet of 6-10 10%
fleet of 10-20
6%
more than 10+ 9%
Grade A warehousing is distinguished from Grade B and Grade C based on height, floor strength, environment sustainability measures, internal roads and parking areas, etc.
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LOGISTICS SECTOR UPDATE
GST and E-way Bill GST: Stage set for formalization India’s greatest tax reform, GST (already implemented, substituted an array of potential duties) has transformed the logistics industry. Post its rollout, most industry players began evaluating the re-organization of their supply-chain and outsourcing models, and reducing the number of storage points. So far, GST, has not led to huge benefits, mainly due to many rate changes, the time taken by the industry to understand the process, and the sizeable preparation needed for supply chain re-orientation. GST rates seem to have stabilised now, though, and we expect actions for re-designing of supply chains to pick up ahead, driven by technology and innovation.
GST: A nationwide uniform market place
First major tax initiative was Value Added Tax (VAT) system in 2005, which reduced multiple taxes from the centre and states.
With VAT’s success, in 2007, the government began efforts for implementation a more refined and globally preferred tax system known as Goods and Services Tax, which was eventually implemented in 2017.
Products or services are now taxed at the same level across the entire country, irrespective of being manufactured and sold in different sub-national territories (states).
GST has replaced almost all indirect taxes, i.e., excise duty, service tax, VAT, central sales tax (CST) and entry taxes.
Central Taxes States Taxes
Central excise duty VAT
Service Tax Goods and Octroi & Entry Tax
Additional custom duty Service tax Purchase Tax
Central Sales tax CGST/ IGST/SGST Luxury Tax
Central Surcharges and Cesses Taxes on lottery & gambling
State cesses & surcharges
Entertainment tax
Source: PhillipCapital India Research
As a result of this new tax model, individual state administrative borders are irrelevant for most industries; this is driving rationalization of logistics operations and infrastructure. Due to the input-credit method, supply chains will eventually come into the formal tax system. The GST system works on the basis of taxing only the component of value addition at each level of goods or services supply, by off-setting the tax paid already at the previous level of the value chain. Thus, it automatically incorporates a mechanism that compels every level of the value chain to ensure that the appropriate tax has already been paid in the previous level. Certain products such as petroleum and gas, alcoholic products, and farm produce are exempted from GST’s purview.
Central Taxes
State Taxes
GST
The effects of GST
Rationalized supply chain
Shift of business from the unorganized to the organized sector
Increased multi-modal movement
Large-scale warehousing
Bulkier movement between hubs
The government implemented GST in July 2017
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The government has acted to simplify GST rules (since its implementation in July 2017) in order to make compliance easier. The transport sector has been given two options for tax structure: 1. Reverse mechanism with 5% rate without input credit 2. Forward mechanism with 12% tax rate with input credit Most transporters have opted for option 1, considering that the share of the unorganized sector is higher, and given the initial resistance from customers. The industry will migrate towards option 2 (forward charge mechanism) over a period, as trade formalises and compliance becomes stricter.
E-way bill: Seamless movement and ease of compliance E-way Bill complements GST, resulting in seamless movement of goods within and across states with proper government records for buyers, transporters, and sellers.
E-way bill: Before and after
E-Way was implemented from 1st July 2018 for interstate movement of cargo in India, followed by for intra-state cargo movement. With the E-Way Bill, the government is moving towards self-declaration with uniform reporting. It is also removing check posts; instead, there will be random checks by designated government officials. Waybill road permit was prevalent in most states under the erstwhile VAT regime. E-way Bill (Electronic Way Bill) is an electronic recording of the earlier waybill system. A waybill is a document issued by a carrier giving details and instructions relating to the shipment of a consignment of goods. Typically, it will show the names of the consignor and consignee, the point of origin of the consignment, its destination, and route. The E-Way Bill is a compliance mechanism where, through a digital interface, the person initiating the movement of goods uploads the prescribed information before the movement of goods begins; the bill is generated on the government’s GST portal. In the earlier tax regime, the E-way bill was not applicable in all states. Under the GST regime, it is applicable across all states and all movements, interstate and intrastate, both with uniform reporting. The bill needs to be generated by every registered person who moves goods – not necessarily only because of supply; i.e., even if cargo is moved for job work, sales returns, etc. It is required to be generated before the movement of goods begins for all modes of transport. There are two parts in an E-way bill – Part A has cargo and invoice details while Part B contains the details of the transporter (ID for unregistered player and GSTN for registered players) including vehicle number. The transporter needs to carry the invoice or bill of supply or delivery challan, and a copy of the e-way bill or the e-way bill number, either physically or mapped to a Radio Frequency Identification Device (RFID) embedded on the vehicle.
With the E-Way Bill, the government is moving towards self-declaration with uniform reporting
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LOGISTICS SECTOR UPDATE
Major changes after GST implementation
Source: PhillipCapital India Research, Industry
The E-way bill is to be generated by the consignor or consignee himself if the transportation is being done in own/hired conveyance, railways, air, or vessels. If goods are handed over to a transporter by road, the E-way bill has to be generated by the transporter. Where neither the consignor nor consignee generates the E-Way bill, it is the responsibility of the transporter to generate it. Pre GST and E-way Bill Post GST and E-way bill
Multiple taxes, entry barrier for state movement Simplified tax structure with one market and one rate
across the country
Commoditized market; low barriers to entry or exit
leading to a very high degree of fragmentation.
Close tracing of input credit and registration by
transporters will lead to formalization in the system
Physical copy of way bill and other documentation
needed
Online data monitoring
Checks at Octroi and other check posts Self-compliance; random physical checks
Source: PhillipCapital India Research
Implementation of E-Way Bill has complemented GST compliance, because it has brought about recording and monitoring of goods transport in India. Its effective implementation helps improve tax collections for the government and provides additional tools to keep tax evasion in check in the system. An analysis by the All India Motors Transport Congress, a body of cargo and passenger transporters, shows that on an average, time to cross state borders has reduced by 2-5 hours after the GST. The study found that most states have done away with the requirement for physical transit pass, stamping, online transit and document-checking at border check posts. Indian trucks’ productivity is very low (200 km per day); it will increase to c.350 km per day through the reduction of congestion and electronic toll collection. Productivity averages c.600-800km per day in developed countries.
The time taken by trucks to cross state borders ranges from 2hrs to 30hrs
Rest and
other 35%
Check post/
official stoppa
ge 25%
Travel time 40%
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LOGISTICS SECTOR UPDATE
Flowchart for E-Way bill
Self-compliance vs. mandatory check
Fine increased from 40% to 200% of tax
Use of technology with centralised data.
Uniform format: One E-Way Bill across the country with multimodal acceptability.
Helps logistics data base; ease of monitoring and tracking tax evasion.
The E-Way Bill will improve self-compliance with matching data of outward and inward supply and collection of input tax credit. It will reduce intervention of officials and use of technology to facilitate faster movement of goods. Our interactions with the industry suggest a gradual shift towards formalization, which will depend on self-compliance and effective implementation by the government. The entry barriers for express and LTL businesses have increased with implementation of e-way bill while it
has not had a material impact on exim and CFS businesses.
Ease of doing business and cost reduction – DPD and AEO The government has promoted Direct Port Delivery (DPD) and Direct Port Entry (DPE) under ease of doing business and reduced time and cost in exim trade. It has led to short-term pain for Container Freight Station (CFS) and Inland Container Depot (ICD) players. Under DPD, importers can get direct delivery of their consignments at their destination from the port, instead of moving it to a CFS. The idea is to enable big savings in terms of time and costs. DPD was initially introduced in 2008 with limited success and re-launched in 2016. Jawaharlal Nehru Port Trust (JNPT) and Chennai have extended their Direct Port Delivery (DPD) facilities to all its Accredited Client Programme (ACP) clients, irrespective of their trade volume. Earlier, the facility was available to customers with a monthly container volume of more than 300 (on 9 February 2016, DPD was extended to all ACP clients and the minimum TEU criteria was dispensed with. On 10 May 2016, it was extended to two other terminals (GTI and NSICT) at the JNPT port). Before DPE, every ‘factory stuff’ container had to proceed to a CFS to get approval from Customs and then proceed to the terminal gates. From December 2016, Customs started granting LEOs (Let Export Orders) from offices in the parking yards inside ports; from there, containers can be directly exported. Direct port entry has increased to 74% after operations began at ports, reducing the cost and time for exporters.
In May 2017, DMICDC launched a logistics data bank project across port terminals of Mundra and Hazira
A company that does not file GST returns is restricted from generating E-Way bills
DPD/DPE have led to short-term pain for CFS / ICD players
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The RFID system is in place at nine major ports and is likely to be rolled out in all others – to track the movement of containers. The PMO had also asked the shipping ministry to convert all ports that are still dealing with paperwork manually to shift to electronic data interchange (EDI). The government is working on integrating port community systems and terminal operator filing systems with ICEGATE, which is the e-commerce portal of Central Board of Excise and Customs (CBEC), for seamless data exchange and online payment. DPD experience at JNPT The government aims to route c.65% of its import container traffic (earlier target was c.80%) via DPD from the current c.60% at JNPT port. The DPD scheme has seen steady growth in terms of the number of total containers handled at JNPT. In May 2020, 61% (54,929 TEUs) of the import container cargo was cleared through DPD vs. just 3.5% (3,486 TEUs) in January 2016 – which shows the phenomenal pick-up in this scheme. Under DPD, an importer’s cargo is cleared (assured) in less than 48 hours, while it takes around seven days if routed through CFS. DPD also helps to reduce the direct costs incurred by importers – they save Rs 7,000 on 20 ft. containers and Rs 15,000 on 40 ft. containers as per government estimates. JNPT is a CFS-driven port and around 90% DPD-cleared cargo moves back to CFS due to lack of storage and transportation infrastructure at the customers’ end. The number of customers availing DPD has increased to 2,500+ now, from 611 in February 2017. We believe it covers majority of importers there, and with no material increase, the impact of Direct Port Delivery (DPD) on CFS volumes is bottoming out. With change in regulations, CFS operators are now focusing more on value-added and warehousing solutions to stay competitive. DPD challenges
Delay in documentation prevents importers from availing of the service: Delays in issuance of delivery orders, lack of electronic payment system with the shipping lines, physical lag in the movement of cargo at the port, unpredictability and non-transparency in the charges imposed on importers.
Other measures that are critical for the success of DPD include: Improvement in evacuation infrastructure, internalisation of all agencies involved, and upgradation of port infrastructure in terms of bonded warehouses and custom facilities.
Arrangement of transportation of containers and management of empty containers for small players.
Major volumes are going back to CFS
Containers cleared under DPD
Source: JNPT port
0
10000
20000
30000
40000
50000
60000
70000
Feb
-17
May
-17
Au
g-1
7
No
v-1
7
Feb
-18
May
-18
Au
g-1
8
No
v-1
8
Feb
-19
May
-19
Au
g-1
9
No
v-1
9
Feb
-20
May
-20
Direct delivery by importers Going back to CFS
20%
25%
30%
35%
40%
45%
50%
55%
60%
65%
0
10000
20000
30000
40000
50000
60000
70000
80000
Feb
-17
May
-17
Au
g-1
7
No
v-1
7
Feb
-18
May
-18
Au
g-1
8
No
v-1
8
Feb
-19
May
-19
Au
g-1
9
No
v-1
9
Feb
-20
May
-20
No of DPD cleared continaers (TEU)
% of import -RHS
JNPT is a CFS-driven port and around 90% containers there move back to CFS due to lack of storage and transportation infrastructure at the customers’ end
DPD+DPD 8%
DPD+CFS
43%
CFS 49%
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LOGISTICS SECTOR UPDATE
Authorized Economic Operator (AEO) programme AEO is a part of the ‘ease of doing business initiative' jointly implemented by the centre and state governments in India. AEO is a facilitation programme under the aegis of the World Customs Organization (WCO) SAFE framework of standards to secure and facilitate global trade. Article 7.7 of the WTO (Word Trade Organization) trade facilitation agreement also provides for implementation of the Authorized Operator Scheme on the basis of international standards. AEO encompasses various players in the international supply chain and ensures security in the global supply chain. Under the programme, an entity engaged in international trade is approved by Customs as compliant with supply chain security standards and granted AEO status and certain benefits. Moving towards self-compliance and facilitation In India, the AEO programme was launched in 2011 on a pilot basis, and rolled out in a full-fledged manner in November 2012. The Central Board of Indirect Taxes and Customs has developed a comprehensive unified trade facilitation programme by incorporating the earlier ACP scheme and ongoing AEO programme into a revised AEO programme from July 2016, with strong internal control systems. AEO was modified in 2018 as per international World Customs Organization (WCO) standards. There are multiple tiers of certification in the new AEO programme for different levels of benefits and facilitation. For importers and exporters, the certificates are AEO-T1, T2 and T3 (T3 gets highest benefits) while for logistics and supply-chain players, the certification is AEO-LO. It is a voluntary programme. The government is moving towards self-compliance of regulation and safety, and giving more benefits to those who are following it.
Trade facilitation under different programmers
Source: Phillip capital Research, Industry
AEO-certified operators receive preferential treatment in terms of less customs examination, relaxed procedural requirements, and deferred duty payment, subject to the operators maintaining prescribed security standards and compliance requirements. Currently, there are around 4,293 AEO status holders.
Multiple tiers of certification in the new AEO programme Certification No of status holder Details
AEO T1 2,985 Verification on the basis of document submission
AEO T2 523 Onsite verification
AEO T3 11 T2 for 2 years, physical verification
AEO LO 774 For logistics, warehousing, CHA; physical verification
As on 26.06.2020
Source: cbic.gov.in
Simplification with global
standard, web based (2018)
New Authorised Economic Operator
Programme (2016)
Authorised Economic Operator
Programme (2011)
Accredited Client Programme
(2005)
Green Channel [1998]
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Benefits of AEO Certification As a next step towards trust-based compliance, the new AEO programme provides extensive benefits, including greater facilitation and self-certification to those entities who have demonstrated strong internal control systems and compliance. Benefits are available to importers, exporters, and stakeholders in international supply chains, logistics provider, custom brokers, terminal operators and warehouse operators. To bring in transparency, around 90% benefits are system-driven. Key benefits of an AEO certificate are: Inclusion of Direct Port Delivery (DPD) of imports to ensure just-in-time inventory
management by manufacturers – clearance from wharf to warehouse. Currently, DPD is also available to non-AEO, which may be withdrawn if they don’t become AEO.
Inclusion of Direct Port of Entry (DPE) or factory-stuffed containers meant for exports.
AEO status holders will receive e-mails about arrival/departure of vessels carrying their consignments.
Faster disbursal of the drawback amount – within 72 hours of EGM submission. The assessment/examination shall be processed on a priority basis for AEO
customers. Faster disbursal of refunds, including IGST refunds and rebates for AEO status
holders – within 45 days of submission of complete documents. Reduced bank guarantees.
Automatic activation of Deferred Duty Payment option for AEO-T2 and T3 status holders. AEOs receive up to 15 days of credit, with a duty-payment option on the 15
th day of the month or on the 1
st of the next month.
Request-based on-site inspection/examination. Paperless declarations with no supporting documents. Recognition by Partner Government Agencies and other stakeholders, as part of
this programme. Recognition at global ports for facilitation with bi-lateral agreements, i.e., HK, Taiwan, and South Korea and more to follow.
The AEO programme provides businesses with an internationally recognized quality mark, which indicates their secure role in the international supply-chain and that their customs procedures are compliant
To bring in transparency, around 90% AEO benefits are system-driven
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LOGISTICS SECTOR UPDATE
Section 2: Improvement in Physical Infrastructure
Improvement in road infrastructure India transports a high 60% of total goods by road vs. 22% in China and 37% in the US. Meanwhile, India’s rail-goods-transport share is lower at 36% vs. 48% for the U.S. and 47% for China. A large part of the country’s freight traffic comprises bulk materials that move over long distances of up to 2,000km, which can be served efficiently by railways and waterways. Therefore, the higher proportion of road transport is putting pressure on the economy by way of much higher dependence on fossil fuels and high level of greenhouse gas emissions. India has one of the largest road networks in the world at c.5.9mn km, which consists of: (1) National highways (NHs), (2) state highways (SHs), (3) major district roads (MDRs), and (4) rural roads (RRs), which include other district roads and village roads. NHs (including expressways) with a length of 132,500mn km account for just c.2.2% of the total road network, but carry 40% traffic. A very high proportion of roads – at c.77% – are two lanes or lower, which cannot support 10.2-tonne permissible load per axle that trucks are allowed to carry. Safety is also a major concern area. Over 130,000 people are known to die annually in road accidents in India, which is c.10% of the world’s total, even when India’s share in the number of total vehicles in the world is just 1%. The World Health Organization has forecasted road traffic injuries to rise and become the fifth-leading cause of death in India by 2030. The government is strengthening the road network through an ambitious programme called Bharatmala. Total investment for Bharatmala will be around Rs 7.5tn – for constructing about 84,000km of roads. Under its first phase, a total of 34,800km of roads, including 10,000km of residual NHDP (National Highway Development Project) and 2,000km coastal and port connectivity roads have been approved for development.
Road construction progress in India
Source: MoRTH
Electronic Tolling System: The government has started an E-tolling system for National Highways and is planning to implement it at all tolls. Fast Tag system helps to reduce time at toll posts. The government also introduced the discount scheme to increase e-toll users. Customers received discounts at 2.5% of toll charge in FY19; 5% in FY18, 10% in FY17.
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
Constructed Awarded
National Highways (including expressways) with a length of 132,500mn km account for just c.2.2% of the road network but carry 40% traffic
2% 3%
95%
National Highway/ Expressway
State Highway
District/ Rural roads
India has one of the largest road networks in the world at c.5.9mn km; its roads carry c.60% of the country’s freight traffic and 80% of its passenger traffic
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FASTag is a simple-to-use, reloadable tag that enables automatic deduction of toll charges. Enabled vehicles can pass through the toll plaza without stopping for the cash transaction. FASTag is linked to a prepaid account from which the applicable toll amount is deducted. The tag employs Radio-frequency Identification (RFID) technology and is affixed on the vehicle's windscreen after the tag account is active. The Government has now made FASTags mandatory for all vehicles on National Highway roads.
Increase in axle-loading norm for trucks The government has increased the loading limits for commercial vehicles (CVs) in India from July 2018 (changed after 35 years) to bring gross vehicle weight at par with international standards. It will reduce vehicle population, congestion, and the carbon footprint. Truck Type Earlier gross wt (tonne) Revised gross weight (tonne) % change
2-axle 16.2 19.0 17.2%
3-axle 25.2 30.5 21.0%
4-axle 34.2 42.0 22.8%
5-axle 43.2 53.5 23.8%
Source: Road ministry
As per industry estimates, freight rates have declined by c.6-8% with an increase in loading norms. Most players cut fleet-addition plans as capacity increased for their existing fleets and demand remained weak. For example, VRL Logistics – one of the largest truck operators – had earlier planned an addition of 1,200 trucks over FY19-20, which it cut by half to c.600 trucks after axle-load norms changed and demand slowed.
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Railways: Under-invested for now The Indian government has targeted increasing the railways’ share in local transport from 36% right now to 45% by 2030 with the development of six freight corridors. In 2016-17, it planned to commission 2,800 kms of tracks with c.7kms added per day against an average of about 4.3kms per day in the previous six years. Now, the government is targeting construction of a railway network of c.19kms per day with an investment of about Rs 8.5tn in the next four years. The country has had suboptimal investments in transportation historically. In the last 64 years, while the freight loading has grown by 1344% and passenger kilometres by 1642%, the route kilometres have grown by only 27%. China has set up 30,500km of new railway lines with a capital investment of CNY 3.58tn over 2012-15. It is investing CNY 2.8tn in constructing 23,000km of lines over 2016-20 and is targeting more than 270,000km by 2050.
Additions to railway track length (km); India lags behind
Source: PhillipCapital India Research, Industry
This divide between railways and roads became even more pronounced when roads expanded rapidly because of focused policy and investments, particularly during the last decade. RITES – a consultancy organization under Indian Railways – estimated that this consistent and unchecked fall in the share of railways through the years has cost the Indian economy about Rs 385bn per year (16% of total transport costs). Indian Railways’ Vision 2020 is an aspirational plan that charts out a growth of 10% over the next 10 years by developing a sharper commercial focus and strong social commitment. Indian Railways is in urgent need of modernization and a generational change to ensure safety, improve productivity, take advantage of advances in technology, and respond to ever-increasing demand in order to meet the inclusive growth aspirations of the country. For this, the government is allowing private participation; it allowed private container train operators in 2006. It encourages last-mile rail connectivity projects at ports and ICD facilities on a PPP basis. It also plans to give out 150 trains on 100 routes to private players for passenger movement. The Indian Railways has decided to run timetabled freight trains on a pilot basis from 25
th June 2020, which could increase the speed and reliability for the movement of
goods. The routes identified for the pilot include Tughlakabad (Delhi)-Mundra Port (Gujarat), Kathuwas (Rajasthan)-Mundra Port, Sanath Nagar (Hyderabad)-Jawaharlal Nehru Port (Mumbai), and Khodiyar (Gujarat)-Mundra Port.
0
20000
40000
60000
80000
100000
120000
140000
160000
1950 1960 1970 1980 1990 2000 2005 2015 2016 2017 2018 2019
China India
India 1.2x
China 6.3x
Indian Railways has suffered from considerable under-investment during the last several years
The government is allowing private participation for growth Newly launched ‘time-table’ container trains could increase the speed of movement and reliability
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All eyes on DFCC Cargo movement by train is more cost competitive than movement by road, particularly for distances of more than 500kms. However, in India, containers are moved by road, even for distances of more than 1,400kms, due to poor rail infrastructure. The cost of goods transportation by railways is inordinately higher because of continuous increases in haulage charges for goods transport and subsidizing of passenger tariff. While the main earnings of Indian Railways come from its freight operations (which cross-subsidises its losses on running passenger trains), passenger trains are given preference and cargo trains are made to wait due to shortage of tracks. As a result, the average speed of a goods train is just c.25kmph per hour (compared to c.70kmph in China) without any time guarantee. On the other hand, cargo tracking makes trucks a better option for many customers.
Higher railway freight and subsidised passenger tariff in India (unit: paise)
Source: Indian Railways
Railways’ market share in the goods movement of the country has come down to c.31% from 65% in 1987, while the road sector's share has gone up to 60% from 34% in the same period. To correct this, Dedicated Freight Corridors (DFCs) will strengthen India’s rail transport infrastructure to meet expected high future demand for freight movement. It is hoped that the development of DFCs would result in enhancing the market share of rail in freight by providing an efficient, safe, economical, and environment-friendly option. DFCC (Dedicated Freight Corridor Corporation) will reduce the unit cost of railway transportation by creating infrastructure that can carry higher throughput per train.
Share of rail cargo movement will increase
Source: Planning commission
0
20
40
60
80
100
120
140
160
180 Revenue per NTKm Revenue PKm
0
20
40
60
80
100
1950-51 1978-79 1986-87 2007-08 2014-15 2018-19 2029-30
The average speed of a goods train is just c.25kmph per hour (compared to c.70kmph in China) and that too without any time guarantee
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LOGISTICS SECTOR UPDATE
Construction of DFCs across the country is the most ambitious project ever conceived by the Indian Railways. Out of the six DFCs planned in a phased manner, two corridors (eastern and western) are scheduled to be fully commissioned by FY21. The eastern corridor will run from Ludhiana in Punjab to Dankuni near Kolkata with a length of 1,839kms and the western corridor will stretch from JNPT near Mumbai to Dadri near Delhi at a length of 1,534kms. The phasing of corridors is synchronized with the existing most-saturated sections on the Mumbai-Delhi and Delhi-Kolkata rail links.
DFC Corridors – two are under construction
Source: DFCCIL
Volume analysis on Western DFCC (WDFC) for exim cargo at port
WDFCC will be mainly used for movement of container cargo from the west coast of India to the northern hinterland. The ports that would cater to WDFCC are currently handling a container volume of c.141mn tonnes, out of which c.36mn tonnes is moved by rail.
After DFCC, incremental cargo potential (including container, cement, and fertilizer) is around 59mn tonnes over the next 3-4 years (see below table).
Apart from exim cargo, there is big potential for domestic cargo movement by rail. However, the success of this depends on upgradation of feeder routes and development of multimodal logistics parks for bulk and container movement.
We have assumed domestic movement of 15mn tonnes on WDFCC in FY23. Currently, domestic container volume for the country through rail is c.12mn tonnes.
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LOGISTICS SECTOR UPDATE
Container cargo potential on WDFCC Ports Total Cargo Container Container Other Cargo Rail share for container Container Rail volume Incremental from road
Unit mtpa mn TEU mtpa mtpa % mtpa mtpa
Mundra 135 4.5 55 80 26% 14.4 25
Kandla 115 0.2 4 111 26% 1.0 12
Pipavav 13 0.8 10 3 68% 6.8 0
Hazira 20 0.6 9 11 25% 2.3 2
Mumbai 61 0.0 0 60 0% 0.0 5
JNPT 71 5.1 62 9 18% 11.2 15
Total 414 11 141 274 25% 36 59
Source: Phillip Capital India research
Theoretical capacity of each DFCC, i.e., western and eastern, could be as high as 600+mn tonnes per annum. Initially, DFCC will run c.237 trains daily on WDFC and 255 on EDFC. The design load-carrying capacity of one wagon on DFCC is 100 tonnes (compared to c.60 tonnes at present) and one train will constitute up to 90 wagons. Assuming an average load of 62 tonnes per wagon, the cargo movement will be around 1.2-1.6mn tonnes per day on each route. Capacity addition, along with assured transit times, would lead to an incremental shift in cargo from road to rail . WDFCC EDFCC Total
No of trains per day 237 255 492
No of Wagons per train 90 90 90
Average load (tonne)/ wagon 55 70 62.5
Load per train 4950 6300 5625
Annual capacity mn tonne 428 586 1010
Source: Phillip Capital India research
Currently, around 130mn tonnes (including all types of cargo) is moving on existing rail lines, parallel to WDFC, and around 180mn tonnes is moving on rail lines parallel to EDFCC, which will move on DFCC. Still, DFCC would have a surplus of around 300mn tonnes capacity on each route. Railways costing is lower at around Rs 1.2 per tonne per km compared to Rs 2.5+ for roads. Additionally, trains on DFCC would be able to reach Delhi from JNPT in 24 hours, which is much lower than the c.3 days that it would take for a truck.
Railways costing per tonne km for different distances and commodity classes Rs /ton/km LR3 LR1 Class 100 Class 150 Class 180
126-150 0.83 1.19 1.25 1.88 2.25
201-225 0.74 1.06 1.11 1.67 2.01
401-425 0.67 0.96 1.01 1.51 1.82
1001-1100 0.65 0.92 0.97 1.46 1.75
1501-1625 0.62 0.89 0.93 1.40 1.68
2001-2125 0.56 0.80 0.84 1.27 1.52
Source: Indian Railway
Capacity addition, along with assured transit times, would lead to an incremental shift in cargo from road to rail
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Indian Railways cargo-wise breakup (mn tonne) Cargo-wise breakup FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
Coal 496.3 508.1 551.8 551.5 520.0 555.2 605.8 587.0
Steel 48.1 50.0 52.1 52.3 52.9 56.3 59.0 57.0
Thermal power plant 315.4 335.4 371.8 371.3 332.0 243.9 257.7 252.9
Pig iron/ Finished steel 35.3 38.6 44.8 44.8 46.5 54.4 53.3 53.8
Iron ore 111.4 124.3 116.9 116.9 133.7 139.8 137.4 153.4
Cement 105.9 109.8 105.4 103.3 107.0 113.0 117.7 110.7
Food grains 48.3 54.4 45.7 44.9 46.0 43.8 39.3 37.5
Fertilizer 45.9 44.4 52.2 48.4 50.9 48.53 51.9 51.6
POL 41.6 41.9 43.2 42.4 42.7 43.11 43.5 43.5
Container 41.1 43.6 45.8 47.4 48.0 53.9 60.3 61.2
Domestic 9.3 10.9 9.0 10.3 9.0 11.1 11.9 11.3
Exim 31.8 32.7 36.8 37.0 39.0 42.8 48.5 49.9
Others 84.1 88.5 89.1 101.5 98.7 107.9 114.1 111.8
Total 1009.9 1053.5 1095.0 1101.0 1093.5 1159.6 1223.3 1210.5
Source: Indian Railway
DFCC Progress and completion targets (updated as of Nov 2019)
WDFCC Physical progress
Stretch Km
Target
commissioning Land %
Land km
affected Civil System
Rewari - iqbalgarh CTP 1&2 641 Mar-20 100 0 91.5 65
Iqbalgarh - Vadodara CTP -3 308 Sep-21 99.9 1.5 42 38
Vadodara - Sachin CTP-13 135 Dec-21 100 0 38 46
Sachin - Valtarana CTP-12 186 Dec-21 98.1 1.3 29 0
Valtarana - JNPT CTP-11 109 Dec-21 96.1 10.4 17 0
Dadrai - Rewari CTP-14 127 Mar-21 99.7 0 37 0
Source: DFCC
EDFCC Physical progress
Stretch Km
Target
commissioning Land %
Land km
affected Civil System
Bhaupur - Khurja EDFC -1 351 Mar-20 100 0 98.7 87
Bhaupur -Mughalsaral EDFC-2 402 Dec-20 99.8 1.55 64 39
Durgawati - Sasaram 56 Dec-20 100 0 100 100
Mughalsarai-Sonnagar 81 Dec-20 95.5 2.68 56 Na
Khurja -Dadri 46 Dec-20 87.2 5.03 43 Na
Pilkhani - Ludhiana 179 Dec-21 100 0 46.5 Na
Khurja-Pilkhani 222 Dec-21 91.1 11 26 Na
Source: DFCC
Due to covid, the target for commissioning of DFCC projects would be delayed by 6-8 months, as per industry feedback. We believe this will have a minimum impact on trade and the economy, considering the slowdown in economic activity and capacity availability on the current Indian railways network due to reduction in passenger trains. Notably, DFCC officials have maintained the completion dates.
