India Logistics: Connecting the dots Vikram Suryavanshi INSTITUTIONAL EQUITY RESEARCH
Logistics
Connecting the dots
INDIA | LOGISTICS | Sector Update 20 July 2020
The Indian logistics sector is witnessing significant changes because of: (1) supportive Companies regulatory policies, (2) government focus on modal shift and transparency, (3) evolving customer requirement for cost-effective solutions with an outsourcing model, (4) Aegis Logistics - Initiating increasing dominance of MNCs, retail, and e-commerce – with standardization, (5) higher Reco BUY CMP, Rs 182 focus on efficiency, consistency, and time-bound solutions, and (6) automation and Target Price, Rs 265 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. Mahindra Logistics Limited – Initiating Reco BUY Trade is moving towards transparency and fair play: GST implementation has rationalized CMP, Rs 316 tax rates, individual state administrative borders have become irrelevant, and the country Target Price, Rs 370 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 Transport Corporation of India - Initiating Reco BUY moving towards operational rationalization, standardization, and larger scale – using CMP, Rs 167 technology. The E-way Bill has brought self-compliance for transporters and already helped Target Price, Rs 235 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. Allcargo Logistics Reco Neutral Modal shift is not all about costs: In our earlier report, we were positive on a modal shift to CMP, Rs 93 water and railways. Since then, water ways (coastal) saw limited success while railways Target Price, Rs 95 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 Container Corporation Reco BUY transport, but it could be a short-term change. For a long-term transition to railways, their CMP, Rs 448 infrastructure inefficiency and transit time need to improve significantly. The development Target Price, Rs 525 of dedicated freight corridors (DFCs, an efficient, safe, and faster option) should help improve railways’ freight market share. DMICDC (Delhi-Mumbai Industrial Corridor Gateway Distriparks Development Corporation Limited) and multimodal logistics parks (MMLP), with common Reco BUY CMP, Rs 89 user facilities, will give a second chance to private container rail operators for expanding Target Price, Rs 122 their business on a more level playing field. These operators will benefit significantly due to better rail network with an increase in asset turnaround. Navkar Corporation Reco Neutral The government is focused on reducing logistics costs to c.10% of GDP by 2025 from CMP, Rs 28 current 13-14% – to increase business competitiveness. Some recent initiatives towards this: Target Price, Rs 27 (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 VRL Logistics Sagarmala and Bharatmala. The logistics sector has become a priority for the government, Reco BUY who has appointed a separate logistics secretary in the Ministry of Commerce for the first CMP, Rs 153 Target Price, Rs 195 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 Blue Dart transparency; it should lead to lower logistics cost and improved competitiveness in Reco Not Rated international trade. CMP, Rs 1963
In the early-stage growth cycle are 3PL, express, container logistics and cold chain: With a Future Supply Chain Solutions shift from bulk cargo to containerisation, container traffic has remained one of the highest Reco Not Rated growing cargoes in India with a GDP multiplier of c.1.5x. Increased scale of operations and CMP, Rs 164 consolidation of warehousing through MMLPs, and standardization of operations and TCI Express Ltd handling equipment will help secular growth in container trade. The outsourcing of logistics Reco Not Rated services is increasing after GST, which has brought in benefit of scale for players such as CMP, Rs 672 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 Vikram Suryavanshi, Research Analyst improvement in the agri supply chain. While it provides a long-term investment opportunity, (+ 9122 6246 4111) players will continue to earn suboptimal returns in the short term. [email protected]
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 SECTOR UPDATE
What we have covered?
Covid-19 impact on Indian logistics players 3
Indian Logistics - an Era of Priority and Focus 8
India Logistics in Key Charts 10
Section-I: Impact of Policy Change 15
Trade moving towards transparency – GST, E- way bill 16
Government focus on logistics cost reduction for the country 17
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
Logistics player financial analysis: Diversity in unity 52
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
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LOGISTICS SECTOR UPDATE
Covid-19 impact on Indian logistics players The Covid-19 has shocked economic activity in India, hurting cargo movement across the country as well as the globe. Sharp correction in stock prices have made valuations attractive from a historical perspective, though it is not yet clear how long economic activity will remain subdued, and to what extent. We believe companies with low-risk balance sheets and unique advantages would be safe havens, compared to the attractive valuations of leveraged players.
Logistics is an essential service to support economic activity in a lockdown Cargo movement in India started declining after the nationwide lockdown began on 24th March. The impact was significant for road transport in the first week, due to strict restrictions on goods vehicle movement, limiting cargo to only essentials. Since then, the government opened things up significantly in the following ways: (1) Allowing all types of cargo movement; in most cases, officers and drivers were not in a position to differentiate between essential and non-essential cargo, particularly for intermediate products, creating chaos. (2) Worker movement stopped/impacted at ports (particularly at JNPT) was started by issuing curfew passes and COVID-19 checks. (3) Port and customs officials continued to work 24x7 to support cargo movement. (4) Haulage charges for movement of empty containers and empty flat wagons from 24 March to 30 April 2020 were reduced to zero. (5) CFS/ICD ground rent for April and May 2020 were waived off, to address congestion of cargo for exim players.
The total cargo volume for Indian railway has recovered sharply and was down only 7.7% yoy to 93.6mn tonne in June 2020. For rail container movement the domestic container volume has recovered fully and in fact was up 3% yoy to 1mn tonne while exim container volume was down 20% to 3.28mn tonne in June 2020.
Road transport remains affected; no material benefit from lower oil prices As per our industry interactions, a sizable number of employees (including drivers) have gone back to their hometowns, and bringing them back to work was challenging in the first 2-3 months. By July, c.70% of India’s total road transport fleets were thought to be operational, but at lower utilisations. Road transporters cannot benefit from a fall in crude prices, as: (1) the government has actually hiked taxes on diesel and (2) there is lower cargo availability, which has increased the cost of operations. However, rail and air cargo players are able to get relatively better cargo bookings.
Covid impact on road transport: % cargo booking on roads vs. pre-covid levels; Rail recovery is better 120 Road cargo booking recovery Railway monthly volume (mn tonne) FY20 Avg 120 100 110
80 100 90 60 80
40 70 60 20 50
0 40
May
June
April
Jan-20
Jun-20
Apr-20
Feb-20
Mar-20
May-20
Q3FY21E Q4FY21E
Q2 FY21E Q2 Pre-Covid
Source: PhillipCapital India Research, Industry, Indian Railways
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LOGISTICS SECTOR UPDATE
Key feedback on Covid-19 from logistics players . Around 70% of the fleet is back on the road, while actual loading was 40-50% by June 2020. While normal truck running is 7-9,000km per month, current running is at about c.4,000km. . Cargo booking was around 10-15% of normal in April, 25-30% in May, and c.50% in June. All payers expect recovery from August and cargo to touch 75- 80% of pre-covid levels. Seasonally, August to December is good for cargo movement, because of the festive seasons. The market expects a full recovery by 4QFY21. . Demand is mainly from these sectors – agriculture, food processing, chemicals, FMCG, and pharma. Steel, cement, textile and auto are facing higher impact. . E-commerce and omni-channel has started accelerating. As more cities are going under lockdown, nonessential businesses are being ordered to close, and customers are generally avoiding public places. There is limited shopping; people buying only essentials is becoming the new normal. . The warehousing segment is doing very well. Demand will increase as customers might want to maintain a ‘safety’ stock. Consolidation of warehouses will increase as customers try to cut costs with increased modernisation and try to minimise contact by using pallets and technology. . Some customers will permanently shift to multimodal transport – rail and coastal. Cargo volume through railways is back to 60-65% of pre Covid-19 levels. . All players are focused on digitization now, and use e-POD and e-billing etc. Increased budget for IT spending and reduction in excess manpower will ensue. . Freight rates are under pressure due to lower demand and supply-chain players are taking contracts at 3-5% lower prices. However, freight on some routes has increased due to no return loads where trucks may have to wait for 3-5 days to get return cargo. Truck operators continue to face challenges of labour shortage, difficulty in obtaining food and services on the way for drivers, and services for vehicles when they breakdown. . Transporters will delay new purchases of commercial vehicles while activities in the second-hand market will increase. Demand for new vehicles will remain low due to: (1) COVID impact on demand and supply chain, (2) recent increase in axle load norms, and (3) increase in prices of vehicle by 10-12% due to BS-6 even as freight rates remain under pressure, which would make it hard for operators to justify the higher costs of new vehicles. . Factory closures in the past two months and lower imports from China could disturb the supply chain in the coming 1-2 months. . For larger operators, moratorium benefits are a big relief, and will help them to survive. In fact, transporters are comfortable even if they earn around Rs 45-50,000 per month as they don’t have to pay EMI (which is normally around Rs 45-50,000 per month) and are hopeful of generating cash flows of Rs 120,000 to 150,000 by September 2020. To re-start operations and generate cash, they are calling back their drivers by offering some joining bonuses (Rs 3-5,000). The driver shortage issue has largely resolved, and most cargo trucks that found themselves stuck during the lockdowns have reached their destinations.
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LOGISTICS SECTOR UPDATE
Financial impact of Covid-19 on logistics companies We expect diverse impact on logistics companies based on dominance of mode of transport, the sector that they service, and models – asset-heavy or asset-light. Out of the logistics players we track, we believe Aegis will see less impact of Covid-19 on revenue and profitability due to resilience of demand for LPG consumption as this is mainly used for household cooking gas in India. Road transport and supply chain players like TCI, VRL, and Gati will be hit significantly due to a decline in factory output and consumption. Post Covid-19, long-distance cargo booking has shifted to railways and companies with storage facilities are able to manage de-congestion at ports by evacuating the cargo and storing at their warehouses/ICDs, thus gaining market share. Concor, Allcargo, GDPL and Navkar will see higher impact of lower exim container trade. Asset-light models of MLL and TCI Express will reduce the stress on profits while VRL’s asset-heavy business model will lead to a sharp impact on its bottom line.
Revenue change over FY19-21 for key logistics players (%)
Aegis Future Supply Chian Mahindra Logistics Blue Dart Gati TCI Express TCI Navkar VRL Gateway Concor Allcargo
-35 -30 -25 -20 -15 -10 -5 0 5 10 15
Source: PhillipCapital India Research estimates
PBT change over FY19-21 for key players (%)
Aegis Future Supply Chian Mahindra Logistics Blue Dart Gati TCI Express TCI Navkar VRL Gateway Concor Allcargo
-140 -120 -100 -80 -60 -40 -20 0 20 40
Source: PhillipCapital India Research estimates
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LOGISTICS SECTOR UPDATE
India Logistics: Era of priority and focus
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LOGISTICS SECTOR UPDATE
Indian Logistics: Era of priority and focus The logistics industry in India is evolving rapidly, and its interplay of infrastructure, policy changes, technology and new type of service-providers provide significant investment opportunities. India has the second-largest population in the world with 1.38bn people and a GDP of US$ 2.9tn. The domestic logistics market is growing The government is taking a special higher than the economy at 8-10% CAGR and will maintain this annual growth rate, interest in developing India’s logistics excluding the impact of Covid-19 in the short term. Logistics has become a priority infrastructure. Working on National sector for the government, that has appointed a separate Logistics Secretary (a first) Logistics Policy, Logistics data bank etc. 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
Cost Transparency Speed Reduction
. Ability to provide multimodal Modal . Road, Rail & Water . Road Integrated . GST . solutions Shift Sagarmala, Rail solution Bharatmala projects . Water . Last mile capability
. . . One country one market Infrastructure status Inventory Inventory remains major cost in GST . Lower transaction cost Policy . DPD/DPE/AEO supply chain, focus on leaner and . Logistics Policy cost faster inventory cycle
. Buyer experience and competition . Ease of doing business Standariza . Containerization Differen- on deliver time. i.e one day E Way Bill . Transparency in data reporting tion . Ware housing ciation delivery etc
NEW OPPORTUNITIES
3 PL outsourcing | E commerce | Express delivery I Waterways
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.
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LOGISTICS SECTOR UPDATE
Logistics: Investment opportunity in India Time Horizon 1-3 year 3-5 year 5+ years Business model Rail & road transport, 3 PL Warehousing, rail Coastal and inland outsourcing, express, e- transport, CFS/ ICD, coastal waterways, cold chain, commerce, CFS/ICD, liquid shipping MMLP – multimodal & gas logistics logistics park
Players TCI limited, TCI Express, Concor, Navkar, Allcargo, Concor, Shreyas Shipping, Mahindra Logistics, Aegis, Gateway, Shreyas Shipping Snowman logistics, TCI ltd Chain, VRL, FSC, Gati, Blue Dart Note Benefit of policy and Model shift and Implementation of DFCC, formalization. Bringing infrastructure DMICTC, port and coastal efficiency in small parcel improvement connectivity projects. supply chain. 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 Project Road Container Express Coastal Cold Engineeri Equipmen transport rail Logistics 3 PL Shipping NVOCC CFS FTWZ Chain ng t Leasing Blue Dart Air/road Concor Started Allcargo Exited Navkar Gateway Snowman Arshiya In VRL Road TCI TCI Express Road Gati Road Aegis Liquid /gas Sical Mahindra Logistics Future Supply Chain Shreyas Shipping Patel Int. Exited Air Note: Based on major business activity, NVOCC – non vessel, Aegis Logistics is into liquid and gas storage and transportation Source: PhillipCapital India Research
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LOGISTICS SECTOR UPDATE
India Logistics: Key Charts
India’s logistics market to see c.11% CAGR (USD bn) Break up of logistics market by activities 400 Warehousing 350 25% CAGR 10.9% 300
250
200 Freight forwarding 150 10%
100 Trans- portation Value added 50 61% logistics 4%
0
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25 FY10 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)
1% 9.0 1.6% 2.0% 8.0 4% Railway 7.0 Road 6.0 Coastal 31% 5.0 Inland water 4.0 Air 3.0 Other 2.0
60% 1.0 0.0 Railway Road Coastal Inland water Air
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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LOGISTICS SECTOR UPDATE
Opportunity driven by formalization and policy initiatives
Dominated by unorganized players right now Fragmented road transport: Truck-fleet ownership 120 Unorganised market Organised market More than Fleet of 10+ 100 10-20 9% 6% 80 Fleet of 6-10 60 10%
40 +500bps to 25% Less than 5 75% 20
0 FY19 FY25
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 India’s rail development has been at a snail’s pace compared to China’s (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 160000 China 100 China India 6.3x 140000 80 120000
100000 India 60 1.2x 80000
60000 40
40000 20 20000
0 0 1950 1960 1970 1980 1990 2000 2005 2015 2016 2017 2018 2019 1950-51 1978-79 1986-87 2007-08 2014-15 2018-19 2029-30
Source: PhillipCapital India Research, Planning Commission
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LOGISTICS SECTOR UPDATE
Containerisation of cargo provides secular opportunities in India as penetration levels are very low and trade is moving toward standardization and consolidation.
