Industry Report

Logistics - 2017

Research Conducted by

Sector Report Logistics – India 2017

In this issue 1 / Logistics Sector – Global View 2 / Logistics Sector – India 3 / Key Drivers & Trends 4 / M&A Transactions 1 / Logistics Sector - Global View

Logistics is an integral activity for economic Technology is being applied and implemented in growth as it involves the management of different formats; physical automation for flow of goods from place of origination to trucking and warehousing; automated place of consumption. The sector comprises documentation and booking of parcels, online shipping, port-services, warehousing, rail, marketplaces for comparing price and services, road and air freight, express cargo and other etc. All these technological enhancements have value added services. The global logistics provided benefits in the form of market currently generates over USD 8 disintermediation of services, cost trillion annually and represents around 11% rationalization and curbing inefficiencies. of global GDP. 2. Shifting of Trade Centers The growth of the logistics sector is linked to Demographic profiles of Asian populations growth in international trade flows and the coupled with economic growth has triggered robustness of the economic environment. demand-led consumption. In , critical World Trade (% of global GDP) positioning and access to natural resources is 70 incentivizing investments in the region. 60 Population density and ever-increasing 50 aspirational requirements are leading large 40 30 World trade impacted scale producers to migrate to these regions to 20 due to Financial Crisis of build infrastructure and production facilities. 2008-09 10 Accordingly, trade movement has been - increasing towards these regions to meet the growing demand and investments. Source: World Bank Estimates 3. E-Commerce Wave Trade was severely affected during the The growth of e-commerce has given way to financial crisis of 2008-2009. Since then, specific logistics channels handling only last global trade had been recovering and has mile deliveries. These channels ensure faster returned back to 2009 levels in recent years, delivery and provide assured reverse logistics. i.e. around 60% of global GDP. They also insure for the consignee collection of The following key trends are being observed payment. This model is a true 3PL (third-party in the logistics sector across the globe: logistics) service offering. With the complexity involved and the level of automation required, 1. Digitization and Automation big e-commerce companies like Amazon and Digitization in the logistics sector is currently others have set up their own last mile delivery in a nascent stage with most processes yet services and are now entering as full fledged to be automated. The current structure of the 4PL logistics service providers. logistics sector involves intermediaries, which lead to leakages in the value chain and hence, higher costs for consumers. 2 / Logistics Sector in India

The size of the logistics sector in India is Going forward, the trend towards integration of estimated to be USD 260 billion. Unlike global logistics service providers is expected to continue trends, the logistics sector in India has been and new players/business models are expected growing at a healthy rate of ~14% over the last 5 to emerge amid the digitization and automation years on strong demand drivers. Over the last two of business processes, implementation of the decades, the Indian logistics sector has evolved new GST (goods and services tax), and expansion from mere transportation services to fully in the 3PL/4PL service landscape. integrated service providers.

Evolution of Logistics Sector in India

Before 1990s 1990s to 2000 2000 to 2014 Beyond 2014

▪ Limited to ▪ With port ▪ Growth in trade ▪ Digitization of outsourcing of modernization, volumes & logistics services to transportation discharge & loading regulations has led increase activities for operations at port to emergence of transparency movement of goods became efficient CFS/ICD operations resulting in through warehouses disintermediation of ▪ Custom clearance, ▪ Third-party logistics services. ▪ Mainly annual freight forwarding, service providers contracts and inventory needed to handle ▪ Market demanded ▪ Due to complex management movement of cargo total integration of excise tax and other became more across the logistics logistics services and duties the focus was structured, restricted value chain outsourcing to to operations in 3PL/4PL service on cargo movement ▪ Higher outsourcing periphery of port providers for reducing and more value inventory and ▪ Focus on integration added services ▪ Efficiency and cost distribution costs of business came into play like rationalization through physical functions to manage in-plant through adaptation distribution supply chain, mostly management, and automation of management multimodal reverse logistics etc. technology on back including open yard of easing regulations ▪ Focus on integrating management supply chain, service providers to meet customers distribution needs 2 / Logistics Sector in India