Modal shift to benefit container train operators The government is working on creating seamless multimodal freight transfers to ensure efficient freight movement in the country. It is planning to move long-line-haul cargo through more efficient modes such as railways and waterways, with first- and last-mile connectivity by road. In 2006, the government deregulated rail transportation of containers. This was the first major effort by the Indian Railways towards attracting private capital to the
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sector. Currently, there are around 16 private container train operators in India. Private investors invested over Rs 40bn in wagons, containers, and terminals, in addition to Rs 6.50bn as license fees. Private rail players had limited success so far, due to frequent and steep increases in rail haulage charges for container trains, together with incongruous policy decisions. While the Indian railways network is one of the largest in the world, it is overburdened, operating at more than 100% utilisation on c.40% of its routes. On its high-density network, 720 lines out of total 1,219 lines operate at more than 80% utilisation.
Share of line capacity utilisation on the Indian Railways
Source: Indian Railway; OTOS: One train only system
The situation will change after the development of the DFC, which is expected to start from September 2020 in a phased manner and complete by December 2021. The current average speed of goods cargo on trains in India is just c.25km per hour, which can be increased to c.65km per hour (design speed is 100km/hr) with dedicated trains, thereby improving reliability. Because of this, a significant part of container cargo that is currently moving by road is likely to shift to rail. Improvement in storage and handing after MMLP (Multi Modal Logistics Parks), A-grade warehousing, and hub-and-spoke arrangement is also likely to help increase domestic cargo rail movement. Indian Railways’ freight segment generates around 70% of its revenue while its share in total cargo movement in country is c.36%. We believe railways’ share in the total cargo of country will increase to c.40% by FY30, with the start of DFCC and strengthening of the existing rail network. To take care of last-mile rail connectivity with ports and logistics hubs, the government created the Rail Vikas Nigam Limited in 2002. We expect container train operators to benefit significantly with an improvement in the rail network.
Improving share of rail and water transport
Source: Planning commission, PhillipCapital India research estimates
0%
5%
10%
15%
20%
25%
30%
35%
40%
<80% 80-100% 100-120% 120-150% >150% OTOS
40% lines on Indian railways are running at more than 100% capacity utilization
57 59 47
36 32 40
6 8 12 1 1 1
2010 2030 2030
Road Rail Water Air
Wtih current trajectory towards balance mix
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Delhi Mumbai Industrial Corridor (DMICDC) DMICDC is developing national industrial corridors by acquiring land with the support of the state government. It is creating basic infrastructure for industrial and social development. Currently, it is working on 8 industrial corridors to leverage rail connectivity along the western dedicated freight corridor (WDFCC). It is investing c. Rs 30bn in each industrial cluster for developing trunk infrastructure with plug-and-play model for private players. The control and governance of each corridor will be managed from one place. Benefits of DMICDC clusters 1. Litigation-free land parcels with availability of quality water and power. 2. No separate environment clearance, which saves 6-8 months. 3. Single-window documentation and follow up by DMICDC for around 67 approvals
with 30 government departments. 4. Rail and rail connectivity. 5. No interference from local and state governments.
National Industrial Corridor Development
Future-ready Plug-and-Play utilities
Source: DMICDC
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Underground utilities installed at Dholera. DMICDC is developing future-ready trunk infrastructure for industries
Source: DMICDC
Underground utilities installed at Dholera Roads and Utilities Details of Land allotment Total Plots allotted Area (acre) Balance land
Shendra Industrial Area, Maharashtra 58 160.3 500
Bidkin Industrial Area, Maharashtra 0 0 2800
Integrated Industrial Township Project, at Greater Noida, Uttar Pradesh 5 153.89 177
Dholera Special Investment Region, Gujarat 3 152.71 3000
Integrated Industrial Township Project,‘Vikram Udyogpuri’ near Ujjain at Madhya Pradesh 1 12 650
Total 67 478.9 7127+
Source: DMICDC
With the development of the DFCC and DMICC, the growth rate in container trade could see a structural shift in coming years. One of constrain for container trade was lack of handing infrastructure at hinterland locations as it require mechanised handling compared to done manually for loose bulk cargo through truck transport. DMICDC facilities will has large warehouses for varied cargo with modern handling equipment Container cargo requires mechanised handling
Source: PhillipCapital India research
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Focus on utilizing waterways for commercial cargo movement
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Revival of coastal and inland water The government’s focus on developing India’s rich and varied natural water resources by promoting waterways for commercial use have started showing results.
In November 2018, Prime Minister Narendra Modi inaugurated India’s first multimodal terminal at Varanasi for inland waterways; this terminal received India’s first container movement on an inland waterway since Independence.
Ferry service for cargo and passengers (RoPAX) between both Ghogha and Dahej (both in Gujarat) under the Sagarmala initiative has reduced the travel time between Saurashtra and South Gujarat to just over an hour from 7-8 hours earlier, and the distance is down to just 31km from 360km.
Cargo movement in the northeast through NW-2 and the Bangladesh Protocol is also picking up.
Concor started coastal shipping in FY19 and expects Rs 50bn revenue from this over the next five years.
TCI is adding one ship every year; in five years, Shreyas has increased its fleet to 13 from 6.
The government is committed to providing an enabling environment and is focusing on the development of waterways with institutional arrangements. The modal shift of cargo to water from roads will reduce costs of transportation, accidents, and environmental pollution, supporting the government’s mission of ‘Clean India’ and ‘Make in India’. The necessary institutional framework is being created to enable the central and state authorities to work together for ensuring inclusive growth. The government highlighted that IRRs in waterway development would be very attractive and is ready to develop innovative models in PPP. To attract investment into the sector, it is considering issues related to financing, taxation, and customs. Coastal Shipping India has a long coastline spanning 7,500 km, forming one of the largest peninsulas in the world. It is serviced by 13 major ports (12 government and 1 corporate) and 187 notified minor and intermediate ports. These ports account for nearly 90% volume of India’s international trade. But coastal shipping accounts for less than 6% of total domestic freight movement, though this mode of transport is approximately 60% more economical, safer, and cleaner, compared to roads.
Waterways
Coastal Shipping
– Large ships with coastal and transhipment movement
– Developed infrastructure
Inland Waterways
– Movement through small barges of 2,000-2,500 tonnes on river
- Infrastructure development under process
Cargo and passenger movement through coastal and inland waterways is beneficial for the country, as it is cheaper than any
other form of transport, safer, and more environment friendly.
Government wants to double the contribution of coastal shipping in total cargo traffic to 12% from current 6%
For a detailed report on waterways
click here
Significant focus on utilization of waterways for cargo movement
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Share of water transport (%)
Source: Industry, PhillipCapital India Research
The potential that coastal shipping and inland waterways holds is largely untapped and these segments are receiving much-need government attention now. Waterways are 50% cheaper than roads and nearly 30% cheaper than rail. The coastal leg, apart from being more fuel efficient, can also carry larger parcel sizes and provides a great opportunity for consolidation of loads and over-dimensional cargo.
Waterways are more fuel efficient than roads and trains Operating cost per tonne km Fuel efficiency ton km/litre
Shipping 0.75 105 Rail 1.18 85 Road 1.51 24
Source IWA
Cargo breakup of coastal movement
Source: Indian Port Association (IPA)
The development of coastal shipping would lead to increased opportunities in container-feeder services. The possibility of a dedicated sea corridor with inter-port connectivity is being explored. Coastal shipping has the potential for transporting 160mtpa of coal and 80mtpa of steel, cement, and food grains. The government is setting up ten coastal economic regions (CERs). To develop each CER, a Special Purpose Vehicle (SPV) would be formed with equity participation from the involved state governments and the Sagar Mala Company. The management of the CER SPV would vest with the state governments. The CER SPV would be responsible for implementing the DPR prepared for the development of the CER. The
0
5
10
15
20
25
30
35
China USA India
POL 49%
Thermal Coal 27%
Iron ore 5%
Cement / Clinker 6%
Other 13%
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government is working on seamless movement of cargo on waterways with integration of coastal and inland waterways.
Inland Waterway Transport (IWT) India took nearly forty years after its Independence to set up the Inland Waterways Authority of India (IWAI, 1986). Even with this delay, it has spent a dismal c.US$ 350mn so far on inland waterways, which compares very badly to China’s US$ 15bn expenditure in the last five years alone! Share of inland waterways in total cargo movement in India is less than 2% compared to Germany at 12%, Belgium at 15%, and Netherlands at a whopping 37%. Some of Europe’s largest seaports use inland waterways because of increasing congestion. Rotterdam, for instance, avoids using almost 100,000 daily truck movements because of the use of inland waterways (Source INE – Inland Navigation Europe). India’s geography favours waterways development. The country has 21,000km inland waterways, of which 5,200kms are major rivers and 500kms are canals suitable for mechanized crafts. The scope for IWT has increased with the announcement of the Waterways Act in 2016, which increased the scope of National Waterways to 111 rivers from just 5 earlier. Out of these, 30 rivers are identified as viable and work has begun on eight of them from 2018.
One of the ways to reduce logistics cost for exim trade is to bring manufacturing close to ports and reduce transport and inventory requirement
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Number of national waterways in India
Source: Inland waterways Authority (IWAI)
List of eight National Waterways (NW) taken up for development since FY18 Name River stretch details State Length (km) Operational
NW -37 River Gandak. From Bhaisaslotal Barrage near Triveni Ghat to Hajipur. Development work started from Ganga confluence to Bagaha Bridge (c.250km) under Phase-1.
Bihar and UP 296 N
NW-86 Rupnarayan River. Confluence of Dwarkeshwar and Silai rivers (Pratappur) to Hooghly river (Geonkhali). Approximately 34 kms (Geonkhali to Kolaghat stretch) has been taken up for development under Phase-1.
West Bengal 72 N
NW-9 Alappuzha – Kottayam – Athirampuzha Canal. Development work has begun under Phase-1 for cargo movement. Waterway is already operational for ferry services.
Kerala 38 P
NW 97 Sundarbans Waterways. The NW is already operational under Indo-Bangladesh Protocol (IBP) route. Namkhana to AtharaBanki Khal and 13 connected rivers (654km) in West Bengal. Phase-1 development work of this NW from Namkhana to Athara Banki Khal (172km) has started.
West Bengal 201 Y
NW 16 Barak River – between Lakhipur and Bhanga with a project cost of c.Rs 760mn. Key cargo commodities on NW 16 are construction material, rice, coal, paper and goods. Under Phase -1, the stretch between Silchar to Bhanga (71km) has been taken up for development. This waterway is operational with limited infrastructure facility.
Assam 121 P
NW-27 Cumberjua River – Zuari river to confluence with Mandovi river. Development works for expansion/setting up of floating jetties and up-gradation/-installation of navigational aids is underway.
Goa 17 N
NW 68 Mandovi River - Usgaon Bridge to Arabian Sea at Reis Magos. Goa 41 N
NW 111 Zuari River - Sanvordem Bridge to Mormugao Port. Goa 50 N
Source: IWAI
The government is developing NW-1 (River Ganga) under the Jal Marg Vikas Project (JMVP; from Haldia to Varanasi, with technical and financial assistance from the World Bank) at an estimated cost of Rs 54bn. Inland Waterways Authority of India (IWAI) is the project implementing agency. The project envisages various sub-projects such as fairway development, navigational aids, and construction of multi-modal terminals at Varanasi, Sahibganj, and Haldia, construction of new navigational lock at Farakka, bank protection work, movement of LNG vessels, LNG bunkering facilities, etc.
1 2 3 4 5
111
0
5000
10000
15000
20000
25000
0
20
40
60
80
100
120
1982 1988 1993 2008 2008 2017
No of Waterways length km (RHS)
After development of night navigation facilities on the entire stretch, travel time form Varanasi to Haldia can come down to 4-5 days from 12-14 days earlier – a significant leap for cargo movement on the NW-1
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After development of night navigation facilities on the entire stretch, travel time from Varanasi to Haldia can come down to 4-5 days from current 12-14 days, a significant advantage for cargo movement on the NW-1. Total cargo movement on Inland Waterways will increase from c.72mn tonnes currently to c.120mn tonnes by 2025. Companies such as Pepsico, Emami Agrotech, IFFCO Fertilizers, and Dabur India have already moved containers on the River Ganga. Major cargo that can be moved on the coastal route includes coal, cement, ODC, and fertilizers.
River Information Service (RIS-Phase 1) Haldia – Farakka Stretch of NW-1 RIS system provides harmonised information services to support traffic and transport management in inland navigation, including interfaces to other transport modes. RIS has the goal of a safe and efficient transport by avoiding the following risks:
Skip – to – ship collisions
Ship – bridge collisions
Groundings
Improved efficiency
Cargo movement on inland waterways will be c.120mn tonnes by 2025
Source: Ministry of Shipping, IWAI
Benefits of Waterways One litre fuel can move 24 tonne-km by road, 85-tonne-km by rail, and 105 tonne-km by waterways. Most companies are now following ESC (Environmental, Social and Corporate Governance) norms and want to use waterways for cargo movement, as it is an environment-friendly mode of transport. H&M, Pepsi, IFFCO, and Maruti etc have announced green mode of transport in their supply chains. Waterways will help ease road congestion, which is positive for truck cargo movement. One ship can carry the load of around 200 trucks with high operating leverage. Major initiatives by the government that will shift the orbit for waterways: 1. Appointment of a logistics secretary under the Ministry of Commerce and
developing a logistics data bank. 2. Fuel-cost benefit with reduction in tax. Diesel under-recovery earlier to market
price has reduced the disparity between road cost and shipping cost. Pre-GST
0
10
20
30
40
50
60
70 FY20 FY25From new waterways
River information system will reduce travel time with night navigation
Source: PhillipCapital India, IWAI
Source: PhillipCapital India, Industry
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effective tax on bunker for shipping for domestic movement was around 40%, which came down to 18% in GST and is now reduced to 5%.
3. Stricter road-side compliance with GST and e-way bill. Invoicing on GST portal. BS-6 norm, AC cabin.
4. 40% discount on vessel related charges (except Coal and iron ore) at port for coastal ships with dedicated coastal berth and priority berthing. 80% discount for RoRo vessel.
5. Simplification of registration and ease of doing business. 6. Permission to mix domestic and Exim cargo. 7. Relaxation of Cabotage law. 8. Allowing fertilizer transport subsidy in inland waterways.
Major initiatives to promote coastal shipping in India
Source: Ministry of Shipping
Relaxation of Cabotage
Green Channel
Clearence
Reduction in Port Charges
Reduction in duties for
Bunker (Fuel for
ships) with 5% GST
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Section 3: Disruptions
Emergence of the IT-enabled platform New-age companies with access to comprehensive data analysis are creating technology-enabled solutions for logistics players. They use analytics and advanced machine learning to improve efficiency and reduce cost of services. These new players will usher in better and transparent pricing, and instant availability. Smaller fleet owners are attaching their trucks to online fleet-aggregator platforms in order to ensure higher truck utilization and better pricing; for most, revenues tend to rise 20-40%. Using technology for efficient route planning helps to optimise time and fuel consumption for the fleet; some platforms claim enabling savings of up to Rs 25,000 per truck per annum. We believe that new players will be a major threat to road transporters, and particularly full-truck carriers, in the short term. However, financial viability of these private-equity-funded start-ups is a major concern in the long term.
Technology-driven platforms are disturbing road-transport dynamics
Source PhillipCapital India research
Online shopping and door delivery are growing opportunities for logistics players and companies are working on efficient solutions for last-mile delivery. For example, companies are offering free delivery or even one-day delivery. For these commitments to succeed, last-mile connectivity is becoming critical. As per industry estimates, around 30-50% of the total cost of logistics is in the form of last-mile connectivity, which is often labour and time intensive. Logistics companies are working on drone deliveries for efficient last-mile delivery. In some areas, there are military restriction for security reasons, which would hamper sustainable implementation.
Source: Industry
Online fleet aggregators are changing the dynamics of the road transport sector in India
Online freight booking
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E-commerce driving logistics; retail to see short-term covid impact Online retailing currently occupies c.8% of total retail sales and has seen strong CAGR of 25-30% over the past five years. Organized retail companies are looking at improving their supply-chain efficiencies and inventory management, which will open doors for service providers to create new and innovative models. Growth is also supported by emerging technology such as IoT, drones, automated warehouses and automated trucks. Such technology is helping speed up e-commerce logistics, which is why many e-commerce giants are adopting it rapidly.
Strong growth in e-commerce in India is changing the requirement for logistics
India had an internet user base of c.462mn in 2019 with c.35% penetration. Despite having the second-largest user base in the world, only behind China’s 751mn or 52% of the population, penetration of e-commerce is low compared to markets such as the United States (266mn, 84%), or France (54mn, 81%), but will grow at a much faster CAGR of 25-30% over the next five years. Regular online-shopping users in India number c.50mn, with the average number of orders at 2.00-2.25mn per day compared to China with c.55mn packets per day. Only 10 percent of India’s 1.3 billion people know English. Amazon has 150mn registered users in India and next 100 will come in the vernacular language. Online retailers are competing on both price and shorter delivery cycles, creating opportunities for express logistics services and a host of value-added services. The online segment also has a stronger need for efficient reverse logistics and network reach, efficient sourcing, and standard packaging practices to facilitate easy and secure shipping, ability to service a high number of stock-keeping units (SKUs), and multiple modes of payment collection. Though opportunities in e-commerce are promising, companies operating in this segment have seen margins declining due to increased competition and reduction in pricing by online retailers for last-mile delivery. Faster delivery (one day, two day, etc.) with reverse logistics for return cargo and capabilities to handle cash-on-delivery are changing the dynamics of logistics players. Most e-commerce companies announce discount sales, which need peak-demand handling for a very short period (1-7 days). The logistics players require strong vendor networks with outsourced models to handle peak demand with low cost structure.
Increasing smart phone penetration with regional langauge
Affordable data
Addressing peak demand and speed
Alibaba and JD.com handled a record US$ 136.5bn in sales during a major Chinese shopping event on 18 June 20, known as ‘618’
Only 10 percent of India’s 1.3 billion people know English. Next e-commerce user base will come in the vernacular language
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Need for a flexible supply-chain to manage high variation in demand after the emergence of e-commerce. USA peak sales in USD bn
Source: Industry data
Covid-19 and e-commerce Covid-19 pandemic and social distancing norms are likely to spur e-commerce and related activities. Shopping behaviour is in term of what people are buying, when, and how is changing. As per WHO, the likelihood of an infection from a package that has been moved, travelled, and exposed to different conditions and temperatures is lower than purchasing items in person.
Covid -19 and retail sales Retail sales have been significantly hurt due to the lock down and social distancing norms. Sales have recovered by up to 50-60% of normal in July 2020, for some categories, but the buying is mainly need based. The impact is lower in tier-2 and 3 cities, and good agricultural output with normal monsoon is likely to support demand in these cities. Companies are hopeful of a recovery in demand in 2HFY21 with the festivals rolling in, and this would be crucial for nearly all retailers. Most companies have negotiated rentals for the lockdown period and even moved to variable rentals that would be based on the sales recovery.
0 2 4 6 8 10
Thanks giving
Black Friday
Satuerday
Sunday
Cyber Monday
2019
2018
2017
While retail businesses are significantly dented in the short term due to Covid-19, e-commerce is flourishing
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E-commerce is increasing the complexity of order fulfilment
E-commerce demands flexible manufacturing and supply-chains
Source: PhillipCapital India research
Logistics supply-chain for e-commerce
Source: Industry data, PhillipCapital India research
Need to strengthen the supply-chain in tier-2 cities and below Incremental growth will come from smaller cities and towns and non-English-speaking customers.
Online shopping
Shifting to tier-2 and below
Source: Company, PhillipCapital India Research
Quicker delivery
Peak demand
Choice of where and
when to deliver
Return and cash
collection
Real time order
visibility
Smaller order size
Receiving
Put away
Storage
Picking up
Packing
Sorting
Delivery
67
33
2018
Metro, Tier -I Tier II and below
45
55 2025
Metro, Tier -I Tier II and below
The last leg of delivery accounts for 25-50% of total logistics costs of e-commerce companies
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Section 4: Emerging opportunities
3PL logistics Indian logistics are likely to see a CAGR of 10-12% to touch Rs 28.1tn by 2025. Third-party logistics (3PL, outsourcing) has gained wide acceptance in developed countries, and it is evolving in India. 3PL will increase with GST, and is likely to grow to US$ 14bn in FY25 from US$ 8.2bn in FY20 (13% CAGR; Source: Mahindra Logistics, Industry). Indian companies need to enhance the efficiency of their supply-chain operations in view of the diversity in geographic conditions, consumer habits, and infrastructure across the country. Smaller companies with diverse presence are not able to operate logistics operations efficiently due to scale and limited return cargo opportunities. 3PL players are capable of offering end-to-end services and can become a single vendor for catering to the complete outsourcing needs of companies who can then choose to focus on their core activities such as production, sales, and marketing. All logistics services can be provided by a 3PL operator.
The 3PL business model
Source: MLL, Industry
Top companies are learning that 3PL service providers can improve their bottom line by allowing them to focus on their own core competencies. In the US, around 86% of Fortune-500 companies use 3PLs for logistics and supply chain functions. These providers help companies to respond to clients’ needs on a case-to-case basis and manage seasonal peak demand. A majority of 3PL player companies globally follow an “asset-light” model where the assets involved are leased. This offers considerable benefits such as improved scalability and flexibility of offerings to suit various sectors and customers. Investments in technology, vendor development, domain knowledge, and developing efficient platforms to suit particular industries is a major differentiating factor for 3PL companies.
Globally, the 3PL market is c.10% of the overall logistics market. In India it is just c.3%
3PL logistics providers help companies to respond to clients’ needs on a case-to-case basis and manage seasonal peak demand. Most 3PL players globally follow an asset-light model
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Evolving 3PL practices in India What edge do large, organized
3PLs have over smaller, unorganized player?
The conventional approach
Pan-India presence, better scalability and
flexibility.
Solution-driven capability
Technology driven implementation
Cost-effective solutions
Professional management and brand
Customers limit outsourcing contracts to routine,
commodity-led services, instead of more innovative,
strategic services
Industry fragmentation.
Companies may be reluctant to outsource logistics
due to its critical role in business activities
Companies may lack awareness of how 3PL can add
value to their supply chain
Source: Industry, PhillipCapital India Research
In India, most 3PL service providers use an asset-light model to acquire big-ticket clients and provide them with integrated end-to-end solutions to address all their logistics requirements. To the clients, this provides operational flexibility and scalability along with cost efficiencies. Sectors such as automobiles, e‐commerce, consumer goods, organized retail, and engineering have a high 3PL growth potential of 15‐20% in long term.
Automobiles account for a major share of the 3PL market in India
FY17 FY2020E CAGR
3PL market (Rs bn) 392 580 21%
Automotive Components 108 165 14%
Cars & SUV 66 119 20%
CV and tractors 25 33 8-10%
2W an 3W 54 81 13-15%
Engineering 3 7 20-22%
E-commerce 59 140 30-32%
FMCG 20 39 24%
Pharma 22 29 8%
Bulk 8 10 6%
Organized Retail 27 65 29%
Telecom 0.2 0.2 21%
Source: Mahindra Logistics
Warehousing and multimodal logistics parks (MMLP) The warehousing market in India is highly fragmented. Majority warehouses are less than 10,000 sq. ft. About 90% of the warehousing space in the country is controlled by small unorganized players with limited mechanization. Under the erstwhile tax structure, most companies had to maintain small warehouses in every state to save on taxes. But this resulted in high inventory costs and other overheads. After GST, companies can finally make storage and transportation decisions based on logistical efficiencies rather than tax efficiency. Most industries are planning to aggregate state-based warehouses into large, regional warehouses. Unorganized operators will not be able to provide such services, which may result in consolidation. GST provides an opportunity for large organized 3PL players to set up larger warehouse networks backed by technology, and grab market share from unorganized players. Most 3PL warehouses use technology for sorting, handling, scanning, bar coding and online tracking of cargo. Big corporates and MNCs are shifting to new and bigger warehousing facilities in the cluster format. Clusters are being developed on continuous land of 100 to 150 acres with warehousing space of c.25,000 sq. ft. per acre (0.5 FSI). New warehouses are A-grade ones with heights of 12.5mtrs (whereas older ones were 6-7mtrs) which helps with 6-7 stacking with a racking system. Approach and internal roads are up to 90mtr wide, allowing easy movement of larger trailers carrying 40-ft containers. These warehouses are equipped with natural light, heat-resistant coating, fire-fighting equipment, water drainage, and they follow safety compliance.
Post GST, companies can finally make storage and transportation decisions based on logistical efficiencies rather than tax efficiency
A-Grade warehousing rents are Rs 18-25 per sq. ft. per month, including Rs 1.5-2.0 as monthly maintenance charged by developers for security, drainage, etc.
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Small godowns vs. A-grade-compliant warehouses
Smaller godown storage Manual handing of cargo Grade A warehouse with a racking system
MMLP for bulk cargo storage and distribution Leading players are setting up Multimodal Logistics Parks (MMLP) to handle diverse cargo instead of the earlier trend of developing simple ICDs and CFSs to handle container cargo only. The focus of logistics companies is shifting to handling multiple cargos with increased share of value-added services. MMLP is a multi-modal freight-handling facility with a minimum area of 100 acres comprising mechanized warehouses, specialized storage solutions such as cold storage, facilities for mechanized material handling and inter-modal transfers container terminals, bulk and break-bulk cargo terminals. In addition, MMLP also provides value-added services such as customs clearance, provisions for late-stage processing activities such as sorting, grading, and aggregation – up to handling freight. MMLPs are mainly connected with rail sliding for efficient handling of large cargo parcels and also have waterways and air cargo connectivity wherever possible. They have supporting infrastructure and ancillary services such as staff housing, weigh bridges, banking and insurance, maintenance and fuel stations, and recreational activities.
Source: PhillipCapital India Research
CONCOR and Allcargo Logistics are setting up MMLPs to benefit from the GST policy and the Private Freight Terminal (PFT) policies of the Indian Railways at strategic locations. CONCOR will be a significant player, with 15 MMLP across high-potential corridors such as DMIC (Delhi-Mumbai) and AKIC (Amritsar-Kolkata), which are likely to be developed alongside the eastern and western corridors.
Multimodal Logistics Parks -
MMLP
Value-added services
Ancillary services
Commodity, container storage
Vehicle parking
Intermodal - road, rail,
water connectivity
Freight aggregation
and distribution
The Ministry of Road Transport & Highways (MORTH) is developing c.35 MMLPs (to account for 50% road freight movement) to improve the logistics efficiency in the country
Typical land use at MMLP
Core logistics
50%
Anci llary
logistics 12%
Truck parking
15%
Admin facilities
11%
Green Zone 12%
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Government focus on cold chain The cold chain industry is at a nascent stage in India, and with changes in organized warehousing and retail, along with favourable government policies, the sector provides huge opportunities in the long term. The cold-chain industry in India comprises of two major segments, i.e., temperature-controlled warehouses (TCW) and temperature-controlled vehicles (TCV). The total industry size in FY17 was estimated at US$ 3.95bn, with temperature-controlled warehouses at US$ 3.67bn, and temperature-controlled vehicles at US$ 0.28bn, comprising 90% and 10% of market share respectively. The segment saw a CAGR of c.12% in the last five years (FY12-17) and will reach US$ 7.92bn by FY22 with a CAGR of c.15%. India’s diverse agro-climatic zones ensure availability of various fruits and vegetables round the year. In fact, The country is the second-largest producer of fruits and vegetables in the world with a production of 269mn tonnes. According to the National Horticulture Board, India produced c.93.7mn tonnes of fruits and 176mn tonnes of vegetables annually. But despite being a leading producer, the processing levels for fruits and vegetables in India are at a meagre 2%, with 5-16% wastage loss across different crops. Of the processing, 40-50% is carried out through organized small-scale industries. According to a study conducted by Central Institute of Post-Harvest Engineering and Technology (CIPHET) the total harvest and post-harvest losses amount to US$ 14bn annually. Lower penetration and high wastage provides huge opportunities for development of post-harvest logistics, storage marketing infrastructure, and innovation technology in cold-chain infrastructure. As per industry experts, India needs strong investment in reefer (refrigerated container) transport capacity for a successful and seamless cold-chain supply chain – from the farm-gate to the consumer. The National Centre for Cold-Chain Development (NCCD) has identified a gap of c.3.2mn tonnes in cold storage capacity in India, a need for +69,000 pack houses (places where fruit is received and processed before being distributed to the market), more than 50,000 reefer trucks, and about 8,000 ripening chambers. Lack of cold-chain logistics, coupled with obsolete processing technology and equipment, low skill sets for handling perishable products, and high capital requirement for setting up of necessary infrastructure are some key constraints hampering scalable growth and desired development in cold chain. Government support for development of the cold-chain industry Investments in the cold-chain sector are likely to rise because of subsidy benefits offered and the recent announcement of infrastructure status for the industry, which will reduce the cost of borrowing by c.100-200bps with longer-duration loans. Cold-chain facility, with minimum investment of Rs 150mn and minimum area of 20,000 sq. ft., and warehousing facility, with minimum investment of Rs 250mn and area of 100,000 sq. ft., are eligible under infrastructure lending. For storage infrastructure with pre-cooling unit and a ripening chamber, the Ministry of Food Processing Industry (MoEPI) offers financial assistance (grant-in-aid) of up to 35% of the total cost of plant and machinery and technical civil work. For value-added and processing infrastructure, including frozen storage and deep freezers, financial assistance from the government is 50% with maximum limit of Rs 100mn. Some states also supply power to cold-chain infrastructure at agri power tariffs. The demand for cold storage is driven by QSRs, pharmaceuticals, and organized food retail. A number of healthcare products such as vaccines, biopharmaceuticals, and clinical-trial materials are heat sensitive, and must be stored at temperatures ranging from 2O°C to -8O°C. With India's vaccine, biopharmaceutical and clinical trials market expected to grow in double digits, demand for efficient cold-chain facilities will increase.
