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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


Transport Corporation of India - Initiating Reco BUY


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


Navkar Corporation

Reco Neutral CMP, Rs 28

Target Price, Rs 27

VRL Logistics

Reco BUY CMP, Rs 153


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]

Page | 3 | PHILLIPCAPITAL INDIA RESEARCH

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



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



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.

https://www.forbes.com/sites/jeffmcmahon/2020/03/26/app-data-captures-plunge-in-urban-movement-as-the-worlds-cities-enter-lockdown-for-covid-19/#320139342155

https://www.forbes.com/sites/jeffmcmahon/2020/03/26/app-data-captures-plunge-in-urban-movement-as-the-worlds-cities-enter-lockdown-for-covid-19/#320139342155



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 (%)


-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



India Logistics: Era of priority and focus



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.



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




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.

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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



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



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

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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

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FY1

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FY1

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FY1

4

FY1

5

FY1

6

FY1

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FY1

8

FY1

9

FY2

0

FY2

1E

FY2

2E

FY2

3E

FY2

4E

FY2

5E

Total Container volume

Volume at Major Prots

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80

100

120

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100

150

200

250

300

FY17 FY22

Contract logistics

Express logistics

Cold Chain



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



Se

ctio

n I:

Po

licy

Ch

ange

s



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



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


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.



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


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



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



Major changes after GST implementation


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


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%



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



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

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Direct delivery by importers Going back to CFS

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55%

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65%

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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%



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]



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



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.

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18,000


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



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.



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


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.

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1950 1960 1970 1980 1990 2000 2005 2015 2016 2017 2018 2019

China India

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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



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

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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



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.



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



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



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



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



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



Focus on utilizing waterways for commercial cargo movement



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

http://backoffice.phillipcapital.in/Backoffice/Researchfiles/PC_-_June_2019_Issue_20190627183754.pdf



Share of water transport (%)


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%



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



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



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

https://economictimes.indiatimes.com/dabur-india-ltd/stocks/companyid-11796.cms



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



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



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

https://en.wikipedia.org/wiki/India

https://en.wikipedia.org/wiki/Market_penetration

https://en.wikipedia.org/wiki/E-commerce

https://en.wikipedia.org/wiki/United_States

https://en.wikipedia.org/wiki/France



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



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



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



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


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.



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.


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%



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



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

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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

http://www.lioncontainers.co.uk/uploads/1/0/9/3/10939787/2315663_orig.jpg



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


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



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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




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


Comparison based on RoCE and price-to-book value (FY20)


*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

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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


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


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.

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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


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

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TCI Express

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Allcargo

VRL

Blue Dart

Snowman

Future

Gateway

Navkar

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TCI

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Aegis

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Container Corporation: One-year forward P/E trend

Gateway: One-year forward P/E trend


TCI: One-year forward P/E trend

VRL: One-year forward P/E trend


Mahindra Logistics: One-year forward P/E trend

Aegis Logistics: One-year forward P/E trend


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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


AEGIS LOGISTICS INITIATING COVERAGE

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



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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Aegis is present across all important ports, which handle c.70% of total POL (Petroleum, Oil, and Lubricants) cargo

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Rail connectivity at the Pipavav terminal should be complete by 3QFY21



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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Import 14.8mn

Import 22mn tonne

LPG consumption dominated by domestic cooking use

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Domestic use CommercialAuto Industry



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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Logistics Distribution Sourcing



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)


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


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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



Mahindra Logistics Limited

Riding on 3PL opportunities


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




52 - WK HI/LO (RS) : 470 / 199


PAR VALUE (RS) : 10



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


KEY FINANCIALS


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



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Mah Logistics BSE Sensex


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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The assets necessary for operations, i.e., vehicle, equipment, warehouses and manpower are owned or arranged by business partners

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



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


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7% 3% Automotive Components

Cars & SUV

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Rs 580bn (FY20)

Expect 3PL market CAGR of 17-18% post Covid-19 from current Rs 580bn



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


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MLL has rolled out a nationwide brand for its mobility services “Alyte.”



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%


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


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



EBITDA margin drivers over FY19-23


EBITDA margin drivers over FY19-23


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


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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


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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


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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)


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



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%



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



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.



Financials


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


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


Other current assets 2,070 2,381 2,738 3,148


Investments 859 875 891 907


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


Provisions 237 260 286 315


Non-current liabilities 1,489 1,515 1,556 1490







Cash Flow Y/E Mar, Rs mn FY20 FY21e FY22e FY23e

Pre-tax profit 806 75 1,003 1,425


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


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


Turnover ratios



Sales/Net FA (x) 34.1 20.8 25.4 26.7

Working capital/Sales (x) 0.1 0.1 0.1 0.1



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


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



Transport Corporation of India (TRPC IN)

Integrated for growth


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%)


COMPANY DATA




52 - WK HI/LO (RS) : 312 / 121


PAR VALUE (RS) : 10


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


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



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TCI BSE Sensex


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.