Container penetration in India is much lower than in China… …but container handling at Indian ports is rising (mn TEU) 250 25 India (mn TEU) Total Container volume China (mn TEU) Volume at Major Prots 200 20
150 15
10 100
5 50
0
0
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
2000 2005 2010 2015 2017 2019 FY05
FY24E FY22E FY23E FY25E FY21E 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)
120 300 Contract logistics Express logistics 100 250 Cold Chain 80 200 60
40 150
20 100 0 50
0 FY17 FY22
Source: Mahindra Logistics, FSC presentation
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LOGISTICS SECTOR UPDATE
Improving road connectivity (km by NHAI and MoRTH) Road transport competitiveness is increasing due to: (1) improving road connectivity (2) increase in axle-loading norms, and (3) reduction in transit time after GST.
Pick up in road construction since FY14 18,000 Constructed Awarded 16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
- FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
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
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LOGISTICS SECTOR UPDATE
Section I: Policy Changes Policy I: Section
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LOGISTICS SECTOR UPDATE
Section 1: Impact of policy changes
The government is focused on reducing logistics costs India is burdened with high logistics costs at c.15% of the value of goods vs. 6-8% in India has a long way to go in terms of other developed/developing economies. The country is unique in terms of both bringing in an efficient modal shift in opportunities and challenges in logistics. Inadequate infrastructure, created using cargo transportation… smaller warehouses to save on state taxes, which resulted in higher costs and increased inventory levels for corporates, has resulted in an inefficient logistics …however, the government has taken network. Third-party logistics outsourcing is at a nascent stage and provides growth several initiatives to make the sector opportunities for organized players. more efficient
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 Roads constitute about 60% of India’s competitiveness. Within BRICS economies, it is placed below South Africa (#33) and total freight traffic 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 Score: 3.61 Score: 3.18 (Rank 14 /160) (Rank 26/160) (Rank 44/160) Agricultural GDP % 1.2 10.1 15.9 Industry DGP % 19.1 46.9 29.7 In the absence of a formal governing Service GDP % 79.7 43.0 54.4 regulatory structure, the sector is fragmented, and run by a multitude of Logistics spent as % of GDP 8.5 18.0 14.0 individual players 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
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LOGISTICS SECTOR UPDATE
Trade to move towards transparency and fair play Logistics in India is fragmented with c.80% activities carried out by unorganized more players. The transportation sector is more fragmented with c.95% run by unorganized than players. Trucks in the country are owned predominantly by small-fleet operators; fleet of 10+ 10-20 9% c.75% of India’s total truck fleet operators own less than 10 trucks. 6%
fleet of Bookings for transportation are normally done through intermediaries such as 6-10 commission agents, because they have access to information about preferred routes, 10% availability of vehicles, and demand. Only in 2-3% cases do customers directly access truck owners and books transportation for their goods themselves. Less than 5 75% 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 Grade A warehousing is distinguished from Grade B and Grade C based on 2015, out of which the share of A-grade warehousing is c.42% at 88mn sq. ft. in FY19 height, floor strength, environment (vs. 29% at c.30mn sq. ft. in FY15). Because of higher outsourcing by big corporates sustainability measures, internal roads and growth in organised retail and e-commerce, the demand for A-grade and parking areas, etc. 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
DPD- AEO Esae of doing E-way bill - buisness seamless movement, compliance
GST - one country one market, Natioanl logisitcs policy
Source: PhillipCapital India Research
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LOGISTICS SECTOR UPDATE
GST and E-way Bill
GST: Stage set for formalization India’s greatest tax reform, GST (already implemented, substituted an array of potential duties) has transformed the logistics industry. Post its rollout, most industry The government implemented GST in players began evaluating the re-organization of their supply-chain and outsourcing July 2017 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 State GST Taxes Taxes
Central Taxes States Taxes Central excise duty VAT Service Tax Goods and Octroi & Entry Tax Additional custom duty Service tax Purchase Tax Central Sales tax CGST/ IGST/SGST Luxury Tax Central Surcharges and Cesses Taxes on lottery & gambling State cesses & surcharges Entertainment tax Source: PhillipCapital India Research
As a result of this new tax model, individual state administrative borders are The effects of GST irrelevant for most industries; this is driving rationalization of logistics operations and Rationalized supply chain infrastructure. Due to the input-credit method, supply chains will eventually come Shift of business from the unorganized into the formal tax system. The GST system works on the basis of taxing only the to the organized sector component of value addition at each level of goods or services supply, by off-setting Increased multi-modal movement the tax paid already at the previous level of the value chain. Thus, it automatically Large-scale warehousing incorporates a mechanism that compels every level of the value chain to ensure that Bulkier movement between hubs 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.
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The government has acted to simplify GST rules (since its implementation in July 2017) in order to make compliance easier. The transport sector has been given two options for tax structure: 1. Reverse mechanism with 5% rate without input credit 2. Forward mechanism with 12% tax rate with input credit
Most transporters have opted for option 1, considering that the share of the unorganized sector is higher, and given the initial resistance from customers. The industry will migrate towards option 2 (forward charge mechanism) over a period, as trade formalises and compliance becomes stricter.
E-way bill: Seamless movement and ease of compliance E-way Bill complements GST, resulting in seamless movement of goods within and across states with proper government records for buyers, transporters, and sellers.
E-way bill: Before and after E-Way was implemented from 1st July 2018 for interstate movement of cargo in With the E-Way Bill, the government is India, followed by for intra-state cargo movement. With the E-Way Bill, the moving towards self-declaration with government is moving towards self-declaration with uniform reporting. It is also uniform reporting 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.
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Major changes after GST implementation
Source: PhillipCapital India Research, Industry
The E-way bill is to be generated by the consignor or consignee himself if the transportation is being done in own/hired conveyance, railways, air, or vessels. If goods are handed over to a transporter by road, the E-way bill has to be generated by the transporter. Where neither the consignor nor consignee generates the E-Way bill, it is the responsibility of the transporter to generate it.
Pre GST and E-way Bill Post GST and E-way bill Multiple taxes, entry barrier for state movement Simplified tax structure with one market and one rate across the country Commoditized market; low barriers to entry or exit Close tracing of input credit and registration by leading to a very high degree of fragmentation. transporters will lead to formalization in the system Physical copy of way bill and other documentation Online data monitoring needed Checks at Octroi and other check posts Self-compliance; random physical checks Source: PhillipCapital India Research
Implementation of E-Way Bill has complemented GST compliance, because it has The time taken by trucks to cross state brought about recording and monitoring of goods transport in India. Its effective borders ranges from 2hrs to 30hrs implementation helps improve tax collections for the government and provides Rest Travel additional tools to keep tax evasion in check in the system. and time other 40% An analysis by the All India Motors Transport Congress, a body of cargo and passenger 35% 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 Check requirement for physical transit pass, stamping, online transit and document-checking post/ at border check posts. Indian trucks’ productivity is very low (200 km per day); it will official increase to c.350 km per day through the reduction of congestion and electronic toll stoppa ge collection. Productivity averages c.600-800km per day in developed countries. 25%
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Flowchart for E-Way bill
A company that does not file GST returns is restricted from generating E- Way bills
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) DPD/DPE have led to short-term pain under ease of doing business and reduced time and cost in exim trade. It has led to for CFS / ICD players 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 In May 2017, DMICDC launched a from Customs and then proceed to the terminal gates. From December 2016, logistics data bank project across port Customs started granting LEOs (Let Export Orders) from offices in the parking yards terminals of Mundra and Hazira 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.
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The RFID system is in place at nine major ports and is likely to be rolled out in all others – to track the movement of containers. The PMO had also asked the shipping ministry to convert all ports that are still dealing with paperwork manually to shift to electronic data interchange (EDI). The government is working on integrating port community systems and terminal operator filing systems with ICEGATE, which is the e-commerce portal of Central Board of Excise and Customs (CBEC), for seamless data exchange and online payment.
DPD experience at JNPT The government aims to route c.65% of its import container traffic (earlier target was c.80%) via DPD from the current c.60% at JNPT port. The DPD scheme has seen steady growth in terms of the number of total containers handled at JNPT. In May 2020, 61% (54,929 TEUs) of the import container cargo was cleared through DPD vs. just 3.5% JNPT is a CFS-driven port and around 90% (3,486 TEUs) in January 2016 – which shows the phenomenal pick-up in this scheme. containers there move back to CFS due to lack of storage and transportation Under DPD, an importer’s cargo is cleared (assured) in less than 48 hours, while it infrastructure at the customers’ end 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 DPD+D PD 40 ft. containers as per government estimates. 8%
JNPT is a CFS-driven port and around 90% DPD-cleared cargo moves back to CFS due CFS to lack of storage and transportation infrastructure at the customers’ end. The 49% 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, DPD+C the impact of Direct Port Delivery (DPD) on CFS volumes is bottoming out. With FS change in regulations, CFS operators are now focusing more on value-added and 43% 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
70000 Direct delivery by importers Going back to CFS No of DPD cleared continaers (TEU) 80000 % of import -RHS 65% 60000 70000 60% 50000 60000 55% 50% 40000 50000 45% 30000 40000 40% 30000 20000 35% 20000 30% 10000 10000 25%
0 0 20%
Feb-18 Feb-17 Feb-18 Feb-19 Feb-20 Feb-17 Feb-19 Feb-20
Aug-17 Aug-18 Aug-18 Aug-19 Aug-17 Aug-19
Nov-17 Nov-18 Nov-19 Nov-17 Nov-18 Nov-19
May-18 May-18 May-19 May-20 May-17 May-19 May-20 May-17 Source: JNPT port
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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
Authorised New Authorised Simplification Accredited Client Economic Economic Green Channel with global Programme Operator Operator [1998] standard, web (2005) Programme Programme based (2018) (2011) (2016)
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
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Benefits of AEO Certification As a next step towards trust-based compliance, the new AEO programme provides To bring in transparency, around 90% extensive benefits, including greater facilitation and self-certification to those entities AEO benefits are system-driven 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 The AEO programme provides holders – within 45 days of submission of complete documents. Reduced bank businesses with an internationally guarantees. recognized quality mark, which indicates their secure role in the . Automatic activation of Deferred Duty Payment option for AEO-T2 and T3 status international supply-chain and that holders. AEOs receive up to 15 days of credit, with a duty-payment option on the their customs procedures are compliant 15th day of the month or on the 1st 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.
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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. India has one of the largest road Meanwhile, India’s rail-goods-transport share is lower at 36% vs. 48% for the U.S. and networks in the world at c.5.9mn km; 47% for China. A large part of the country’s freight traffic comprises bulk materials its roads carry c.60% of the country’s freight traffic and 80% of its passenger that move over long distances of up to 2,000km, which can be served efficiently by traffic 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 National Highways (including of: (1) National highways (NHs), (2) state highways (SHs), (3) major district roads expressways) with a length of (MDRs), and (4) rural roads (RRs), which include other district roads and village roads. 132,500mn km account for just c.2.2% NHs (including expressways) with a length of 132,500mn km account for just c.2.2% of of the road network but carry 40% the total road network, but carry 40% traffic. A very high proportion of roads – at traffic 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 National Highway/ Expressway State Highway road accidents in India, which is c.10% of the world’s total, even when India’s share in District/ Rural roads 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 2% 3% 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 95% 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 18,000 Constructed Awarded 16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
- FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
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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FASTag is a simple-to-use, reloadable tag that enables automatic deduction of toll charges. Enabled vehicles can pass through the toll plaza without stopping for the cash transaction. FASTag is linked to a prepaid account from which the applicable toll amount is deducted. The tag employs Radio-frequency Identification (RFID) technology and is affixed on the vehicle's windscreen after the tag account is active. The Government has now made FASTags mandatory for all vehicles on National Highway roads.
Increase in axle-loading norm for trucks The government has increased the loading limits for commercial vehicles (CVs) in India from July 2018 (changed after 35 years) to bring gross vehicle weight at par with international standards. It will reduce vehicle population, congestion, and the carbon footprint.
Truck Type Earlier gross wt (tonne) Revised gross weight (tonne) % change 2-axle 16.2 19.0 17.2% 3-axle 25.2 30.5 21.0% 4-axle 34.2 42.0 22.8% 5-axle 43.2 53.5 23.8% Source: Road ministry
As per industry estimates, freight rates have declined by c.6-8% with an increase in loading norms. Most players cut fleet-addition plans as capacity increased for their existing fleets and demand remained weak. For example, VRL Logistics – one of the largest truck operators – had earlier planned an addition of 1,200 trucks over FY19- 20, which it cut by half to c.600 trucks after axle-load norms changed and demand slowed.