State-wise % share of cold-storage capacity
Source: Industry data
The demand for cold storage will increase with growth in organized food retail Quick Service Restaurants (QSRs), and pharmaceuticals
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Changing dynamics in containers Most of India’s container cargo moves through gateway ports in north-west India, accounting for c.65% of the container trade. Container traffic that used to belong to major ports earlier is now growing faster at select non-major/intermediate ports such as Pipavav and Mundra ports in Gujarat and Krishnapatnam in Andhra Pradesh. The share of container cargo as a percentage of total cargo at major ports has increased to 21% in 2020 from 14% in 2004.
Containers volumes remain concentrated at few ports (mn TEU)
Source: IPA
Containerization in India is growing faster than growth in other cargo with increased penetration in bulk and liquid cargo, which is the case globally. Historically, container cargo has grown at 1.5x GDP (growth is very high in economic recovery period). With increased container penetration and development of industrial corridors, this growth should increase. We expect c.15% decline in container volume to 15.2mn TEU in FY21 due to Covid-19; 10% CAGR over FY21-25 to 22.5mn TEU in FY25.
Container volume trend
Source: IPA, PhillipCapital India Research estimates
Goods that had hitherto moved in bulk are now being transported by containers due to their inherent advantages over break-bulk cargo transport. Tea, rice, food grains, and newsprint, shipped as bulk cargo, are examples of items that are now being containerized. The main containerized cargo are auto and engineering components, garments, electronic goods, agro products, cotton yarn, machinery/parts, granite products, coir products, leather products and jute products. The handling cost is
0
1
2
3
4
5
6 FY19 FY20
Four ports handle c.70% volume
0
5
10
15
20
25
0
500
1000
1500
2000
2500
3000
FY0
5
FY0
6
FY0
7
FY0
8
FY0
9
FY1
0
FY1
1
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8
FY1
9
FY2
0
FY2
1
FY2
2
FY2
3
FY2
4
FY2
5
Total Cargo (mn tonne)
Contianer volume (mn TEU) -RHS
CAGR 8.8%
CAGR 6.3%
Container traffic has remained one of the highest growing cargoes in India historically, with a GDP multiplier of around 1.5x Logistic players related to container movement and trade are uniquely placed to benefit from: (1) growing infrastructure for container handling with MMLPs (Multi-Modal Logistics Parks), and (2) shift to containerized cargo from bulk
Page | 50 | PHILLIPCAPITAL INDIA RESEARCH
LOGISTICS SECTOR UPDATE
lower for containerized cargo as opposed to break bulk, with standardization and lower wastage or damage to the cargo. The cost advantage in container transportation for exports occurs due to India’s balance of trade– with more imports than exports, incoming containers wait for repositioning to other locations. Container shipping lines, instead of moving empty container from India offer good deals for exporters to specific locations. As a result, soya, sugar, steel plates and agricultural products have gone the container way. The cargo damages are up to 20% of the cargo when shipped in break bulk, offering a strong incentive to box it. Containers are now also used for movement of liquid and bulk cargo with specially designed containers and FIBC (Flexible Intermediate Bulk Containers) bags offering cost-effective container solutions. The flexi bags are fabricated from FDA-approved virgin polyethylene and polypropylene, which are suitable for a wide range of food grade and non-hazardous liquid and bulk cargo. In India, most of bulk material is moved in loose form while liquid is transported through tankers. Container bags are designed for transportation of large quantities of these materials into standard 20-ft ISO containers. These bags go inside the container and bulk or liquid material is pumped inside for loading, which normally takes 20-40 minutes. One container can carry 14-24,000 litres of liquid and are suitable for petroleum oil, edible oil, latex and chemical industries. After loading is finished the container can be moved by road, railway or sea to any point worldwide. Material is unloaded again through pumps at destination. The cost of these flexi bags is significantly lower than transporting liquid cargo through metal tanks. Metal tanks (isotanks) also need cleaning before use while flexi bags are light weight and disposable. In the same 20-ft container, flexible bags can load 30-40% more cargo compared to conventional liquid logistics.
Use of flexi bags for bulk and liquid cargo
Source: Industry, PhillipCapital India Research
Globally, there is a weight limit for lifting goods manually (up to 20kg) and manual transportation (55kg). But in India, manual labour is used for lifting and handling cargo parcels of up to 100kg and more. After GST, cargo movement will move to multi-modal larger logistics parks which would have handling equipment vs. current movement through small parcels and godowns. With increasing labour cost and health norms, the logistics industry needs to find sustainable solutions. Also, parcel sizes need to be standardised. Container rail operators such as Concor are already working with bulk manufacturers and IFCI to provide supply-chain solutions through containers. We believe commodities such as cement, grains, and liquid will use flexi bags for movement through containers in the future.
Substantial incremental demand should come from a shift of general cargo in break bulk to containerized form as well general increase related to trade growth and GDP.
Container rail operators such as Concor are already working with bulk manufacturers and IFCI to provide supply-chain solutions through containers
Page | 51 | PHILLIPCAPITAL INDIA RESEARCH
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Fi
nan
cial
An
alys
is
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Key Financials for logistics players Company Bluedart Concor Allcargo Navkar Gateway VRL TCI TCI Exp. Mahindra FSC Gati Aegis Patel
CMP (Rs) 1963 448 93 28 89 153 167 672 316 164 46 182 20
MCap (Rs mn) 46582 272962 22849 4214 9674 13822 12831 25771 22588 7196 4996 61818 331
EV (Rs mn) 49766 244512 32937 8960 17330 15508 16772 25675 21377 7177 7148 65039 787
P/E (x)
FY19 51.9 22.5 9.5 8.0 11.4 15.0 8.8 35.3 26.4 10.7 30.5 29.1 5.2
FY20 209.3 27.1 13.6 9.3 9.6 15.3 8.4 28.9 41.0 105.4 -13.4 19.0 28.1
FY21 -44.9 51.2 23.7 36.5 59.4 -29.1 25.4 41.8 494.1 -17.6 -9.4 23.0 22.7
FY22 50.8 30.9 11.8 8.2 15.3 14.1 10.7 31.6 30.6 60.4 -39.1 17.3 4.2
FY23 28.0 21.1 9.3 6.4 9.6 11.0 8.5 27.8 21.5 11.2 30.8 13.5 3.8
P/B (x)
FY19 8.1 2.6 1.1 0.2 0.7 2.1 1.4 9.6 4.6 1.2 0.9 4.9 0.3
FY20 9.5 2.7 1.1 0.2 0.7 2.4 1.2 7.6 4.3 0.8 0.9 4.1 0.3
FY21 13.3 2.6 1.1 0.2 0.7 2.3 1.2 6.6 4.4 0.9 1.0 3.9 0.2
FY22 11.4 2.5 1.0 0.2 0.7 2.0 1.1 5.6 3.9 0.9 1.0 3.4 0.2
FY23 8.7 2.4 0.9 0.2 0.7 1.8 1.0 4.8 3.4 0.8 1.0 2.9 0.2
EV/EBITDA
FY19 17.4 17.4 7.3 5.9 21.0 6.4 6.7 21.6 14.1 5.9 7.6 17.5 5.3
FY20 10.5 14.6 6.5 5.4 5.5 5.2 7.0 21.2 13.5 3.0 20.1 12.6 9.7
FY21 14.8 24.5 9.3 8.5 8.4 12.4 11.7 29.6 23.8 3.8 28.1 12.9 10.2
FY22 8.9 16.2 6.7 5.7 6.6 4.8 7.4 22.6 11.5 2.9 9.1 10.5 4.7
FY23 7.6 11.6 5.8 5.1 5.6 4.2 6.3 19.8 9.1 2.2 5.6 8.7 4.3
P/Cash EPS (x)
FY19 21.4 16.6 5.8 4.5 7.6 7.2 5.7 32.4 21.0 6.1 11.7 23.7 3.0
FY20 12.6 17.9 5.7 4.8 4.6 7.2 5.7 26.6 17.6 3.9 318.6 15.8 7.4
FY21 19.3 25.6 7.5 7.6 6.5 29.2 9.7 36.9 27.3 5.2 -39.7 17.5 5.8
FY22 10.6 18.6 5.6 4.4 4.8 7.0 6.2 28.6 14.6 3.7 16.9 13.8 2.6
FY23 9.1 14.1 4.8 3.8 4.0 5.9 5.3 25.3 11.7 2.8 8.3 11.2 2.4
RocE (%)
FY19 18.2 15.6 11.8 5.2 2.9 16.4 16.2 41.3 25.3 9.9 7.1 19.4 7.9
FY20 8.4 14.2 7.6 5.4 8.8 12.4 14.8 34.6 14.3 7.8 0.4 20.8 5.8
FY21 0.5 7.1 4.8 2.7 4.3 -4.4 4.7 21.2 3.6 2.5 -0.8 17.1 4.0
FY22 14.4 11.2 8.4 4.8 7.1 17.7 10.2 23.9 15.8 6.5 3.6 19.7 8.1
FY23 19.3 15.4 9.5 5.5 9.3 20.0 11.6 23.2 19.1 10.4 7.6 21.3 8.3
D/E (x)
FY19 0.9 0.1 0.3 0.3 0.6 0.2 0.5 0.0 0.3 0.5 2.0 0.2 0.5
FY20 0.9 0.0 0.6 0.3 0.6 0.3 0.4 0.0 0.4 0.2 2.2 0.4 0.5
FY21 1.3 0.0 0.3 0.3 0.4 0.3 0.4 0.0 0.5 0.3 1.9 0.4 0.5
FY22 1.1 0.0 0.4 0.3 0.4 0.3 0.4 0.0 0.5 0.3 1.7 0.3 0.4
FY23 0.8 0.0 0.4 0.3 0.3 0.2 0.4 0.0 0.5 0.4 1.6 0.2 0.4
Source: PhillipCapital India Research estimates
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Five-year EBITDA analysis pre-AS 116 and pre-Covid impact (FY14-19)
Average EBITDA growth was 11% over FY14-19.
Growth was below 5% for five companies – Concor (+5%), VRL (3.4%), Allcargo (2.8%).
Good growth: Future Supply +34%, Mahindra Logistics +23% and TCI Express +19.8%.
Decline: Gateway and Navkar at -3.2% and -5.5%.
Direct port delivery and slowdown in exim trade impacted the profits of CFS players such as Navkar, Gateway, and Allcargo.
Companies in the emerging space such as Express Logistics and 3PL, with their domestic growth story, performed well.
Comparison: EBITDA CAGR (FY14-19) and one-year forward P/E ratio
Source: PhillipCapital India Research
Comparison based on RoCE and price-to-book value (FY20)
Source: PhillipCapital India Research
*IND AS 116: With a change in accounting standards for lease, the operating costs for companies are
now lower. This is because long-term lease costs are now below EBITDA (because of amortizing and
depreciating) resulting in increase in interest and depreciation. RoCE is impacted negatively for some
companies.
Concor
Allcargo
Blue Dart
Aegis
VRL Navkar
Gateway
TCI
TCI Express
Mahindra
Future
Snowman
-20
-10
0
10
20
30
40
50
0 10 20 30 40 50 60 70 80
EBIT
DA
CA
GR
(FY
14
-19
)
PE
Concor
Allcargo
Blue Dart Aegis
VRL
Navkar Gateway
TCI
TCI Express Mahindra
FSC Snowman
0
10
20
30
40
50
-5 0 5 10 15
RO
CE
P/BV
AS 116 effect on EBITDA in FY20
0% 50% 100% 150%
Future *
Blue Dart
Mahindra
Snowman
VRL
Gateway
Allcargo
Concor
Aegis
Navkar
TCI
TCI Express
Page | 54 | PHILLIPCAPITAL INDIA RESEARCH
LOGISTICS SECTOR UPDATE
ROCE and asset turn analysis Average ROCE was 15.6% for FY19 which declined to 12.6% in FY20 for 12
players. Average asset turn was 2.3x for FY19, which declined to 1.8x in FY20, due to the economic slowdown and Covid-19.
Asset-light express business players had higher asset turns; 3x for TCI Express and 5x for Mahindra in FY20.
Higher asset turns in Allcargo due to MTO business and in Aegis due to LPG outsourcing activities.
Capital intensity of different players (FY20)
Profitability ratios across players
Source: Company, PhillipCapital India Research
Debt analysis The decline in profitability has impacted the return ratios for companies. Overall, D/E looks comfortable for the sector at an average of 0.6x, however a closer look at debt / EBITDA reveals cash flow risks for Gateway, Navkar, and FSC.
Return ratios – RoCE %
Gross leverage across players
Source: Company, PhillipCapital India Research
Players that are asset-light (into express logistics or 3PL) are trading at better valuations compared with leveraged and asset-heavy players. However, we believe that the long-term valuation gap would narrow with the cost of technology coming down, and with improvement in the valuations of asset-heavy players.
0.0
1.0
2.0
3.0
4.0
5.0
6.0 Asset turn
Average 1.8x
0
5
10
15
20
25 EBIT %
0
5
10
15
20
25
30
35
40 RoCE
Average 12.6%
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0 D/E
Page | 55 | PHILLIPCAPITAL INDIA RESEARCH
LOGISTICS SECTOR UPDATE
Leverage to income-generation ratios across players (FY20)
Valuation premium to book value (FY20)
Source: Company, PhillipCapital India Research
0
1
2
3
4Debt/EBITDA
0
10
20 P/BV
Page | 56 | PHILLIPCAPITAL INDIA RESEARCH
LOGISTICS SECTOR UPDATE
Valuations of leading players The stock prices of most players have seen significant correction over the past two years, except TCI Express and Concor. The valuation multiples (one-year forward PEs) have seen corrections of 30-50% for stocks, mainly due to a decline in earnings growth and increased leverage.
Stock returns over the past five years (since FY15)
Change in PE multiples over the past five years
Source: Company, PhillipCapital India Research (Note: # Snowman reported loss in FY20)
Adjusted EBITDA CAGR over 5 years (FY15-20)
Change in valuation multiple (EV/EBITDA) over FY15-20
Source: Company, PhillipCapital India Research
Average EV/EBITDA for top-12 logistics player was c.24x in FY15; excluding Blue Dart, it was c.20x. Valuations have since corrected sharply and average EV/EBIDTA (adjusted for AS-116) was c.12x in FY20 for all 12 players; c.11x excluding Blue Dart. We have seen significant correction in Blue Dart, Navkar, Mahindra, and Future Supply Chain. All these companies have reported growth in EBITDA, which signal that the correction is mainly because of performance relative to growth expectation, and overall market movement.
-100 0 100 200 300 400
Aegis
TCI Express
TCI
Concor
Mahindra
Allcargo
VRL
Blue Dart
Snowman
Future
Gateway
Navkar
-50
0
50
100
150
200
250
FY14 FY20
-40.0% -30.0% -20.0% -10.0% 0.0% 10.0% 20.0% 30.0% 40.0%
Allcargo
Concor
Gateway
VRL
Navkar
TCI
TCI Express
Gati
Blue Dart
Mahindra
Future
Aegis
0
10
20
30
40
50
60
70 FY14 FY20
Page | 57 | PHILLIPCAPITAL INDIA RESEARCH
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Container Corporation: One-year forward P/E trend
Gateway: One-year forward P/E trend
Source: PhillipCapital India Research
TCI: One-year forward P/E trend
VRL: One-year forward P/E trend
Source: PhillipCapital India Research
Mahindra Logistics: One-year forward P/E trend
Aegis Logistics: One-year forward P/E trend
Source: PhillipCapital India Research
12X
18X
25X
30X
-
100
200
300
400
500
600
700
Ap
r-0
5
Mar
-06
Feb
-07
Jan
-08
Dec
-08
No
v-0
9
Oct
-10
Sep
-11
Au
g-1
2
Jul-
13
Jun
-14
May
-15
Ap
r-1
6
Mar
-17
Feb
-18
Jan
-19
Dec
-19
No
v-2
0
Price (Rs.)
10X
15X
20X 25X
-
50
100
150
200
250
300
350
400
450
500
Ap
r-0
8
Feb
-09
Dec
-09
Oct
-10
Au
g-1
1
Jun
-12
Ap
r-1
3
Feb
-14
Dec
-14
Oct
-15
Au
g-1
6
Jun
-17
Ap
r-1
8
Feb
-19
Dec
-19
Oct
-20
Price (Rs.)
10X
15X
20X
25X
-
100
200
300
400
500
600
Ap
r-0
9
Jan
-10
Oct
-10
Jul-
11
Ap
r-1
2
Jan
-13
Oct
-13
Jul-
14
Ap
r-1
5
Jan
-16
Oct
-16
Jul-
17
Ap
r-1
8
Jan
-19
Oct
-19
Jul-
20
Price (Rs.)
20X
25X 30X
35X
-300
-200
-100
-
100
200
300
400
500
Apr-15 Apr-16 Apr-17 Apr-18 Apr-19 Apr-20
Price (Rs.)
20X
30X
40X
50X
-
100
200
300
400
500
600
700
Dec
-17
Feb
-18
Ap
r-1
8
Jun
-18
Au
g-1
8
Oct
-18
Dec
-18
Feb
-19
Ap
r-1
9
Jun
-19
Au
g-1
9
Oct
-19
Dec
-19
Feb
-20
Ap
r-2
0
Jun
-20
Price (Rs.)
15X
20X
25X
30X
-
50
100
150
200
250
300
350
Apr-15 Apr-16 Apr-17 Apr-18 Apr-19 Apr-20
Price (Rs.)
Page | 58 | PHILLIPCAPITAL INDIA RESEARCH
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Co
mp
anie
s Se
ctio
n
INSTITUTIONAL EQUITY RESEARCH
Page | 59 | PHILLIPCAPITAL INDIA RESEARCH Please see penultimate page for additional important disclosures. PhillipCapital (India) Private Limited. (“PHILLIPCAP”) is a foreign broker-dealer unregistered in the USA. PHILLIPCAP research is prepared by research analysts who are not registered in the USA. PHILLIPCAP research is distributed in the USA pursuant to Rule 15a-6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities Inc, an SEC registered and FINRA-member broker-dealer.
Aegis Logistics (AGIS IN)
Standing on a solid foundation
INDIA | LOGISTICS | Initiating Coverage
20 July 2020
Aegis Logistics Ltd (AGIS) is a leading player providing services such as sourcing of products, storage, and distribution for oil, gas, and chemicals. It has become a critical part of India’s gas and liquid logistics national network, and integrated supply-chain management infrastructure. AGIS will see little COVID-19 impact due to resilient demand for LPG, driven by domestic cooking needs. We initiate coverage with a BUY rating.
Niche player in liquid and gas logistics – focus on cost-effective solutions: Liquid - AGIS has storage tanks to handle liquid cargo, with a total capacity of 729,310KL per annum spread across Mumbai, Kochi, Halida, Kandla, Mangalore, and Pipavav Port. It is expanding its capacity at Kochi, Haldia, and Mangalore by 82,000KL to touch 811,310KL in FY21, at a capex of Rs 600mn. It offers third-party liquid logistics services for handling and storage, provides operations and maintenance (O&M) services, and has a well-diversified customer base, including OMCs and chemical industries. Its revenue model is fee-based, with a monthly storage charge. It enjoys attractive EBITDA margins of c.65% in liquid logistics. Gas logistics - it has storage and handling facilities at Mumbai, Pipavav, and Halida ports, with a total throughput capacity of 5mn tonnes per annum. It is setting up a 4mn-tonne per annum capacity facility at Kandla port with a capital expenditure of Rs 3.5bn and will start operation in 4QFY21. The gas throughput volume saw 45% CAGR to 3mn tonnes in FY14-20 (capacity utilization at c.60%), and with Kandla’s expansion, it should see 14% CAGR to 4.5mn tonnes over FY20-23, with a total capacity of 9mn tonnes per annum. The company has the advantage of having control over the entire logistics chain – from sourcing and storage to distribution – via rail, roads and pipelines, which will help it to gain market share in India’s growing liquid and gas market.
Targeting 30% market share in LPG handling and distribution: India’s LPG consumption CAGR was 7.2% over FY10-20 to touch 26.4mn tonnes, while domestic supply CAGR was just 1.1%. As a result, LPG imports CAGR was a high c.18.5%; c.14.8mn tonnes in FY20 vs. 2.7mn tonnes in FY10. Aegis has c.20% market share here, with an annual volume of c.3mt. With increasing consumption, demand will rise to c.40mn tonnes by FY35, assuming conservative CAGR of 3% at which imports are likely to increase to c.25mt per annum. Aegis is best placed to capitalize on a growing LPG trade, with its established network, growing capacities, and expertise in third-party logistics (3PL) for handling oil and gas. Additionally, the Kandla terminal will be connected to both the existing Jamnagar-Loni LPG pipeline and the proposed Kandla-Gorakhpur LPG pipeline for distribution, providing significant cost savings to customers. Larger sized projects will help AGIS bring bigger gas carrying ships (VLGCs) – an additional cost advantage. Aegis has a JV with ITOCHU Petroleum Co., (Singapore) Pte Ltd for LPG sourcing and supply. The JV arranges sourcing and transportation requirements of all leading Indian importers and helps AGIS’s own gas-distribution business.
Focusing on gas retailing and distribution – moving into B2C: AGIS is aggressively expanding in gas distribution for home consumption, commercial, and industrial use. For automobile-gas retailing, it has a network of 115 retail stations in seven states under the Aegis Auto Gas brand, for which it plans to have a national footprint – with 200 stations in 20 states. It also markets LPG packed in cylinders for commercial and industrial applications through 164 commercial distributors in 55 cities in 9 states. It has entered into the domestic LPG sector with the Chhota CIKANDER brand.
Valuation: The company has created a niche in liquid and gas logistics and has healthy return ratios with RoCE at 18-25%. Its control on the complete supply chain helps it to reduce costs and provide reliable services at very competitive rates. The stock trades at 17.3x FY22 EPS and a P/BV of 3.1x compared to average P/E of 29x and P/BV of 5.3x over FY15-20. We have valued the company at 25x FY22 EPS (c.10% discount to average P/E) to arrive at a target of Rs 265.
BUY CMP RS 182 Target Price: Rs 265 (+45%) COMPANY DATA
O/S SHARES (MN) : 340
MARKET CAP (RSBN) : 62
MARKET CAP (USDBN) : 0.8
52 - WK HI/LO (RS) : 267 / 108
LIQUIDITY 3M (USDMN) : 0.7
PAR VALUE (RS) : 1.0
SHARE HOLDING PATTERN, %
Mar 20 Dec 19 Sep 19
PROMOTERS : 59.6 59.6 59.6
FII / NRI : 12.8 12.7 12.4
FI / MF : 2.3 2.2 2.4
NON PRO : 6.9 7.0 7.0
PUBLIC & OTHERS : 18.3 18.6 18.7
PRICE VS. SENSEX
Source: Phillip Capital India Research
KEY FINANCIALS
Rs mn FY20 FY21E FY22E
Net Sales 71,833 61,042 90,094
EBIDTA 5,153 5,049 6,204
Net Profit 3,384 2,796 3,728
EPS, Rs 9.6 7.9 10.5
PER, x 19.0 23.0 17.3
EV/EBIDTA, x 12.6 13.2 10.5
P/BV, x 3.9 3.6 3.1
ROE, % 20.5 15.6 18.0
Debt/Equity (%) 35.4 34.6 26.7
Source: PhillipCapital India Research Est.
Vikram Suryavanshi, Research Analyst (022 6246 4111) [email protected]
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Aegis BSE Sensex
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Building terminals around India’s coastline Aegis Logistics (AGIS) is primarily engaged in the ‘terminalling’ (storage) of oil products, chemicals, and liquefied gases, sourcing of LPG, and retail distribution of LPG. AGIS is expanding its terminal network across India’s coastline to capture growth in liquid and gas logistics. It owns and operates a shore-based storage tank for receiving and handling bulk liquids. Its terminals are located in Mumbai, Kochi, Kandla, Pipavav, Mangalore and Haldia, and are connected by pipelines to various berths (place at a port for ships carrying petroleum products) for handling exports and imports of chemicals, petroleum products, and petrochemicals.
Aegis Logistics’ operations – storage facilities at port locations and evacuation by pipeline, rail, and tankers
AGIS: Expanding its network of storage terminals and debottlenecking at existing sites
Liquid logistics terminal capacity (KL) Existing Expansion Total
Mumbai 273000 0 273000
Kochi 51000 20000 71000
Haldia 120190 12000 132190
Pipavav 120120 0 120120
Kandla 140000 0 140000
Mangalore 25000 50000 75000
Total 729310 82000 811310
Source: Company
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The company has three business segments in gas logistics: (1) Gas storage and handling: Storage and distribution facilities at Mumbai, Pipavav
and Haldia ports. (2) Gas distribution and retailing for domestic and commercial use. (3) Gas sourcing and shipping: Managed through its JV with ITOCHU. Source: Company
The company has gas storage facilities at Mumbai, Pipavav, and Haldia and is expanding at Kandla port. It is expanding capacity at Pipavav port by 200,000 tonnes per annum with a capital expenditure of Rs 750mn (including railway gantry), which it expects to complete by 3QFY21.
Gas throughput capacity expansion (mn tonnes per annum)
Source: Company
Sourcing JV to provide competitive advantage Aegis has a JV with ITOCHU Petroleum Co., (Singapore) Pte Ltd for LPG sourcing and supply. The JV arranges the sourcing and transportation requirements of all leading Indian LPG importers and helps AGIS’s own gas-distribution business. The company aggregates orders from different importers (mainly BPCL, HPCL and IOCL) and is able to generate good profitability due to its expertise in sourcing and infrastructure support for handling and storage. We expect its sourcing volume to grow due to increase in LPG consumption, which is largely met by imports.
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Mumbai Pipavav Haldia Kandla
Aegis is present across all important ports, which handle c.70% of total POL (Petroleum, Oil, and Lubricants) cargo
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Kandla Mumbai Haldia
Kochi Manglore Others
Rail connectivity at the Pipavav terminal should be complete by 3QFY21
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Increasing focus on B-to-C high-margin business opportunities In the gas segment, along with its existing 3PL business, AGIS has started its own distribution business. It sells LPG through Aegis Auto Gas stations for automobiles (autos and passenger cars), bulk distribution for industrial use, commercial and retail distribution of LPG cylinders. Margins in gas distribution are significantly higher than 3PL.
Aegis Gas distribution business
Auto LPG has emerged as an alternate fuel to petrol over the past 10 years in India. AGIS opened its first auto LPG station in 2005; since then, it has expanded to 115 stations all over western and southern India (seven states in total) under the brand Aegis Autogas. It has an agreement with ESSAR to sell Aegis Autogas at existing ESSAR-petrol and diesel stations and potentially at all its new sites. The company plan to increase the network of Aegis Autogas to 200 stations over 20 states in five years. It also markets LPG packed in cylinders used for domestic, commercial, and industrial applications due to their handling convenience and cleanliness. With the rationalization of LPG subsidies resulting in a decrease in the diversion of subsidised LPG to the transport and commercial sector, the volume performance of the gas retail and distribution business continues to grow. It has entered into the domestic LPG sector with the Chhota CIKANDER brand, selling cylinders of 2kg, 5kg, 12kg, and 19kg in urban cities. Under bulk industrial distribution, it supplies LPG through road tankers to auto, steel, plastic and ceramic industries.
LPG distribution volume (000) tonnes
Source: Company
Gas Distribution Business
Aegis Autogas Commercial & Domestic retail
Bulk Industrial
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Increasing market share in LPG imports LPG consumption CAGR in India over FY10-20 has been 7.2% to 26.4mn tonnes, while domestic supply CAGR was much lower at 1.1%. As a result, LPG imports increased to c.14.8mn tonnes in FY20 from 2.7mn in FY10, a CAGR of 18.5%.
India LPG imports to touch c.22mn tonnes by FY30
Source: Industry data, PhillipCapital India Research estimates
With increasing consumption, demand will increase to c.40mn tonnes by FY35, assuming conservative CAGR of 3%, and imports are likely to increase to c.25mt per annum. The demand will grow due to: (1) Increase in penetration levels with PMUY (Pradhan Mantri Ujjwala Yojana
Scheme) – a strong push for cleaner fuels by the government and commitment towards 100% LPG penetration.
(2) Increase in average consumption per household. The number of households using LPG is likely to increase to c.95% in the next 3-5 years from the current c.80%. A total of 80.25mn BPL households have been covered under PMUY since the inception of the scheme in May 2016. Average per-capita consumption is around 4.5 cylinders per year in India, which will increase to c.6 with economic growth. With increasing consumption, imports are likely to increase, as domestic supply is not growing. Aegis is best-placed to capitalize on the growing LPG consumption, with its established network and growing capacities. Gujarat and nearby locations cater to 40% of India’s LPG consumption. The company is setting up a new LPG terminal at Kandla with a static capacity of 45,000 MT and a potential throughput capacity of 4mn tonnes per annum. The project will be complete in 4QFY21, with a total capital expenditure of Rs 3.5bn. The LPG facility will be connected to the existing Jamnagar – Kandla – Loni pipeline (2.5mn tonne per annum capacity will be expanded to 3.5mn tonne) for evacuation of LPG, along with evacuation by tankers. The facility will also benefit from the upcoming pipeline from Kandla to Gorakhpur (6.5mn tonnes capacity). Gujarat is likely to import c.10mn tonnes of LPG; the Aegis terminal at Kandla port, with evacuation facilities by rail and pipeline, is better placed to serve growing LPG demand. The demand for LPG is resilient in India, as a majority (c.88%) of consumption is for cooking gas. We expect marginal impact on demand due to COVID-19 and a fall in volume of c.5% in FY21 for its 3PL throughput business. We expect AGIS to report throughput (logistics) volume growth of 20% in FY22 and c.30% in FY23 in the gas segment, with additional volume support from pipeline connectivity at Mumbai, rail connectivity at Pipavav, and a scale up of volumes at the upcoming new terminal at Kandla.
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Demand Supply
Import 14.8mn
Import 22mn tonne
LPG consumption dominated by domestic cooking use
88%
10% 1% 1%
Domestic use CommercialAuto Industry
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Volume growth drivers in the gas-logistics segment Mumbai Uran Chakan Pipeline Commissioned in June 2020 – additional potential of
0.5mntpa.
Pipavav Rail Interconnectivity To be complete in 3QFY21; potential of 0.3-0.5mntpa
Kandla New terminal of 4mtpa capacity Will start in 4QFY21; estimated to handle c.1mn tonne in
FY22.