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)



Freight division revenue growth Freight division margin support from LTL


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



Supply chain revenue growth SCM short-term impact on margins due to auto slowdown


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


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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%


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


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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


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g 21%

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Contianers 19%

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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


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


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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


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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


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


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


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




Investments 1,799 1,978 2,175 2,240




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


Provisions 102 112 124 136









Cash Flow Y/E Mar, Rs mn FY20 FY21E FY22E FY23E

Pre-tax profit 1,340 468 1,235 1,585


Chg in working capital -315 5 -694 -555

Total tax paid -417 -89 -210 -269



Chg in investments 112 -179 -197 -65


Free cash flow 329 -48 -313 -200


Debt raised/(repaid) -405 155 277 149


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


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


Turnover ratios



Sales/Net FA (x) 3.6 2.7 3.4 3.5




Payable days 9.4 9.7 9.8 9.9


Liquidity ratios

Current ratio (x) 3.2 3.9 3.6 3.6

Quick ratio (x) 3.2 3.8 3.6 3.6



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



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




52 - WK HI/LO (RS) : 123 / 52


PAR VALUE (RS) : 1



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


PRICE VS. SENSEX


KEY FINANCIALS


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



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Allcargo BSE Sensex


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



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


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


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



Investments 6,063 4,563 4,335 4,378



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


Provisions 463 510 561 617










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


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


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


Per Share data

EPS (INR) 6.8 3.9 7.9 10.0

Growth, % (30.4) (42.5) 101.9 27.0


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


Turnover ratios



Sales/Net FA (x) 3.9 3.4 4.3 4.7





Payable days 49.0 60.7 56.3 54.3


Liquidity ratios

Current ratio (x) 1.5 1.5 1.6 1.7

Quick ratio (x) 1.5 1.5 1.6 1.7


Dividend cover (x) (3.4) (2.0) (2.6)


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



Container Corporation (CCRI IN)

Thinking out of the box


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





52 - WK HI/LO (RS) : 665 / 263


PAR VALUE (RS) : 1



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


PRICE VS. SENSEX


KEY FINANCIALS


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



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Container Corp BSE Sensex

http://backoffice.phillipcapital.in/Backoffice/Researchfiles/PC_-_Concor_Co_update_-_May_2020_20200507162759.pdf


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



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


Cash & bank 21,686 28,543 27,713 34,160

Debtors 1,591 1,750 1,925 2,118

Inventory 261 287 316 347




Investments 24,492 24,492 29,492 29,492

Gross fixed assets 85,763 91,198 98,698 1,06,198


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


Provisions 692 747 807 872


Non-current liabilities 760 760 761 761


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



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



Chg in investments 1,362 0 -5,000 0


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


Per Share data

EPS (INR) 16.6 8.8 14.5 21.2

Growth, % (17.0) (47.1) 65.3 46.6


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


Turnover ratios



Sales/Net FA (x) 1.2 1.0 1.2 1.5

Working capital/Sales (x) (0.0) (0.1) (0.1) (0.0)



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


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



Gateway Distriparks Ltd (GDPL IN)

De-leveraging remains focus


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%)


COMPANY DATA




52 - WK HI/LO (RS) : 141 / 73

2IQUIDITY 3M (USDMN) : 0.2

PAR VALUE (RS) : 10


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


PRICE VS. SENSEX


KEY FINANCIALS


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 BSE Sensex


GATEWAY DISTRIPARKS LTD COMPANY UPDATE

Financials


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



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


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


Cash & bank 86 128 184 147

Debtors 1,298 1,401 1,514 1,816


Other current assets 1,490 894 1,028 1,182


Investments 1,258 1,215 1,270 1,327




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


Provisions 335 368 405 445




Paid-up capital 1,087 1,087 1,087 1,087






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


Cash flow from financing activities -1,161 -2,015 -1,187 -1,289

Net chg in cash 299 -506 55 2,460

Valuation Ratios


Per Share data

EPS (INR) 9.2 1.5 5.8 12.3

Growth, % 18.5 (83.8) 288.7 111.3


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


Turnover ratios



Sales/Net FA (x) 0.9 0.7 0.9 1.1




Payable days 33.9 43.5 38.2 35.1


Liquidity ratios

Current ratio (x) 2.6 2.0 2.1 2.3

Quick ratio (x) 2.6 2.0 2.1 2.3


Dividend cover (x) 2.1 1.5 1.5 2.5


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



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%)