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Railways: Under-invested for now The Indian government has targeted increasing the railways’ share in local transport Indian Railways has suffered from from 36% right now to 45% by 2030 with the development of six freight corridors. In considerable under-investment during 2016-17, it planned to commission 2,800 kms of tracks with c.7kms added per day the last several years 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 160000 China India China 6.3x 140000
120000
100000 India 1.2x 80000
60000
40000
20000
0 1950 1960 1970 1980 1990 2000 2005 2015 2016 2017 2018 2019
Source: PhillipCapital India Research, Industry
This divide between railways and roads became even more pronounced when roads expanded rapidly because of focused policy and investments, particularly during the last decade. RITES – a consultancy organization under Indian Railways – estimated that this consistent and unchecked fall in the share of railways through the years has cost the Indian economy about Rs 385bn per year (16% of total transport costs).
Indian Railways’ Vision 2020 is an aspirational plan that charts out a growth of 10% The government is allowing private over the next 10 years by developing a sharper commercial focus and strong social participation for growth commitment. Indian Railways is in urgent need of modernization and a generational change to ensure safety, improve productivity, take advantage of advances in Newly launched ‘time-table’ container technology, and respond to ever-increasing demand in order to meet the inclusive trains could increase the speed of growth aspirations of the country. For this, the government is allowing private movement and reliability 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 25th 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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All eyes on DFCC Cargo movement by train is more cost competitive than movement by road, The average speed of a goods train is particularly for distances of more than 500kms. However, in India, containers are just c.25kmph per hour (compared to moved by road, even for distances of more than 1,400kms, due to poor rail c.70kmph in China) and that too infrastructure. The cost of goods transportation by railways is inordinately higher without any time guarantee 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)
180 Revenue per NTKm Revenue PKm 160 140 120 100 80 60 40 20 0
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 100
80
60
40
20
0 1950-51 1978-79 1986-87 2007-08 2014-15 2018-19 2029-30
Source: Planning commission
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Construction of DFCs across the country is the most ambitious project ever conceived by the Indian Railways. Out of the six DFCs planned in a phased manner, two corridors (eastern and western) are scheduled to be fully commissioned by FY21. The eastern corridor will run from Ludhiana in Punjab to Dankuni near Kolkata with a length of 1,839kms and the western corridor will stretch from JNPT near Mumbai to Dadri near Delhi at a length of 1,534kms. The phasing of corridors is synchronized with the existing most-saturated sections on the Mumbai-Delhi and Delhi-Kolkata rail links.
DFC Corridors – two are under construction
Source: DFCCIL
Volume analysis on Western DFCC (WDFC) for exim cargo at port WDFCC will be mainly used for movement of container cargo from the west coast of India to the northern hinterland. The ports that would cater to WDFCC are currently handling a container volume of c.141mn tonnes, out of which c.36mn tonnes is moved by rail. After DFCC, incremental cargo potential (including container, cement, and fertilizer) is around 59mn tonnes over the next 3-4 years (see below table). Apart from exim cargo, there is big potential for domestic cargo movement by rail. However, the success of this depends on upgradation of feeder routes and development of multimodal logistics parks for bulk and container movement. We have assumed domestic movement of 15mn tonnes on WDFCC in FY23. Currently, domestic container volume for the country through rail is c.12mn tonnes.
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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 Capacity addition, along with assured 600+mn tonnes per annum. Initially, DFCC will run c.237 trains daily on WDFC and 255 transit times, would lead to an on EDFC. The design load-carrying capacity of one wagon on DFCC is 100 tonnes incremental shift in cargo from road to (compared to c.60 tonnes at present) and one train will constitute up to 90 wagons. rail 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
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Indian Railways cargo-wise breakup (mn tonne) Cargo-wise breakup FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 Coal 496.3 508.1 551.8 551.5 520.0 555.2 605.8 587.0 Steel 48.1 50.0 52.1 52.3 52.9 56.3 59.0 57.0 Thermal power plant 315.4 335.4 371.8 371.3 332.0 243.9 257.7 252.9 Pig iron/ Finished steel 35.3 38.6 44.8 44.8 46.5 54.4 53.3 53.8 Iron ore 111.4 124.3 116.9 116.9 133.7 139.8 137.4 153.4 Cement 105.9 109.8 105.4 103.3 107.0 113.0 117.7 110.7 Food grains 48.3 54.4 45.7 44.9 46.0 43.8 39.3 37.5 Fertilizer 45.9 44.4 52.2 48.4 50.9 48.53 51.9 51.6 POL 41.6 41.9 43.2 42.4 42.7 43.11 43.5 43.5 Container 41.1 43.6 45.8 47.4 48.0 53.9 60.3 61.2 Domestic 9.3 10.9 9.0 10.3 9.0 11.1 11.9 11.3 Exim 31.8 32.7 36.8 37.0 39.0 42.8 48.5 49.9 Others 84.1 88.5 89.1 101.5 98.7 107.9 114.1 111.8 Total 1009.9 1053.5 1095.0 1101.0 1093.5 1159.6 1223.3 1210.5 Source: Indian Railway
DFCC Progress and completion targets (updated as of Nov 2019)
WDFCC Physical progress Target Land km Stretch Km commissioning Land % 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 Target Land km Stretch Km commissioning Land % affected Civil System Bhaupur - Khurja EDFC -1 351 Mar-20 100 0 98.7 87 Bhaupur -Mughalsaral EDFC-2 402 Dec-20 99.8 1.55 64 39 Durgawati - Sasaram 56 Dec-20 100 0 100 100 Mughalsarai-Sonnagar 81 Dec-20 95.5 2.68 56 Na Khurja -Dadri 46 Dec-20 87.2 5.03 43 Na Pilkhani - Ludhiana 179 Dec-21 100 0 46.5 Na Khurja-Pilkhani 222 Dec-21 91.1 11 26 Na Source: DFCC
Due to covid, the target for commissioning of DFCC projects would be delayed by 6-8 months, as per industry feedback. We believe this will have a minimum impact on trade and the economy, considering the slowdown in economic activity and capacity availability on the current Indian railways network due to reduction in passenger trains. Notably, DFCC officials have maintained the completion dates.
Modal shift to benefit container train operators The government is working on creating seamless multimodal freight transfers to ensure efficient freight movement in the country. It is planning to move long-line-haul cargo through more efficient modes such as railways and waterways, with first- and last-mile connectivity by road.
In 2006, the government deregulated rail transportation of containers. This was the first major effort by the Indian Railways towards attracting private capital to the
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LOGISTICS SECTOR UPDATE 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 40% 35% 40% lines on Indian railways are running at more than 100% capacity utilization 30% 25% 20% 15% 10% 5% 0% <80% 80-100% 100-120% 120-150% >150% OTOS
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 Road Rail Water Air 1 1 1 6 8 12
36 32 40
57 59 47
2010 2030 2030 Wtih current trajectory towards balance mix
Source: Planning commission, PhillipCapital India research estimates
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Delhi Mumbai Industrial Corridor (DMICDC) DMICDC is developing national industrial corridors by acquiring land with the support of the state government. It is creating basic infrastructure for industrial and social development. Currently, it is working on 8 industrial corridors to leverage rail connectivity along the western dedicated freight corridor (WDFCC). It is investing c. Rs 30bn in each industrial cluster for developing trunk infrastructure with plug-and-play model for private players. The control and governance of each corridor will be managed from one place.
Benefits of DMICDC clusters 1. Litigation-free land parcels with availability of quality water and power. 2. No separate environment clearance, which saves 6-8 months. 3. Single-window documentation and follow up by DMICDC for around 67 approvals with 30 government departments. 4. Rail and rail connectivity. 5. No interference from local and state governments.
National Industrial Corridor Development
Future-ready Plug-and-Play utilities
Source: DMICDC
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Underground utilities installed at Dholera. DMICDC is developing future-ready trunk infrastructure for industries
Source: DMICDC
Underground utilities installed at Dholera Roads and Utilities Details of Land allotment Total Plots allotted Area (acre) Balance land Shendra Industrial Area, Maharashtra 58 160.3 500 Bidkin Industrial Area, Maharashtra 0 0 2800 Integrated Industrial Township Project, at Greater Noida, Uttar Pradesh 5 153.89 177 Dholera Special Investment Region, Gujarat 3 152.71 3000 Integrated Industrial Township Project,‘Vikram Udyogpuri’ near Ujjain at Madhya Pradesh 1 12 650 Total 67 478.9 7127+ Source: DMICDC
With the development of the DFCC and DMICC, the growth rate in container trade could see a structural shift in coming years. One of constrain for container trade was lack of handing infrastructure at hinterland locations as it require mechanised handling compared to done manually for loose bulk cargo through truck transport. DMICDC facilities will has large warehouses for varied cargo with modern handling equipment
Container cargo requires mechanised handling
Source: PhillipCapital India research
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Focus on utilizing waterways for commercial cargo movement
Page | 34 | PHILLIPCAPITAL INDIA RESEARCH Significant focus on utilization of waterways for cargo movement
LOGISTICS SECTOR UPDATE
Revival of coastal and inland water The government’s focus on developing India’s rich and varied natural water resources Cargo and passenger movement through by promoting waterways for commercial use have started showing results. coastal and inland waterways is beneficial In November 2018, Prime Minister Narendra Modi inaugurated India’s first for the country, as it is cheaper than any multimodal terminal at Varanasi for inland waterways; this terminal received other form of transport, safer, and more environment friendly. India’s first container movement on an inland waterway since Independence. Ferry service for cargo and passengers (RoPAX) between both Ghogha and Dahej Government wants to double the (both in Gujarat) under the Sagarmala initiative has reduced the travel time contribution of coastal shipping in total between Saurashtra and South Gujarat to just over an hour from 7-8 hours cargo traffic to 12% from current 6%
earlier, and the distance is down to just 31km from 360km. Cargo movement in the northeast through NW-2 and the Bangladesh Protocol is For a detailed report on waterways also picking up. click here 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.
Waterways
Coastal Shipping Inland Waterways – Movement through small barges – Large ships with coastal and of 2,000-2,500 tonnes on river transhipment movement - Infrastructure development – Developed infrastructure under process
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.
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Share of water transport (%) 35
30
25
20
15
10
5
0 China USA India
Source: Industry, PhillipCapital India Research
The potential that coastal shipping and inland waterways holds is largely untapped and these segments are receiving much-need government attention now. Waterways are 50% cheaper than roads and nearly 30% cheaper than rail. The coastal leg, apart from being more fuel efficient, can also carry larger parcel sizes and provides a great opportunity for consolidation of loads and over-dimensional cargo.
Waterways are more fuel efficient than roads and trains Operating cost per tonne km Fuel efficiency ton km/litre Shipping 0.75 105 Rail 1.18 85 Road 1.51 24 Source IWA
Cargo breakup of coastal movement Other 13%
Cement / Clinker 6% Iron ore 5% POL 49%
Thermal Coal 27%
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
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LOGISTICS SECTOR UPDATE government is working on seamless movement of cargo on waterways with integration of coastal and inland waterways.
One of the ways to reduce logistics cost for exim trade is to bring manufacturing close to ports and reduce transport and inventory requirement
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.
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Number of national waterways in India 120 25000 No of Waterways length km (RHS)
100 111 20000
80 15000 60 10000 40
5000 20 1 2 3 4 5 0 0 1982 1988 1993 2008 2008 2017
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. Bihar and UP 296 N From Bhaisaslotal Barrage near Triveni Ghat to Hajipur. Development work started from Ganga confluence to Bagaha Bridge (c.250km) under Phase-1. NW-86 Rupnarayan River. West Bengal 72 N 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. NW-9 Alappuzha – Kottayam – Athirampuzha Canal. Kerala 38 P Development work has begun under Phase-1 for cargo movement. Waterway is already operational for ferry services. NW 97 Sundarbans Waterways. The NW is already operational under Indo-Bangladesh West Bengal 201 Y 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. NW 16 Barak River – between Lakhipur and Bhanga with a project cost of c.Rs 760mn. Assam 121 P 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. NW-27 Cumberjua River – Zuari river to confluence with Mandovi river. Goa 17 N Development works for expansion/setting up of floating jetties and up-gradation/- installation of navigational aids is underway.
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 After development of night navigation (JMVP; from Haldia to Varanasi, with technical and financial assistance from the facilities on the entire stretch, travel World Bank) at an estimated cost of Rs 54bn. Inland Waterways Authority of India time form Varanasi to Haldia can come (IWAI) is the project implementing agency. The project envisages various sub-projects down to 4-5 days from 12-14 days such as fairway development, navigational aids, and construction of multi-modal earlier – a significant leap for cargo terminals at Varanasi, Sahibganj, and Haldia, construction of new navigational lock at movement on the NW-1 Farakka, bank protection work, movement of LNG vessels, LNG bunkering facilities, etc.
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After development of night navigation facilities on the entire stretch, travel time from Varanasi to Haldia can come down to 4-5 days from current 12-14 days, a significant advantage for cargo movement on the NW-1.
Total cargo movement on Inland Waterways will increase from c.72mn tonnes currently to c.120mn tonnes by 2025. Companies such as Pepsico, Emami Agrotech, IFFCO Fertilizers, and Dabur India have already moved containers on the River Ganga. Major cargo that can be moved on the coastal route includes coal, cement, ODC, and fertilizers. River information system will reduce travel time with night navigation
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 70 FY20 FY25 From new waterways Source: PhillipCapital India, IWAI 60 50
40
30
20
10
0
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. Source: PhillipCapital India, Industry
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
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effective tax on bunker for shipping for domestic movement was around 40%, which came down to 18% in GST and is now reduced to 5%. 3. Stricter road-side compliance with GST and e-way bill. Invoicing on GST portal. BS-6 norm, AC cabin. 4. 40% discount on vessel related charges (except Coal and iron ore) at port for coastal ships with dedicated coastal berth and priority berthing. 80% discount for RoRo vessel. 5. Simplification of registration and ease of doing business. 6. Permission to mix domestic and Exim cargo. 7. Relaxation of Cabotage law. 8. Allowing fertilizer transport subsidy in inland waterways.