India's logistical costs as a percentage of GDP is Current Issues and Challenges on the higher side: 13.0% vs. global average of The main issues currently faced by the logistics 11.7%. Logistics in India are plagued by an sector in India are as follows: inefficient system, lagging infrastructure, lower 1. Connectivity Congestion average trucking speeds, congestion and bottlenecks in surface transportation, etc. India is ranked 35th in the Logistics Performance Index (LPI) by the World Bank Logistics Costs (% of GDP) which benchmarks efficiency of trade logistics across nations. India's low ranking is due to 13,50% 13,00% 11,90% slow transit time for the movement of cargo 9,20% 8,20% through road and shipping networks. In terms of transportation through shipping channels, transit time is affected due to lengthy custom clearance processes and the number of United Pacific South India intermediaries required for bringing products States America in/out of the country. The road logistics Source: CIA, World Bank, Armstrong & Associates network is affected due to poor infrastructure as national highways constitute only 2% of the In terms of the relative composition of overall road network. In addition, toll collection, transportation and logistics costs, transportation inter-state checkpoints and other stoppages costs in the US and China are high due to lead to higher transit times. widespread geography. Interestingly, costs are 2. Lower Standardization also high in India but due to a combination of factors including vehicle quality, stressed drivers, India's logistics market has been impacted by overloading, poor road infrastructure, and low lower standardization of cargos and average speeds. In addition, costs are higher due containerization of logistics traffic, hampering to excessive taxes and toll expenditures. the overall speed and thus increasing cost of movement.

Transportation Warehousing Container traffic as % of overall traffic Inventories Others (incl. losses) 70% 71% 73% 54% India 35% 9% 25% 31% 50% 51% 51% 52% 53%

China 50% 25% 15% 10%

US 49% 9% 24% 18%

Source: KPMG Analysis Source: KPMG Analysis 2 / Logistics Sector in India

3. Unfavorable Modal Mix 4. Tax Structure and Regulatory Cargo movement in India is skewed towards Inefficiencies road networks. India boasts the world's fourth India is currently in the midst of a transition largest railway network and is cheaper than from a historical state-wise tax regime to a roads, but suffers from under investment centralized Goods and Service Tax. At present, resulting in capacity constraints, redundant India has different applicable tax rates within 29 railway sliding, inadequate rolling stocks, and states and multiple taxes levied are by both non-availability of cargo hubs in proximity to Central and State governments when goods industrial hubs with a large work-force. Inland move across the state borders. This leads to waterways, despite being green and cost higher cost and inefficiency/delays on account effective, are affected due to inadequate transit of inadequate documentation and necessary gateways between inland waterways and clearances while goods are transiting across linkages to coastal shipping. Air is the fastest multiple state borders. The planned dual GST transportation mode but continues to have model (central GST and state GST) proposes to replace around 29 state and federal taxes with miniscule (1%) share in the transportation pie a single tax regime at the point of sale. and suffers from limited connectivity and an absence of designated cargo terminals. The inability to provide last mile connection leads industries to prefer the road as mean of transportation of goods.

Modal Mix - Transportation (in %)

Rail Road Water Air

1 1 1 1 8 14 46 43 37 60

30 46 48 31 23 10 India China US Europe

Source: CII & CARE 3 / Key Drivers & Trends

Despite the challenges, the logistics sector in India warehouses closer to consumption centers. is expected to grow at a healthy rate of close to Currently, small warehouses are operated for 12%-14% going forward. The growth is expected distribution by carry & forward agents to link along with a transition of the sector from high cost movement of goods for the ease of taxation. to a leaner cost alternative through rationalization This leads to inability to achieve scale with of expenses, elimination of intermediaries and pilferage at multiple levels. The GST will give technology adaptation. This is possible with way to a large hub and spoke model (prevalent significant development and improvement in developed countries) with large automated envisaged in infrastructure, adaptation of warehouses aided by technology to achieve technology and backed by a changing regulatory economies of scale. The hub and spoke model environment. will enable optimal use of transportation with room for reverse logistics as well. Key drivers and trends which are expected to contribute towards the growth of the sector are: 1. Implementation of Goods and Service Tax 2. Infrastructure Development The Indian parliament cleared the long pending a) Road Development implementation of the Goods and Service Tax Over the last two years, the Government of (GST) which will simplify the tax structure and India has increased its pace of road improve the turnaround time for trucks, hence construction. Further, the policy has been easing cargo movement. The GST is expected to strengthened with the Government mandating be implemented across the country from 1st July that no road project will be awarded until 80% 2017. As discussed earlier, the current tax structure of land is acquired, which increases the leads to inefficiencies and delays in cargo viability of the project and reduces delays in movement. The GST is expected to trigger a implementation after award of the project. The significant change in the warehousing sector with Government has set a target of constructing the small state-wise warehouses being 15,000 km of roads in FY 2017-18 with consolidated in large nodal based multi-product budgetary allocation of close to USD 14 billion for the year. The stage is set to develop a Changes in Warehousing Structure Several Warehouses (Current) to Nodal Warehousing (Post GST) more robust road infrastructure network Existing Scenario Post GST Implementation across the country. b) Dedicated Freight Corridors/DMIC The Government approved the construction of dedicated freight corridors in 2014/15 to increase freight handling capacity through railways and reduce transit time. Currently, the plan is to connect the high container traffic routes of North to West and North to East through dedicated freight corridors.