Financials - Gas logistics to be a major growth driver Liquid logistics: The company has reported revenue CAGR of 8% to Rs 2bn over
FY14-20. We expect marginal impact of Covid-19 here; revenue will remain flat in FY21, with revenue CAGR of 5.9% to Rs 2.47bn in FY20-23, due to expansion in Mangalore, Kochi and Haldia. EBITDA CAGR was 9% to Rs 1.4bn over FY14-20; we expect this at 5.5% to Rs 1.65bn over FY19-23. EBITDA margins should remain stable at c.65% in the liquid segment.
Gas segment: Revenue in the gas segment is mainly a function of gas prices and volatility in sourcing volume. The company earns sourcing fees based on volume, so EBITDA is a more relevant matrix in this business, rather than revenue. AGIS sourced 1.23mn tonnes in FY19 and 1.86mn tonnes in FY20. This sourcing volume depends on tenders issued by PSU companies – mainly HPCL, BPCL and IOC. Logistics volumes (throughput volume) that AGIS’s terminals handle on which they earn storage and handling fees saw 45% CAGR to 3mn tonnes over FY14-FY20; we expect c.14% CAGR to 4.5mn tonne in FY20-23. The gas segment is likely to see strong growth on increased capacity utilization at existing terminals and new capacity addition at Kandla.
Gas segment volume (‘000 tonnes) FY17 FY18 FY19 FY20 FY21 FY22 FY23
Logistics 1,351 1,743 2,522 3,026 2,874 3,449 4,484
Distribution 60 79 114 164 148 178 206
Sourcing 1,043 1,177 1,232 1,861 1,768 1,945 2,139
Source: Company, PhillipCapital India research estimates
The gas division contributed c.75% of AGIS’s EBITDA in FY20 and has reported strong CAGR of 58% to Rs 3.7bn over FY14-20; we expect this at 16% over FY20-23 to Rs 5.8bn, contributing c.78% of total EBITDA in FY23 vs. 22% in FY14.
Liquid segment revenue (Rs mn) Gas segment revenue (Rs mn)
Source: Company, PhillipCapital India Research estimates
The company has undergone a capital expenditure of c.Rs 10.7bn over the past six years (FY15-20) to expand its capacity in liquid and gas terminals. It has set up an LPG
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Gas division volume breakup FY20
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Logistics Distribution Sourcing
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bottling plant at Haldia with a capital expenditure of Rs 250mn and expects this to help it capture the north-east market for its distribution business. It expects to complete capital expenditure of c.Rs 4bn over FY20-22, including major expansion at Kandla. Strong utilization of expanded facilities with healthy profitability has resulted in a comfortable leverage for the company with D/E of 0.2x and debt/EBITDA of 0.7x. It has significantly low working capital needs compared with its scale of operations. Gross working capital, excluding cash, is Rs 6.3bn in FY20, representing 27% of capital employed. Aegis had seen negative net working capital of Rs 2.8bn in FY19, mainly due to higher payables of Rs 4.8bn, compared with receivable days of Rs 2.3bn, while net working capital remained marginal at Rs 866mn in FY20.
Cash flow to improve with increased utilization Balance sheet remains strong (Rs mn)
Source: Company, PhillipCapital India Research estimates
Profitability trend
Source: Company, PhillipCapital, PhillipCapital India Research estimates
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Valuation The company has created a niche in liquid, chemicals, and gas logistics and has healthy return ratios (RoCEs of 18-25%). Capacity addition will drive growth over the next 2-5 years. The business model is difficult to replicate due to its location advantage with pipeline connectivity and it has a strong advantage of project execution at lower costs in a short duration due to its experience. Its control on the complete supply chain helps it to reduce costs and provide reliable services at very competitive rates. The stock trades at 17.3x FY22 and a P/BV of 3.1x, compared to an average P/E of 29x and P/BV of 5.3x over FY15-20. We have valued the company at 25x FY22 (c.10% discount to average P/E) with a target of Rs 265.
PE
Source: PhillipCapital India Research
EV/EBITDA
Source: PhillipCapital India Research
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Financials
Income Statement Y/E Mar, Rs mn FY20 FY21e FY22e FY23e
Net sales 71,833 61,042 90,094 1,00,151
Growth, % 28 -15 48 11
Total income 71,833 61,042 90,094 1,00,151
Raw material expenses -64,719 -55,060 -82,165 -91,338
Employee expenses -512 -553 -636 -732
Other Operating expenses -1,448 -380 -1,088 -574
EBITDA (Core) 5,153 5,049 6,204 7,507
Growth, % 39.0 (2.0) 22.9 21.0
Margin, % 7.2 8.3 6.9 7.5
Depreciation -687 -887 -928 -969
EBIT 4,466 4,162 5,276 6,539
Growth, % 39.4 (6.8) 26.8 23.9
Margin, % 6.2 6.8 5.9 6.5
Interest paid -331 -433 -387 -341
Other Non-Operating Income 328 142 164 165
Non-recurring Items -2,388 -930 -140 0
Pre-tax profit 2,076 2,940 4,914 6,363
Tax provided -736 -697 -910 -1,145
Profit after tax 1,340 2,244 4,004 5,218
Others (Minorities, Associates) -344 -378 -416 -458
Net Profit 996 1,866 3,588 4,760
Growth, % 52.8 (17.4) 33.4 27.7
Balance Sheet Y/E Mar, Rs mn FY20 FY21e FY22e FY20
Cash & bank 2,634 1,330 2,021 3,154
Debtors 4,540 5,448 6,538 7,846
Inventory 421 455 491 530
Loans & advances 647 698 754 815
Other current assets 684 786 904 1,040
Total current assets 8,926 8,718 10,709 13,385
Investments 361 648 1,224 2,374
Gross fixed assets 18,643 21,643 22,643 23,643
Less: Depreciation -1,656 -2,543 -3,470 -4,439
Add: Capital WIP 2,201 2,245 2,290 2,336
Net fixed assets 19,188 21,346 21,463 21,540
Total assets 28,475 30,712 33,395 37,299
Current liabilities 8,424 8,502 8,586 8,677
Provisions 179 188 198 208
Total current liabilities 8,603 8,690 8,784 8,884
Non-current liabilities 2,420 2,820 2,220 1,620
Total liabilities 11,023 11,510 11,004 10,504
Paid-up capital 340 334 334 334
Reserves & surplus 16,207 17,583 20,357 24,303
Shareholders’ equity 17,452 19,202 22,391 26,795
Total equity & liabilities 28,475 30,712 33,395 37,299
Source: Company, PhillipCapital India Research Estimates
Cash Flow Y/E Mar, Rs mn FY20 FY21e FY22e FY20
Pre-tax profit 2,076 2,940 4,914 6,363
Depreciation 687 887 928 969
Chg in working capital -742 -1,009 -1,206 -1,443
Total tax paid -658 -697 -910 -1,145
Cash flow from operating activities 1,363 2,121 3,725 4,744
Capital expenditure -5,381 -3,044 -1,045 -1,046
Chg in investments 782 -288 -575 -1,150
Cash flow from investing activities -4,599 -3,332 -1,620 -2,196
Free cash flow -3,237 -1,210 2,105 2,548
Equity raised/(repaid) 2,126 -6 0 0
Debt raised/(repaid) 290 400 -600 -600
Dividend (incl. tax) -489 -489 -815 -815
Cash flow from financing activities 1,742 -95 -1,415 -1,415
Net chg in cash -1,495 -1,305 690 1,133
Valuation Ratios
FY20 FY21e FY22e FY20
Per Share data
EPS (INR) 9.6 7.9 10.5 13.4
Growth, % 52.8 (17.4) 33.4 27.7
Book NAV/share (INR) 46.7 50.6 58.4 69.6
FDEPS (INR) 9.6 7.9 10.5 13.4
CEPS (INR) 18.2 13.0 13.5 16.2
CFPS (INR) (5.4) 5.8 10.2 13.1
DPS (INR) 1.2 1.2 1.9 1.9
Return ratios
Return on assets (%) 6.5 9.0 13.7 15.7
Return on equity (%) 20.5 15.6 18.0 19.3
Return on capital employed (%) 9.0 12.7 18.7 20.8
Turnover ratios
Asset turnover (x) 4.5 2.8 3.8 4.0
Sales/Total assets (x) 2.8 2.1 2.8 2.8
Sales/Net FA (x) 4.3 3.0 4.2 4.7
Working capital/Sales (x) (0.0) (0.0) 0.0 0.0
Fixed capital/Sales (x) 0.2 0.3 0.2 0.2
Receivable days 23.1 32.6 26.5 28.6
Inventory days 2.1 2.7 2.0 1.9
Payable days 22.0 26.7 18.2 16.8
Working capital days (10.8) (6.7) 0.4 5.7
Liquidity ratios
Current ratio (x) 1.1 1.0 1.2 1.5
Quick ratio (x) 1.0 1.0 1.2 1.5
Interest cover (x) 13.5 9.6 13.6 19.2
Total debt/Equity (%) 35.4 34.6 26.7 19.8
Net debt/Equity (%) 19.5 27.1 17.0 7.0
Valuation
PER (x) 19.0 23.0 17.3 13.5
PEG (x) - y-o-y growth 0.4 (1.3) 0.5 0.5
Price/Book (x) 3.9 3.6 3.1 2.6
EV/Net sales (x) 0.9 1.1 0.7 0.6
EV/EBITDA (x) 12.6 13.2 10.5 8.5
EV/EBIT (x) 14.6 16.0 12.4 9.7
INSTITUTIONAL EQUITY RESEARCH
Page | 68 | PHILLIPCAPITAL INDIA RESEARCH Please see penultimate page for additional important disclosures. PhillipCapital (India) Private Limited. (“PHILLIPCAP”) is a foreign broker-dealer unregistered in the USA. PHILLIPCAP research is prepared by research analysts who are not registered in the USA. PHILLIPCAP research is distributed in the USA pursuant to Rule 15a-6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities Inc, an SEC registered and FINRA-member broker-dealer.
Mahindra Logistics Limited
Riding on 3PL opportunities
INDIA | LOGISTICS | Initiating Coverage
20 July 2020
Mahindra Logistics (MLL) is one of India’s largest third-party logistics (3PL) solutions providers with an asset-light model. It has two business segments – Supply Chain Management (SCM) and Enterprise Mobility (EM) – that contribute c.90% and c.10% respectively to its revenue. It has developed a scalable and flexible business model with a large network of business partners. With its technological expertise, client relationships, and the Mahindra Group’s strategic support, MLL should be a major beneficiary of a pick-up in India’s 3PL market.
Asset-light, technology-backed business model: Its business model is quite differentiated, with a focus on technology and supply-chain solutions rather than pure transportation. It outsources transportation requirements from business partners (c.1,450 in SCM and c.350 in EM) and its warehousing space is leased. Such an asset-light business model allows flexibility and scalability in its operations and high capital efficiency. Its focus is on logistics solutions, managing customers’ inbound, outbound, and in-factory logistics, and warehousing. MLL has invested in developing a technology platform that reduces customers’ idle time and optimizes vehicle planning and warehousing requirements. It has developed expertise in integrated end-to-end solutions for diverse customers through its 24 offices, 350 operating locations, and 35 network hubs, and pan-India business partners.
3PL, an evolving space in logistics: 3PL has gained wide acceptance in developed countries and is evolving in India post GST. The Indian logistics industry’s CAGR is likely to be c.10% to touch c.Rs 28.1tn over FY21-25, post covid-19. The Indian 3PL market should grow to Rs 1.05tn in FY25 from Rs 580bn in FY20, a CAGR of 13%. Short-term growth will be lower due to covid, after which the 3PL market should grow by 17-18% annually. Sectors such as pharma, e-commerce, consumer goods, organized retail, and engineering have high 3PL growth potential of 15-25% while auto should recover from a low base. Indian logistics is seeing a structural change after GST, e-way bill, and infrastructure status to the industry. Supply-chain operations are shifting from small unorganised players to large pan-India players, who are integrating with the global supply chains for imports and exports.
Enterprise mobility to hurt in the short term due to Covid-19: MLL provides technology-enabled people-transportation services under the brand “Alyte” to c.100+ domestic and MNC companies, operating mainly in IT, ITeS, business process outsourcing, financial services, and consulting segments. This business is also asset light, and focuses on small vehicles provided by c.350 business partners across 12 cities. The Covid-19 pandemic and social distancing norms, along with increased culture of work from home, is likely to impact the EM business in the short term.
Scalable model with attractive return ratios: MLL’s FY13-19 revenue CAGR was 17% (SCM +18%; EM +7.8%) to Rs 38.5bn in FY19 from Rs 15.3bn in FY13. The company is aggressively expanding its non-Mahindra clients in SCM; this segment saw 40% revenue CAGR to Rs 13.6bn over FY15-19, contributing 40% of total SCM revenue. Its EBITDA CAGR was 27% – from Rs 365mn in FY13 to Rs 1.2bn in FY19. FY20 revenue was hurt by weakness in the auto sector (c.65% of SCM revenue) with transition to BS-6 norms and Covid-19. MLL saw a decline in RoCE to 14.3% in FY20 from c.25% in FY19, pre Covid-19. We expect 24% earning CAGR to Rs 1.05bn over FY20-23 and RoCE to recover to c.19% in FY23.
Valuations: On CMP, it trades at 30.5x our FY22 EPS of Rs 10.4 per share. We believe scalability provided by its asset-light model (net cash of Rs 1.1bn in FY20), along with emerging opportunities in 3PL outsourcing after GST, will help it to grow rapidly. Reasons for long-term investment in MLL – strong balance sheet, policy changes in the sector (organised market in logistics is just c.10%), and promoter background. We value the stock at 25x FY23 EPS to arrive at a target of Rs 370.
BUY CMP Rs 316 / TARGET RS 370 (+16%)
SEBI CATEGORY: SMALL CAP
COMPANY DATA
O/S SHARES (MN) : 72
MARKET CAP (RSBN) : 23
MARKET CAP (USDBN) : 0.4
52 - WK HI/LO (RS) : 470 / 199
LIQUIDITY 3M (USDMN) : 0.2
PAR VALUE (RS) : 10
SHARE HOLDING PATTERN, %
Mar 20 Dec 19 Sep 19
PROMOTERS : 58.5 58.5 58.5
FII / NRI : 19.5 18.8 18.8
FI / MF : 9.4 10.0 10.2
NON PRO : 4.5 4.7 4.6
PUBLIC & OTHERS : 8.1 8.1 8.0
PRICE VS. SENSEX
Source: Phillip Capital India Research
KEY FINANCIALS
Rs mn FY20 FY21E FY22E
Net Sales 34,711 26,856 35,328
EBIDTA 1,582 897 1,853
Net Profit 551 46 737
EPS, Rs 7.7 0.6 10.4
PER, x 40.8 492.0 30.5
EV/EBIDTA, x 14.5 25.9 12.7
P/BV, x 4.2 4.3 3.9
ROE, % 10.3 0.9 12.7
Debt/Equity (%) 27.6 28.8 26.4
Source: PhillipCapital India Research Est.
Vikram Suryavanshi, Research Analyst (+ 9122 6246 4111) [email protected]
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INITIATING COVERAGE MAHINDRA LOGISTICS LIMITED
Asset-light, technology-backed business model Key highlights
Focused on technology and supply-chain solutions rather than transportation solutions.
The Mahindra brand and MLL’s experience in logistics have enabled long-standing relationships with customers.
Outsources transportation requirements from business partners (c.1,450 in SCM and c.350 in EM). Business partners are small fleet owners with a long-term commitment to MLL. This business model also allows it to manage any fluctuations in demand more efficiently and minimize any adverse effects from cyclical movements.
Business model helps reduce any risks emanating from changes in laws and regulations.
An asset-light business model allows flexibility and scalability in operations and high capital efficiency for the company.
MLL has low capital expenditure requirements to support growth (apart from working capital) and it sees capital expenditure at c.Rs 300-400mn per year, while its cash-flow generation is much higher at c.Rs 1.2bn+ annually. Its major capex has been for handling equipment and developing a technology platform that will (1) lower its customers’ idle time, and (2) optimise vehicle planning and warehousing requirements. It has developed expertise in end-to-end multimodal solutions for diverse customers and industry verticals through a network of hubs and pan-India business partners.
Asset-light model with high sales turnover MLL has high asset turn (FY19)
Source: Company, PhillipCapital India Research Note FSC: Future Supply Chain
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Its capital employed is Rs 5.4bn and sales turnover is Rs 38.5bn – one of the highest ratios in the industry. Only around 25% of its capital employed is in gross fixed assets while c.45% is in working capital
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3PL: An evolving space in India Indian logistics has seen structural changes after developments such as GST, e-way bill, and with the sector receiving infrastructure status; industry CAGR should be 10% over FY21-25 to touch Rs 28.1tn, after a decline of c.5% in FY21 due to Covid-19. 3PL has gained wide acceptance in developed countries and is evolving in India post GST. 3PL’s current 3% share in India’s total logistics market is much lower than 10% of the overall logistics market in the US and China, indicating significant room for 3PL adoption. The Indian 3PL market should grow to Rs 1.05tn in FY25 from Rs 580bn in FY20, a CAGR of 13%. Short-term growth due to Covid-19 will be lower. Post covid, the market will grow at 17-18% annually. E-commerce, consumer goods, organized retail, and engineering sectors are likely to have high 3PL growth potential of 15-25% and 3PL in the overall logistics market is likely to increase to 3.7% by FY25. Some of emerging trends benefiting MLL are:
Operations are shifting from small unorganised players to large pan-India registered players, creating opportunities for MLL. According to a CRISIL report, it businesses in India are increasingly outsourcing their logistics-related operations to large and organized 3PL service providers, who provide long-term, strategic solutions. This is because 2PL or other smaller, unorganized players offer limited transportation and warehousing services, thus fast losing preference.
The strong growth prospects of the end-user industries, particularly e-commerce and organised retail, favour 3PL services.
Consolidation of warehouses after GST provides opportunities for organized 3PL logistics service providers to manage complex distribution channels for companies operating in verticals such as consumer goods and pharmaceuticals.
Efficient planning and consolidation will help 3PL operators to reduce inventory days and working capital for customers.
3PL market in India
Industry verticals in 3PL logistics
Source: Company, PhillipCapital India Research
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India 3PL market (Rs bn) % of logistics industry (%) (rhs)
27%
17%
6% 14%
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7% 3% Automotive Components
Cars & SUV
CV and tractors
2W an 3W
E-commerce
FMCG
Pharma
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Rs 580bn (FY20)
Expect 3PL market CAGR of 17-18% post Covid-19 from current Rs 580bn
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Key financials
Slowdown in auto, Covid-19 has dented the near-term outlook Revenue declined by c.10% in FY20 with a 10.5% fall in SCM revenues and 4.5% in EM. About 65% of MLL’s SCM revenue comes from the auto segment which has taken a hit due to the current economic slowdown and implementation of BS-6 norms from 1 April 2020. MLL has seen a 17% decline in the auto segment’s revenue to Rs 20bn for FY20, while non-auto revenue grew by 3.9%. The company is focusing on value-added warehousing and integrated logistics, which has resulted in a 16% growth in warehousing revenue to Rs 6bn in FY20. Its strategy of focusing on sectors with high growth opportunities for 3PL – such as pharma, consumer, and e-commerce – should help it to outperform industry growth in the long term. In its supply-chain business, it is focused on providing solutions with warehousing, packing, kitting, and sequencing with a technology back-end, rather than just transportation. We see 21% decline in supply-chain revenue to Rs 24.6bn in FY21 due to Covid-19, but we expect a recovery of 32% to Rs 32.4bn in FY22. We have assumed a 25% decline in revenue from the Mahindra group, to Rs 12.9bn, considering continued weakness in auto segment, while revenue from non- Mahindra segment is likely to decline by 15% in FY21. MLL’s enterprise mobility segment’s revenue is likely to see a significant negative impact due to the Covid-19 pandemic because of social distancing norms and the increase in the work-from-home culture. We have assumed a decline of 40% to Rs 2.2bn in FY21. The company has started on-call services post Covid-19 for emergency transport needs of individuals and corporates. MLL has rolled out a nationwide brand for its mobility services “Alyte”, which has multiple offerings such as employee-transport management, customer and network management, and a common asset pool for improved efficiency. In its supply-chain (SCM) segment, c.56% revenue comes from the Mahindra Group, which will report revenue CAGR of 5.2% to Rs 20.1bn over FY20-23. Revenue CAGR for non-Mahindra in SCM is estimated at 11% to Rs 18.6bn, contributing to (c.44% of total SCM).
Short term revenue dip due to Covid -19; strong long-term growth outlook
Source: Company, PhillipCapital India Research estimates
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Key revenue assumptions (Rs mn)
FY18 FY19 FY20 FY21e FY22e FY23e CAGR FY20-23
Total Revenue 34161 38515 34711 26856 35328 42265 6.8%
SCM 30752 34659 31034 24650 32459 38823 7.8%
% share 90.0% 90.0% 89.4% 91.8% 91.9% 91.9%
Mahindra group 18175 20999 17294 12971 17510 20137 5.2%
Non Mahindra Group 12577 13660 13740 11679 14949 18686 10.8%
Enterprise Mobility 3405 3855 3676 2206 2867 3441 -2.2%
Source: Company, PhillipCapital India Research estimates
Revenue share from warehousing activities was 20% at Rs 6bn, out of total SCM revenue of Rs 31bn in FY20. Warehousing revenue CAGR over FY20-23 should be 14% to touch Rs 9bn, contributing c.23% of SCM revenue. EBITDA margins in warehousing are significantly higher than transportation, so higher growth in warehousing should support margin improvement. Transportation revenue accounted for c.80% of SCM revenue in FY20 and should see 6% CAGR to Rs 29.7bn in FY20-23. We expect this revenue to fall by c.15% in FY20 mainly due to Covid and slowdown in auto segment and reduction in operations from bulk customers.
Margin improvement mainly due to AS116 and increasing warehousing revenue
Source: Company, PhillipCapital India Research estimates
Operating profit and margins improvement MLL’s gross EBIT margin was 10.3% in SCM and 9.2% in EM in FY20. Gross margin in SCM has improved by 100bps from 9.3% in FY19 mainly due to AS 116 while gross EBIT margin in enterprise mobility (EM) declined by 140bps. The margin decline in EM is mainly due to reduction in business from two big customers in FY20. Within EM, it has discontinued its loss-making scheduled bus business in FY19. With growth and revenue mix tilted in favour of value-added businesses and warehousing, EBITDA margins should recover to 5.5% in FY23 from 3.9% in FY19. However, adjusting for AS116 and ESOP expense, adjusted operational margins will be 4.1% in line with adjusted margins of 4.1% in FY19. PBT in FY20 was negatively impacted by Rs 33mn due to AS 116 accounting change resulting in higher amortization of lease cost.
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IND AS impact of +163bps on margins
IND AS
impact AS116 Adj. Chg %
Net income 34711 34711 0
Operating cost 33129 33694 565
EBITDA 1582 1017 565
Margin 4.6% 2.9% 163
Depreciation 734 256 478
Interest 176 56 120
PBT 672 705 -33
Source: Company; For FY20
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EBITDA margin drivers over FY19-23
Source: Company, PhillipCapital India research estimates
EBITDA margin drivers over FY19-23
Source: Company, PhillipCapital India research estimates
Improvement in working capital The company had gross working capital, ex-cash, of Rs 8.8bn in FY20, representing c.25% of sales, i.e., 92 days of sales. Net working capital was Rs 1.8bn considering current liabilities of Rs 6.9bn. MLL has seen stretched working capital (a bit) to 69/62 days at present, from almost balanced trade receivable/payable days in FY17. This has resulted in higher net working capital at c.5% of sales. We estimate net working capital to increase at c.7% of sales over FY21 due to Covid -19.
Businesses to remain working-capital heavy Net working capital trend
Source: Company, PhillipCapital India Research estimates
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Control on working capital
Source: Company, PhillipCapital India Research estimates
Return ratios hit in short term; flexible model to help bounce back MLL had high average RoCEs (pre-tax) of 29% over FY13-19, which dipped to 14% in FY20. From here, we see a significant decline in FY21, due to the impact of Covid-19 and the economic slowdown hurting the working-capital cycle and utilization levels. The company had advance income tax assets of Rs 961mn in FY19, c.18% of capital employed, mainly a result of higher TDS (tax deduction at source) of c.2% on transportation revenue. It has received approval for a lower TDS rate of c.1.6% from FY20, resulting in lower advance tax assets. We expect total capital employed to increase to Rs 8.3bn in FY23 from Rs 5.4bn in FY19, mainly due to increase in working capital and lease liability of c.Rs 1.1bn because of IndAS 116.
Return ratios to be a hit by Covid-19, increase in lease liability because of AS-116
Source: Company, PhillipCapital India Research estimates
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Valuations On CMP, it trades at 21.4x our FY23 EPS of Rs 14.8 per share. MLL has a significantly different business model from other listed logistics players, except FSC. We believe the scalability that its asset-light model provides, along with emerging opportunities in 3PL outsourcing after GST, should spur rapid growth ahead. Its strong balance sheet, enabling policy changes (current organised market in logistics is c.5%), and its promoter background makes the case for long-term investment in this stock. MLL has traded at an average PE of 47x and EV/EBITDA of 25x since listing. We valued the stock at 25x FY23 EPS to arrive at a target of Rs 370.
One-year forward P/E and EV/EBITDA since listing
Source: Company, PhillipCapital India Research
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About the company One of India’s largest 3PL (third-party logistics) solutions providers.
Was established as a division of Mahindra and Mahindra (M&M) in 2000 and became a 100% subsidiary in 2008.
Its c.Rs 8bn initial public offer was in 2016. Business segments
Two business segments: Supply-chain solutions (SCM) and enterprise mobility (EM) - (earlier known as people transport).
Supply-chain: Initially started to provide in-house support to the Mahindra group, but now caters to diverse industries including consumer, pharma, engineering and e-commerce along with bulk cargo movement.
Enterprise mobility: Spans 12 Indian cities; key clients include Tech Mahindra, AXISCADES Engineering Technologies, and ANZ Support Services India.
Revenue breakup (Rs 34.7bn; FY20)
Source: Company, PhillipCapital India Research
Supply-chain management business Customized and end-to-end logistics solutions and services including
transportation and distribution, warehousing, in-factory logistics and value-added services.
16.5mn sq. ft. of warehousing space spread across multi-user warehouses, built-to-suit warehouses, stockyards, network hubs and cross-docks.
It serves over 200 domestic and multinational companies operating in several industry verticals, including automotive, engineering, consumer goods, pharmaceuticals, e-commerce and bulk. Its key clients include Volkswagen India, Vodafone India, Thermax, JSW Steel, Ashok Leyland, Siemens, Bosch, BMW India, 3M India, and Mercedes-Benz India.
Operate in-factory stores and linefeed at over 50 manufacturing locations.
Network serves more than 17000 pin codes through 35 hubs located across India.
Supply Chain 89%
EM (Enterprise Mobility)
11%
Transportation
66%
Warehousing 17%
Freight forward
6%
EM 11%
16.5mn sq. ft. warehousing space
50 stock yard
350 operating locations
500+ customers
15,000 workforce
1,450 business partners
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SCM revenue break up (Rs 31bn; FY20)
Source: Company
Technology
It has developed last-mile optimisation software and accounts-receivable management systems for high visibility efficiency. Technology solutions help to reduce transit time significantly for its clients.
MLL has two transport management systems (TMS): (1) Mahindra Integrated Logistics Execution System (MILES), which is exclusively used for transportation of finished automobiles. (2) MyCargo360, which is a flexible and scalable TMS and is deployed across all industry verticals.
MLL has a strong focus on technological capabilities to manage pan-India operations, maintain operational and fiscal controls, and support client-service levels. It has a cloud-based platform for:
Advanced transportation management system with an integrated ecosystem involving real-time exchange of information with diverse client and service provider systems.
Real-time and seamless supply chain visibility across the entire logistics value chain.
Warehouse management service for faster accessibility to the markets.
Implementation of “internet of things” projects in certain operations.
Using analytics to support real-time decision making and operations support.
Integrated logistics solutions
Source: Company
Mahindra 56%
Non Mahindra
44%
Auto 65%
Non Auto 35%
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Transportation services
Enters into annual service contracts that are renewed every year with most clients.
The contracts are usually customized on the basis of cost-per-truck (dedicated vehicles), per-trip, per-tonne, per-tonne per-kilometre, per-kilogram, overall project-based, cost-plus management fees etc.
Most contracts have a fuel clause to reduce the risk of crude volatility beyond the range.
Warehousing services
It manages multi-product, multi-user warehouses in Tauru Road, Gurgaon, and Chakan, Pune.
It typically enters into 3-5 -year project-based contracts, customized to certain terms, which may vary on the basis of per square foot, per headcount of manpower (cost plus), overall project cost plus margin and savings and output based, etc.
Most of the warehousing contracts are pay per use and has back to back arrangement with customers due to this MLL has limited impact of Covid-19 on its warehousing business.
It typically enters into annual contracts customized according to per manpower requirements, cost plus, and per vehicle production in plants etc.
MLL is focus on value-added activities
Source: Company presentation
Long -haul, inbound,
outbound,milk run
Consolidation and
distribution through docks
Route planning Reverse logistics
ODC cargo movement
Transport desk model
Last mile distribution
Warehousing accounts for 20% of SCM revenue
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Lords Freight (India) Pvt Limited
MLL acquired a majority stake in Lords Freight (82.9%) in FY19.
It was founded in 2011 in Mumbai.
Lords is an international logistics solution provider that specialises in air and ocean freight forwarding for exports and imports.
In ocean forwarding (c.30% of total revenue) it is mainly into less-than-container-load (LCL) consolidation business (asset-light) and books slots with shipping lines for container transportation.
In air-freight forwarding, it charters aircrafts. It has increased its focus on express and freight forwarding and provides services across 12,000 pin codes in India.
It focuses on East Asia, Europe and North America for freight forwarding through air and sea.