Major initiatives to promote coastal shipping in India
Relaxation of Cabotage
Reduction in duties for Green Bunker Channel (Fuel for Clearence ships) with 5% GST
Reduction in Port Charges
Source: Ministry of Shipping
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Section 3: Disruptions
Emergence of the IT-enabled platform New-age companies with access to comprehensive data analysis are creating Online fleet aggregators are changing technology-enabled solutions for logistics players. They use analytics and advanced the dynamics of the road transport machine learning to improve efficiency and reduce cost of services. These new sector in India 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 Online freight booking
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
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E-commerce driving logistics; retail to see short-term covid impact Online retailing currently occupies c.8% of total retail sales and has seen strong CAGR of 25-30% over the past five years. Organized retail companies are looking at improving their supply-chain efficiencies and inventory management, which will open doors for service providers to create new and innovative models. Growth is also supported by emerging technology such as IoT, drones, automated warehouses and automated trucks. Such technology is helping speed up e-commerce logistics, which is why many e-commerce giants are adopting it rapidly.
Strong growth in e-commerce in India is changing the requirement for logistics Only 10 percent of India’s 1.3 billion people know English. Next e-commerce user base will come in the vernacular language
Increasing smart phone penetration with regional Affordable data langauge
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 Addressing peak demand and speed segment have seen margins declining due to increased competition and reduction in Alibaba and JD.com handled a record pricing by online retailers for last-mile delivery. Faster delivery (one day, two day, US$ 136.5bn in sales during a major etc.) with reverse logistics for return cargo and capabilities to handle cash-on-delivery Chinese shopping event on 18 June 20, are changing the dynamics of logistics players. Most e-commerce companies known as ‘618’ 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.
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Need for a flexible supply-chain to manage high variation in demand after the emergence of e-commerce. USA peak sales in USD bn
Cyber Monday
Sunday 2019 2018 Satuerday 2017
Black Friday
Thanks giving
0 2 4 6 8 10
Source: Industry data
Covid-19 and e-commerce Covid-19 pandemic and social distancing norms are likely to spur e-commerce and While retail businesses are significantly related activities. Shopping behaviour is in term of what people are buying, when, and dented in the short term due to Covid- how is changing. As per WHO, the likelihood of an infection from a package that has 19, e-commerce is flourishing 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.
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E-commerce is increasing the complexity of order fulfilment
E-commerce demands flexible manufacturing and supply-chains
Choice of Return and Real time Quicker Peak where and Smaller cash order delivery demand when to order size collection visibility deliver
Source: PhillipCapital India research
Logistics supply-chain for e-commerce
Receiving Storage Packing Delivery The last leg of delivery accounts for 25-50% of total logistics costs of e- Put away Picking Sorting commerce companies
up 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
Metro, Tier -I Tier II and below Metro, Tier -I Tier II and below
33 2018 45 55 2025
67
Source: Company, PhillipCapital India Research
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Section 4: Emerging opportunities
3PL logistics Indian logistics are likely to see a CAGR of 10-12% to touch Rs 28.1tn by 2025. Third- Globally, the 3PL market is c.10% of the party logistics (3PL, outsourcing) has gained wide acceptance in developed countries, overall logistics market. In India it is and it is evolving in India. 3PL will increase with GST, and is likely to grow to US$ 14bn just c.3% 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 3PL logistics providers help companies by allowing them to focus on their own core competencies. In the US, around 86% of to respond to clients’ needs on a case- Fortune-500 companies use 3PLs for logistics and supply chain functions. These to-case basis and manage seasonal providers help companies to respond to clients’ needs on a case-to-case basis and peak demand. Most 3PL players manage seasonal peak demand. A majority of 3PL player companies globally follow an globally follow an asset-light model “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.
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Evolving 3PL practices in India What edge do large, organized The conventional approach 3PLs have over smaller, unorganized player? Pan-India presence, better scalability and Customers limit outsourcing contracts to routine, flexibility. commodity-led services, instead of more innovative, Solution-driven capability strategic services Technology driven implementation Industry fragmentation. Cost-effective solutions Companies may be reluctant to outsource logistics Professional management and brand due to its critical role in business activities Companies may lack awareness of how 3PL can add value to their supply chain Source: Industry, PhillipCapital India Research
In India, most 3PL service providers use an asset-light model to acquire big-ticket clients and provide them with integrated end-to-end solutions to address all their logistics requirements. To the clients, this provides operational flexibility and scalability along with cost efficiencies. Sectors such as automobiles, e‐commerce, consumer goods, organized retail, and engineering have a high 3PL growth potential of 15‐20% in long term.
Automobiles account for a major share of the 3PL market in India FY17 FY2020E CAGR 3PL market (Rs bn) 392 580 21% Automotive Components 108 165 14% Cars & SUV 66 119 20% CV and tractors 25 33 8-10% 2W an 3W 54 81 13-15% Engineering 3 7 20-22% E-commerce 59 140 30-32% FMCG 20 39 24% Pharma 22 29 8% Bulk 8 10 6% Organized Retail 27 65 29% Telecom 0.2 0.2 21% Source: Mahindra Logistics
Warehousing and multimodal logistics parks (MMLP) The warehousing market in India is highly fragmented. Majority warehouses are less Post GST, companies can finally make than 10,000 sq. ft. About 90% of the warehousing space in the country is controlled storage and transportation decisions by small unorganized players with limited mechanization. Under the erstwhile tax based on logistical efficiencies rather structure, most companies had to maintain small warehouses in every state to save than tax efficiency 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 A-Grade warehousing rents are Rs 18- cluster format. Clusters are being developed on continuous land of 100 to 150 acres 25 per sq. ft. per month, including Rs with warehousing space of c.25,000 sq. ft. per acre (0.5 FSI). New warehouses are A- 1.5-2.0 as monthly maintenance charged by developers for security, grade ones with heights of 12.5mtrs (whereas older ones were 6-7mtrs) which helps drainage, etc. 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.
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Small godowns vs. A-grade-compliant warehouses
Smaller godown storage Manual handing of cargo Grade A warehouse with a racking system
MMLP for bulk cargo storage and distribution Leading players are setting up Multimodal Logistics Parks (MMLP) to handle diverse cargo instead of the earlier trend of developing simple ICDs and CFSs to handle The Ministry of Road Transport & container cargo only. The focus of logistics companies is shifting to handling multiple Highways (MORTH) is developing c.35 cargos with increased share of value-added services. MMLPs (to account for 50% road freight movement) to improve the logistics MMLP is a multi-modal freight-handling facility with a minimum area of 100 acres efficiency in the country 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.
Value-added Typical land use at MMLP services Freight Green Admin aggregation Ancillary Zone facilities 12% and services 11% distribution Core Multimodal logistics Truck 50% Logistics Parks - parking MMLP 15% Intermodal - Commodity, road, rail, Anci container water llary storage connectivity logistics 12% Vehicle parking
Source: PhillipCapital India Research
CONCOR and Allcargo Logistics are setting up MMLPs to benefit from the GST policy and the Private Freight Terminal (PFT) policies of the Indian Railways at strategic locations. CONCOR will be a significant player, with 15 MMLP across high-potential corridors such as DMIC (Delhi-Mumbai) and AKIC (Amritsar-Kolkata), which are likely to be developed alongside the eastern and western corridors.
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Government focus on cold chain The cold chain industry is at a nascent stage in India, and with changes in organized warehousing and retail, along with favourable government policies, the sector provides huge opportunities in the long term. The cold-chain industry in India comprises of two major segments, i.e., temperature-controlled warehouses (TCW) and temperature-controlled vehicles (TCV). The total industry size in FY17 was estimated at US$ 3.95bn, with temperature-controlled warehouses at US$ 3.67bn, State-wise % share of cold-storage capacity 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 Source: Industry data 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. The demand for cold storage will ft., and warehousing facility, with minimum investment of Rs 250mn and area of increase with growth in organized food retail Quick Service Restaurants (QSRs), 100,000 sq. ft., are eligible under infrastructure lending. and pharmaceuticals
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.
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LOGISTICS SECTOR UPDATE
Changing dynamics in containers Most of India’s container cargo moves through gateway ports in north-west India, Container traffic has remained one of the accounting for c.65% of the container trade. Container traffic that used to belong to highest growing cargoes in India historically, major ports earlier is now growing faster at select non-major/intermediate ports such with a GDP multiplier of around 1.5x as Pipavav and Mundra ports in Gujarat and Krishnapatnam in Andhra Pradesh. The Logistic players related to container movement share of container cargo as a percentage of total cargo at major ports has increased and trade are uniquely placed to benefit from: to 21% in 2020 from 14% in 2004. (1) growing infrastructure for container handling with MMLPs (Multi-Modal Logistics Parks), and (2) shift to containerized cargo Containers volumes remain concentrated at few ports from bulk (mn TEU)
6 FY19 FY20 5
4 Four ports handle c.70% volume 3
2
1
0
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
3000 25 Total Cargo (mn tonne) Contianer volume (mn TEU) -RHS 2500 20 2000 CAGR 8.8% 15 1500 10 1000
500 CAGR 6.3% 5
0 0
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25 FY05 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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LOGISTICS SECTOR UPDATE lower for containerized cargo as opposed to break bulk, with standardization and lower wastage or damage to the cargo.
The cost advantage in container transportation for exports occurs due to India’s balance of trade– with more imports than exports, incoming containers wait for Substantial incremental demand should repositioning to other locations. Container shipping lines, instead of moving empty come from a shift of general cargo in container from India offer good deals for exporters to specific locations. As a result, break bulk to containerized form as well general increase related to trade soya, sugar, steel plates and agricultural products have gone the container way. The growth and GDP. cargo damages are up to 20% of the cargo when shipped in break bulk, offering a strong incentive to box it.
Containers are now also used for movement of liquid and bulk cargo with specially designed containers and FIBC (Flexible Intermediate Bulk Containers) bags offering cost-effective container solutions. The flexi bags are fabricated from FDA-approved virgin polyethylene and polypropylene, which are suitable for a wide range of food grade and non-hazardous liquid and bulk cargo. In India, most of bulk material is moved in loose form while liquid is transported through tankers. Container bags are designed for transportation of large quantities of these materials into standard 20-ft ISO containers. These bags go inside the container and bulk or liquid material is pumped inside for loading, which normally takes 20-40 minutes. One container can carry 14-24,000 litres of liquid and are suitable for petroleum oil, edible oil, latex and chemical industries. After loading is finished the container can be moved by road, railway or sea to any point worldwide. Material is unloaded again through pumps at destination. The cost of these flexi bags is significantly lower than transporting liquid cargo through metal tanks. Metal tanks (isotanks) also need cleaning before use while flexi bags are light weight and disposable. In the same 20-ft container, flexible bags can load 30-40% more cargo compared to conventional liquid logistics.
Use of flexi bags for bulk and liquid cargo
Source: Industry, PhillipCapital India Research
Globally, there is a weight limit for lifting goods manually (up to 20kg) and manual Container rail operators such as Concor transportation (55kg). But in India, manual labour is used for lifting and handling are already working with bulk cargo parcels of up to 100kg and more. After GST, cargo movement will move to manufacturers and IFCI to provide multi-modal larger logistics parks which would have handling equipment vs. current supply-chain solutions through movement through small parcels and godowns. With increasing labour cost and containers 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.