Source: Centrum Research 3 / Key Drivers & Trends

Completion of these projects will not only increase Cost of Transportation the freight handling capacity on these routes but (Rs. per MT per Km) will also increase the average travelling speed of freight wagons from the current 25kms/hour to 70 kms/hour. The vast expanse of India would be interlinked to enable seamless cargo movement from areas of production to areas of consumption. 2,28

1,41 1,19

Road Transport Rail Transport Waterways Transport Source: World Bank Estimates

In 2016, the Government announced 106 new national waterways through enactment of the National Waterways Act. This will help realize the potential of inland waterways as greener and more cost effective options and establish routes in which adjoining hinterlands could be serviced. According to government estimates, inland waterways Going forward, the Government is further transport has potential investment committed to developing three additional freight opportunities of around USD 600 million in corridors i.e. (1) East-West Corridor (Kolkata- the next 3-4 years, towards various , 2328 kms) (2) North-South Corridor ongoing/proposed programs. (Delhi-, 2,343 kms) and (3) East Coast 3. Integrated Supply Chain Service Corridor (Kharagpur- Vijayawada, 1,114 kms). Provider Completion of these corridors will improve the logistics efficiency and reduce costs and transit The logistics sector stands to benefit from time. the increasing trend of outsourcing. Logistics functions are traditionally performed by the c) Inland Waterways Development organizations themselves. However, India has about 14,500 kms of navigable corporate entities recognize the benefits waterways which include rivers, canals, associated in engaging third-party logistics backwaters, creeks, etc. Currently, only 4,382 kms providers for integration of information flow, of waterways have been utilized. There is a huge material handling, production, packaging, potential waiting to be unlocked through inventory, transportation, warehousing and development of these inland waterways. often security. This allows corporate entities 3 / Key Drivers & Trends to concentrate on their core business and also penetrated the technology users with much achieve cost rationalization through outsourcing. affordable terms providing lean investments and Higher outsourcing of services have further easy upgrades. These providers offer increased benefited from: versatility and inbuilt flexibility to adapt to changes and market developments. a) Shift from 80-20 to 65-35 Traditionally, logistics as a service constitute Robotics is being utilized at warehouses for 80% of cost in the form of transportation (mainly tagging, labelling, sorting, and placing products in fuel) and 20% in the form of storing and carts and shelves. The role of robotics has peripheral services. However, over the last 4-5 enabled round-the-clock operations. This has years with the drop in fuel prices, the logistics helped to rationalize the costs of evacuation cost had eased considerably. This enabled value during low peak hours of traffic. added service providers to raise their share of Similarly, Industrial Internet of Things (IIoT) , services and include services like packaging, in- Internet of Things (IoT) and Big Data Analytics plant inventory management, etc. The cost shift are streamlining supply chain functions of is now gradually moving from traditional 80-20 organizations for just-in-time inventory and to 65-35, with additional benefits in the form of provide predictive analysis to manage service integration. procurement processes. b) Unorganized Sector & Asset Lean Business Technology is enabling logistics firms to Model eliminate inefficiencies to boost operations. Traditionally, logistics providers have been 5. Contingency Preparedness working on an asset-heavy business model. With the help of technology, some companies have Logistics solutions are being designed to cater to migrated to the asset-lean model of providing meet the requirements of emergency integrated logistics solution with an optimum contingencies, especially natural and manmade mix of owned and outsourced assets. The disasters. With dynamic geo-political situations unorganized nature of the transportation sector, and climatic changes, the world is prone to face which is largely fragmented, benefited the challenges and disasters more often. Logistics integrated supply chain service provider to justify service providers are getting more attuned to need of outsourcing partners. providing services to meet emergency needs. 4. “TECHNOGISTIC Powered” – Technology 6. E-Commerce and Emerging Logistics Reshaping Existing Delivery Systems Channels: E-commerce is currently a USD 16 billion market Cloud based systems are replacing legacy but growing rapidly and expected to reach USD enterprise resource planning (ERP) systems in 100 billion by 2020. Advent of e-commerce has manufacturing and logistics organizations. led to creation of multisource channels for Software-as-a-Service (SaaS) companies have vendors, even small sized ones. 3 / Key Drivers & Trends