2x2 Logistics
MLL partnered 2X2 Logistics Pvt. Ltd., which specialises in automotive outbound logistics solutions for four-wheeler and two-wheeler industries. It operates in the Indian vehicle-carrier logistics segment.
MLL requires specialized vehicles to carry finished automobiles from manufacturing locations to stockyards, or directly to distributors.
Owns 127 specialized carriers with an average age of less than three years. Transtech Logistics (Shipx)
Acquired a strategic stake of 39.8% in Shipx in FY19.
Shipx is a ‘software as a service’ or SaaS platform that serves the supply-chain automation needs of 3PL players, shippers, and transporters.
It will increase bring in operational efficiencies by offering technological solutions to its customers as well as business partners.
Business risk MLL takes the services from its business partners and passes on its cost to the
customers. There could be short term impact on financial performance due to mismatch of timing of contract renewal or negotiation with business partners and customers.
Revenue is still focused on the auto segment with c.65% share in SCM; medium-term growth will largely depend on this segment.
Outsourcing model means there is limited control on quality of service. Spot hiring to manage seasonal demand could result in higher costs. In certain
circumstances, hiring vehicles on an ad-hoc basis would be necessary, and such third-party vehicles could significantly increase operational cost, which could adversely affect margins. In addition, availability of third-party vehicles may be uncertain during periods of high demand. MLL does not have control over the servicing and maintenance of these vehicles.
MLL operates in a highly competitive industry, dominated by a large number of unorganized players. The transportation segment is commoditized, and has low barriers to entry or exit, leading to a market with a very high degree of fragmentation.
Technological disruptions with many digital platforms for transportation can dilute MLL’s value proposition.
MLL is focusing on aggressive growth in freight forwarding, which could lead to higher growth in revenue. However, the business is asset light with lower margins of 1.2-2.0%, which could impact our estimates.
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Financials
Income Statement Y/E Mar, Rs mn FY20 FY21e FY22e FY23e
Net sales 34,711 26,856 35,328 42,265
Growth, % -10 -23 32 20
Total income 34,711 26,856 35,328 42,265
Raw material expenses -29,342 -22,694 -29,781 -35,629
Employee expenses -3,067 -3,527 -4,056 -4,664
Other Operating expenses -720 261 363 370
EBITDA (Core) 1,582 897 1,853 2,342
Growth, % 4.6 (43.3) 106.6 26.3
Margin, % 4.6 3.3 5.2 5.5
Depreciation -734 -781 -815 -887
EBIT 848 116 1,038 1,454
Growth, % (34.4) (86.3) 796.0 40.1
Margin, % 2.4 0.4 2.9 3.4
Interest paid -176 -169 -170 -170
Other Non-Operating Income 140 128 134 141
Pre-tax profit 806 75 1,003 1,425
Tax provided -257 -19 -256 -363
Profit after tax 548 56 747 1,061
Others (Minorities, Associates) 3 -10 -10 -10
Net Profit 551 46 737 1,051
Growth, % (35.7) (91.7) 1,512.9 42.7
Net Profit (adjusted) 551 46 737 1,051
Unadj. shares (m) 71 71 71 71
Wtd avg shares (m) 71 71 71 71
Balance Sheet Y/E Mar, Rs mn FY20 FY21e FY22e FY23e
Cash & bank 1,061 854 662 878
Debtors 6,592 4,709 6,097 7,295
Inventory 0 0 0 0
Loans & advances 150 173 198 228
Other current assets 2,070 2,381 2,738 3,148
Total current assets 9,874 8,116 9,696 11,549
Investments 859 875 891 907
Gross fixed assets 2,137 2,540 3,033 3,643
Less: Depreciation -943 -1,241 -1,569 -1,963
Add: Capital WIP 82 10 12 12
Net fixed assets 1,276 1,308 1,476 1,692
Total assets 13,935 12,240 14,019 16,120
Current liabilities 6,757 5,172 6,319 7,464
Provisions 237 260 286 315
Total current liabilities 6,993 5,433 6,605 7,779
Non-current liabilities 1,489 1,515 1,556 1490
Total liabilities 8,482 6,948 8,162 8,269
Paid-up capital 715 715 715 715
Reserves & surplus 4,647 4,521 5,086 5,966
Shareholders’ equity 5,418 5,292 5,857 6,737
Total equity & liabilities 13,899 12,240 14,019 16,120
Source: Company, PhillipCapital India Research Estimates
Cash Flow Y/E Mar, Rs mn FY20 FY21e FY22e FY23e
Pre-tax profit 806 75 1,003 1,425
Depreciation 734 781 815 887
Chg in working capital -1,007 -26 -615 -480
Total tax paid -250 -18 -241 -342
Cash flow from operating activities 282 812 962 1,490
Capital expenditure -1,252 -813 -983 -1,103
Chg in investments 362 -15 -16 -16
Cash flow from investing activities -897 -829 -998 -1,119
Free cash flow -614 -16 -36 370
Equity raised/(repaid) 0 0 0 0
Debt raised/(repaid) 1,105 26 26 -1,088
Cash flow from financing activities 935 -156 -155 -1,269
Net chg in cash 321 -172 -192 -899
Valuation Ratios
FY20 FY21e FY22e FY23e
Per Share data
EPS (INR) 7.7 0.6 10.4 14.8
Growth, % (35.7) (91.7) 1,512.9 42.7
Book NAV/share (INR) 75.4 73.6 81.5 93.9
FDEPS (INR) 7.7 0.6 10.4 14.8
CEPS (INR) 18.1 11.6 21.8 27.3
CFPS (INR) 18.2 9.6 11.6 19.0
Return ratios
Return on assets (%) 5.6 1.7 7.0 8.2
Return on equity (%) 10.3 0.9 12.7 15.7
Return on capital employed (%) 11.3 3.2 12.4 16.2
Turnover ratios
Asset turnover (x) 8.9 6.5 7.7 7.9
Sales/Total assets (x) 2.7 2.1 2.7 2.8
Sales/Net FA (x) 34.1 20.8 25.4 26.7
Working capital/Sales (x) 0.1 0.1 0.1 0.1
Fixed capital/Sales (x) 0.0 0.0 0.0 0.0
Receivable days 69.3 64.0 63.0 63.0
Inventory days - - - -
Payable days 65.4 60.0 58.0 58.2
Working capital days 21.6 28.4 28.0 27.7
Liquidity ratios
Current ratio (x) 1.5 1.6 1.5 1.5
Quick ratio (x) 1.5 1.6 1.5 1.5
Interest cover (x) 4.8 0.7 6.1 8.5
Total debt/Equity (%) 27.6 28.8 26.4 6.7
Net debt/Equity (%) 7.8 12.5 15.0 (6.5)
Valuation
PER (x) 40.8 492.0 30.5 21.4
PEG (x) - y-o-y growth (1.1) (5.4) 0.0 0.5
Price/Book (x) 4.2 4.3 3.9 3.4
EV/Net sales (x) 0.7 0.9 0.7 0.5
EV/EBITDA (x) 14.5 25.9 12.7 9.5
EV/EBIT (x) 27.1 200.6 22.6 15.2
INSTITUTIONAL EQUITY RESEARCH
Page | 81 | PHILLIPCAPITAL INDIA RESEARCH Please see penultimate page for additional important disclosures. PhillipCapital (India) Private Limited. (“PHILLIPCAP”) is a foreign broker-dealer unregistered in the USA. PHILLIPCAP research is prepared by research analysts who are not registered in the USA. PHILLIPCAP research is distributed in the USA pursuant to Rule 15a-6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities Inc, an SEC registered and FINRA-member broker-dealer.
Transport Corporation of India (TRPC IN)
Integrated for growth
INDIA | LOGISTICS | Initiating Coverage
20 July 2020
Transport Corporation of India (TCI), a dominant multimodal logistics player with a pan-India network, would be one of the biggest beneficiaries of GST implementation. This is based on its integrated business for distribution, warehousing, and inventory management and capability in providing road, rail and coastal transportation.
Specific focused business segments and multi-modal national network: TCI has three strategic business units: (1) TCI Freight: For heavy cargo services through road, rail, and sea; this contributed to 52% of consolidated revenue in FY20; (2) TCI Supply Chain (SCM): This offers single-window solutions to manage logistics operations of big industries (34% of revenue). (3) TCI Seaways: Coastal shipping, NVOCC (Non-Vessel Operating Common Carrier), and project cargo (13% of revenue). It also has a JV with CONCOR to provide end-to-end multi-modal solutions and a JV with Mitsui for auto distribution logistics. While the business verticals operate as individual entities, they create synergy together, and allow TCI to offer a broad range of end-to-end customized services to a wide range of domestic and international clients.
Supply-chain business to benefit from outsourcing, warehousing, GST-driven consolidation: TCI is a Lead Logistics Provider – LLP, often called 4th-party logistics providers, can manage every aspect of supply chain, including managing other 3PLs, offering customized logistics solutions, warehousing, and information management solution. TCI manages c.12mn sq. ft. of warehousing space and aims to be significant player in apparel, retail, and FMCG. It manages high-margin e-fulfilment centres and back-end operations for e-commerce. Post covid, cargo movement on roads is significantly disturbed. TCI is benefiting because of its rail and coastal services on which it has developed efficient and reliable supply chains for customers. Its SCM division will benefit from regulatory reforms to bring transparency and a level-playing field for organized players. However, its revenue and profitability have taken a short-term hit due to weakness in the auto segment, Covid-19, and the economic slowdown.
Growth in shipping to improve margins and lower effective tax rate: TCI will benefit from the government’s initiative to increase the share of water transport in India. TCI’s Seaways division has 7 ships with a total capacity of 91,880 DWT; out of these, 3 are deployed on the east coast for bulk movement and 4 on the west coast, mainly for container cargo. Profits from shipping operations have benefits of tonnage tax, which help lower TCI’s effective tax outgo. EBITDA margins are at 25-30%, much higher than 10-12% in SCM and just 3-4% in freight. Growth in shipping will support margins and lower effective tax for the company.
Expanding the network strength, digitization in challenging times: TCI has increased its capital expenditure in order to capitalize on opportunities in warehousing, supply chain, and shipping. The freight division is asset-light; capex is mainly done in supply chain, shipping (fleet addition), warehousing, network expansion, and IT. It had a capital expenditure of Rs 5.2bn over FY17-20 and expects capex of c.Rs 4.3bn over FY21-23. With cash profit of c.Rs 5.8bn over FY21-23, the D/E will remain comfortable at 0.4x, while debt-to-EBITDA would be below 2x.
Valuation and outlook: TCI trades at 10.7x FY22 earnings of Rs 15.6 per share. It has a strong history of maintaining growth in different economic cycles. It is best placed to provide a cost-effective solution to the customized needs of its clients due to its national network (historical asset base at strategic locations) and multimodal capabilities. The level playing field for organized players post GST and E-way Bill would help the company to increase its market share in logistics. We value the company at 15x FY22 EPS to arrive at a target of Rs 235. Initiate with a Buy rating.
BUY CMP Rs 167 / TARGET RS 235 (+40%)
SEBI CATEGORY: SMALL CAP
COMPANY DATA
O/S SHARES (MN) : 77
MARKET CAP (RSBN) : 13
MARKET CAP (USDBN) : 0.2
52 - WK HI/LO (RS) : 312 / 121
LIQUIDITY 3M (USDMN) : 0.2
PAR VALUE (RS) : 10
SHARE HOLDING PATTERN, %
Jun 20 Mar 20 Dec 19
PROMOTERS : 66.9 66.9 66.8
FII / NRI : 2.4 2.5 2.4
FI / MF : 9.5 9.4 9.4
NON PRO : 9.0 9.7 9.7
PUBLIC & OTHERS : 12.2 11.6 11.8
PRICE VS. SENSEX
Source: Phillip Capital India Research
KEY FINANCIALS
Rs mn FY20E FY21E FY22E
Net Sales 27178 20968 27647
EBIDTA 2405 1434 2274
Net Profit 1531 505 1201
EPS, Rs 19.9 6.6 15.6
PER, x 8.4 25.4 10.7
EV/EBIDTA, x 7.0 11.7 7.5
P/BV, x 1.3 1.2 1.1
ROE, % 15.0 4.8 10.3
Debt/Equity (%) 41.0 41.1 39.7
Source: PhillipCapital India Research Est.
Vikram Suryavanshi, Research Analyst (+ 9122 6246 4111) [email protected]
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TCI BSE Sensex
Page | 82 | PHILLIPCAPITAL INDIA RESEARCH
TRANSPORT CORPORATION OF INDIA INITIATING COVERAGE
National network with multimodal capabilities to benefit from formalization
TCI is one of the oldest logistics players in India, established in 1958.
Has 700+ own offices and operates 9,000+ trucks daily.
It will be a major beneficiary of evolving changes in the logistics sector, with its presence across the value chain – road, rail, coastal, 3PL, and warehousing, and the cold chain business.
It is best placed to provide cost-effective solutions to the customized needs of its clients due to its national network and multimodal capabilities.
The level playing field for organized players after GST and E-way bill would help the company to increase its market share in logistics.
Capability to offer multimodal solutions with a pan-India network
Source: Company, PhillipCapital Research
The company has three business divisions: (1) TCI Freight (2) TCI Supply Chain Services and (3) TCI Seaways
The cold-chain business is through a 100% subsidiary – TCI Cold Chain.
Transystem International (TLI) is a joint venture between TCI (49%) and Mitsui & Co. Ltd. (51%). TLI is a logistical partner for Toyota Kirloskar and other Japanese companies providing complete logistics solutions from inbound Logistics (IBL) to Outbound Logistics of Completely Built Units (CBU) and spare parts management, warehousing, and distribution.
TCI has a JV with Concor – the largest container rail player in India for rail movement, which provides multimodal end-to-end solutions to customers. TCI Concor provides bulk multi-modal logistics solutions by rail and road by leveraging benefits of the extensive networks of TCI and Concor. It moves goods in a more environmentally responsible manner.
Domestic logistics market and TCI presence Full truck Less than truck Rail 3PL Coastal
Entry barrier Low Medium High High High
Industry structure Fragmented Semi-organized Organized Organized Organized
Market size ($ bn0 100 10 16 6 1
TCI Revenue growth 10% 10% 12% 18% 10%
TCI EBITDA margin 2-4% 8-11% 3-6% 8-12% 25-35%
TCI presence TCI Freight TCI Freight TCI-Concor JV SCM Seaways
Source: Company
TCI Services
Busienss units
TCI Freight : FTL, FCL,LTL,
ODC
Supply Chain Solutions:
Single window 3PL Services
Shipping: Coastal
shipping, NVOCC and
Project cargo
Joint Ventures /Subsidiaries
TCI CONCOR: 51% holding in
JV providing rail transprort
and end to end movement
Transystem: 49% JV with
Mitsui for Auto Supply
Chainsolution
TCI Cold Chain: 100%
subsidiary for Cold chain
Warehousing and
Distribution
TCI Bangladesh:
100% Subsidiary
with end to end transport
and C&F
TCI Nepal: 100%
Subsidiary with end to
end transportation
and C&F.
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TRANSPORT CORPORATION OF INDIA INITIATING COVERAGE
Multimodal player at the national level; focusing on domestic cargo movement
Source: Company
TCI freight division to be a beneficiary of regulatory changes TCI Freight, TCI’s largest division, contributing c.52% of its total revenue, offers total multimodal transportation solutions through road and rail – viz. full truck load, less than truck load, and over dimensional cargo (ODC). It is focusing on the higher-margin less than truck load (LTL) business (c.33% revenue share) to utilize its existing branch network and manpower. The division has a fully automated systems for information flow and real-time tracking of cargo movement with a single-window solution. The freight division has a legacy of over six decades of service in a fragmented and unorganised market, which should now pay off with the market shifting towards organised players. This division has 700+ owned branches, 25 IT-enabled hubs, a dedicated fleet of c. 3,500 trucks, handling equipment, and trailers. It also provides storage facilities for traders and manufacturers with infrastructure across key markets. This division has reported revenue CAGR of 10% to Rs 14.3bn over FY15-20 and EBITDA margin improvement to 3.9% in FY20 from 2.7% in FY15 with an increase in the share of its LTL business. Revenue CAGR in the freight division will reduce to c.3% (to Rs 15.6bn) over FY20-23 due to the economic slowdown; we expect freight revenue to decline by 23% to Rs 11bn in FY21 due to lockdown and Covid-19 impact.
Hubs for freight business with capabilities in both full truck load (FTL) and less than truck load (LTL)
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TRANSPORT CORPORATION OF INDIA INITIATING COVERAGE
Freight division revenue growth Freight division margin support from LTL
Source: Company, PhillipCapital India Research Estimates
Supply chain business to benefit from outsourcing, warehousing TCI has developed supply chain and warehousing capabilities well ahead of implementation of GST, which should help the company to gain market share. The company is a Lead Logistics Provider (LLP) offering customized logistics solutions, warehousing, planning and information management solution to varied and critical sectors of the economy like auto, telecom, health care, retail & consumer products, chemicals and cold chain. It has invested in IT capabilities and developed domain knowledge in handling large-sized modern warehousing and distribution centres. It currently operates c.12mn sq. ft. of warehousing and a fleet of 4,000 vehicles (1,020 owned); it has 8 fulfilment centres to serve the complete e-commerce chain. These handle c.100,000 orders and c.20,000 deliveries per day for both B2B and B2C customers. Its recent foray into cold-chain warehousing and distribution of perishable items has increased the scope of operation to pharma, FMCG, and QSR for the company. Though the supply-chain business offers a long-term CAGR of 12-15%, it is impacted in the short term due to a slowdown in the auto sector, which accounts for c.80% of revenue currently. The company has identified growth sectors, including retail - apparel, FMCG, pharma, food processing and e-commerce, where it aims to be a significant player in warehousing. Unique positioning of 3PL/4PL SCM business
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Customers perspective
•Optimum controls on operations and hence better KPI (Key Performance Indicators) management.
• High ability to offer customized solutions.
• Long-term retention possible, as it creates customer confidence.
TCI business model advantage
• Internal management and control.
• Moderate ownership of assets enables it to control the outside market
•Able to control pricing and cost
Sectors
• Automobile and spare parts
• Pharma
• Chemical
• FMCG
• Health care
• Cold chain
A lead logistics provider (LLP) is called a 4th-party logistics provider (4PL) and directs every aspect of the supply chain, including managing other 3PLs, overseeing transportation management, and warehouse operations
SCS division is a moderately asset-heavy model
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TRANSPORT CORPORATION OF INDIA INITIATING COVERAGE
Supply chain revenue growth SCM short-term impact on margins due to auto slowdown
Source: Company, PhillipCapital India Research Estimates
Growth in shipping to improve margins and lower effective tax rate TCI will benefit from the government’s initiative to increase share of water transport in India to reduce the cost of transportation. It has started a shipping division since February 1995 and provides ship management, charter, and stevedoring services. TCI Seaways division has seven ships with a total capacity of 91,880 DWT, out of which three are deployed in the Chennai-Andaman-Chennai and Vizag-Andaman-Vizag coastal sectors. The cargo on the east coast to Port Blair largely consists of cattle, perishables, and reefer and general cargo to the island; it ferries back betel nuts, coconut powder and household goods to the mainland from Andaman. Its other four ships are deployed on the west coast, providing services for container cargo from Kandla and Mundra to south Kochi and Tuticorin. The management plans to add one vessel every 15-18 months. The profits from shipping operations have benefits of tonnage tax (it is a fixed tax, based on capacity of fleet and not on the reported profit) resulting in lower effective tax for the company. EBITDA margins in shipping are 25-30% compared with margins of 10-12% in SCM and 3-4% in freight. The growth in shipping will also support margin improvement and lower effective tax for the company. The utilization level in shipping has come down to c.50% in June 2020 due to Covid-19 and lockdown has impact the movement of Tiles and Marbles which is major commodity moved thorough coastal shipping.
Shipping revenue supported by fleet addition Shipping EBITDA margin trend
Source: Company, PhillipCapital India Research Estimates
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The profits from shipping operations have benefits of tonnage tax (it is a fixed tax based on capacity of fleet and not on the reported profit) and effective tax rate on shipping profits is c.4-5%, resulting in lower effective tax for the company
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TRANSPORT CORPORATION OF INDIA INITIATING COVERAGE
Key financials TCI’s revenue CAGR looks low at 2.4% to Rs 27.2bn over FY15-20 due to the de-
merger of its express business in FY16 into TCI Express, a separate listed entity. Excluding this express business, revenue CAGR was 9.1% over FY15-20.
Revenue from the freight segment grew 10% to Rs 14.4bn over FY15-20.
Capacity addition in shipping resulted in revenue CAGR of 24.7% to Rs 3.6bn while revenue CAGR from SCM was 4% to Rs 9.5bn.
We believe the company has a strong infrastructure base and systems in place for high growth in the medium to long term.
However, economic weakness (particularly the auto sector) and Covid depressed the performance in FY20. It lost c.Rs 1bn revenue due to the lockdown in March 2020. FY21 financials will also be negatively affected.
TCI has maintained health liquidity to face the current challenging environment. Its working capital utilization has come down to 45% in June 2020 from 73% in FY20 (out of its total limit of Rs 2.8bn). It has taken board approval to raise Rs 2bn to improve liquidity in case the Covid-19 situation worsens.
We expect lower revenue CAGR of 4.2% to Rs 30.7bn over FY20-23.
Key revenue assumptions Year FY15 FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E CAGR FY15-20 CAGR FY20-23
Revenue 24167 25214 19427 23461 27537 27178 20968 27647 30740 2.4% 4.2%
Revenue (Ex XPS) 17565 18545 19427 23461 27537 27178 20968 27647 30740 9.1% 4.2%
EBITDA 1932 1968 1607 2127 2495 2405 1434 2274 2658 4.5% 3.4%
EBITDA (Ex XPS) 1412 1422 1607 2127 2495 2405 1434 2274 2658 11.2% 3.4%
Freight 8908 9685 10590 11992 13988 14351 11044 14552 15622 10.0% 2.9%
SCM 7813 7802 7374 9126 10241 9490 7082 9553 11441 4.0% 6.4%
Shipping 1220 1411 1639 2564 3593 3677 2897 3670 3817 24.7% 1.2%
Source: Company, PhillipCapital India Research Estimates
Operating profits and margin The company has been able to improve margins in its freight business with a
focus on the high-margin LTL business.
Margins in SCM were dented due to slowdown in the auto segment.
Improvement in margins is supported by growth in the high-margin shipping business.
EBITDA and margin trend PAT CAGR of 13.4% to Rs 1.5bn over FY15-20
Source: Company, PhillipCapital India Research Estimates
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TRANSPORT CORPORATION OF INDIA INITIATING COVERAGE
Capacity expansion in SCM and coastal shipping
TCI has increased capital expenditure to capitalize on the opportunities in warehousing, supply chain and shipping. Its freight division is asset light, while capex is mainly in supply chain and shipping for the addition of network hubs, warehouse and handling equipment.
We have assumed capex of Rs 4.3bn over FY20-23 compared to total capital expenditure of Rs 5.2bn over FY17-20.
With cash profit of c.Rs 5.8bn over FY21-23, the D/E is likely to remain comfortable at 0.4x, while debt-to-EBITDA would be below 2x. .
Strong cash flows to support capex Capex break up at FY17-20
Source: Company, PhillipCapital India Research Estimates
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Capex (Rs mn) Cash profit Hubs /Warehousin
g 21%
Ships 30%
Contianers 19%
Trucks 25%
Handling equipments
5%
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TRANSPORT CORPORATION OF INDIA INITIATING COVERAGE
Working capital to remain range bound
TCI has a gross working capital (ex-cash) of Rs 6.3bn in FY20, which is c.23% of sales and net working capital of Rs 4.3bn, i.e., c.16% of sales. Freight business is working-capital-heavy compared to supply chain and shipping. The company has controlled working capital in challenging time.
Total receivable days are c.65 in FY20, which should increase to c.76 days mainly due to decline in revenue due to Covid-19.
We expect gross and net working capital to remain at c.25% and c.18% of sales respectively.
Working capital trend
Source: Company, PhillipCapital India Research Estimates
Return ratios TCI’s RoCE improved from 10.5% in FY17 to touch 14.1% in FY19 due to improvement in margins while it impacted in FY20 due to Covid-19 to 12.5%. Its gross asset turnover remained at c.3x (sales / gross fixed asset). With capex in warehousing and fleet addition, RoCE will fall in the short term to c.12% in FY22.
Return ratios to decline due to lower asset tun
Source: Company, PhillipCapital India Research Estimates
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Segmental return ratios are comparable
Asset turn (x) EBIT margins (%) RoCE %
Source: Company, PhillipCapital India Research Estimates
Valuation
TCI is trading at 10.7x FY22 earnings of Rs 15.6 per share. It has a strong history of maintaining growth in different economic cycles due to diverse business segments and customers.
It is best placed to provide cost-effective solutions to customized needs of its clients due to a national network (historical asset base at strategic locations) and multimodal capabilities.
The level playing field for organized players after GST and E-way bill will help the company to increase its market share in logistics.
We value the company at 15x FY22 with a target of Rs 235.
One-year forward PE chart P/BV trend
Source: Company, PhillipCapital India Research Estimates
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Financials
Income Statement Y/E Mar, Rs mn FY20 FY21E FY22E FY23E
Net sales 27,178 20,968 27,647 30,740
Growth, % -1 -23 32 11
Other income 0 0 0 0
Total income 27,178 20,968 27,647 30,740
Freight expense -22,143 -17,089 -22,533 -25,053
Employee expenses -1,572 -1,174 -1,548 -1,721
Other Operating expenses -1,058 -1,271 -1,293 -1,307
EBITDA (Core) 2,405 1,434 2,274 2,658
Growth, % (3.6) (40.4) 58.6 16.9
Margin, % 8.9 6.8 8.2 8.6
Depreciation -825 -812 -873 -905
EBIT 1,580 622 1,401 1,753
Growth, % (8.2) (60.7) 125.3 25.1
Margin, % 5.8 3.0 5.1 5.7
Interest paid -343 -348 -371 -383
Other Non-Operating Income 201 195 204 215
Non-recurring Items -99 0 0 0
Pre-tax profit 1,340 468 1,235 1,585
Tax provided -159 -89 -210 -269
Profit after tax 1,181 379 1,025 1,316
Others (Minorities, Associates) 252 126 176 202
Net Profit 1,432 505 1,201 1,518
Growth, % 4.9 (67.0) 137.9 26.4
Net Profit (adjusted) 1,531 505 1,201 1,518
Unadj. shares (m) 77 77 77 77
Balance Sheet Y/E Mar, Rs mn FY20 FY21E FY22E FY23E
Cash & bank 259 364 378 403
Debtors 4,873 4,366 5,302 5,895
Inventory 66 72 80 88
Loans & advances 268 300 336 376
Other current assets 1,121 1,143 1,257 1,383
Total current assets 6,586 6,245 7,353 8,145
Investments 1,799 1,978 2,175 2,240
Gross fixed assets 10,527 11,624 12,944 14,744
Less: Depreciation -3,043 -3,855 -4,728 -5,633
Add: Capital WIP 216 183 183 183
Net fixed assets 7,699 7,952 8,399 9,294
Non-current assets 234 234 234 234
Total assets 16,319 16,410 18,161 19,914
Current liabilities 1,934 1,494 1,894 2,105
Provisions 102 112 124 136
Total current liabilities 2,036 1,606 2,017 2,241
Non-current liabilities 3,988 4,142 4,420 4,569
Total liabilities 6,024 5,748 6,437 6,810
Paid-up capital 154 154 154 154
Reserves & surplus 10,085 10,451 11,514 12,894
Shareholders’ equity 10,295 10,662 11,724 13,104
Total equity & liabilities 16,319 16,410 18,161 19,914
Source: Company, PhillipCapital India Research Estimates
Cash Flow Y/E Mar, Rs mn FY20 FY21E FY22E FY23E
Pre-tax profit 1,340 468 1,235 1,585
Depreciation 825 812 873 905
Chg in working capital -315 5 -694 -555
Total tax paid -417 -89 -210 -269
Cash flow from operating activities 1,432 1,197 1,204 1,666
Capital expenditure -1,216 -1,065 -1,320 -1,800
Chg in investments 112 -179 -197 -65
Cash flow from investing activities -1,104 -1,244 -1,517 -1,865
Free cash flow 329 -48 -313 -200
Equity raised/(repaid) 496 470 470 470
Debt raised/(repaid) -405 155 277 149
Dividend (incl. tax) -101 -128 -127 -126
Cash flow from financing activities 246 622 796 696
Net chg in cash 575 575 484 496
Valuation Ratios Y/E Mar, Rs mn FY20 FY21E FY22E FY23E
Per Share data
EPS (INR) 19.9 6.6 15.6 19.8
Growth, % 4.7 (67.0) 137.9 26.4
Book NAV/share (INR) 133.3 138.1 151.9 169.9
FDEPS (INR) 19.9 6.6 15.6 19.8
CEPS (INR) 32.0 17.1 27.0 31.6
CFPS (INR) 19.1 13.0 13.0 18.9
DPS (INR) 1.5 1.5 1.5 1.5
Return ratios
Return on assets (%) 9.5 4.4 8.1 8.9
Return on equity (%) 15.0 4.8 10.3 11.6
Return on capital employed (%) 10.9 5.0 9.0 10.0
Turnover ratios
Asset turnover (x) 2.3 1.7 2.1 2.2
Sales/Total assets (x) 1.7 1.3 1.6 1.6
Sales/Net FA (x) 3.6 2.7 3.4 3.5
Working capital/Sales (x) 0.2 0.2 0.2 0.2
Receivable days 65.4 76.0 70.0 70.0
Inventory days 0.9 1.3 1.1 1.0
Payable days 9.4 9.7 9.8 9.9
Working capital days 57.6 74.4 65.5 65.3
Liquidity ratios
Current ratio (x) 3.2 3.9 3.6 3.6
Quick ratio (x) 3.2 3.8 3.6 3.6
Interest cover (x) 4.6 1.8 3.8 4.6
Total debt/Equity (%) 41.0 41.1 39.7 36.6
Net debt/Equity (%) 38.5 37.6 36.5 33.6
Valuation
PER (x) 8.4 25.4 10.7 8.4
PEG (x) - y-o-y growth 1.8 (0.4) 0.1 0.3
Price/Book (x) 1.3 1.2 1.1 1.0
EV/Net sales (x) 0.6 0.8 0.6 0.6
EV/EBITDA (x) 7.0 11.7 7.5 6.5
EV/EBIT (x) 10.6 27.0 12.2 9.8
INSTITUTIONAL EQUITY RESEARCH
Page | 91 | PHILLIPCAPITAL INDIA RESEARCH
Allcargo Logistics (AGLL IN)
On express mode
INDIA | LOGISTICS | Company Update
20 July 2020
AGLL is one of the largest players (consolidators) in less than container load (LCL or multiple-cargo loads) in the world with services spread across 90 countries and shipments across 4,000+ port pairs. AGLL is expanding its business network into contract logistics, warehousing and express distribution – to strength domestic operations and benefit from the network effect. Multimodal Transport Operations (MTO) and CFS to take a hit due to COVID-19 MTO business accounts for c.88% of its FY20 consolidated revenue and c.54% of EBITDA. It is asset light with high returns on capital; segment RoCE was c.26% in 9MFY20. Its volume significantly outperformed market growth with its focus on market share gain and FCL (full container load, or single-cargo load); volume CAGR was 14% over FY16-19 and 9MFY20 growth was c.7.4%, higher than 2-3% growth in the global container trade. CFS business contributes to c.7% of AGLL’s revenue and c.30% of EBITDA. It has a presence across key container ports in India (i.e., JNPT, Chennai, and Mundra) that collectively handle 75%+ of India’s container cargo. Even the CFS business has outperformed the market with 5.8% CAGR over FY16-19 and stable volume in 9MFY20, despite negative impact of DPD (Direct port Delivery) and the economic slowdown. Both MTO and CFS businesses are dependent on containerized trade growth globally, which will see pressure with COVID-19 and the global trade slowdown. Acquisition of Gati to complement domestic supply chain business AGLL completed the acquisition of 46.8% stake in Gati Ltd for Rs 6bn – 26% stake from promoters for Rs 4.2bn and 20.8% through open offer for Rs 1.8bn. Gati is a leading player in express logistics with an already established pan-India network and strong brand name. The acquisition will help AGLL to provide a unique offering – complete supply chain and last mile – to its customers, which complements MTO. AGLL has strong track record in turning around its acquisitions, particularly its Belgium‐based ECU line, which helped to increase its MTO business 5x due to better operating margins. It has invested Rs 1bn as capital into Gati, and appointed two directors on its board. It expects significant improvement in Gati’s operating performance over 2-3 years. For FY20, Gati’s EBITDA was Rs 357mn, margins were 2.1% (industry range of 7-9%) and reported loss was Rs 419mn. Deleveraging of balance sheet through stale sale and sale of low RoCE assets AGLL has expanded scale and service offerings to customers aided by an expansion in contract logistics, warehousing and last-mile delivery capabilities. It is developing its land-bank into warehousing and logistics parks and targeting 6mn sq. ft. development by FY21 with a total capital expenditure of c.Rs 110bn (Rs c.Rs 8.7bn spent so far). The business expansion has resulted in higher gross debt – Rs 4.4bn in FY18, c.Rs 10.1bn in 9MFY20. Meanwhile, there profitability of the existing business is under pressure and some expansion would have back-ended cash flows. To deleverage its balance sheet and unlock value, AGLL entered into a definitive agreement with Blackstone to sell 90% stake in a warehousing SPV for Rs 3.8bn, through which it will reduce its consolidated debt by c.Rs 4bn and improve the group’s liquidity position. AGLL will continue to have the AMC of this warehousing business, along with 10% stake in profits. Its P&E business reported an EBIT loss of Rs 56mn in 9MFY20 and contributes c.15% to capital employed, pulling down return ratios. The performance in projects business has declined due to lower utilization of higher yielding equipment, some of which the company plan to sell for which it expects to garner c. Rs 1bn. Valuation The stock trades at 11.8x FY22 EPS. We expect earnings will decline by 42% in FY21 due to Covid-19. After the Blackstone deal and sale of assets in P&E, AGLL’s leverage profile will improve significantly. We maintain valuation at 12x FY22 EPS and target at Rs 95.