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LOGISTICS SECTOR UPDATE
Financial Analysis Financial
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LOGISTICS SECTOR UPDATE
Key Financials for logistics players Company Bluedart Concor Allcargo Navkar Gateway VRL TCI TCI Exp. Mahindra FSC Gati Aegis Patel CMP (Rs) 1963 448 93 28 89 153 167 672 316 164 46 182 20 MCap (Rs mn) 46582 272962 22849 4214 9674 13822 12831 25771 22588 7196 4996 61818 331 EV (Rs mn) 49766 244512 32937 8960 17330 15508 16772 25675 21377 7177 7148 65039 787 P/E (x) FY19 51.9 22.5 9.5 8.0 11.4 15.0 8.8 35.3 26.4 10.7 30.5 29.1 5.2 FY20 209.3 27.1 13.6 9.3 9.6 15.3 8.4 28.9 41.0 105.4 -13.4 19.0 28.1 FY21 -44.9 51.2 23.7 36.5 59.4 -29.1 25.4 41.8 494.1 -17.6 -9.4 23.0 22.7 FY22 50.8 30.9 11.8 8.2 15.3 14.1 10.7 31.6 30.6 60.4 -39.1 17.3 4.2 FY23 28.0 21.1 9.3 6.4 9.6 11.0 8.5 27.8 21.5 11.2 30.8 13.5 3.8 P/B (x) FY19 8.1 2.6 1.1 0.2 0.7 2.1 1.4 9.6 4.6 1.2 0.9 4.9 0.3 FY20 9.5 2.7 1.1 0.2 0.7 2.4 1.2 7.6 4.3 0.8 0.9 4.1 0.3 FY21 13.3 2.6 1.1 0.2 0.7 2.3 1.2 6.6 4.4 0.9 1.0 3.9 0.2 FY22 11.4 2.5 1.0 0.2 0.7 2.0 1.1 5.6 3.9 0.9 1.0 3.4 0.2 FY23 8.7 2.4 0.9 0.2 0.7 1.8 1.0 4.8 3.4 0.8 1.0 2.9 0.2 EV/EBITDA FY19 17.4 17.4 7.3 5.9 21.0 6.4 6.7 21.6 14.1 5.9 7.6 17.5 5.3 FY20 10.5 14.6 6.5 5.4 5.5 5.2 7.0 21.2 13.5 3.0 20.1 12.6 9.7 FY21 14.8 24.5 9.3 8.5 8.4 12.4 11.7 29.6 23.8 3.8 28.1 12.9 10.2 FY22 8.9 16.2 6.7 5.7 6.6 4.8 7.4 22.6 11.5 2.9 9.1 10.5 4.7 FY23 7.6 11.6 5.8 5.1 5.6 4.2 6.3 19.8 9.1 2.2 5.6 8.7 4.3 P/Cash EPS (x) FY19 21.4 16.6 5.8 4.5 7.6 7.2 5.7 32.4 21.0 6.1 11.7 23.7 3.0 FY20 12.6 17.9 5.7 4.8 4.6 7.2 5.7 26.6 17.6 3.9 318.6 15.8 7.4 FY21 19.3 25.6 7.5 7.6 6.5 29.2 9.7 36.9 27.3 5.2 -39.7 17.5 5.8 FY22 10.6 18.6 5.6 4.4 4.8 7.0 6.2 28.6 14.6 3.7 16.9 13.8 2.6 FY23 9.1 14.1 4.8 3.8 4.0 5.9 5.3 25.3 11.7 2.8 8.3 11.2 2.4 RocE (%) FY19 18.2 15.6 11.8 5.2 2.9 16.4 16.2 41.3 25.3 9.9 7.1 19.4 7.9 FY20 8.4 14.2 7.6 5.4 8.8 12.4 14.8 34.6 14.3 7.8 0.4 20.8 5.8 FY21 0.5 7.1 4.8 2.7 4.3 -4.4 4.7 21.2 3.6 2.5 -0.8 17.1 4.0 FY22 14.4 11.2 8.4 4.8 7.1 17.7 10.2 23.9 15.8 6.5 3.6 19.7 8.1 FY23 19.3 15.4 9.5 5.5 9.3 20.0 11.6 23.2 19.1 10.4 7.6 21.3 8.3 D/E (x) FY19 0.9 0.1 0.3 0.3 0.6 0.2 0.5 0.0 0.3 0.5 2.0 0.2 0.5 FY20 0.9 0.0 0.6 0.3 0.6 0.3 0.4 0.0 0.4 0.2 2.2 0.4 0.5 FY21 1.3 0.0 0.3 0.3 0.4 0.3 0.4 0.0 0.5 0.3 1.9 0.4 0.5 FY22 1.1 0.0 0.4 0.3 0.4 0.3 0.4 0.0 0.5 0.3 1.7 0.3 0.4 FY23 0.8 0.0 0.4 0.3 0.3 0.2 0.4 0.0 0.5 0.4 1.6 0.2 0.4 Source: PhillipCapital India Research estimates
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LOGISTICS SECTOR UPDATE
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 50
Future
40 Aegis
19) 30 - Mahindra Blue Dart 20 TCI Allcargo TCI Express Snowman 10 Concor
0 EBITDA CAGR (FY14 CAGR EBITDA -10 Gateway VRL Navkar -20 0 10 20 30 40 50 60 70 80 PE Source: PhillipCapital India Research
Comparison based on RoCE and price-to-book value (FY20) AS 116 effect on EBITDA in FY20 0% 50% 100% 150% 50 Mahindra TCI Express Future * 40 Blue Dart Mahindra
30 Snowman Concor Blue Dart VRL Aegis ROCE TCI 20 Gateway
Allcargo Allcargo VRL 10 Concor FSC Snowman Aegis Navkar Gateway 0 Navkar -5 0 5 10 15 TCI P/BV TCI Express Source: PhillipCapital India Research
*IND AS 116: With a change in accounting standards for lease, the operating costs for companies are now lower. This is because long-term lease costs are now below EBITDA (because of amortizing and depreciating) resulting in increase in interest and depreciation. RoCE is impacted negatively for some companies.
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LOGISTICS SECTOR UPDATE
ROCE and asset turn analysis Average ROCE was 15.6% for FY19 which declined to 12.6% in FY20 for 12 players. Average asset turn was 2.3x for FY19, which declined to 1.8x in FY20, due to the economic slowdown and Covid-19. Asset-light express business players had higher asset turns; 3x for TCI Express and 5x for Mahindra in FY20. Higher asset turns in Allcargo due to MTO business and in Aegis due to LPG outsourcing activities.
Capital intensity of different players (FY20) Profitability ratios across players 6.0 Asset turn 25 EBIT %
5.0 20 4.0 15 3.0 Average 1.8x 10 2.0
1.0 5
0.0 0
Source: Company, PhillipCapital India Research
Debt analysis The decline in profitability has impacted the return ratios for companies. Overall, D/E looks comfortable for the sector at an average of 0.6x, however a closer look at debt / EBITDA reveals cash flow risks for Gateway, Navkar, and FSC.
Return ratios – RoCE % Gross leverage across players
40 RoCE 1.0 D/E 35 0.9 0.8 30 0.7 25 0.6 20 0.5 15 Average 12.6% 0.4 0.3 10 0.2 5 0.1 0 0.0
Source: Company, PhillipCapital India Research
Players that are asset-light (into express logistics or 3PL) are trading at better valuations compared with leveraged and asset-heavy players. However, we believe that the long-term valuation gap would narrow with the cost of technology coming down, and with improvement in the valuations of asset-heavy players.
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LOGISTICS SECTOR UPDATE
Leverage to income-generation ratios across players (FY20) Valuation premium to book value (FY20)
4 20 P/BV Debt/EBITDA
3
2 10
1
0 0
Source: Company, PhillipCapital India Research
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LOGISTICS SECTOR UPDATE
Valuations of leading players The stock prices of most players have seen significant correction over the past two years, except TCI Express and Concor. The valuation multiples (one-year forward PEs) have seen corrections of 30-50% for stocks, mainly due to a decline in earnings growth and increased leverage.
Stock returns over the past five years (since FY15) Change in PE multiples over the past five years -100 0 100 200 300 400 250
Aegis 200 FY14 FY20 TCI Express TCI 150 Concor Mahindra 100 Allcargo 50 VRL Blue Dart 0 Snowman Future -50 Gateway Navkar
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
70 FY14 FY20 Aegis 60 Future 50 Mahindra Blue Dart 40 Gati TCI Express 30 TCI 20 Navkar VRL 10 Gateway Concor 0 Allcargo -40.0% -30.0% -20.0% -10.0% 0.0% 10.0% 20.0% 30.0% 40.0%
Source: Company, PhillipCapital India Research
Average EV/EBITDA for top-12 logistics player was c.24x in FY15; excluding Blue Dart, it was c.20x. Valuations have since corrected sharply and average EV/EBIDTA (adjusted for AS-116) was c.12x in FY20 for all 12 players; c.11x excluding Blue Dart. We have seen significant correction in Blue Dart, Navkar, Mahindra, and Future Supply Chain. All these companies have reported growth in EBITDA, which signal that the correction is mainly because of performance relative to growth expectation, and overall market movement.
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LOGISTICS SECTOR UPDATE
Container Corporation: One-year forward P/E trend Gateway: One-year forward P/E trend
700 Price (Rs.) 500 Price (Rs.) 30X 450 600 400 500 350 300 400 25X 250 18X 300 200 25X 20X 200 150 12X 15X 100 10X 100 50
- -
Jul-13
Jan-08 Jan-19
Jun-14
Oct-10
Apr-05 Apr-16
Feb-07 Sep-11 Feb-18
Jun-17 Jun-12
Dec-08 Dec-19
Oct-10 Oct-15 Oct-20
Aug-12
Apr-08 Apr-13 Apr-18
Feb-09 Feb-14 Feb-19
Nov-09 Nov-20
Dec-09 Dec-14 Dec-19
Mar-06 Mar-17
Aug-11 Aug-16 May-15 Source: PhillipCapital India Research
TCI: One-year forward P/E trend VRL: One-year forward P/E trend Price (Rs.) 500 Price (Rs.) 600 400 35X 500 300 30X 25X 400 25X 200 20X 300 20X 100 15X 200 - 10X -100 100 -200 - -300
Apr-15 Apr-16 Apr-17 Apr-18 Apr-19 Apr-20
Jul-11 Jul-14 Jul-17 Jul-20
Jan-10 Jan-13 Jan-16 Jan-19
Oct-10 Oct-13 Oct-16 Oct-19
Apr-12 Apr-15 Apr-18 Apr-09 Source: PhillipCapital India Research
Mahindra Logistics: One-year forward P/E trend Aegis Logistics: One-year forward P/E trend 700 Price (Rs.) 350 Price (Rs.)
600 300 30X 500 50X 250 25X 400 40X 200 20X 300 30X 150 200 20X 15X 100 100 50 -
-
Jun-18 Jun-19 Jun-20
Oct-19 Oct-18
Apr-18 Apr-19 Apr-20
Feb-18 Feb-19 Feb-20
Dec-17 Dec-18 Dec-19 Aug-19 Aug-18 Apr-15 Apr-16 Apr-17 Apr-18 Apr-19 Apr-20
Source: PhillipCapital India Research
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LOGISTICS SECTOR UPDATE
Section Companies
Page | 58 | PHILLIPCAPITAL INDIA RESEARCH INSTITUTIONAL EQUITY RESEARCH
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 BUY products, storage, and distribution for oil, gas, and chemicals. It has become a critical part CMP RS 182 of India’s gas and liquid logistics national network, and integrated supply-chain Target Price: Rs 265 (+45%) 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. COMPANY DATA Niche player in liquid and gas logistics – focus on cost-effective solutions: Liquid - AGIS has O/S SHARES (MN) : 340 MARKET CAP (RSBN) : 62 storage tanks to handle liquid cargo, with a total capacity of 729,310KL per annum spread MARKET CAP (USDBN) : 0.8 across Mumbai, Kochi, Halida, Kandla, Mangalore, and Pipavav Port. It is expanding its 52 - WK HI/LO (RS) : 267 / 108 capacity at Kochi, Haldia, and Mangalore by 82,000KL to touch 811,310KL in FY21, at a capex LIQUIDITY 3M (USDMN) : 0.7 of Rs 600mn. It offers third-party liquid logistics services for handling and storage, provides PAR VALUE (RS) : 1.0 operations and maintenance (O&M) services, and has a well-diversified customer base, SHARE HOLDING PATTERN, % including OMCs and chemical industries. Its revenue model is fee-based, with a monthly Mar 20 Dec 19 Sep 19 storage charge. It enjoys attractive EBITDA margins of c.65% in liquid logistics. Gas logistics - PROMOTERS : 59.6 59.6 59.6 it has storage and handling facilities at Mumbai, Pipavav, and Halida ports, with a total FII / NRI : 12.8 12.7 12.4 throughput capacity of 5mn tonnes per annum. It is setting up a 4mn-tonne per annum FI / MF : 2.3 2.2 2.4 capacity facility at Kandla port with a capital expenditure of Rs 3.5bn and will start operation NON PRO : 6.9 7.0 7.0 PUBLIC & OTHERS : 18.3 18.6 18.7 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 PRICE VS. SENSEX over FY20-23, with a total capacity of 9mn tonnes per annum. The company has the 350 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 300 growing liquid and gas market. 250 200 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 150 1.1%. As a result, LPG imports CAGR was a high c.18.5%; c.14.8mn tonnes in FY20 vs. 2.7mn 100 tonnes in FY10. Aegis has c.20% market share here, with an annual volume of c.3mt. With 50 increasing consumption, demand will rise to c.40mn tonnes by FY35, assuming conservative 0 CAGR of 3% at which imports are likely to increase to c.25mt per annum. Aegis is best placed Apr-16 Apr-18 Apr-20 to capitalize on a growing LPG trade, with its established network, growing capacities, and Aegis BSE Sensex expertise in third-party logistics (3PL) for handling oil and gas. Additionally, the Kandla Source: Phillip Capital India Research 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 KEY FINANCIALS to customers. Larger sized projects will help AGIS bring bigger gas carrying ships (VLGCs) – Rs mn FY20 FY21E FY22E an additional cost advantage. Aegis has a JV with ITOCHU Petroleum Co., (Singapore) Pte Ltd Net Sales 71,833 61,042 90,094 for LPG sourcing and supply. The JV arranges sourcing and transportation requirements of all EBIDTA 5,153 5,049 6,204 leading Indian importers and helps AGIS’s own gas-distribution business. Net Profit 3,384 2,796 3,728 EPS, Rs 9.6 7.9 10.5 Focusing on gas retailing and distribution – moving into B2C: AGIS is aggressively expanding PER, x 19.0 23.0 17.3 in gas distribution for home consumption, commercial, and industrial use. For automobile- EV/EBIDTA, x 12.6 13.2 10.5 gas retailing, it has a network of 115 retail stations in seven states under the Aegis Auto Gas P/BV, x 3.9 3.6 3.1 brand, for which it plans to have a national footprint – with 200 stations in 20 states. It also ROE, % 20.5 15.6 18.0 markets LPG packed in cylinders for commercial and industrial applications through 164 Debt/Equity (%) 35.4 34.6 26.7 commercial distributors in 55 cities in 9 states. It has entered into the domestic LPG sector Source: PhillipCapital India Research Est. with the Chhota CIKANDER brand.
Valuation: The company has created a niche in liquid and gas logistics and has healthy Vikram Suryavanshi, Research Analyst (022 6246 4111) return ratios with RoCE at 18-25%. Its control on the complete supply chain helps it to [email protected] 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.