COMPANY DATA




52 - WK HI/LO (RS) : 43 / 13


PAR VALUE (RS) : 10



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


KEY FINANCIALS


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


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Navkar BSE Sensex


NAVKAR CORPORATION COMPANY UPDATE

Financials


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


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


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


Cash & bank 24 387 377 471

Debtors 800 822 1,053 1,175

Inventory 97 104 113 122


Other current assets 703 773 835 902


Investments 684 753 828 911




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



Paid-up capital 1,505 1,505 1,505 1,505








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


Per Share data

EPS (INR) 3.0 0.8 3.4 4.4

Growth, % (14.5) (74.5) 344.0 28.0


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


Turnover ratios



Sales/Net FA (x) 0.3 0.2 0.2 0.3




Payable days 30.6 24.6 26.0 26.0


Liquidity ratios

Current ratio (x) 2.2 3.2 3.2 3.4

Quick ratio (x) 2.1 3.1 3.1 3.3



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



VRL Logistics (VRLL IN)

High operating leverage


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





52 - WK HI/LO (RS) : 340 / 187


PAR VALUE (RS) : 1



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


PRICE VS. SENSEX


KEY FINANCIALS


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



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VRL Logistics BSE Sensex


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


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


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


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




Investments 1 1 1 1




Net fixed assets 7,725 6,978 7,396 7,809

Total assets 12,113 11,363 12,199 13,029


Provisions 347 382 420 462

Total current liabilities 1,079 773 985 1,092








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


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





Payable days 0.7 1.7 1.8 1.8


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


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



Blue Dart (BDE IN)

Delivering leadership


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




52 - WK HI/LO (RS) : 3068 / 1875


PAR VALUE (RS) : 10



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


PRICE VS. SENSEX


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



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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)



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


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


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




Future Supply Chain Solutions Ltd (FSCSL IN) Expanding sector focus


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




52 - WK HI/LO (RS) : 632 / 81


PAR VALUE (RS) : 10



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


PRICE VS. SENSEX


KEY FINANCIALS


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


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


Vikram Suryavanshi (+ 9122 6246 4111) [email protected]

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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.


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


82%

12%

4% 2%

Contract logistics Express buisness

Cold chain Other



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



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


Depreciation 191 497 454 1,603

EBIT 709 470 815 992

Interest paid 128 160 178 757


Tax provided 124 0 0 0


Minorities, Associates 0 -6 -21 -173

Net Profit 457 305 615 62

Growth, % 55.7 (33.4) 101.9 (89.9)


Unadj. shares (m) 391 401 401 439


Balance Sheet Y/E Mar, Rs mn FY17 FY18 FY19 FY20E

Equity 391 401 401 439

Reserves 6362 6192 2835 3904


Minority interest 0 0 0 124




Total Loan 755 848 2807 1857

Lease liability 0 0 0 2995


Gross block 1666 4094 5546 6646




Right to use asset 0 0 0 2562

Goodwill 0 0 0 0



Current assets 2863 3654 5141 6138

Inventory 0 0 55 60


Cash 470 797 1243 1853




Trade Payable 978 1795 2618 2517



Net Working capital 1552 1576 2106 3159




TCI Express Ltd (TCIEXP IN)

Fulfilling the need for urgency


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




52 - WK HI/LO (RS) : 950 / 491


PAR VALUE (RS) : 1



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


KEY FINANCIALS


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


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


Vikram Suryavanshi, Research Analyst

(022 6246 4111)

[email protected]

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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



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


Net Profit 375 586 729 891

Growth, % 30.6 56.4 24.3 22.3




Balance Sheet Y/E Mar, Rs mn FY17 FY18 FY19 FY20

Equity 76 76 76 76

Reserves 1531 1992 2595 3296





Total Loan 310 398 87 28

Lease liability 0 0 0 1

Deferred tax 33 45 43 3


Gross block 1135 1781 1960 2138




Right to use asset 0 0 0 16



Current investments 0 0 13 295

Current assets 1344 1767 1918 1896

Inventory 0 0 0 0


Cash 88 122 171 126




Trade Payable 372 646 723 620



Net Working capital 852 840 943 1024




Annexure: I Indian Logistics: Stock Performance

Container Corporation Blue Dart

Allcargo Logistics Gateway Distriparks

Navkar Corporation VRL Logistics


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Gati Transport Corporation of India

Aegis Logistics Sical Logistics

Patel Integrated Logistics Snowman Logistics


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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



TCI Express

Mahindra Logistics


Future Supply Chain

Tiger logistics


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



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



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



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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

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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

5 Research Analyst, his associate, PCIL or its associates have received compensation for investment banking or merchant banking or brokerage services or for any other products or services from the company(ies) covered in the Research report, in the last twelve months

No

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