Neutral (Maintain) CMP RS 93
TARGET RS 95 (+2%) COMPANY DATA
O/S SHARES (MN) : 246
MARKET CAP (RSBN) : 23
MARKET CAP (USDBN) : 0.8
52 - WK HI/LO (RS) : 123 / 52
LIQUIDITY 3M (USDMN) : 0.3
PAR VALUE (RS) : 1
SHARE HOLDING PATTERN, %
Mar 20 Dec 19 Sep 19
PROMOTERS : 70.0 70.0 70.0
FII / NRI : 13.2 12.2 12.1
FI / MF : 3.7 3.9 3.9
NON PRO : 4.4 4.7 4.8
PUBLIC & OTHERS : 8.7 9.2 9.2
PRICE VS. SENSEX
Source: Phillip Capital India Research
KEY FINANCIALS
Rs mn FY20 FY21E FY22E
Net Sales 73,462 62,051 71,757
EBIDTA 5,035 3,556 4,941
Net Profit 1,683 967 1,952
EPS, Rs 6.8 3.9 7.9
PER, x 13.6 23.7 11.8
EV/EBIDTA, x 6.5 7.7 5.9
P/BV, x 1.1 1.1 1.0
ROE, % 7.8 4.4 8.5
Debt/Equity (%) 61.4 34.6 37.7
Source: PhillipCapital India Research Est.
Vikram Suryavanshi, Research Analyst (022 6246 4111) [email protected]
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Page | 92 | PHILLIPCAPITAL INDIA RESEARCH
ALLCARGO LOGISTICS COMPANY UPDATE
Financials
Consolidated Income Statement Y/E Mar, Rs mn FY20 FY21e FY22e FY23e
Net sales 73,462 62,051 71,757 79,152
Growth, % 6.5 -15.5 15.6 10.3
Total income 73,462 62,051 71,757 79,152
Employee expenses -11,122 -10,010 -11,011 -11,892
Other Operating expenses -57,306 -48,485 -55,806 -61,548
EBITDA (Core) 5,035 3,556 4,941 5,712
Growth, % 12.2 (29.4) 38.9 15.6
Margin, % 6.9 5.7 6.9 7.2
Depreciation -2,316 -2,084 -2,170 -2,336
EBIT 2,719 1,472 2,771 3,376
Growth, % (7.1) (45.8) 88.2 21.8
Margin, % 3.7 2.4 3.9 4.3
Interest paid -685 -546 -594 -634
Other Non-Operating Income 413 371 409 449
Pre-tax profit 2,507 1,359 2,672 3,356
Tax provided -711 -324 -646 -798
Profit after tax 1,796 1,035 2,026 2,558
Others (Minorities, Associates) -113 -68 -73 -79
Net Profit 1,683 967 1,952 2,479
Growth, % (30.4) (42.5) 101.9 27.0
Net Profit (adjusted) 1,683 967 1,952 2,479
Unadj. shares (m) 246 246 246 246
Wtd avg shares (m) 247 247 247 247
Balance Sheet Y/E Mar, Rs mn FY20 FY21e FY22e FY23e
Cash & bank 3,080 2,874 2,302 2,829
Debtors 11,501 11,156 12,829 13,599
Inventory 78 101 131 170
Loans & advances 1,062 1,147 1,239 1,338
Other current assets 7,444 8,933 10,720 12,864
Total current assets 23,164 24,211 27,221 30,800
Investments 6,063 4,563 4,335 4,378
Gross fixed assets 33,856 31,356 33,156 34,656
Less: Depreciation -16,199 -17,542 -18,972 -20,568
Add: Capital WIP 2,690 2,744 2,798 2,854
Net fixed assets 20,347 16,557 16,982 16,942
Total assets 51,600 47,398 50,645 54,270
Current liabilities 15,406 16,268 17,179 18,141
Provisions 463 510 561 617
Total current liabilities 15,870 16,778 17,740 18,758
Non-current liabilities 14,007 8,441 9,571 10,490
Total liabilities 29,877 25,220 27,311 29,248
Paid-up capital 491 491 491 491
Reserves & surplus 20,965 21,352 22,435 24,044
Shareholders’ equity 21,723 22,178 23,334 25,022
Total equity & liabilities 51,600 47,398 50,645 54,270
Source: Company, PhillipCapital India Research Estimates
Cash Flow Y/E Mar, Rs mn FY20 FY21e FY22e FY23e
Pre-tax profit 2,507 1,359 2,672 3,356
Depreciation 2,316 2,084 2,170 2,336
Chg in working capital -2,749 -343 -2,620 -2,033
Total tax paid -652 -324 -646 -798
Cash flow from operating activities 1,423 2,776 1,576 2,860
Capital expenditure -5,044 1,706 -2,595 -2,296
Chg in investments -2,658 1,500 228 -43
Cash flow from investing activities -7,642 3,268 -2,280 -2,175
Free cash flow -6,219 6,044 -704 686
Equity raised/(repaid) 20 150 150 150
Debt raised/(repaid) 7,222 -5,607 1,088 876
Dividend (incl. tax) 403 403 604 604
Cash flow from financing activities 7,590 -5,054 1,843 1,630
Net chg in cash 1,371 990 1,138 2,316
Valuation Ratios
FY20 FY21e FY22e FY23e
Per Share data
EPS (INR) 6.8 3.9 7.9 10.0
Growth, % (30.4) (42.5) 101.9 27.0
Book NAV/share (INR) 87.0 88.5 92.9 99.5
FDEPS (INR) 6.8 3.9 7.9 10.0
CEPS (INR) 16.2 12.4 16.7 19.5
CFPS (INR) 12.1 9.7 4.5 9.3
DPS (INR) (2.0) (2.0) (3.0) (3.0)
Return ratios
Return on assets (%) 4.9 2.7 4.8 5.6
Return on equity (%) 7.8 4.4 8.5 10.1
Return on capital employed (%) 7.6 4.8 8.4 9.5
Turnover ratios
Asset turnover (x) 3.5 2.9 3.4 3.4
Sales/Total assets (x) 1.6 1.3 1.5 1.5
Sales/Net FA (x) 3.9 3.4 4.3 4.7
Working capital/Sales (x) 0.1 0.1 0.1 0.1
Fixed capital/Sales (x) 0.2 0.2 0.2 0.2
Receivable days 57.1 65.6 65.3 62.7
Inventory days 0.4 0.6 0.7 0.8
Payable days 49.0 60.7 56.3 54.3
Working capital days 23.2 29.8 39.4 45.3
Liquidity ratios
Current ratio (x) 1.5 1.5 1.6 1.7
Quick ratio (x) 1.5 1.5 1.6 1.7
Interest cover (x) 4.0 2.7 4.7 5.3
Dividend cover (x) (3.4) (2.0) (2.6)
Total debt/Equity (%) 61.4 34.6 37.7 38.8
Net debt/Equity (%) 47.0 21.5 27.7 27.3
Valuation
PER (x) 13.6 23.7 11.8 9.3
PEG (x) - y-o-y growth (0.4) (0.6) 0.1 0.3
Price/Book (x) 1.1 1.1 1.0 0.9
Yield (%) (2.1) (2.1) (3.2)
EV/Net sales (x) 0.4 0.4 0.4 0.4
EV/EBITDA (x) 6.5 7.7 5.9 5.2
EV/EBIT (x) 12.1 18.7 10.5 8.8
INSTITUTIONAL EQUITY RESEARCH
Page | 93 | PHILLIPCAPITAL INDIA RESEARCH
Container Corporation (CCRI IN)
Thinking out of the box
INDIA | LOGISTICS | Company Update
20 July 2020
Container Corporation of India (CONCOR) is at the cusp of becoming a true multi modal logistics solution provider by launching several new initiatives in coastal shipping, distribution logistics, first-mile last-mile connectivity, and IT initiatives to support business growth. Its pan-India presence with aggressive expansion plans (ahead of competitors) should help the company to grow faster and improve asset turnover. Container remains attractive cargo, and Concor enjoys near monopoly
We believe CONCOR is uniquely placed to capitalize growth opportunities in containers and
bulk-supply chains. We believe substantial incremental demand will come from a shift of
general cargo to the containerized form in break bulk (unitised cargo), as is the case globally.
CONCOR is working to develop solutions for transportation of bulk commodities through
standard containers using flexi packaging. It enjoys significant competitive advantages and
economies of scale over private players. It has 83 terminals, 15,498 wagons including 13,417
high-speed wagons, and 25,682 containers. It plans to increase terminals to 100 and 20
distribution centres. Its second-largest competitor is just 1/10th of its size despite the
government allowing 15 private players to enter containerized transportation in 2007.
Asset turnaround to improve after DFCs, DMICDC
CONCOR’s capital expenditure over FY14-20 was Rs 57.8bn (average annual capex of Rs
8.1bn) for capacity addition and land acquisition – to be ready to capture growth
opportunities post DFCC. Dedicated freight corridors will enhance the railways’ market share
in carrying containers via faster, reliable, and competitive services. Container trains will
carry almost 4x present cargo, with speeds up to 100kmph, thus yielding significant
reduction in capital intensity, in turn resulting in better return ratios for operators. CONCOR
is likely to gain market share after DFCC due to larger scale of operations and hub-and-spoke
network for consolidation and distribution of containers across the country.
Strong balance sheet to help navigate through current challenging times Container handling volumes fell 2.1% in FY20 (after a CAGR of 9.4% over FY16-19) due to economic headwinds and Covid-19. Management expects 20% volume fall in FY21; we estimate a fall of 17.5% in FY21 and growth of 20% in FY22. CONCOR is debt free with a cash balance of c.Rs 35bn, which will help it to grow in the current challenging times, while most other players have leveraged balance sheets. It is worth noting that the government has disallowed CONCOR’s claim of Rs 8.6bn out of total claim of Rs 10.4 under the SEIS export incentive till FY16-19. While CONCOR has not accounted for SEIS income in FY20, it is hopeful of receiving c.Rs 1.7bn, and is awaiting clarity on the disallowed claim. Government planning strategic stake with management control The government has decided to sell 30% stake out of the total 54.8% in Concor to a strategic partner along with transfer of management control. We believe privatization will create positive value for shareholders in the long term. The Indian railways has started market driven pricing from April 2020 for the use of its leased land by Concor, which could increase land-licence fees by an additional c.Rs 4.5bn. CONCOR is negotiating for moratorium benefits due to covid or to go back to the earlier method of variable structure for lease payments. For additional details click here.
Outlook and valuation We see EBITDA at -40%/+51% to Rs 9.9/15.0bn in FY21/22. We continue to value the company on DCF with a target of Rs 525. Maintain BUY.
BUY (Maintain) CMP RS 448
TARGET RS 525 (+17%) COMPANY DATA
O/S SHARES (MN) : 609
MARKET CAP (RSBN) : 273
MARKET CAP (USDBN) : 3.6
52 - WK HI/LO (RS) : 665 / 263
LIQUIDITY 3M (USDMN) : 11.1
PAR VALUE (RS) : 1
SHARE HOLDING PATTERN, %
Mar 20 Dec 19 Sep 19
PROMOTERS : 54.8 54.8 54.8
FII / NRI : 27.2 27.5 28.7
FI / MF : 13.4 13.2 12.2
NON PRO : 1.4 1.3 1.4
PUBLIC & OTHERS : 3.2 3.2 2.9
PRICE VS. SENSEX
Source: Phillip Capital India Research
KEY FINANCIALS
Rs mn FY20 FY21E FY22E
Net Sales 64,737 54,084 66,039
EBIDTA 16,748 9,992 15,100
Net Profit 10,085 5,335 8,821
EPS, Rs 16.6 8.8 14.5
PER, x 27.1 51.2 30.9
EV/EBIDTA, x 15.2 24.8 16.5
P/BV, x 2.7 2.6 2.5
ROE, % 10.0 5.2 8.2
Debt/Equity (%) 3.2 3.1 3.0
Source: PhillipCapital India Research Est.
Vikram Suryavanshi, Research Analyst (022 6246 4111) [email protected]
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CONTAINER CORPORATION COMPANY UPDATE
Financials
Consolidated Income Statement Y/E Mar, Rs mn FY20 FY21e FY22e FY23e
Net sales 64,737 54,084 66,039 80,040
Growth, % -1 -16 22 21
Total income 64,737 54,084 66,039 80,040
Terminal and Service Charges -34,984 -29,386 -34,382 -39,540
Employee expenses -3,135 -2,978 -3,336 -3,736
Other Operating expenses -9,870 -11,727 -13,221 -15,601
EBITDA (Core) 16,748 9,992 15,100 21,163
Growth, % 19.0 (40.3) 51.1 40.2
Margin, % 25.9 18.5 22.9 26.4
Depreciation -5,130 -5,324 -5,831 -6,459
EBIT 11,618 4,668 9,269 14,704
Growth, % 18.2 (59.8) 98.6 58.6
Margin, % 17.9 8.6 14.0 18.4
Interest paid -361 -288 -297 -306
Other Non-Operating Income 2,797 2,734 2,789 2,844
Pre-tax profit 7,727 7,113 11,761 17,243
Tax provided -3,970 -1,778 -2,940 -4,311
Profit after tax 3,757 5,335 8,821 12,932
Net Profit 3,757 5,335 8,821 12,932
Growth, % (17.0) (47.1) 65.3 46.6
Net Profit (adjusted) 10,085 5,335 8,821 12,932
Unadj. shares (m) 609 609 609 609
Wtd avg shares (m) 609 609 609 609
Balance Sheet Y/E Mar, Rs mn FY20 FY21e FY22e FY23e
Cash & bank 21,686 28,543 27,713 34,160
Debtors 1,591 1,750 1,925 2,118
Inventory 261 287 316 347
Loans & advances 815 847 881 917
Other current assets 5,277 5,541 5,818 6,109
Total current assets 29,630 36,969 36,654 43,651
Investments 24,492 24,492 29,492 29,492
Gross fixed assets 85,763 91,198 98,698 1,06,198
Less: Depreciation -38,476 -43,800 -49,631 -56,090
Add: Capital WIP 9,375 7,500 6,000 4,800
Net fixed assets 56,662 54,897 55,067 54,908
Total assets 1,10,784 1,16,359 1,21,212 1,28,051
Current liabilities 11,092 11,678 12,295 12,945
Provisions 692 747 807 872
Total current liabilities 11,784 12,425 13,102 13,817
Non-current liabilities 760 760 761 761
Total liabilities 12,544 13,186 13,863 14,578
Paid-up capital 3,047 3,047 3,047 3,047
Reserves & surplus 97,600 1,00,127 1,04,308 1,10,432
Shareholders’ equity 1,00,647 1,03,173 1,07,355 1,13,479
Total equity & liabilities 1,13,191 1,16,359 1,21,217 1,28,051
Source: Company, PhillipCapital India Research Estimates
Cash Flow Y/E Mar, Rs mn FY20 FY21e FY22e FY23e
Pre-tax profit 7,727 7,113 11,761 17,243
Depreciation 5,130 5,324 5,831 6,459
Chg in working capital 36,535 159 162 165
Total tax paid -3,905 -1,778 -2,940 -4,311
Cash flow from operating activities 45,487 10,819 14,814 19,555
Capital expenditure -13,599 -3,560 -6,000 -6,300
Chg in investments 1,362 0 -5,000 0
Cash flow from investing activities -12,236 -3,560 -11,000 -6,300
Free cash flow 33,251 7,259 3,814 13,255
Debt raised/(repaid) -4,073 0 0 0
Dividend (incl. tax) -2,566 -2,809 -4,644 -6,809
Cash flow from financing activities -6,640 -2,809 -4,639 -6,807
Net chg in cash 26,611 4,450 -825 6,448
Pre-tax profit 7,727 7,113 11,761 17,243
Valuation Ratios
FY20 FY21e FY22e FY23e
Per Share data
EPS (INR) 16.6 8.8 14.5 21.2
Growth, % (17.0) (47.1) 65.3 46.6
Book NAV/share (INR) 165.2 169.3 176.2 186.2
FDEPS (INR) 16.6 8.8 14.5 21.2
CEPS (INR) 35.4 17.5 24.0 31.8
CFPS (INR) 70.1 13.3 19.7 27.4
DPS (INR) 3.6 3.9 6.5 9.6
Return ratios
Return on assets (%) 3.4 4.8 7.6 10.5
Return on equity (%) 10.0 5.2 8.2 11.4
Return on capital employed (%) 14.2 7.1 11.2 15.4
Turnover ratios
Asset turnover (x) 1.0 1.0 1.3 1.6
Sales/Total assets (x) 0.6 0.5 0.6 0.6
Sales/Net FA (x) 1.2 1.0 1.2 1.5
Working capital/Sales (x) (0.0) (0.1) (0.1) (0.0)
Receivable days 9.0 11.8 10.6 9.7
Inventory days 1.5 1.9 1.7 1.6
Payable days 11.8 13.8 12.7 11.8
Working capital days (17.7) (21.9) (18.5) (15.8)
Liquidity ratios
Current ratio (x) 2.7 3.2 3.0 3.4
Quick ratio (x) 2.6 3.1 3.0 3.3
Dividend cover (x) 4.6 2.2 2.2 2.2
Total debt/Equity (%) 3.2 3.1 3.0 2.9
Net debt/Equity (%) (18.3) (24.5) (22.8) (27.2)
Valuation
PER (x) 27.1 51.2 30.9 21.1
PEG (x) - y-o-y growth (1.6) (1.1) 0.5 0.5
Price/Book (x) 2.7 2.6 2.5 2.4
Yield (%) 0.8 0.9 1.5 2.1
EV/Net sales (x) 3.9 4.6 3.8 3.0
EV/EBITDA (x) 15.2 24.8 16.5 11.4
EV/EBIT (x) 21.9 53.1 26.8 16.5
INSTITUTIONAL EQUITY RESEARCH
Page | 95 | PHILLIPCAPITAL INDIA RESEARCH
Gateway Distriparks Ltd (GDPL IN)
De-leveraging remains focus
INDIA | LOGISTICS | Company Update
20 July 2020
GDPL is an established port-related container logistics player with exposure to CFS and container rail movement. It has created a strong asset-based network, which will be a beneficiary of secular growth in container trade. However, the recent slowdown will be a challenge for the company due to high leverage. Strong asset base for end-to-end container logistics GDPL is one of India’s largest private CFS operators with a total handling capacity of 660,000 TEU p.a., with five CFS facilities at Mumbai, Chennai, Vizag, Krishnapatnam, and Kochi, covering major container trade in India. Its rail business provides intermodal rail transportation services for exim containers between its rail-linked ICDs at Gurgaon, Ludhiana, Faridabad, and Viramgam, and maritime ports of Mumbai, Mundra, and Pipavav. Its rail business operates 31 rakes (21 owned + 10 leased) and 278 road trailers. It is setting up new terminals at major manufacturing zones in north and west India. Its capex in rail is likely to be c.Rs 1.2bn over the next two years, mainly for development of satellite terminals to expand rail operations and handling equipment.
DPD, SEIS uncertainty, and increased competition in rail are near-term headwinds CFS has faced challenges over the past few years with increased competition and slowdown in the economy. DPD (Direct Port Delivery) has also hit GDPL’s profits over the past two years. CFS margins have dipped to c.22%, from a high of c.55% in FY12, hurting earning growth despite aggressive expansion at different ports. While the impact of DPD has bottomed out on GDPL’s CFS business, overall gloomy macroeconomic scenario and trade impact due to COVID -19 remain concern areas in the short term. Also, GDPL received a notice from the additional director of foreign trade in 3QFY20 for SEIS (Service Exports from India Scheme) claims of Rs 1bn, accounted for in FY16-18, for which the management will provide additional supporting documents, and is hopeful of receiving the benefit. De-leveraging with the sale of Chandra CFS and fund raising GDPL increased its shareholding in Gateway Rail (GRFL) from 50.01% to 99.93% at the end of FY19 for Rs 8.5bn, resulting in an increase in gross debt to Rs 7.6bn in FY20 from Rs 1.1bn in FY18. Debt to EBITDA increased to 2.8x in FY20 from 0.5x in FY18. To deleverage its balance sheet, GDPL sold its Chandra CFS in Chennai for c.Rs 470mn in 2QFY20 and signed a definitive agreement to sell its 40.2% stake in Snowman to Adani Ports for c.Rs 2.96bn (at Rs 44 per share) in 3QFY20. However, the deal was cancelled and now GDPL has announced plans to raise Rs 1.5bn to repay high cost NCDs due for payment in April 2021. Higher operating leverage in rail and overall leverage to impact earnings in FY21 GDPL reported 12% volume decline in CFS and growth of 8.5% in rail business in FY20. Its performance significantly depends on container-handling volume at ports; we expect volume decline of 23% in CFS and 12% in rail business in FY21 due to Covid-19. This volume fall will impact profitability due to high operating leverage in the rail business. We expect EBITDA at -34%/+28% in FY21/22 to Rs 2bn/2.6bn; profits at Rs 163mn in FY21 (sharp drop) and Rs 633mn in FY22. Our estimates have upside risk if Snowman stake-sale happens.
Outlook and valuation: At CMP, the stock trades at 15.3x our FY22 earnings. We believe the cancellation of the Snowman deal and increased uncertainty has increased the leverage risk in the near term. GDPL’s valuation is mainly supported by its asset value. Earnings will be hurt in the short term due to a decline in exim trade and negative operating leverage. We have valued its rail business at 9x FY22 EV/EBITDA and CFS at 7x; our SOTP-based valuation is at Rs 122 (unchanged).
BUY (Maintain) CMP RS 89 / TARGET Rs 122 (+37%)
SEBI CATEGORY: SMALL CAP
COMPANY DATA
O/S SHARES (MN) : 109
MARKET CAP (RSBN) : 10
MARKET CAP (USDBN) : 0.2
52 - WK HI/LO (RS) : 141 / 73
2IQUIDITY 3M (USDMN) : 0.2
PAR VALUE (RS) : 10
SHARE HOLDING PATTERN, %
Jun 20 Mar 20 Dec19
PROMOTERS : 30.2 30.2 30.0
FII / NRI : 27.3 27.6 27.2
FI / MF : 28.5 29.1 28.7
NON PRO : 5.1 4.9 5.2
PUBLIC & OTHERS : 8.9 8.3 9.0
PRICE VS. SENSEX
Source: Phillip Capital India Research
KEY FINANCIALS
Rs mn FY20 FY21E FY22E
Net Sales 12920 10455 12667
EBIDTA 3134 2068 2641
Net Profit 1004 163 633
EPS, Rs 9.2 1.5 5.8
PER, x 9.6 59.4 15.3
EV/EBIDTA, x 5.5 7.5 5.6
PBV, x 0.7 0.7 0.7
ROE, % 7.6 1.2 4.6
Debt/Equity (%) 58.8 43.1 37.8 Vikram Suryavanshi, Research Analyst (022 6246 4111)[email protected]
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GATEWAY DISTRIPARKS LTD COMPANY UPDATE
Financials
Income Statement Y/E Mar, Rs mn FY20 FY21e FY22e FY23e
Net sales 12,920 10,455 12,667 14,556
Growth, % 200 -19 21 15
Total income 12,920 10,455 12,667 14,556
Raw material expenses 0 0 0 0
Employee expenses -598 -645 -678 -712
Other Operating expenses -9,188 -7,742 -9,348 -10,753
EBITDA (Core) 3,134 2,068 2,641 3,091
Growth, % 280.4 (34.0) 27.7 17.0
Margin, % 24.3 19.8 20.8 21.2
Depreciation -1,333 -1,336 -1,368 -1,410
EBIT 1,801 732 1,273 1,680
Growth, % 261.4 (59.4) 74.0 32.0
Margin, % 13.9 7.0 10.1 11.5
Interest paid -1,026 -681 -621 -562
Other Non-Operating Income 176 167 192 221
Pre-tax profit 950 217 844 1,338
Tax provided 63 -54 -211 0
Profit after tax 1,013 163 633 1,338
Others (Minorities, Associates) -9 0 0 0
Net Profit 1,004 163 633 1,338
Growth, % 18.5 (83.8) 288.7 111.3
Net Profit (adjusted) 1,004 163 633 1,338
Unadj. shares (m) 109 109 109 109
FY20 has Impact of consolidation of rail financials
Balance Sheet Y/E Mar, Rs mn FY20 FY21e FY22e FY23e
Cash & bank 86 128 184 147
Debtors 1,298 1,401 1,514 1,816
Loans & advances 13 15 17 19
Other current assets 1,490 894 1,028 1,182
Total current assets 2,886 2,438 2,742 3,164
Investments 1,258 1,215 1,270 1,327
Gross fixed assets 16,769 17,469 18,069 18,870
Less: Depreciation -2,444 -3,780 -5,148 -6,558
Add: Capital WIP 54 54 54 54
Net fixed assets 14,379 13,743 12,975 12,366
Non-current assets 5,274 5,315 5,356 3,236
Total assets 23,796 22,711 22,343 22,256
Current liabilities 1,107 1,218 1,290 1,366
Provisions 335 368 405 445
Total current liabilities 1,442 1,586 1,695 1,812
Non-current liabilities 9,075 7,313 6,716 6,149
Total liabilities 10,517 8,899 8,411 7,961
Paid-up capital 1,087 1,087 1,087 1,087
Reserves & surplus 12,080 12,613 12,734 13,096
Shareholders’ equity 13,278 13,812 13,932 14,295
Total equity & liabilities 23,796 22,711 22,343 22,256
Source: Company, PhillipCapital India Research Estimates
Cash Flow Y/E Mar, Rs mn FY20 FY21e FY22e FY23e
Pre-tax profit 942 217 844 1,338
Depreciation 1,333 1,336 1,368 1,410
Chg in working capital -1,026 668 -104 1,858
Total tax paid -333 -54 -211 0
Cash flow from operating activities 916 2,167 1,897 4,607
Capital expenditure -738 -700 -600 -801
Chg in investments 1,292 42 -55 -57
Cash flow from investing activities 545 -658 -655 -858
Free cash flow 1,460 1,509 1,243 3,749
Equity raised/(repaid) 44 -50 0 0
Debt raised/(repaid) -636 -1,837 -674 -647
Dividend (incl. tax) -577 -128 -513 -641
Cash flow from financing activities -1,161 -2,015 -1,187 -1,289
Net chg in cash 299 -506 55 2,460
Valuation Ratios
FY20 FY21e FY22e FY23e
Per Share data
EPS (INR) 9.2 1.5 5.8 12.3
Growth, % 18.5 (83.8) 288.7 111.3
Book NAV/share (INR) 121.1 126.0 127.1 130.5
FDEPS (INR) 9.2 1.5 5.8 12.3
CEPS (INR) 21.5 13.8 18.4 25.3
CFPS (INR) 23.6 18.8 16.1 20.8
DPS (INR) 4.5 1.0 4.0 5.0
Return ratios
Return on assets (%) 8.7 3.6 5.6 9.0
Return on equity (%) 7.6 1.2 4.6 9.4
Return on capital employed (%) 8.8 4.3 7.1 9.3
Turnover ratios
Asset turnover (x) 0.9 0.8 1.0 1.2
Sales/Total assets (x) 0.6 0.4 0.6 0.7
Sales/Net FA (x) 0.9 0.7 0.9 1.1
Working capital/Sales (x) 0.1 0.1 0.1 0.1
Fixed capital/Sales (x) 1.4 1.6 1.3 1.1
Receivable days 36.7 48.9 43.6 45.5
Payable days 33.9 43.5 38.2 35.1
Working capital days 47.8 38.1 36.5 41.4
Liquidity ratios
Current ratio (x) 2.6 2.0 2.1 2.3
Quick ratio (x) 2.6 2.0 2.1 2.3
Interest cover (x) 1.8 1.1 2.1 3.0
Dividend cover (x) 2.1 1.5 1.5 2.5
Total debt/Equity (%) 58.8 43.1 37.8 32.3
Net debt/Equity (%) 58.1 42.2 36.5 31.3
Valuation
PER (x) 9.6 59.4 15.3 7.2
PEG (x) - y-o-y growth 0.5 (0.7) 0.1 0.1
Price/Book (x) 0.7 0.7 0.7 0.7
Yield (%) 5.1 1.1 4.5 5.6
EV/Net sales (x) 1.3 1.5 1.2 1.0
EV/EBITDA (x) 5.5 7.5 5.6 4.6
EV/EBIT (x) 9.6 21.1 11.6 8.4
INSTITUTIONAL EQUITY RESEARCH
Page | 97 | PHILLIPCAPITAL INDIA RESEARCH Please see penultimate page for additional important disclosures. PhillipCapital (India) Private Limited. (“PHILLIPCAP”) is a foreign broker-dealer unregistered in the USA. PHILLIPCAP research is prepared by research analysts who are not registered in the USA. PHILLIPCAP research is distributed in the USA pursuant to Rule 15a-6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities Inc, an SEC registered and FINRA-member broker-dealer.