Page | 59 | PHILLIPCAPITAL INDIA RESEARCH Please see penultimate page for additional important disclosures. PhillipCapital (India) Private Limited. (“PHILLIPCAP”) is a foreign broker-dealer unregistered in the USA. PHILLIPCAP research is prepared by research analysts who are not registered in the USA. PHILLIPCAP research is distributed in the USA pursuant to Rule 15a-6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities Inc, an SEC registered and FINRA-member broker-dealer.
AEGIS LOGISTICS 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
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AEGIS LOGISTICS INITIATING COVERAGE
The company has three business segments in gas logistics: Aegis is present across all important (1) Gas storage and handling: Storage and distribution facilities at Mumbai, Pipavav ports, which handle c.70% of total POL and Haldia ports. (Petroleum, Oil, and Lubricants) cargo
(2) Gas distribution and retailing for domestic and commercial use. (3) Gas sourcing and shipping: Managed through its JV with ITOCHU. Kandla Mumbai Haldia Kochi Manglore Others
29% 30%
12% 19% 7% 3%
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)
Rail connectivity at the Pipavav Mumbai Pipavav Haldia Kandla terminal should be complete by 3QFY21
4000000
2500000 2500000 2500000
1400000 1400000 1600000 600000 250000 1100000 1100000 1100000 500000 700000 2015-16 2016-17 2017-18 2018-19 2020-21
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 LOGISTICS INITIATING COVERAGE
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
Gas Distribution Business
Aegis Autogas Commercial & Domestic Bulk Industrial retail
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 Entry into domestic LPGs with 2-19kg applications due to their handling convenience and cleanliness. With the cylinders 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 50 45 40 35 30 25 20 15 10 5 0
Source: Company
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AEGIS LOGISTICS INITIATING COVERAGE
Increasing market share in LPG imports LPG consumption CAGR in India over FY10-20 has been 7.2% to 26.4mn tonnes, while LPG consumption dominated by domestic supply CAGR was much lower at 1.1%. As a result, LPG imports increased to domestic cooking use c.14.8mn tonnes in FY20 from 2.7mn in FY10, a CAGR of 18.5%. Domestic use Commercial Auto Industry 1% India LPG imports to touch c.22mn tonnes by FY30 10% 1% 40 Demand Supply 35
30
25 Import 22mn tonne 20 Import 14.8mn 15 88%
10
5
0
FY20 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY21 FY22 FY23 FY24 FY25 FY26 FY27 FY28 FY29 FY30 FY05 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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AEGIS LOGISTICS INITIATING COVERAGE
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 Gas division volume breakup FY20 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 Logistics Distribution Sourcing 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. 32% 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. 3% 65% 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)
Revenue (Rs mn) EBITDA (Rs mn) Revenue (Rs mn) EBITDA (Rs mn) EBITDA (%) -RHS 3000 EBITDA (%) -RHS 70 120000 7 68 2500 100000 6 66 64 5 2000 80000 62 4 1500 60 60000 3 58 1000 40000 56 2 54 500 20000 1 52 0 50 0 0 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23
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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AEGIS LOGISTICS INITIATING COVERAGE 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) Capex (Rs mn) Cash profit Gross Debt Rs mn - RHS D/E (x) Debt/EBITDA (x) 7000 2.5 7000
6000 6000 2.0 5000 5000
4000 1.5 4000
3000 1.0 3000
2000 2000 0.5 1000 1000
0 0.0 0 FY12FY13FY14FY15FY16FY17FY18FY19FY20FY21FY22FY23 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23
Source: Company, PhillipCapital India Research estimates
Profitability trend 8000 EBITDA (Rs mn) PAT (Rs mn) 7000 6000 5000 4000 3000 2000 1000 0 -1000 -2000 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23
Source: Company, PhillipCapital, PhillipCapital India Research estimates
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AEGIS LOGISTICS INITIATING COVERAGE
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 350 Price (Rs.)
300 30X 250 25X 200 20X 150 15X 100
50
-
Jul-15 Jul-16 Jul-17 Jul-18 Jul-19 Jul-20
Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21
Oct-16 Oct-15 Oct-17 Oct-18 Oct-19 Oct-20
Apr-15 Apr-16 Apr-17 Apr-18 Apr-19 Apr-20
Source: PhillipCapital India Research
EV/EBITDA
1,60,000 EV (Rs.m)
1,40,000 25X 1,20,000 20X 1,00,000
80,000 15X
60,000 10X 40,000
20,000
- Apr-15 Apr-16 Apr-17 Apr-18 Apr-19 Apr-20
Source: PhillipCapital India Research
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AEGIS LOGISTICS INITIATING COVERAGE
Financials
Income Statement Cash Flow Y/E Mar, Rs mn FY20 FY21e FY22e FY23e Y/E Mar, Rs mn FY20 FY21e FY22e FY20 Net sales 71,833 61,042 90,094 1,00,151 Pre-tax profit 2,076 2,940 4,914 6,363 Growth, % 28 -15 48 11 Depreciation 687 887 928 969 Chg in working capital -742 -1,009 -1,206 -1,443 Total tax paid -658 -697 -910 -1,145 Total income 71,833 61,042 90,094 1,00,151 Cash flow from operating activities 1,363 2,121 3,725 4,744 Raw material expenses -64,719 -55,060 -82,165 -91,338 Capital expenditure -5,381 -3,044 -1,045 -1,046 Employee expenses -512 -553 -636 -732 Chg in investments 782 -288 -575 -1,150 Other Operating expenses -1,448 -380 -1,088 -574 Cash flow from investing activities -4,599 -3,332 -1,620 -2,196 EBITDA (Core) 5,153 5,049 6,204 7,507 Free cash flow -3,237 -1,210 2,105 2,548 Growth, % 39.0 (2.0) 22.9 21.0 Equity raised/(repaid) 2,126 -6 0 0 Margin, % 7.2 8.3 6.9 7.5 Debt raised/(repaid) 290 400 -600 -600 Depreciation -687 -887 -928 -969 Dividend (incl. tax) -489 -489 -815 -815 EBIT 4,466 4,162 5,276 6,539 Cash flow from financing activities 1,742 -95 -1,415 -1,415 Growth, % 39.4 (6.8) 26.8 23.9 Net chg in cash -1,495 -1,305 690 1,133 Margin, % 6.2 6.8 5.9 6.5 Interest paid -331 -433 -387 -341 Other Non-Operating Income 328 142 164 165 Valuation Ratios Non-recurring Items -2,388 -930 -140 0 FY20 FY21e FY22e FY20 Pre-tax profit 2,076 2,940 4,914 6,363 Per Share data Tax provided -736 -697 -910 -1,145 EPS (INR) 9.6 7.9 10.5 13.4 Profit after tax 1,340 2,244 4,004 5,218 Growth, % 52.8 (17.4) 33.4 27.7 Book NAV/share (INR) 46.7 50.6 58.4 69.6 Others (Minorities, Associates) -344 -378 -416 -458 FDEPS (INR) 9.6 7.9 10.5 13.4 Net Profit 996 1,866 3,588 4,760 CEPS (INR) 18.2 13.0 13.5 16.2 Growth, % 52.8 (17.4) 33.4 27.7 CFPS (INR) (5.4) 5.8 10.2 13.1 DPS (INR) 1.2 1.2 1.9 1.9 Return ratios Balance Sheet Return on assets (%) 6.5 9.0 13.7 15.7 Y/E Mar, Rs mn FY20 FY21e FY22e FY20 Return on equity (%) 20.5 15.6 18.0 19.3 Cash & bank 2,634 1,330 2,021 3,154 Return on capital employed (%) 9.0 12.7 18.7 20.8 Debtors 4,540 5,448 6,538 7,846 Turnover ratios Inventory 421 455 491 530 Asset turnover (x) 4.5 2.8 3.8 4.0 Loans & advances 647 698 754 815 Sales/Total assets (x) 2.8 2.1 2.8 2.8 Other current assets 684 786 904 1,040 Sales/Net FA (x) 4.3 3.0 4.2 4.7 Total current assets 8,926 8,718 10,709 13,385 Working capital/Sales (x) (0.0) (0.0) 0.0 0.0 Investments 361 648 1,224 2,374 Fixed capital/Sales (x) 0.2 0.3 0.2 0.2 Gross fixed assets 18,643 21,643 22,643 23,643 Receivable days 23.1 32.6 26.5 28.6 Less: Depreciation -1,656 -2,543 -3,470 -4,439 Inventory days 2.1 2.7 2.0 1.9 Add: Capital WIP 2,201 2,245 2,290 2,336 Payable days 22.0 26.7 18.2 16.8 Net fixed assets 19,188 21,346 21,463 21,540 Working capital days (10.8) (6.7) 0.4 5.7 Total assets 28,475 30,712 33,395 37,299 Liquidity ratios Current ratio (x) 1.1 1.0 1.2 1.5 Current liabilities 8,424 8,502 8,586 8,677 Quick ratio (x) 1.0 1.0 1.2 1.5 Provisions 179 188 198 208 Interest cover (x) 13.5 9.6 13.6 19.2 Total current liabilities 8,603 8,690 8,784 8,884 Total debt/Equity (%) 35.4 34.6 26.7 19.8 Non-current liabilities 2,420 2,820 2,220 1,620 Net debt/Equity (%) 19.5 27.1 17.0 7.0 Total liabilities 11,023 11,510 11,004 10,504 Valuation Paid-up capital 340 334 334 334 PER (x) 19.0 23.0 17.3 13.5 Reserves & surplus 16,207 17,583 20,357 24,303 PEG (x) - y-o-y growth 0.4 (1.3) 0.5 0.5 Shareholders’ equity 17,452 19,202 22,391 26,795 Price/Book (x) 3.9 3.6 3.1 2.6 Total equity & liabilities 28,475 30,712 33,395 37,299 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 Source: Company, PhillipCapital India Research Estimates
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Mahindra Logistics Limited
Riding on 3PL opportunities
INDIA | LOGISTICS | Initiating Coverage 20 July 2020
Mahindra Logistics (MLL) is one of India’s largest third-party logistics (3PL) solutions BUY providers with an asset-light model. It has two business segments – Supply Chain CMP Rs 316 / TARGET RS 370 (+16%) 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 SEBI CATEGORY: SMALL CAP large network of business partners. With its technological expertise, client relationships, COMPANY DATA and the Mahindra Group’s strategic support, MLL should be a major beneficiary of a pick- O/S SHARES (MN) : 72 up in India’s 3PL market. MARKET CAP (RSBN) : 23 MARKET CAP (USDBN) : 0.4 Asset-light, technology-backed business model: Its business model is quite differentiated, 52 - WK HI/LO (RS) : 470 / 199 with a focus on technology and supply-chain solutions rather than pure transportation. It LIQUIDITY 3M (USDMN) : 0.2 outsources transportation requirements from business partners (c.1,450 in SCM and c.350 in PAR VALUE (RS) : 10 EM) and its warehousing space is leased. Such an asset-light business model allows flexibility SHARE HOLDING PATTERN, % and scalability in its operations and high capital efficiency. Its focus is on logistics solutions, Mar 20 Dec 19 Sep 19 managing customers’ inbound, outbound, and in-factory logistics, and warehousing. MLL has PROMOTERS : 58.5 58.5 58.5 invested in developing a technology platform that reduces customers’ idle time and FII / NRI : 19.5 18.8 18.8 optimizes vehicle planning and warehousing requirements. It has developed expertise in FI / MF : 9.4 10.0 10.2 integrated end-to-end solutions for diverse customers through its 24 offices, 350 operating NON PRO : 4.5 4.7 4.6 PUBLIC & OTHERS : 8.1 8.1 8.0 locations, and 35 network hubs, and pan-India business partners.
3PL, an evolving space in logistics: 3PL has gained wide acceptance in developed countries PRICE VS. SENSEX and is evolving in India post GST. The Indian logistics industry’s CAGR is likely to be c.10% to 160 touch c.Rs 28.1tn over FY21-25, post covid-19. The Indian 3PL market should grow to Rs 140 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 120 pharma, e-commerce, consumer goods, organized retail, and engineering have high 3PL 100 growth potential of 15-25% while auto should recover from a low base. Indian logistics is 80 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 60 players, who are integrating with the global supply chains for imports and exports. 40 Nov-17 Nov-18 Nov-19 Enterprise mobility to hurt in the short term due to Covid-19: MLL provides technology- Mah Logistics BSE Sensex enabled people-transportation services under the brand “Alyte” to c.100+ domestic and MNC companies, operating mainly in IT, ITeS, business process outsourcing, financial Source: Phillip Capital India Research services, and consulting segments. This business is also asset light, and focuses on small KEY FINANCIALS vehicles provided by c.350 business partners across 12 cities. The Covid-19 pandemic and Rs mn FY20 FY21E FY22E social distancing norms, along with increased culture of work from home, is likely to impact Net Sales 34,711 26,856 35,328 the EM business in the short term. EBIDTA 1,582 897 1,853 Scalable model with attractive return ratios: MLL’s FY13-19 revenue CAGR was 17% (SCM Net Profit 551 46 737 +18%; EM +7.8%) to Rs 38.5bn in FY19 from Rs 15.3bn in FY13. The company is aggressively EPS, Rs 7.7 0.6 10.4 PER, x 40.8 492.0 30.5 expanding its non-Mahindra clients in SCM; this segment saw 40% revenue CAGR to Rs EV/EBIDTA, x 14.5 25.9 12.7 13.6bn over FY15-19, contributing 40% of total SCM revenue. Its EBITDA CAGR was 27% – P/BV, x 4.2 4.3 3.9 from Rs 365mn in FY13 to Rs 1.2bn in FY19. FY20 revenue was hurt by weakness in the auto ROE, % 10.3 0.9 12.7 sector (c.65% of SCM revenue) with transition to BS-6 norms and Covid-19. MLL saw a Debt/Equity (%) 27.6 28.8 26.4 decline in RoCE to 14.3% in FY20 from c.25% in FY19, pre Covid-19. We expect 24% earning Source: PhillipCapital India Research Est. CAGR to Rs 1.05bn over FY20-23 and RoCE to recover to c.19% in FY23. Vikram Suryavanshi, Research Analyst Valuations: On CMP, it trades at 30.5x our FY22 EPS of Rs 10.4 per share. We believe (+ 9122 6246 4111) scalability provided by its asset-light model (net cash of Rs 1.1bn in FY20), along with [email protected] 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.