In traditional brick and mortar channels To meet this growing demand of e-commerce distribution is much simpler with products arriving logistics, new channels and companies have at warehouses in bulk, moved around in pallets emerged with different business models and and selected by the case, and shipped out to store catering exclusively to e-commerce in bulk. E-commerce businesses pose a unique companies like , Ecom Express, challenge to the traditional logistics channel. In e- DotZot, etc. These companies have commerce, inventory arrives in bulk but needs to attracted significant PE capital as growth be distributed into different SKUs. The distribution trajectory forecasted to rise on the back of to onward channels is much more diverse and in growing market size. smaller parcels. The complexity of this process 7. Green Transition increases with thousands of suppliers, multiple warehouses and extensive sales channel across Reverse logistics has become an integral part geographies, increasing the risk of misplaced of e-commerce transactions. Similarly, a orders. In addition to that, logistics channel sustainable solution for manufacturing companies are also expected to process the companies and production plants is payment through delivery and manage the envisaged in the form of ‘Green Earth’ complicated reverse logistics in case of return of initiatives for recycling and disposal of product. residual plant wastages. In developed countries, manufacturing units follow Managing all these activities requires technology stringent norms with regards to recycling and and standardization to synchronize business disposal of residual plant waste. However, in processes with real-time access and insight to India, residual raw material and waste like inventory management. sludge is often disposed in open yards. With intense competition in the e-commerce Meeting green standards would require segment and emphasis on prompt and fast finding logistical solutions for disposal and delivery of products, the distribution channel has treatment through creation of cluster been put under immense pressure in all major infrastructure for further processing, recycling modes of freight movement. "Just in Time" and and finding alternative use of the residual "Just in Case" strategies in logistics must now plant waste. meet to the challenge of "Just Do It" demand created by today's highly impatient customers. 4 / M&A Transactions

The growing size of the Indian logistics market The logistics sector has also seen has led to investment by domestic and investment from major PE players like international players in the sector. Several Warburg Pincus, Mandela Capital, Everstone international logistics companies like Fedex, Capital, Carlyle Capital, CDC, etc., DHL, Kinetsu World, UPS, Kuehne and Nagel, highlighting the potential of the sector. CEVA logistics, etc., have already established their presence through JVs, acquisitions or green field projects. Deal Value Company Investor Date Type (Stake)

USD 100 mn Delhivery Carlyle Mar-17 PE (Undisclosed)

Incofin, Sohanlal Commodity USD 20 mn ResponsAbility Mar-17 PE Takeout Management (Undisclosed) Investments

USD 30 mn Blackbuck SandCapital, IFC Feb-17 PE (Undisclosed)

USD 30 mn Sri Kailash Logistics Everstone Capital Jan-17 PE (majority stake)

USD 4 mn Letstransport GMO Jan-17 Strategic (Undisclosed)

Stellar Value Chain Undisclosed Kelvin Cold Chain Jan-17 Strategic Solutions Pvt Ltd (majority stake)

USD 75 mn Rivigo Warburg Pincus Nov-16 PE (Undisclosed)

Browntape Technologies Pvt. USD 3 mn Nov-16 Strategic Ltd, (20% to 26%)

USD 155 mn TVS Logistics CDPQ Oct-16 PE takeout (Undisclosed)

USD 10 mn FR8 Omnivore Partners Oct-16 PE (Undisclosed)

USD 21 mn ETA Engineering Pvt Ltd Vikram Logistics Aug-16 Strategic (100%)

Stellar Value Chain Solutions USD 125 mn Warburg Pincus Aug-16 PE Pvt. Ltd (Undisclosed)

USD 150 mn Indev Logistics Kerry Logistics Apr-16 Strategic (50%) 4 / M&A Transactions

Deal Value Company Investor Date Type (Stake)

USD 87 mn Future supply SSG Capital Apr-16 Debt (50%)

USD 60 mn Continental Warehousing IFC Mar-16 Debt and PE (9.7%)

CCI Integrated Logistics Pvt Ltd Ltd. Mar-16 Strategic Undisclosed

USD 37 mn ColdEx Logistics Asia Climate Partners Feb-16 PE (Undisclosed)

Ambit Pragma Undisclosed Mehta Frozen Foods Carrier Feb-16 PE Ventures (74%)

Sohanlal Commodity Everstone Capital & USD 23.5 mn Sep-15 PE management ICICI Bank (32.5%)

Undisclosed LCL Logistix CMA-CGM Group Apr-15 Strategic (15%)

USD 25 mn Pristine Logistics CDC Jan-15 PE (Undisclosed)

USD 16.7 million Mahindra Logistics Ltd Kedaara Capital Apr-14 PE (30%)

Contact: Rajat Dutta Vishesh Kathuria [email protected] | +91 9820062488 [email protected] | +91 9769383842