Navkar Corporation (NACO IN)
Deep-asset play
INDIA | LOGISTICS | Quarterly Update
20 July 2020
Navkar (NACO) is a leading player in container-handling and storage, with CFS and ICD facilities in Mumbai and Vapi. It has significantly outperformed industry growth, along with market share gains. NACO has the competitive advantage of rail connectivity at Vapi and JNPT, and creating new market opportunities in domestic container trains with a strong business model offering cost benefits to its customers. Differentiated services in a crowded market NACO has one of the highest CFS capacities in the industry at 1mn TEU per annum; it has facilities at Mumbai and Vapi and caters to JNPT and Hazira ports. Rail connectivity allows transportation of cargo from inland destinations on the Indian rail network, increasing NACO’s marketable area. Its competitive advantages: (1) Favourable cargo mix (exim) with higher share of export cargo helping shipping companies to manage empty containers. Other CFS players are mainly import oriented. Also, NACO is also one of largest agri-cargo exporters. (2) Value-added services with container repair and empty storage. Its Mumbai CFS has a unit for the inspection and approval of agricultural cargo set up by the government’s plant and quarantine authorities (Ministry of Agriculture). Importers and exports in Gujarat can save c.20-25% by transporting goods through rail from its Vapi ICD, compared to road transport due to lower rail transport cost. Focus on trains operations with end-to-end services NACO has received a Container Terminal Operator (CTO) license, paid Rs 100mn as license fees, and acquired two rakes (trains) in 4QFY20. Its capex in FY20 was c.1.6bn, mainly for scaling up rail operations including TXR – train examination facility – and acquisition of two trains. It is handling rail operations with 7 trains (5 leased and 2 owned). It handled 767 trains at JNPT and 1,368 trains at Vapi in FY20. It is focusing on client development and end-to-end delivery of containers as a long-term strategy. It has set up a fully-integrated logistics park close to its ICD at Vapi at an estimated cost of Rs 3.14bn, which complements its ICD business, giving customers the flexibility of storage at affordable costs, along with value-added activities. Vapi-Valsad-Daman-Silvassa-Surat-Ankleswar-Bharuch-Baroda belt is one of the largest and vibrant industrial clusters in India, covering industries such as chemicals, textiles, engineering, food products, steel, and paper. The total addressable container market in Gujarat is 1.5mn TEU p.a.; NACO is currently working with 40 shipping lines in its Vapi ICD. Short-term impact on profitability – operational flexibility to help NCACO has started handing DPD containers at JNPT. It should benefit from marketing efforts at Vapi and its focus on domestic train operations. It saw 5% growth in container handing in FY20 supported by 52% growth at Vapi to 127,915 TEU. It is expanding domestic train movement (15% of total FY20 revenue) which offers significant growth potential. We expect -17%/+23% movement in container volume in FY21/22. The fall in exim trade will be compensated to an extent by domestic movement and market share gain in Vapi. We see FY21/22 EBITDA at Rs 1.0/1.6bn with debt at Rs 4.5bn in FYXX; debt/EBITDA at 2.8x. It has low routine capex of c. Rs 450mn at present. Cash profit of c.Rs 1.5bn over FY21-22 will help to de-leverage its balance sheet. NACO has surplus 45 acres at Navi Mumbai, which it plans to monetize to repay its debt. Outlook and valuation: The stock trades at 8.2x our FY22 expected earnings of Rs 3.4 and 5.7x EV/EBITDA. We believe the impact of DPD is bottoming out for its JNPT CFS, and that growth in Vapi has improved its cash flow. Strong asset base and operational expertise will help it to expand its rail operations. We maintain FY22 target PE of 8x; target at Rs 27.
Neutral (Maintain) CMP RS 28 / TARGET Rs 27 (-3%)
SEBI CATEGORY: SMALL CAP
COMPANY DATA
O/S SHARES (MN) : 151
MARKET CAP (RSBN) : 4
MARKET CAP (USDBN) : 0.1
52 - WK HI/LO (RS) : 43 / 13
LIQUIDITY 3M (USDMN) : 0.2
PAR VALUE (RS) : 10
SHARE HOLDING PATTERN, %
Mar 20 Dec 19 Sep 19
PROMOTERS : 69.0 69.0 69.0
FII / NRI : 0.2 0.2 0.2
FI / MF : 7.8 8.2 8.2
NON PRO : 10.7 10.3 9.7
PUBLIC & OTHERS : 12.3 12.4 12.9
PRICE VS. SENSEX
Source: Phillip Capital India Research
KEY FINANCIALS
Rs mn FY20 FY21E FY22E
Net Sales 5,671 4,108 5,263
EBIDTA 1,663 1,056 1,568
Net Profit 452 115 512
EPS, Rs 3.0 0.8 3.4
PER, x 9.3 36.5 8.2
EV/EBIDTA, x 5.8 8.7 5.7
PBV, x 0.2 0.2 0.2
ROE, % 251.0 63.7 275.0
Debt/Equity (%) 30.3 29.4 27.6
Vikram Suryavanshi, Research Analyst (022 6246 4111) [email protected]
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NAVKAR CORPORATION COMPANY UPDATE
Financials
Income Statement Y/E Mar, Rs mn FY20 FY21e FY22e FY23e
Net sales 5,671 4,108 5,263 5,874
Growth, % 17.5 -27.6 28.1 11.6
Operating expenses -2,968 -2,156 -2,695 -3,007
Employee expenses -356 -329 -358 -399
Other Operating expenses -684 -567 -642 -717
EBITDA (Core) 1,663 1,056 1,568 1,750
Growth, % 9 -37 49 12
Margin, % 29 26 30 30
Depreciation -421 -442 -447 -452
EBIT 1,242 613 1,121 1,299
Growth, % 10.3 -50.6 82.8 15.8
Margin, % 21.9 14.9 21.3 22.1
Interest paid -476 -479 -463 -453
Other Non-Operating Income 8 20 24 29
Pre-tax profit 774 154 683 874
Tax provided -323 -38 -171 -219
Profit after tax 452 115 512 656
Net Profit 452 115 512 656
Growth, % -14.5 -74.5 344.0 28.0
Net Profit (adjusted) 452 115 512 656
Unadj. shares (m) 151 151 151 151
Wtd avg shares (m) 151 151 151 151
Balance Sheet Y/E Mar, Rs mn FY20 FY21e FY22e FY23e
Cash & bank 24 387 377 471
Debtors 800 822 1,053 1,175
Inventory 97 104 113 122
Loans & advances 5 5 5 6
Other current assets 703 773 835 902
Total current assets 1,629 2,091 2,383 2,675
Investments 684 753 828 911
Gross fixed assets 23,142 23,642 24,142 24,642
Less: Depreciation -2,038 -2,481 -2,927 -3,379
Add: Capital WIP 460 138 135 133
Net fixed assets 21,564 21,300 21,350 21,396
Total assets 23,877 24,143 24,561 24,981
Current liabilities 743 645 738 782
Provisions 62 64 65 66
Total current liabilities 805 708 802 849
Non-current liabilities 5,079 5,328 5,139 5,037
Total liabilities 5,885 6,036 5,942 5,886
Paid-up capital 1,505 1,505 1,505 1,505
Reserves & surplus 16,487 16,602 17,114 17,590
Shareholders’ equity 17,992 18,107 18,619 19,095
Total equity & liabilities 23,877 24,143 24,561 24,981
Source: Company, PhillipCapital India Research Estimates
Cash Flow Y/E Mar, Rs mn FY20 FY21e FY22e FY23e
Pre-tax profit 774 154 683 874
Depreciation 421 442 447 452
Chg in working capital -31 -196 -207 -152
Total tax paid -104 337 -171 -219
Cash flow from operating activities 1,059 737 752 955
Capital expenditure -1,701 -178 -497 -497
Chg in investments -17 -68 -75 -83
Other investing activities 0 0 0 0
Cash flow from investing activities -1,718 -246 -572 -580
Free cash flow -659 490 179 375
Debt raised/(repaid) 578 -127 -188 -102
Dividend (incl. tax) 0 0 0 -179
Cash flow from financing activities 578 -127 -188 -281
Net chg in cash -81 363 -9 94
Valuation Ratios
FY20 FY21e FY22e FY23e
Per Share data
EPS (INR) 3.0 0.8 3.4 4.4
Growth, % (14.5) (74.5) 344.0 28.0
Book NAV/share (INR) 119.5 120.3 123.7 126.9
FDEPS (INR) 3.0 0.8 3.4 4.4
CEPS (INR) 5.8 3.7 6.4 7.4
CFPS (INR) 7.0 4.8 4.8 6.2
DPS (INR) - - - 1.0
Return ratios
Return on assets (%) 540.3 267.8 474.4 538.6
Return on equity (%) 251.0 63.7 275.0 343.3
Return on capital employed (%) 541.9 270.2 482.0 550.0
Turnover ratios
Asset turnover (x) 0.3 0.2 0.2 0.3
Sales/Total assets (x) 0.2 0.2 0.2 0.2
Sales/Net FA (x) 0.3 0.2 0.2 0.3
Working capital/Sales (x) 0.2 0.3 0.2 0.2
Receivable days 51.5 73.0 73.0 73.0
Inventory days 6.2 9.3 7.8 7.6
Payable days 30.6 24.6 26.0 26.0
Working capital days 55.5 94.2 88.0 88.3
Liquidity ratios
Current ratio (x) 2.2 3.2 3.2 3.4
Quick ratio (x) 2.1 3.1 3.1 3.3
Interest cover (x) 2.6 1.3 2.4 2.9
Total debt/Equity (%) 30.3 29.4 27.6 26.4
Net debt/Equity (%) 30.2 27.3 25.6 23.9
Valuation
PER (x) 9.3 36.5 8.2 6.4
PEG (x) - y-o-y growth (0.6) (0.5) 0.0 0.2
Price/Book (x) 0.2 0.2 0.2 0.2
EV/Net sales (x) 1.7 2.2 1.7 1.5
EV/EBITDA (x) 5.8 8.7 5.7 5.0
EV/EBIT (x) 7.8 14.9 8.0 6.8
INSTITUTIONAL EQUITY RESEARCH
Page | 99 | PHILLIPCAPITAL INDIA RESEARCH
VRL Logistics (VRLL IN)
High operating leverage
INDIA | LOGISTICS | Company Update
20 July 2020
Parcel delivery service provider with pan-India last-mile connectivity. Operates through mainly an owned fleet supplemented by third-party hired vehicles. VRLL has strong brand equity backed by 40+ years of operations. It would be one of the major beneficiaries of GST implementation and economic recovery. Market leader in less-than truck load with a pan-India network Goods transportation (GT) is c.82% of VRLL’s revenue while passenger buses account for c.16%. It operates its own fleet of 5,091 vehicles (4,754 goods carriers and 337 passenger buses) with 693 branches. Its network: 47 transit hubs in 22 states and 5 union territories, providing general‐parcel (LTL: less than truck load) and priority‐parcel deliveries, and courier and full‐truckload (FTL) services. Its hub‐and‐spoke model enables it to facilitate last‐mile connectivity to remote areas in India. High operating leverage with an asset-ownership model For c.90% of its transportation, it uses its owned fleet, and for 8-10%, outside vehicles, depending on the market situation. It also owns buses in the passenger segment. The asset-ownership model helps it to control costs, customise vehicles for the parcels business, and allows it to provide consistent service and safety. Additionally, it has dedicated in-house vehicle body designing and vehicle maintenance facilities. Moreover, it owns petrol pumps for captive consumption, which provide cost advantages of Rs 2-3 per litre; it uses c.20-30% bio-diesel, which also significantly reduces fuel costs. VRL also benefits from higher volume discounts for purchases of spare parts, tyres, and other consumables due to its large fleet. A significant part of the driver salaries it pays is variable (linked to km operated), which helps VRLL to control costs during weak demand scenarios. Axle loading norm, e-way bill and GST, are positive for the company
Road transport has benefitted by the recent upward revision in ‘safe axle weights’ by the government (by 15-20%) for goods transport vehicles, creating c.6-7% additional capacity for VRLL and reducing operating costs and capex needs. The company mainly carries low-weight volumetric cargo, which has seen significant axle-norm benefits.
VRLL added 520 vehicles in GT in FY20 (318 in 4Q), including 432 HCVs, to benefit from lower prices pre-BS-VI norms. It has postponed FY21’s capital expenditure plan (c.Rs 700mn including c.Rs 400mn for buses) due to Covid-19.
The company mainly caters to less than truck load (LTL), which accounts for 87% of its GT revenue. Post GST, there has been a gradual shift to LTL from FTL, mainly as customers prefer sending smaller quicker truckloads directly to their distributors rather than waiting at multiple warehouses in every state.
We believe VRL would be a major beneficiary of economic recovery, resulting in volume recovery and margin improvement.
COVID -19 lockdown – short-term earnings impact VRLL has a very well diversified customer base; its largest/top-10 customers contributed only 1%/5% of its GT revenues. It has big corporates and small and medium enterprises, distributors, and traders (SMEs contribute c.45% of business) as customers. VRLL caters to diverse sectors such as textiles, engineering, auto, agri, consumer durables and pharma, each contributing c.8-15% of revenue; the recent lockdown and subsequent slowdown will hit operations in the short term. Due to social distancing norms, the bus segment can operate at only up to 50% capacity, marring this segment. Outlook and valuation The stock trades at 14.1x FY22 EPS of Rs 10.9. We maintain our target at Rs 195, based on valuation of 18x FY22 EPS.
BUY (Maintain) CMP RS 153
TARGET RS 195 (+27%) COMPANY DATA
O/S SHARES (MN) : 291
MARKET CAP (RSBN) : 55
MARKET CAP (USDBN) : 0.8
52 - WK HI/LO (RS) : 340 / 187
LIQUIDITY 3M (USDMN) : 0.5
PAR VALUE (RS) : 1
SHARE HOLDING PATTERN, %
Mar 20 Dec 19 Sep 19
PROMOTERS : 68.1 68.1 68.1
FII / NRI : 4.7 5.0 5.5
FI / MF : 21.4 21.2 20.4
NON PRO : 1.5 1.4 1.4
PUBLIC & OTHERS : 4.4 4.4 4.7
PRICE VS. SENSEX
Source: Phillip Capital India Research
KEY FINANCIALS
Rs mn FY20 FY21E FY22E
Net Sales 21,185 14,808 21,407
EBIDTA 2,983 1,251 3,249
Net Profit 901 -475 981
EPS, Rs 10.0 (5.3) 10.9
PER, x 15.3 (29.1) 14.1
EV/EBIDTA, x 6.1 14.5 5.5
P/BV, x 2.2 2.4 2.2
ROE, % 14.4 (8.2) 15.3
Debt/Equity (%) 71.6 78.2 69.8
Source: PhillipCapital India Research Est.
Vikram Suryavanshi, Research Analyst (022 6246 4111) [email protected]
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VRL LOGISTICS COMPANY UPDATE
Financials
Income Statement Y/E Mar, Rs mn FY20 FY21 FY22e FY23e
Net sales 21,185 14,808 21,407 23,886
Growth, % 0.4 -30.1 44.6 11.6
Freight -14,103 -9,848 -13,914 -15,526
Employee expenses -3,805 -3,554 -4,067 -4,299
Other Operating expenses -294 -156 -176 -341
EBITDA (Core) 2,983 1,251 3,249 3,719
Growth, % 22.2 (58.1) 159.8 14.5
Margin, % 14.1 8.4 15.2 15.6
Depreciation -1,675 -1,612 -1,667 -1,792
EBIT 1,307 -362 1,582 1,927
Growth, % (8.8) (127.7) (537.5) 21.8
Margin, % 6.2 (2.4) 7.4 8.1
Interest paid -367 -380 -388 -374
Other Non-Operating Income 103 108 114 119
Pre-tax profit 1,043 -633 1,308 1,673
Tax provided -142 158 -327 -418
Profit after tax 901 -475 981 1,255
Net Profit 901 -475 981 1,255
Growth, % (2.0) (152.7) (306.6) 27.9
Net Profit (adjusted) 901 -475 981 1,255
Unadj. shares (m) 90 90 90 90
Wtd avg shares (m) 90 90 90 90
Balance Sheet Y/E Mar, Rs mn FY20 FY21 FY22e FY23e
Cash & bank 134 215 443 678
Debtors 823 823 892 995
Inventory 293 165 238 265
Loans & advances 426 451 477 505
Other current assets 415 435 457 480
Total current assets 2,091 2,088 2,507 2,924
Investments 1 1 1 1
Gross fixed assets 12,451 12,651 14,051 15,551
Less: Depreciation -4,794 -5,743 -6,726 -7,815
Add: Capital WIP 68 70 71 72
Net fixed assets 7,725 6,978 7,396 7,809
Total assets 12,113 11,363 12,199 13,029
Current liabilities 732 391 565 630
Provisions 347 382 420 462
Total current liabilities 1,079 773 985 1,092
Non-current liabilities 4,791 4,825 4,796 4,592
Total liabilities 5,870 5,598 5,781 5,684
Paid-up capital 903 903 903 903
Reserves & surplus 4,828 5,217 5,870 6,797
Shareholders’ equity 6,243 5,765 6,419 7,345
Total equity & liabilities 12,113 11,363 12,199 13,029
Source: Company, PhillipCapital India Research Estimates
Cash Flow Y/E Mar, Rs mn FY20 FY21 FY22e FY23e
Pre-tax profit 1,043 -633 1,308 1,673
Depreciation 1,675 1,612 1,667 1,792
Chg in working capital -2,436 -223 22 -75
Total tax paid -142 158 -327 -418
Other operating activities 0 0 0 0
Cash flow from operating activities 140 914 2,670 2,972
Capital expenditure -1,946 -865 -2,085 -2,205
Chg in investments 0 0 0 0
Cash flow from investing activities -1,946 -865 -2,085 -2,205
Free cash flow -1,806 50 585 767
Equity raised/(repaid) 629 -767 100 100
Debt raised/(repaid) 2,910 34 -29 -204
Dividend (incl. tax) 634 2 273 273
Cash flow from financing activities 4,173 -731 344 169
Net chg in cash 2,367 -681 929 936
Valuation Ratios
FY20 FY21 FY22e FY23e
Per Share data
EPS (INR) 10.0 (5.3) 10.9 13.9
Growth, % (2.0) (152.7) (306.6) 27.9
Book NAV/share (INR) 69.1 63.8 71.1 81.3
FDEPS (INR) 10.0 (5.3) 10.9 13.9
CEPS (INR) 28.5 12.6 29.3 33.7
CFPS (INR) 25.8 8.9 28.3 31.6
DPS (INR) (7.0) (0.0) (3.0) (3.0)
Return ratios Return on assets (%) 11.6 (0.8) 11.6 12.9
Return on equity (%) 14.4 (8.2) 15.3 17.1
Return on capital employed (%) 12.4 (4.4) 17.7 20.0
Turnover ratios Asset turnover (x) 2.5 1.8 2.6 2.7
Sales/Net FA (x) 2.8 2.0 3.0 3.1
Working capital/Sales (x) 0.1 0.1 0.1 0.1
Fixed capital/Sales (x) 0.4 0.5 0.3 0.3
Receivable days 14.2 20.3 15.2 15.2
Inventory days 5.0 4.1 4.1 4.1
Payable days 0.7 1.7 1.8 1.8
Working capital days 21.1 36.5 25.6 24.7
Liquidity ratios
Current ratio (x) 2.9 5.3 4.4 4.6
Quick ratio (x) 2.5 4.9 4.0 4.2
Interest cover (x) 3.6 (1.0) 4.1 5.2
Total debt/Equity (%) 71.6 78.2 69.8 58.2
Net debt/Equity (%) 69.5 74.4 62.9 48.9
Valuation
PER (x) 15.3 (29.1) 14.1 11.0
PEG (x) - y-o-y growth (7.9) 0.2 (0.0) 0.4
Price/Book (x) 2.2 2.4 2.2 1.9
Yield (%) (4.6) (0.0) (2.0) (2.0)
EV/Net sales (x) 0.9 1.2 0.8 0.7
EV/EBITDA (x) 6.1 14.5 5.5 4.7
EV/EBIT (x) 13.9 (50.1) 11.3 9.0
INSTITUTIONAL EQUITY RESEARCH
Page | 101 | PHILLIPCAPITAL INDIA RESEARCH
Blue Dart (BDE IN)
Delivering leadership
INDIA | LOGISTICS | Company Update
20 July 2020
BDE is a leading express-service provider in India with more than 30 years of operational experience. BDE has a domestic network covering 34,854 locations and more than 220 countries and territories are serviced worldwide through DHL, providing reach and access to its customers. It is the only scheduled cargo airline with a dedicated fleet of freighters and infrastructure support. Unparalleled reach and network It is a dominant leader in the domestic air-express industry with c.50% market share; c.15% of the ‘ground’ segment. It has a fleet of six Boeing 757 freighters offering a revenue payload of over 425 tonnes per day, 11,122 vehicles and over 13,200 employees. It carried c.240mn domestic shipments and 0.8mn international shipments weighing c.769,490 tonnes in FY20. All its aircraft are owned through a subsidiary – Bludart Aviation – which runs scheduled services; 80% of its vehicle fleet is outsourced. BDE is increasing its coverage and footprint in tier-2 and 3 cities with a focus on small and medium enterprises. It has warehouses at 85 locations in India and bonded warehouses in 7 major metros – namely Ahmadabad, Bangalore, Chennai, Delhi, Mumbai, Kolkata, and Hyderabad. BDE has started an e-fulfilment centre at Gurgaon and Bangalore and is expanding to other regions too. Organized express market will remain attractive, due to growth in e-commerce and retail The express industry’s growth has a strong co‐relation with GDP growth (1.8‐2.0x). The size is c.Rs 170bn, with organized at c.Rs 109bn, of which c.Rs 50bn is air and c.Rs 59bn is ground. The organized express market will see 10-12% CAGR driven by: (1) trade changing to parcel movement after GST from full load earlier, and (2) growth in e-commerce. BDE derives c.75% revenue from air and the rest from surface. It gets c.94% revenue from institutional clients; it has c.40,000 such customers who sign annual contracts, giving BDE strong revenue sustainability. Retail customers (walk ins) account for c.6% of its revenue, which is a high-margin business. E-commerce revenue share is c.18%; this promises to be a high-growth business with a projected 25-30% industry growth over the next five years. Presently, there is higher competitive pressure in express cargo, particularly air express BDE’s revenue CAGR over FY15-20 was 7% to Rs 31.7bn; PAT was -29% to Rs 222mn. The economic slowdown due to Covid-19 resulted in a PBT fall of c.80% to Rs 250mn; adjusting for AS-116, PBT decline was 32%. EBITDA margins declined from a high of 14.9% in FY14 to touch 9% in FY19. It reported EBITDA margin of 14.9% in FY20 due to Ind AS 116 accounting benefit of c.Rs 2bn while adjusted margins were at 8.7%. It has a high fixed-cost base due to its air-cargo business. The sharp decline is mainly due to increased competition from new players and a shift in volume to surface express cargo from air express. With economic slowdown, the cost-conscious customers and e-commerce players have made do with elongated delivery dates for their product deliveries to save on air-express costs, which are +3x of surface express costs. BDE’s air express business has a high fixed cost of c.75% due to own leased aircrafts, but provides significant operating leverage – when demand recovers. With its leadership in the express business and strong operating expertise, BDE should come out stronger in current business challenges, considering competitors’ unsustainable cost matrices and service levels. Valuations We believe that with its strong customer relationships, network, and technology support, Blue Dart will be a major beneficiary of the growing express business. It trades at 209x its FY20 EPS and 37x EV/EBITDA.
Not rated CMP RS 1963 COMPANY DATA
O/S SHARES (MN) : 24
MARKET CAP (RSBN) : 47
MARKET CAP (USDBN) : 0.6
52 - WK HI/LO (RS) : 3068 / 1875
LIQUIDITY 3M (USDMN) : 0.4
PAR VALUE (RS) : 10
SHARE HOLDING PATTERN, %
Mar 20 Dec 19 Sep 19
PROMOTERS : 75.0 75.0 75.0
FII / NRI : 2.7 3.7 4.6
FI / MF : 10.9 9.9 9.3
NON PRO : 1.7 1.8 1.5
PUBLIC & OTHERS : 9.7 9.7 9.6
PRICE VS. SENSEX
Source: Phillip Capital India Research
KEY FINANCIALS
Y/E Mar FY18 FY19 FY20
EPS (Rs) 61.0 37.8 9.4
Cash EPS (Rs) 109.3 91.8 74.6
Book Value (Rs) 224.2 243.5 206.9
Dividend (Rs / Share) 12.5 12.5 0.0
P/E (X) 32.2 51.9 209.3
P/BV (x) 8.8 8.1 9.5
EV/EBITDA 13.7 17.0 18.1
RoCE (%) 29.4 18.2 8.4
RoE (%) 27.2 15.5 4.5
Source: PhillipCapital India Research Est.
Vikram Suryavanshi, Research Analyst (022 6246 4111) [email protected]
020
40
60
80100
120
140160
180
Apr-16 Apr-17 Apr-18 Apr-19
Bluedart BSE Sensex
Page | 102 | PHILLIPCAPITAL INDIA RESEARCH
BLUE DART COMPANY UPDATE
Financials
Income Statement Y/E Mar, Rs mn FY17 FY18 FY19 FY20
Net sales 26,895 27,992 31,744 31,751
Growth, % 4.9 4.1 13.4 0.0
Freight and Handling 14,041 14,789 17,662 16,561
Employee expenses 5,549 5,845 6,984 7,335
Other Operating expenses 3,888 3,846 4,244 3,114
EBITDA (Core) 3,417 3,513 2,855 4,742
Growth, % (10.5) 2.8 (18.7) 66.1
Margin, % 12.7 12.5 9.0 14.9
Other income 262 207 192 155
Depreciation 1,038 1,145 1,279 3,473
EBIT 2,641 2,575 1,768 1,424
Interest paid 450 405 427 1,174
Pre-tax profit 2,191 2,170 1,341 250
Tax provided 793 723 444 27
Profit after tax 1,398 1,447 898 222
Others (Minorities, Associates) 0 0 0 0
Net Profit 1,398 1,447 898 222
Growth, % (27.5) 3.5 (38.0) (75.2)
Extraordinary - - - (641.1)
Net Profit (adjusted) 1,398 1,447 898 (419)
Unadj. shares (m) 24 24 24 24
Source: Company, PhillipCapital India Research Estimates
Balance Sheet Y/E Mar, Rs mn FY17 FY18 FY19 FY20
Equity 237 237 237 237
Reserves 4057 5081 5540 4671
Shareholders’ Equity 4294 5318 5777 4908
Long term borrowing 3193 3167 4316 4150
Short term borrowing 1732 974 712 225
Current maturity 0 0 0 0
Total Loan 4925 4141 5028 4375
Deferred tax -557 -692 -1096 -1707
Capital Employed 8663 8767 9709 16885
Gross block 5844 6956 9302 12675
Tangible Assets 4098 4648 5885 6617
Intangible Assets 913 934 1039 990
Capital work in Progress 363 593 526 160
Non-current investments 562 558 569 596
Non-current assets 104 203 366 61
Current investments 544 266 298 191
Current assets 6830 7132 8334 7022
Inventory 247 213 260 270
Trade Receivables 3607 4223 4910 5282
Cash 2568 2287 2687 1000
Loans and Advances 11 10 9 8
Other current assets 398 400 467 462
Current Liabilities 4752 5567 7308 7816
Trade Payable 2721 3684 4343 4010
Other current liabilities 1042 1006 1895 2290
Provisions 988 877 1071 1515
Net Working capital 2079 1566 1026 -793
Capital Employed 8663 8767 9709 16885
INSTITUTIONAL EQUITY RESEARCH
Page | 103 | PHILLIPCAPITAL INDIA RESEARCH
Future Supply Chain Solutions Ltd (FSCSL IN) Expanding sector focus
INDIA | LOGISTICS | Company Update
20 July 2020
FSCSL is one of India’s leading third-party (3PL) logistics operators with c.80% revenue coming from contract logistics. It provides services for express and temperature-controlled logistics as well, with a major focus on retail and FMCG sectors. It is a pioneer in adopting modern technology and automation in warehousing and supply chain, and should be a major beneficiary of the growing logistics outsourcing in India.