Page | 68 | PHILLIPCAPITAL INDIA RESEARCH Please see penultimate page for additional important disclosures. PhillipCapital (India) Private Limited. (“PHILLIPCAP”) is a foreign broker-dealer unregistered in the USA. PHILLIPCAP research is prepared by research analysts who are not registered in the USA. PHILLIPCAP research is distributed in the USA pursuant to Rule 15a-6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities Inc, an SEC registered and FINRA-member broker-dealer.
MAHINDRA LOGISTICS LIMITED INITIATING COVERAGE
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. The assets necessary for operations, i.e., Outsources transportation requirements from business partners (c.1,450 in SCM vehicle, equipment, warehouses and and c.350 in EM). Business partners are small fleet owners with a long-term manpower are owned or arranged by commitment to MLL. This business model also allows it to manage any business partners 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 Its capital employed is Rs 5.4bn and working capital) and it sees capital expenditure at c.Rs 300-400mn per year, while its sales turnover is Rs 38.5bn – one of the cash-flow generation is much higher at c.Rs 1.2bn+ annually. Its major capex has highest ratios in the industry. Only been for handling equipment and developing a technology platform that will (1) around 25% of its capital employed is in lower its customers’ idle time, and (2) optimise vehicle planning and warehousing gross fixed assets while c.45% is in requirements. It has developed expertise in end-to-end multimodal solutions for working capital 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) Sales/ Capital Employed (x) Average 9 20 8 18 7 16 6 14 5 12 4 10 3 8 2 6 1
4 0 TCI
2 FSC MLL
0 Blue Dart Blue
FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21e FY22e FY23e Express TCI
Source: Company, PhillipCapital India Research Note FSC: Future Supply Chain
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MAHINDRA LOGISTICS LIMITED INITIATING COVERAGE
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 India 3PL market (Rs bn) % of logistics industry (%) (rhs) 800 4
700 3 600 3 Expect 3PL market CAGR of 17-18% post 500 2 Covid-19 from current Rs 580bn 400 2 300 1 200 100 1 0 0 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21e FY22e FY23e
Industry verticals in 3PL logistics
Automotive Components 7% 3% Cars & SUV 6% 27% 5% CV and tractors 2W an 3W Rs 580bn E-commerce 15% (FY20) FMCG
17% Pharma 14% Organised Retail 6% Others
Source: Company, PhillipCapital India Research
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MAHINDRA LOGISTICS LIMITED INITIATING COVERAGE
Key financials
Slowdown in auto, Covid-19 has dented the near-term outlook SCM segmental growth (%) FY20 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 20 a hit due to the current economic slowdown and implementation of BS-6 norms from 15 1 April 2020. MLL has seen a 17% decline in the auto segment’s revenue to Rs 20bn 10 for FY20, while non-auto revenue grew by 3.9%. 5 0 The company is focusing on value-added warehousing and integrated logistics, which -5 has resulted in a 16% growth in warehousing revenue to Rs 6bn in FY20. Its strategy -10 Auto
of focusing on sectors with high growth opportunities for 3PL – such as pharma, -15 Auto Non Warehousing consumer, and e-commerce – should help it to outperform industry growth in the -20 Transportation 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, MLL has rolled out a nationwide brand considering continued weakness in auto segment, while revenue from non- Mahindra for its mobility services “Alyte.” 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
45 Revenue (Rs bn) Impact of Covid-19 ; BS -VI transition in Auto 40 40 YoY growth -RHS 30 35 20 30
25 10
20 0 15 -10 10 -20 5
0 -30 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21e FY22e FY23e
Source: Company, PhillipCapital India Research estimates
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MAHINDRA LOGISTICS LIMITED INITIATING COVERAGE
Key revenue assumptions (Rs mn) FY18 FY19 FY20 FY21e FY22e FY23e CAGR FY20-23 Total Revenue 34161 38515 34711 26856 35328 42265 6.8% SCM 30752 34659 31034 24650 32459 38823 7.8% % share 90.0% 90.0% 89.4% 91.8% 91.9% 91.9% Mahindra group 18175 20999 17294 12971 17510 20137 5.2% Non Mahindra Group 12577 13660 13740 11679 14949 18686 10.8% Enterprise Mobility 3405 3855 3676 2206 2867 3441 -2.2% Source: Company, PhillipCapital India Research estimates
Revenue share from warehousing activities was 20% at Rs 6bn, out of total SCM revenue of Rs 31bn in FY20. Warehousing revenue CAGR over FY20-23 should be 14% to touch Rs 9bn, contributing c.23% of SCM revenue. EBITDA margins in warehousing are significantly higher than transportation, so higher growth in warehousing should support margin improvement.
Transportation revenue accounted for c.80% of SCM revenue in FY20 and should see 6% CAGR to Rs 29.7bn in FY20-23. We expect this revenue to fall by c.15% in FY20 mainly due to Covid and slowdown in auto segment and reduction in operations from bulk customers.
Margin improvement mainly due to AS116 and increasing warehousing revenue
2500 EBITDA (Rs mn) Margins (%)- RHS Adjusted margins 6.0
5.0 2000
4.0 IND AS impact of +163bps on margins 1500 IND AS 3.0 impact AS116 Adj. Chg % 1000 Net income 34711 34711 0 2.0 Operating cost 33129 33694 565 EBITDA 1582 1017 565 500 1.0 Margin 4.6% 2.9% 163 Depreciation 734 256 478 Interest 176 56 120 0 0.0 PBT 672 705 -33 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21e FY22e FY23e Source: Company; For FY20 Source: Company, PhillipCapital India Research estimates
Operating profit and margins improvement MLL’s gross EBIT margin was 10.3% in SCM and 9.2% in EM in FY20. Gross margin in SCM has improved by 100bps from 9.3% in FY19 mainly due to AS 116 while gross EBIT margin in enterprise mobility (EM) declined by 140bps. The margin decline in EM is mainly due to reduction in business from two big customers in FY20. Within EM, it has discontinued its loss-making scheduled bus business in FY19.
With growth and revenue mix tilted in favour of value-added businesses and warehousing, EBITDA margins should recover to 5.5% in FY23 from 3.9% in FY19. However, adjusting for AS116 and ESOP expense, adjusted operational margins will be 4.1% in line with adjusted margins of 4.1% in FY19. PBT in FY20 was negatively impacted by Rs 33mn due to AS 116 accounting change resulting in higher amortization of lease cost.
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MAHINDRA LOGISTICS LIMITED INITIATING COVERAGE
EBITDA margin drivers over FY19-23 6.0
5.0
4.0
3.0
2.0
1.0
0.0 EBITDA (FY19) AS116 Revenue mix, Pricing and cost EBITDA (FY23) efficiency impact
Source: Company, PhillipCapital India research estimates
EBITDA margin drivers over FY19-23
10000 Warehouse (Rs mn) Revenue share in SCM-RHS 25
8000 20
6000 15
4000 10
2000 5
0 0 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23
Source: Company, PhillipCapital India research estimates
Improvement in working capital The company had gross working capital, ex-cash, of Rs 8.8bn in FY20, representing c.25% of sales, i.e., 92 days of sales. Net working capital was Rs 1.8bn considering current liabilities of Rs 6.9bn. MLL has seen stretched working capital (a bit) to 69/62 days at present, from almost balanced trade receivable/payable days in FY17. This has resulted in higher net working capital at c.5% of sales. We estimate net working capital to increase at c.7% of sales over FY21 due to Covid -19.
Businesses to remain working-capital heavy Net working capital trend
Gross working capital (ex cash) Rs mn Net working captial (ex cash) Rs mn 3500 8.0 12000 % of sales -RHS 30 % of sales -RHS 3000 7.0 10000 25 6.0 2500 5.0 8000 20 2000 4.0 6000 15 1500 3.0
1000 2.0 4000 10 1.0 500 2000 5 0.0 0 -1.0 0 0 -500 -2.0
Source: Company, PhillipCapital India Research estimates
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MAHINDRA LOGISTICS LIMITED INITIATING COVERAGE
Control on working capital Receivable days Payable days 80 70 60 50 40 30 20 10 0 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21e FY22e FY23e Source: Company, PhillipCapital India Research estimates
Return ratios hit in short term; flexible model to help bounce back MLL had high average RoCEs (pre-tax) of 29% over FY13-19, which dipped to 14% in FY20. From here, we see a significant decline in FY21, due to the impact of Covid-19 and the economic slowdown hurting the working-capital cycle and utilization levels. The company had advance income tax assets of Rs 961mn in FY19, c.18% of capital employed, mainly a result of higher TDS (tax deduction at source) of c.2% on transportation revenue. It has received approval for a lower TDS rate of c.1.6% from FY20, resulting in lower advance tax assets. We expect total capital employed to increase to Rs 8.3bn in FY23 from Rs 5.4bn in FY19, mainly due to increase in working capital and lease liability of c.Rs 1.1bn because of IndAS 116.
Return ratios to be a hit by Covid-19, increase in lease liability because of AS-116 50% RoCE % RoE (%) 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21e FY22e FY23e
Source: Company, PhillipCapital India Research estimates
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MAHINDRA LOGISTICS LIMITED INITIATING COVERAGE
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
PE Average PE EV/EBITDA Avg EV/EBITDA 70
60
50
40
30
20
10
0
Jul-18 Jul-19
Jan-18 Jan-19 Jan-20
Sep-18 Sep-19
Nov-17 Nov-18 Nov-19
Mar-18 Mar-19 Mar-20
May-18 May-19 May-20
Source: Company, PhillipCapital India Research
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MAHINDRA LOGISTICS LIMITED INITIATING COVERAGE
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) EM 11% EM Freight (Enterprise forward Mobility) 6% 11%
Warehousing 17%
Transportatio Supply Chain n 89% 66%
Source: Company, PhillipCapital India Research
Supply-chain management business Customized and end-to-end logistics solutions and services including 16.5mn sq. ft. warehousing space transportation and distribution, warehousing, in-factory logistics and value- 50 stock yard added services. 350 operating locations 16.5mn sq. ft. of warehousing space spread across multi-user warehouses, built- 500+ customers to-suit warehouses, stockyards, network hubs and cross-docks. 15,000 workforce It serves over 200 domestic and multinational companies operating in several 1,450 business partners 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.
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MAHINDRA LOGISTICS LIMITED INITIATING COVERAGE
SCM revenue break up (Rs 31bn; FY20)
Non Auto Non 35% Mahindra 44%
Mahindra 56% Auto 65%
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
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MAHINDRA LOGISTICS LIMITED INITIATING COVERAGE
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.
Long -haul, Consolidation inbound, and Reverse ODC cargo Transport desk Last mile Route planning outbound,milk distribution logistics movement model distribution run through docks
Warehousing services It manages multi-product, multi-user warehouses in Tauru Road, Gurgaon, and Warehousing accounts for 20% of SCM Chakan, Pune. revenue 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
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MAHINDRA LOGISTICS LIMITED INITIATING COVERAGE
Lords Freight (India) Pvt Limited MLL acquired a majority stake in Lords Freight (82.9%) in FY19. It was founded in 2011 in Mumbai. Lords is an international logistics solution provider that specialises in air and ocean freight forwarding for exports and imports. In ocean forwarding (c.30% of total revenue) it is mainly into less-than-container- load (LCL) consolidation business (asset-light) and books slots with shipping lines for container transportation. In air-freight forwarding, it charters aircrafts. It has increased its focus on express and freight forwarding and provides services across 12,000 pin codes in India. It focuses on East Asia, Europe and North America for freight forwarding through air and sea.
2x2 Logistics MLL partnered 2X2 Logistics Pvt. Ltd., which specialises in automotive outbound logistics solutions for four-wheeler and two-wheeler industries. It operates in the Indian vehicle-carrier logistics segment. MLL requires specialized vehicles to carry finished automobiles from manufacturing locations to stockyards, or directly to distributors. Owns 127 specialized carriers with an average age of less than three years.
Transtech Logistics (Shipx) Acquired a strategic stake of 39.8% in Shipx in FY19. Shipx is a ‘software as a service’ or SaaS platform that serves the supply-chain automation needs of 3PL players, shippers, and transporters. It will increase bring in operational efficiencies by offering technological solutions to its customers as well as business partners.
Business risk MLL takes the services from its business partners and passes on its cost to the customers. There could be short term impact on financial performance due to mismatch of timing of contract renewal or negotiation with business partners and customers. Revenue is still focused on the auto segment with c.65% share in SCM; medium- term growth will largely depend on this segment. Outsourcing model means there is limited control on quality of service. Spot hiring to manage seasonal demand could result in higher costs. In certain circumstances, hiring vehicles on an ad-hoc basis would be necessary, and such third-party vehicles could significantly increase operational cost, which could adversely affect margins. In addition, availability of third-party vehicles may be uncertain during periods of high demand. MLL does not have control over the servicing and maintenance of these vehicles. MLL operates in a highly competitive industry, dominated by a large number of unorganized players. The transportation segment is commoditized, and has low barriers to entry or exit, leading to a market with a very high degree of fragmentation. Technological disruptions with many digital platforms for transportation can dilute MLL’s value proposition. MLL is focusing on aggressive growth in freight forwarding, which could lead to higher growth in revenue. However, the business is asset light with lower margins of 1.2-2.0%, which could impact our estimates.