Diversifying focus to high-growth sectors: FSC has consciously developed domain expertise in the supply-chain segment in several consumption-driven sectors including fashion, food, FMCG, furniture, consumer durables, and electronics. These sectors are less cyclical and are seeing strong secular growth in the long term, unlike many others such as manufacturing or industrials. Around 85-90% of FSC’s business is driven by consumption-driven sectors. Outsourcing of SCM and other logistics services should rise in the future, with a change in tax structure. 3PL providers, such as FSC, are able perform SCM more efficiently than customers’ in-house operations, because of domain expertise, technology adoption due to scale, efficient management of operations, and flexible employee-cost structures.
India food-grid: Redefining food and FMCG supply-chain in India: India’s food and FMCG supply chain is highly inefficient and faces formidable challenges in terms of inventory management, availability issues, freshness of product, distribution costs and time-to-market. FSC is developing large food and FMCG distribution centres, making one India Food Grid (IFG). Under this, manufacturers will get clear visibility in terms of stock availability, and consumers will get quicker delivery of products. The expansion of IFG is on an asset-light model with leased facilities (each distribution centre will be c.200,000 sq. ft.) while FSC will invest in handling equipment and racking systems. Each distribution centre will cater to a 100-200km catchment; initially, major customers will be Big Bazar/Easy Day.
Nippon Express to provide global expertise with client addition: Nippon Express has acquired 22% stake in FSC in December 2019 through its subsidiary Nippon Express (South Asia & Oceania) Pte ltd. The proceeds will be used for capital expenditure, debt reduction, and working capital requirements. FSC and Nippon Express have signed a business collaboration agreement (BCA) to jointly explore growth opportunities for new and existing customers, based on a strategic partnership. Nippon Express will offer FSC’s integrated service to Japanese and other foreign customers, while FSC will provide Nippon Express’ global logistics services to Indian customers. Nippon will introduce latest global technologies and process improvements and Kaizen activity at FSC.
Earnings growth through cost rationalization and productivity: FSCSL has increased its focus on operational efficiency through project Lakshya, which aims for transport cost savings, network and warehouse redesign and consolidation, and revisiting customer contracts. It has scaled down its loss-making last-mile-delivery business since 3QFY20, and there will be no material impact on earnings from now. Considering customer rationalization and warehousing consolidation, revenue growth will be muted in the short term, with improvement in margins and earnings.
Valuations: Strong infrastructure for consumer-driven sectors and partnerships with Nippon will help FSCSL to increase its market share in 3PL and express businesses. With growing outsourcing after GST, it will be able to leverage its national network efficiently with the benefit of operating leverage. Covid-19 and slowdown in retail along with liquidity concerns for the parent group would act as short-term headwinds. On CMP, FSC trades at 11.7x FY19 earnings of Rs 14 per share.
Not rated CMP Rs 164 COMPANY DATA
O/S SHARES (MN) : 44
MARKET CAP (RSBN) : 7
MARKET CAP (USDBN) : 0.1
52 - WK HI/LO (RS) : 632 / 81
LIQUIDITY 3M (USDMN) : 0.2
PAR VALUE (RS) : 10
SHARE HOLDING PATTERN, %
Mar 20 Dec 19 Sep 19
PROMOTERS : 47.9 47.9 52.4
FII / NRI : 8.2 8.3 10.4
FI / MF : 10.2 10.8 12.0
NON PRO : 28.4 28.2 20.3
PUBLIC & OTHERS : 5.3 4.8 4.9
PRICE VS. SENSEX
Source: Phillip Capital India Research
KEY FINANCIALS
Y/E Mar FY17 FY18 FY19
EPS (Rs) 10.4 6.9 14.0
Cash EPS (Rs) 14.8 18.3 24.4
Book Value (Rs) 66.7 109.5 123.6
Dividend (Rs / Share) 0.0 1.0 1.3
P/E (X) 15.7 23.6 11.7
P/BV (x) 2.5 1.5 1.3
EV/EBITDA 9.8 8.5 7.2
RoCE (%) 18.8 8.3 9.9
RoE (%) 15.6 6.3 11.3
Source: PhillipCapital India Research Est.
Vikram Suryavanshi (+ 9122 6246 4111) [email protected]
0
20
40
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80
100
120
140
Dec-17 Dec-18 Dec-19
FSC BSE Sensex
Page | 104 | PHILLIPCAPITAL INDIA RESEARCH
FUTURE SUPPLY CHAIN SOLUTIONS LTD COMPANY UPDATE
Integrated service offering, backed by automation FSC is a third-party (3PL) logistics operator with contract logistics, express logistics, and cold-chain services. Its focus is on providing customized solutions for customers’ supply-chain requirements, with a value proposition, rather than just bulk transportation. It has developed warehouse-management and transport-management systems, with strong domain expertise in consumption-driven businesses, which tend to have huge complexities in their supply chains. FSC has set up one of the most modern sorting centres in India, and is using technology and automation for making the supply-chain more reliable, reducing inventory, and providing faster service. Contract logistics constitutes c.82% of its revenue and express logistics c.12%; the rest comes mainly from temperature-controlled logistics. It offers last-mile connectivity through its group company – Leanbox Logistics Solutions.
Source: Company, PhillipCapital India Research
In contract logistics, the company offer these services: (1) Integrated built-to-suit
and automated warehousing. (2) Transportation and distribution. (3) Value-added services such as kitting, packaging, and bundling. And (4) Reverse logistics. The focus is more on warehousing management and distribution while transportation from factory to warehouse, a low-margin and competitive business, is normally done by suppliers.
Express business offers services for time-definite full-and-part truck loads, and point-to-point services. It works with a hub-and-spoke distribution model with real-time shipment tracking. Express business covers 11,434 pin codes across countries with 13 hubs and 126 branches, and helps cross-sell services to customers.
Temperature-controlled business accounts for c.4% of revenue, provides warehousing, and reefer transportation. Temperature-controlled business will provide strategic support to group companies’ requirements, and is focused on frozen foods and is not in the commodity business.
Integrated services
Contract logistics
1. Automated
warehousing
2. Transportation and
distribution
3. Value-added services
4. Reverse logistics
Express logistics Temperature-controlled
Focus on complex supply chain solutions in consumer centric businesses
Source: Company, PhillipCapital India Research
82%
12%
4% 2%
Contract logistics Express buisness
Cold chain Other
Page | 105 | PHILLIPCAPITAL INDIA RESEARCH
FUTURE SUPPLY CHAIN SOLUTIONS LTD COMPANY UPDATE
FSC state-of-the art distribution centre at MIHAN, Nagpur
High-speed Cross-belt Sorter System
Operational since July 2017. The first-of-its-kind in India
Improved efficiency and throughput
Sorting capacity – Unit sorter: 16,000 units per hour – Case sorter: 2,000 cases per hour – 400 destinations
Length of the conveyor belt is 2.6 km
Dynamic Put-to-Light Sortation System
Improved speed of sortation by almost 40% from manual sortation methods
Expanded ordinary processing capacity of distribution centres
Enables accuracy of packing and labelling
Page | 106 | PHILLIPCAPITAL INDIA RESEARCH
FUTURE SUPPLY CHAIN SOLUTIONS LTD COMPANY UPDATE
Financials
Income Statement Y/E Mar, Rs mn FY17 FY18 FY19 FY20E
Net sales 5,612 9,378 12,284 11,483
Growth, % 7.9 67.1 31.0 -6.5
Cost of logistics 3,753 6,442 8,860 7,039
Employee expenses 565 1,118 1,173 1,006
Other expense 551 977 1,040 1,022
EBITDA (Core) 743 841 1,211 2,416
Growth, % 6.3 13.3 43.9 99.5
Margin, % 13.2 9.0 9.9 21.0
Other income 158 126 58 180
Depreciation 191 497 454 1,603
EBIT 709 470 815 992
Interest paid 128 160 178 757
Pre-tax profit 582 311 636 235
Tax provided 124 0 0 0
Profit after tax 457 311 636 235
Minorities, Associates 0 -6 -21 -173
Net Profit 457 305 615 62
Growth, % 55.7 (33.4) 101.9 (89.9)
Net Profit (adjusted) 457 305 615 62
Unadj. shares (m) 391 401 401 439
Source: Company, PhillipCapital India Research Estimates
Balance Sheet Y/E Mar, Rs mn FY17 FY18 FY19 FY20E
Equity 391 401 401 439
Reserves 6362 6192 2835 3904
Shareholders’ Equity 6599 6430 3073 4141
Minority interest 0 0 0 124
Long term borrowing 735 268 2187 1087
Short term borrowing 20 580 620 770
Current maturity 0 0 0 0
Total Loan 755 848 2807 1857
Lease liability 0 0 0 2995
Capital Employed 3775 5651 8229 12797
Gross block 1666 4094 5546 6646
Tangible Assets 1288 3163 4178 4774
Intangible Assets 10 22 18 18
Capital work in Progress 698 25 639 750
Right to use asset 0 0 0 2562
Goodwill 0 0 0 0
Non-current investments 227 94 73 77
Non-current assets 0 771 1214 1457
Current assets 2863 3654 5141 6138
Inventory 0 0 55 60
Trade Receivables 2167 2596 3696 3775
Cash 470 797 1243 1853
Loans and Advances 61 112 50 100
Other current assets 165 149 97 350
Current liabilities 1311 2078 3034 2979
Trade Payable 978 1795 2618 2517
Other current liabilities 306 205 291 320
Provisions 28 78 125 142
Net Working capital 1552 1576 2106 3159
Capital Employed 3774 5651 8229 12797
INSTITUTIONAL EQUITY RESEARCH
Page | 107 | PHILLIPCAPITAL INDIA RESEARCH
TCI Express Ltd (TCIEXP IN)
Fulfilling the need for urgency
INDIA | LOGISTICS | Company Update
20 July 2020
Despite a weak macro-economic environment impacting major sectors of the economy, TCIEXP is the
fastest growing express-service company in India. It has one of the largest hub-and-spoke networks
in the country, and its asset light-model helps it to drive strong cash flows.
Strong distribution infrastructure – key advantage TCIEXP was established in 1996 as one of the divisions of TCI Limited and hived off to become TCIEXP, an independent company, in 2016. It addresses the time-critical needs of industrial customers for whom delays could result in major business losses in the event of stock loss. TCI Express has developed a pan-India network for express door-to-door delivery services. It covers 704 of India’s 739 districts, with 800+ branches, capable of servicing more than 40,000 pickup and delivery points. It operated through c.5,000 hired containerized vehicles and has established 28 strategically-located sorting centres, acting like hubs, to enhance operational efficiency. It also provides international delivery to c.202 countries through its IATA-approved agent network. Network-effect and scale gives it operational efficiency, and also helps it to get a larger share of its customers’ cargo. Asset light model with high return ratio TCIEXP works with vendor-managed trucks for its transportation needs. It mainly invests on strategic hubs and branches, and development and implementation of IT and handling equipment. It has an asset turnaround of 3.5x on capital employed of Rs 2.5bn and gross block of 1.8bn. It hires trucks from a strong vendor base developed over time, and most of its sorting centres and branches are leased. It has annual contracts with vendors; payments are based on per-km running for long distances, fixed for shorter distances. It has flexibility in pricing services and vendors have fuel-escalation clauses. The asset-light business helps it to scale up operations according to demand and reduce its balance-sheet risk. Sticky customers with focus on service It focuses on tier-2 and 3 cities, and provides services to industry verticals such as automotive, pharmaceuticals, retail, engineering, apparel and e-commerce. TCIEXP is focused on high-value parcel sizes – from 5kg to 1-tonne. It has c.95% revenue from B2B, including surface express (86%), air express (9%), and reverse logistics. The 5% B2C revenue is from e-commerce, where it providing last-mile and cash on delivery to leverage its network. It also focuses on value-added services including COD, Sunday delivery, ODA – out of delivery area, and customized solutions. Its revenue growth was driven primarily by an increase in Small and Medium Enterprises (SME) customers and branch expansion (added 70 in FY20). Its strong performance is a result of operational efficiency initiatives and better working-capital management. Operating leverage with capex in developing hubs, efficiency TCIEXP is expanding the size of sorting centres with automation, and also owns some of the facilities at strategic locations. It had a capital expenditure of Rs 320mn in FY20 for setting up sorting centres at Gurgaon and Pune, which should be operational in 3QFY21. It has invested in robust ERP solutions to ensure seamless connectivity across its network of offices. Its GPS-enabled fleet ensured time-definite and accurate delivery services. Automated systems such as Electronic Data Interchange (EDI) and Application Programme Interface (API) facility have helped cater to the growing technological demand of customers. Valuations TCI Express, with its own branch network and focus on customer service, would be a beneficiary of the growing express business. It trades at 28.9x FY20 EPS of Rs 23.3 and EV/EBITDA of 21x.
Not Rated CMP RS 672 COMPANY DATA
O/S SHARES (MN) : 38
MARKET CAP (RSBN) : 26
MARKET CAP (USDBN) : 0.3
52 - WK HI/LO (RS) : 950 / 491
LIQUIDITY 3M (USDMN) : 0.4
PAR VALUE (RS) : 1
SHARE HOLDING PATTERN, %
Mar 20 Dec 19 Sep 19
PROMOTERS : 66.9 66.9 66.9
FII / NRI : 4.2 5.1 5.2
FI / MF : 6.7 5.4 4.8
NON PRO : 6.5 6.5 6.8
PUBLIC & OTHERS : 15.6 16.1 16.3
PRICE VS. SENSEX
Source: Phillip Capital India Research
KEY FINANCIALS
Y/E Mar FY18 FY19 FY20
EPS (Rs) 15.3 19.0 23.3
Cash EPS (Rs) 16.7 20.7 25.3
Book Value (Rs) 54.0 69.8 88.1
Dividend (Rs / Share) 2.5 3.0 4.0
P/E (X) 43.9 35.3 28.9
P/BV (x) 12.4 9.6 7.6
EV/EBITDA 28.7 21.5 21.1
RoCE (%) 34.9 41.3 34.6
RoE (%) 28.4 27.3 26.4
Source: PhillipCapital India Research Est.
Vikram Suryavanshi, Research Analyst
(022 6246 4111)
70
120
170
220
270
320
370
Jan-17 Jan-18 Jan-19 Jan-20
TCI Exp BSE Sensex
Page | 108 | PHILLIPCAPITAL INDIA RESEARCH
TCI EXPRESS LTD COMPANY UPDATE
Financials
Income Statement Y/E Mar, Rs mn FY17 FY18 FY19 FY20
Net sales 7,503 8,851 10,238 10,320
Growth, % 13.1 18.0 15.7 0.8
Cost of logistics 5,766 6,644 7,534 7,342
Employee expenses 588 725 859 1,018
Other expense 530 575 656 747
EBITDA (Core) 619 907 1,190 1,213
Growth, % 13.8 46.5 31.3 1.9
Margin, % 8.3 10.2 11.6 11.8
Other income 14 21 32 44
Depreciation 43 52 65 78
EBIT 590 875 1,157 1,179
Interest paid 24 38 38 9
Pre-tax profit 565 838 1,119 1,170
Tax provided 190 251 390 279
Profit after tax 375 586 729 891
Net Profit 375 586 729 891
Growth, % 30.6 56.4 24.3 22.3
Net Profit (adjusted) 375 584 729 891
Unadj. shares (m) 38 38 38 38
Source: Company, PhillipCapital India Research Estimates
Balance Sheet Y/E Mar, Rs mn FY17 FY18 FY19 FY20
Equity 76 76 76 76
Reserves 1531 1992 2595 3296
Shareholders’ Equity 1607 2068 2671 3372
Long term borrowing 5 17 23 19
Short term borrowing 305 382 64 9
Current maturity 0 0 0 0
Total Loan 310 398 87 28
Lease liability 0 0 0 1
Deferred tax 33 45 43 3
Capital Employed 1951 2511 2802 3404
Gross block 1135 1781 1960 2138
Tangible Assets 955 1602 1716 1816
Intangible Assets 16 18 15 22
Capital work in Progress 79 0 14 111
Right to use asset 0 0 0 16
Non-current investments 50 52 102 119
Non-current assets 0 0 0 0
Current investments 0 0 13 295
Current assets 1344 1767 1918 1896
Inventory 0 0 0 0
Trade Receivables 1131 1544 1631 1658
Cash 88 122 171 126
Loans and Advances 63 71 85 91
Other current assets 62 30 31 21
Current liabilities 493 927 975 872
Trade Payable 372 646 723 620
Other current liabilities 96 248 212 205
Provisions 24 33 41 47
Net Working capital 852 840 943 1024
Capital Employed 1951 2511 2802 3404
Page | 109 | PHILLIPCAPITAL INDIA RESEARCH
LOGISTICS SECTOR UPDATE
Annexure: I Indian Logistics: Stock Performance
Container Corporation Blue Dart
Allcargo Logistics Gateway Distriparks
Navkar Corporation VRL Logistics
Source: Company, PhillipCapital India Research
0
100
200
300
400
500
600
700
Ap
r-0
3
Ap
r-0
4
Ap
r-0
5
Ap
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6
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7
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8
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3
Ap
r-1
4
Ap
r-1
5
Ap
r-1
6
Ap
r-1
7
Ap
r-1
8
Ap
r-1
9
Ap
r-2
0
Concor
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
Ap
r-0
3
Ap
r-0
4
Ap
r-0
5
Ap
r-0
6
Ap
r-0
7
Ap
r-0
8
Ap
r-0
9
Ap
r-1
0
Ap
r-1
1
Ap
r-1
2
Ap
r-1
3
Ap
r-1
4
Ap
r-1
5
Ap
r-1
6
Ap
r-1
7
Ap
r-1
8
Ap
r-1
9
Ap
r-2
0
Blue Dart
0
50
100
150
200
250
Jun
-06
Jun
-07
Jun
-08
Jun
-09
Jun
-10
Jun
-11
Jun
-12
Jun
-13
Jun
-14
Jun
-15
Jun
-16
Jun
-17
Jun
-18
Jun
-19
Jun
-20
allcargo
0
50
100
150
200
250
300
350
400
450
500
Mar
-05
Mar
-06
Mar
-07
Mar
-08
Mar
-09
Mar
-10
Mar
-11
Mar
-12
Mar
-13
Mar
-14
Mar
-15
Mar
-16
Mar
-17
Mar
-18
Mar
-19
Mar
-20
Gateway
0
50
100
150
200
250
Sep-15 Sep-16 Sep-17 Sep-18 Sep-19
Navkar Corp
0
50
100
150
200
250
300
350
400
450
500
Apr-15 Apr-16 Apr-17 Apr-18 Apr-19 Apr-20
VRL
Page | 110 | PHILLIPCAPITAL INDIA RESEARCH
LOGISTICS SECTOR UPDATE
Gati Transport Corporation of India
Aegis Logistics Sical Logistics
Patel Integrated Logistics Snowman Logistics
Source: Company, PhillipCapital India Research
0
50
100
150
200
250
300
350
Ap
r-0
3
Ap
r-0
4
Ap
r-0
5
Ap
r-0
6
Ap
r-0
7
Ap
r-0
8
Ap
r-0
9
Ap
r-1
0
Ap
r-1
1
Ap
r-1
2
Ap
r-1
3
Ap
r-1
4
Ap
r-1
5
Ap
r-1
6
Ap
r-1
7
Ap
r-1
8
Ap
r-1
9
Ap
r-2
0
Gati
0
50
100
150
200
250
300
350
400
Ap
r-0
3
Ap
r-0
4
Ap
r-0
5
Ap
r-0
6
Ap
r-0
7
Ap
r-0
8
Ap
r-0
9
Ap
r-1
0
Ap
r-1
1
Ap
r-1
2
Ap
r-1
3
Ap
r-1
4
Ap
r-1
5
Ap
r-1
6
Ap
r-1
7
Ap
r-1
8
Transport corp
0
50
100
150
200
250
300
350
Ap
r-0
3
Ap
r-0
4
Ap
r-0
5
Ap
r-0
6
Ap
r-0
7
Ap
r-0
8
Ap
r-0
9
Ap
r-1
0
Ap
r-1
1
Ap
r-1
2
Ap
r-1
3
Ap
r-1
4
Ap
r-1
5
Ap
r-1
6
Ap
r-1
7
Ap
r-1
8
Ap
r-1
9
Ap
r-2
0
Aegis logistics
0
100
200
300
400
500
600A
pr-
03
Ap
r-0
4
Ap
r-0
5
Ap
r-0
6
Ap
r-0
7
Ap
r-0
8
Ap
r-0
9
Ap
r-1
0
Ap
r-1
1
Ap
r-1
2
Ap
r-1
3
Ap
r-1
4
Ap
r-1
5
Ap
r-1
6
Ap
r-1
7
Ap
r-1
8
Ap
r-1
9
Ap
r-2
0
sical
0
20
40
60
80
100
120
140
160
180
Ap
r-0
3
Ap
r-0
4
Ap
r-0
5
Ap
r-0
6
Ap
r-0
7
Ap
r-0
8
Ap
r-0
9
Ap
r-1
0
Ap
r-1
1
Ap
r-1
2
Ap
r-1
3
Ap
r-1
4
Ap
r-1
5
Ap
r-1
6
Ap
r-1
7
Ap
r-1
8
Ap
r-1
9
Ap
r-2
0
patel
0
20
40
60
80
100
120
140
Sep
-14
Dec
-14
Mar
-15
Jun
-15
Sep
-15
Dec
-15
Mar
-16
Jun
-16
Sep
-16
Dec
-16
Mar
-17
Jun
-17
Sep
-17
Dec
-17
Mar
-18
Jun
-18
Sep
-18
Dec
-18
Mar
-19
Jun
-19
Sep
-19
Dec
-19
Mar
-20
Jun
-20
snowman
Page | 111 | PHILLIPCAPITAL INDIA RESEARCH
LOGISTICS SECTOR UPDATE
TCI Express
Mahindra Logistics
Source: Company, PhillipCapital India Research
Future Supply Chain
Tiger logistics
Source: Company, PhillipCapital India Research
0
100
200
300
400
500
600
700
800
900
1000
Dec
-16
Mar
-17
Jun
-17
Sep
-17
Dec
-17
Mar
-18
Jun
-18
Sep
-18
Dec
-18
Mar
-19
Jun
-19
Sep
-19
Dec
-19
Mar
-20
Jun
-20
TCIEXP IN Equity
0
100
200
300
400
500
600
700
No
v-1
7
Jan
-18
Mar
-18
May
-18
Jul-
18
Sep
-18
No
v-1
8
Jan
-19
Mar
-19
May
-19
Jul-
19
Sep
-19
No
v-1
9
Jan
-20
Mar
-20
May
-20
Jul-
20
MAHLOG IN Equity
0
100
200
300
400
500
600
700
800
Dec
-17
Feb
-18
Ap
r-1
8
Jun
-18
Au
g-1
8
Oct
-18
Dec
-18
Feb
-19
Ap
r-1
9
Jun
-19
Au
g-1
9
Oct
-19
Dec
-19
Feb
-20
Ap
r-2
0
Jun
-20
FSCSL IN Equity
0
50
100
150
200
250
300
350Se
p-1
3
Mar
-14
Sep
-14
Mar
-15
Sep
-15
Mar
-16
Sep
-16
Mar
-17
Sep
-17
Mar
-18
Sep
-18
Mar
-19
Sep
-19
Mar
-20
TGLI IN Equity
Page | 112 | PHILLIPCAPITAL INDIA RESEARCH
LOGISTICS SECTOR UPDATE
Stock Price, Price Target and Rating History – Container Corp
Stock Price, Price Target and Rating History – Allcargo Logistics
Stock Price, Price Target and Rating History – VRL Logistics
N (TP 690) B (TP 820) B (TP 8200)
B (TP 840)
B (TP 840)
B (TP 900)
B (TP 720)
M-19 B (TP 675)
B (TP 650) N (TP 610)
B (TP 525)
200
250
300
350
400
450
500
550
600
650
700
O-17 N-17 J-18 F-18 A-18 M-18 J-18 A-18 O-18 N-18 J-19 F-19 A-19 J-19 J-19 S-19 O-19 D-19 J-20 M-20 A-20 J-20
B (TP 180) B (TP 190)
B (TP 210)
B (TP 200) B (TP 165) B (TP 174) B (TP 174) B (TP 170)
B (TP 170) B (TP 170)
B (TP 125) B (TP 125) B (TP 130)
0
50
100
150
200
250
M-17 J-17 A-17O-17N-17D-17 F-18M-18M-18 J-18 A-18 S-18B (TP 174)D-18 F-19M-19M-19 J-19 J-19 S-19 O-19D-19 J-20 M-20A-20 J-20
N (TP 350)
N (TP 375)
N (TP 411)
N (TP 405)
B (TP 375)
B (TP 345)
B (TP 340)
B (TP 370) N (TP 290)
B (TP 195)
0
50
100
150
200
250
300
350
400
450
500
J-17 S-17 O-17 D-17 J-18 M-18 A-18 J-18 J-18 A-18 O-18 N-18 J-19 F-19 A-19 M-19 J-19 A-19 O-19 N-19 J-20 F-20 A-20 M-20 J-20
Page | 113 | PHILLIPCAPITAL INDIA RESEARCH
LOGISTICS SECTOR UPDATE
Stock Price, Price Target and Rating History - Gateway Dist.
Stock Price, Price Target and Rating History – Navkar Corp
Rating Methodology We rate stock on absolute return basis. Our target price for the stocks has an investment horizon of one year. We have different threshold for large market capitalisation stock and Mid/small market capitalisation stock. The categorisation of stock based on market capitalisation is as per the SEBI requirement.
Large cap stocks Rating Criteria Definition
BUY >= +10% Target price is equal to or more than 10% of current market price
NEUTRAL -10% > to < +10% Target price is less than +10% but more than -10%
SELL <= -10% Target price is less than or equal to -10%.
Mid cap and Small cap stocks Rating Criteria Definition
BUY >= +15% Target price is equal to or more than 15% of current market price
NEUTRAL -15% > to < +15% Target price is less than +15% but more than -15%
SELL <= -15% Target price is less than or equal to -15%.
N (TP 265)
N (TP 280)
B (TP 280)
B (TP 255) B (TP 255)
B (TP 205)
B (TP 195)
B (TP 188) B (TP 190)
N (TP 113) N (TP 100) B (TP 122)
0
50
100
150
200
250
300
J-17 A-17 O-17 N-17 J-18 F-18 A-18M-18 J-18 A-18 S-18 N-18 D-18 F-19 M-19M-19 J-19 A-19 S-19 N-19 D-19 J-20 M-20A-20 J-20
B (TP 250)
B (TP 250) B (TP 240)
B (TP 240)
B (TP 240)
B (TP 205)
B (TP 105)
B (TP 100) B (TP 90)
UR B (TP 43) B (TP 46) B (TP 27)
0
50
100
150
200
250
J-17 A-17 O-17 N-17 J-18 F-18 A-18M-18 J-18 A-18 S-18 N-18 D-18 F-19 M-19M-19 J-19 A-19 S-19 N-19 D-19 J-20 M-20A-20 J-20
Page | 114 | PHILLIPCAPITAL INDIA RESEARCH
LOGISTICS SECTOR UPDATE
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research report. 4. The Research Analyst, PCIL, and its associates have not received compensation for investment banking or merchant banking or brokerage services or for
any other products or services from the company(ies) covered in this report, in the past twelve months. 5. The Research Analyst, PCIL or its associates have not managed or co-managed in the previous twelve months, a private or public offering of securities for
the company (ies) covered in this report. 6. PCIL or its associates have not received compensation or other benefits from the company(ies) covered in this report or from any third party, in
connection with the research report. 7. The Research Analyst has not served as an Officer, Director, or employee of the company (ies) covered in the Research report. 8. The Research Analyst and PCIL has not been engaged in market making activity for the company(ies) covered in the Research report. 9. Details of PCIL, Research Analyst and its associates pertaining to the companies covered in the Research report:
Sr. no. Particulars Yes/No
1 Whether compensation has been received from the company(ies) covered in the Research report in the past 12 months for investment banking transaction by PCIL
No
2 Whether Research Analyst, PCIL or its associates or relatives of the Research Analyst affiliates collectively hold more than 1% of the company(ies) covered in the Research report
No
3 Whether compensation has been received by PCIL or its associates from the company(ies) covered in the Research report No
4 PCIL or its affiliates have managed or co-managed in the previous twelve months a private or public offering of securities for the company(ies) covered in the Research report
No
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No
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Suitability and Risks: This research report is for informational purposes only and is not tailored to the specific investment objectives, financial situation or particular requirements of any individual recipient hereof. Certain securities may give rise to substantial risks and may not be suitable for certain investors. Each investor must make its own determination as to the appropriateness of any securities referred to in this research report based upon the legal, tax and accounting considerations applicable to such investor and its own investment objectives or strategy, its financial situation and its investing experience. The value of any security may be positively or adversely affected by changes in foreign exchange or interest rates, as well as by other financial, economic, or political factors. Past performance is not necessarily indicative of future performance or results.
Page | 115 | PHILLIPCAPITAL INDIA RESEARCH
LOGISTICS SECTOR UPDATE
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Page | 116 | PHILLIPCAPITAL INDIA RESEARCH
LOGISTICS SECTOR UPDATE
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