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MAHINDRA LOGISTICS LIMITED INITIATING COVERAGE
Financials
Income Statement Cash Flow Y/E Mar, Rs mn FY20 FY21e FY22e FY23e Y/E Mar, Rs mn FY20 FY21e FY22e FY23e Net sales 34,711 26,856 35,328 42,265 Pre-tax profit 806 75 1,003 1,425 Growth, % -10 -23 32 20 Depreciation 734 781 815 887 Total income 34,711 26,856 35,328 42,265 Chg in working capital -1,007 -26 -615 -480 Raw material expenses -29,342 -22,694 -29,781 -35,629 Total tax paid -250 -18 -241 -342 Employee expenses -3,067 -3,527 -4,056 -4,664 Cash flow from operating activities 282 812 962 1,490 Other Operating expenses -720 261 363 370 Capital expenditure -1,252 -813 -983 -1,103 EBITDA (Core) 1,582 897 1,853 2,342 Chg in investments 362 -15 -16 -16 Growth, % 4.6 (43.3) 106.6 26.3 Cash flow from investing activities -897 -829 -998 -1,119 Margin, % 4.6 3.3 5.2 5.5 Free cash flow -614 -16 -36 370 Depreciation -734 -781 -815 -887 Equity raised/(repaid) 0 0 0 0 EBIT 848 116 1,038 1,454 Debt raised/(repaid) 1,105 26 26 -1,088 Growth, % (34.4) (86.3) 796.0 40.1 Cash flow from financing activities 935 -156 -155 -1,269 Margin, % 2.4 0.4 2.9 3.4 Net chg in cash 321 -172 -192 -899 Interest paid -176 -169 -170 -170 Other Non-Operating Income 140 128 134 141 Pre-tax profit 806 75 1,003 1,425 Valuation Ratios Tax provided -257 -19 -256 -363 FY20 FY21e FY22e FY23e Profit after tax 548 56 747 1,061 Per Share data Others (Minorities, Associates) 3 -10 -10 -10 EPS (INR) 7.7 0.6 10.4 14.8 Net Profit 551 46 737 1,051 Growth, % (35.7) (91.7) 1,512.9 42.7 Growth, % (35.7) (91.7) 1,512.9 42.7 Book NAV/share (INR) 75.4 73.6 81.5 93.9 Net Profit (adjusted) 551 46 737 1,051 FDEPS (INR) 7.7 0.6 10.4 14.8 Unadj. shares (m) 71 71 71 71 CEPS (INR) 18.1 11.6 21.8 27.3 Wtd avg shares (m) 71 71 71 71 CFPS (INR) 18.2 9.6 11.6 19.0 Return ratios Return on assets (%) 5.6 1.7 7.0 8.2 Balance Sheet Return on equity (%) 10.3 0.9 12.7 15.7 Y/E Mar, Rs mn FY20 FY21e FY22e FY23e Return on capital employed (%) 11.3 3.2 12.4 16.2 Cash & bank 1,061 854 662 878 Turnover ratios Debtors 6,592 4,709 6,097 7,295 Asset turnover (x) 8.9 6.5 7.7 7.9 Inventory 0 0 0 0 Sales/Total assets (x) 2.7 2.1 2.7 2.8 Loans & advances 150 173 198 228 Sales/Net FA (x) 34.1 20.8 25.4 26.7 Other current assets 2,070 2,381 2,738 3,148 Working capital/Sales (x) 0.1 0.1 0.1 0.1 Total current assets 9,874 8,116 9,696 11,549 Fixed capital/Sales (x) 0.0 0.0 0.0 0.0 Investments 859 875 891 907 Receivable days 69.3 64.0 63.0 63.0 Gross fixed assets 2,137 2,540 3,033 3,643 Inventory days - - - - Less: Depreciation -943 -1,241 -1,569 -1,963 Payable days 65.4 60.0 58.0 58.2 Add: Capital WIP 82 10 12 12 Working capital days 21.6 28.4 28.0 27.7 Net fixed assets 1,276 1,308 1,476 1,692 Liquidity ratios Total assets 13,935 12,240 14,019 16,120 Current ratio (x) 1.5 1.6 1.5 1.5 Quick ratio (x) 1.5 1.6 1.5 1.5 Current liabilities 6,757 5,172 6,319 7,464 Interest cover (x) 4.8 0.7 6.1 8.5 Provisions 237 260 286 315 Total debt/Equity (%) 27.6 28.8 26.4 6.7 Total current liabilities 6,993 5,433 6,605 7,779 Net debt/Equity (%) 7.8 12.5 15.0 (6.5) Non-current liabilities 1,489 1,515 1,556 1490 Valuation Total liabilities 8,482 6,948 8,162 8,269 PER (x) 40.8 492.0 30.5 21.4 Paid-up capital 715 715 715 715 PEG (x) - y-o-y growth (1.1) (5.4) 0.0 0.5 Reserves & surplus 4,647 4,521 5,086 5,966 Price/Book (x) 4.2 4.3 3.9 3.4 Shareholders’ equity 5,418 5,292 5,857 6,737 EV/Net sales (x) 0.7 0.9 0.7 0.5 Total equity & liabilities 13,899 12,240 14,019 16,120 EV/EBITDA (x) 14.5 25.9 12.7 9.5 EV/EBIT (x) 27.1 200.6 22.6 15.2 Source: Company, PhillipCapital India Research Estimates
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INSTITUTIONAL EQUITY RESEARCH
Transport Corporation of India (TRPC IN)
Integrated for growth
INDIA | LOGISTICS | Initiating Coverage 20 July 2020
Transport Corporation of India (TCI), a dominant multimodal logistics player with a pan- BUY India network, would be one of the biggest beneficiaries of GST implementation. This is CMP Rs 167 / TARGET RS 235 (+40%) based on its integrated business for distribution, warehousing, and inventory management and capability in providing road, rail and coastal transportation. SEBI CATEGORY: SMALL CAP Specific focused business segments and multi-modal national network: TCI has three COMPANY DATA strategic business units: (1) TCI Freight: For heavy cargo services through road, rail, and sea; O/S SHARES (MN) : 77 MARKET CAP (RSBN) : 13 this contributed to 52% of consolidated revenue in FY20; (2) TCI Supply Chain (SCM): This MARKET CAP (USDBN) : 0.2 offers single-window solutions to manage logistics operations of big industries (34% of 52 - WK HI/LO (RS) : 312 / 121 revenue). (3) TCI Seaways: Coastal shipping, NVOCC (Non-Vessel Operating Common LIQUIDITY 3M (USDMN) : 0.2 Carrier), and project cargo (13% of revenue). It also has a JV with CONCOR to provide end- PAR VALUE (RS) : 10 to-end multi-modal solutions and a JV with Mitsui for auto distribution logistics. While the SHARE HOLDING PATTERN, % business verticals operate as individual entities, they create synergy together, and allow TCI Jun 20 Mar 20 Dec 19 to offer a broad range of end-to-end customized services to a wide range of domestic and PROMOTERS : 66.9 66.9 66.8 international clients. FII / NRI : 2.4 2.5 2.4 FI / MF : 9.5 9.4 9.4 Supply-chain business to benefit from outsourcing, warehousing, GST-driven NON PRO : 9.0 9.7 9.7 consolidation: TCI is a Lead Logistics Provider – LLP, often called 4th-party logistics PUBLIC & OTHERS : 12.2 11.6 11.8 providers, can manage every aspect of supply chain, including managing other 3PLs, offering customized logistics solutions, warehousing, and information management solution. TCI PRICE VS. SENSEX manages c.12mn sq. ft. of warehousing space and aims to be significant player in apparel, 250 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 200 benefiting because of its rail and coastal services on which it has developed efficient and 150 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 100 profitability have taken a short-term hit due to weakness in the auto segment, Covid-19, and 50 the economic slowdown. Growth in shipping to improve margins and lower effective tax rate: TCI will benefit from 0 Apr-16 Apr-17 Apr-18 Apr-19 Apr-20 the government’s initiative to increase the share of water transport in India. TCI’s Seaways TCI BSE Sensex 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 Source: Phillip Capital India Research from shipping operations have benefits of tonnage tax, which help lower TCI’s effective tax KEY FINANCIALS outgo. EBITDA margins are at 25-30%, much higher than 10-12% in SCM and just 3-4% in Rs mn FY20E FY21E FY22E freight. Growth in shipping will support margins and lower effective tax for the company. Net Sales 27178 20968 27647 Expanding the network strength, digitization in challenging times: TCI has increased its EBIDTA 2405 1434 2274 capital expenditure in order to capitalize on opportunities in warehousing, supply chain, and Net Profit 1531 505 1201 EPS, Rs 19.9 6.6 15.6 shipping. The freight division is asset-light; capex is mainly done in supply chain, shipping PER, x 8.4 25.4 10.7 (fleet addition), warehousing, network expansion, and IT. It had a capital expenditure of Rs EV/EBIDTA, x 7.0 11.7 7.5 5.2bn over FY17-20 and expects capex of c.Rs 4.3bn over FY21-23. With cash profit of c.Rs P/BV, x 1.3 1.2 1.1 5.8bn over FY21-23, the D/E will remain comfortable at 0.4x, while debt-to-EBITDA would be ROE, % 15.0 4.8 10.3 below 2x. Debt/Equity (%) 41.0 41.1 39.7 Valuation and outlook: TCI trades at 10.7x FY22 earnings of Rs 15.6 per share. It has a strong Source: PhillipCapital India Research Est. history of maintaining growth in different economic cycles. It is best placed to provide a Vikram Suryavanshi, Research Analyst cost-effective solution to the customized needs of its clients due to its national network (+ 9122 6246 4111) (historical asset base at strategic locations) and multimodal capabilities. The level playing [email protected] 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.
Page | 81 | PHILLIPCAPITAL INDIA RESEARCH Please see penultimate page for additional important disclosures. PhillipCapital (India) Private Limited. (“PHILLIPCAP”) is a foreign broker-dealer unregistered in the USA. PHILLIPCAP research is prepared by research analysts who are not registered in the USA. PHILLIPCAP research is distributed in the USA pursuant to Rule 15a-6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities Inc, an SEC registered and FINRA-member broker-dealer.
TRANSPORT CORPORATION OF INDIA 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
TCI Services
Busienss units
Joint Ventures /Subsidiaries Shipping: Supply Chain TCI Freight : Coastal Solutions: FTL, FCL,LTL, shipping, Single window ODC NVOCC and 3PL Services Project cargo
TCI Cold Chain: TCI TCI Nepal: TCI CONCOR: Transystem: 100% Bangladesh: 100% 51% holding in 49% JV with subsidiary for 100% Subsidiary JV providing Mitsui for Auto Cold chain Subsidiary with end to rail transprort Supply Warehousing with end to end and end to end Chainsolution and end transport transportation movement Distribution and C&F and C&F.
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
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TRANSPORT CORPORATION OF INDIA INITIATING COVERAGE
Multimodal player at the national level; focusing on domestic cargo movement
Source: Company Hubs for freight business with TCI freight division to be a beneficiary of regulatory changes capabilities in both full truck load (FTL) and less than truck load (LTL) 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.
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TRANSPORT CORPORATION OF INDIA INITIATING COVERAGE
Freight division revenue growth Freight division margin support from LTL Revenue (Rs mn) YoY growth -RHS 18000 40.0 EBITDA (rs mn) EBITDA (%) - RHS 700 5 16000 30.0 14000 600 20.0 4 12000 500 10.0 10000 400 3 8000 0.0 300 2 6000 -10.0 200 4000 1 100 2000 -20.0 0 -30.0 0 0 FY15 FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E FY15 FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E
Source: Company, PhillipCapital India Research Estimates
Supply chain business to benefit from outsourcing, warehousing TCI has developed supply chain and warehousing capabilities well ahead of A lead logistics provider (LLP) is called a implementation of GST, which should help the company to gain market share. The 4th-party logistics provider (4PL) and company is a Lead Logistics Provider (LLP) offering customized logistics solutions, directs every aspect of the supply chain, warehousing, planning and information management solution to varied and critical including managing other 3PLs, overseeing transportation management, and sectors of the economy like auto, telecom, health care, retail & consumer products, warehouse operations 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 SCS division is a moderately asset-heavy cold-chain warehousing and distribution of perishable items has increased the scope model 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 TCI business model Customers perspective Sectors advantage •Optimum controls on • Internal management • Automobile and spare operations and hence and control. parts better KPI (Key • Moderate ownership of • Pharma Performance Indicators) assets enables it to • Chemical management. control the outside • FMCG • High ability to offer market • Health care customized solutions. •Able to control pricing • Cold chain • Long-term retention and cost possible, as it creates customer confidence.
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TRANSPORT CORPORATION OF INDIA INITIATING COVERAGE
Supply chain revenue growth SCM short-term impact on margins due to auto slowdown
Revenue (Rs mn) YoY growth -RHS EBITDA (Rs mn) EBITDA (%) - RHS 16000 40.0 1400 14
30.0 1200 12 12000 20.0 1000 10
10.0 800 8 8000 0.0 600 6
-10.0 400 4 4000 -20.0 200 2
0 -30.0 0 0 FY15 FY16 FY17 FY18 FY19 FY20 FY21EFY22EFY23E FY15 FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E
Source: Company, PhillipCapital India Research Estimates
Growth in shipping to improve margins and lower effective tax rate TCI will benefit from the government’s initiative to increase share of water transport in India to reduce the cost of transportation. It has started a shipping division since February 1995 and provides ship management, charter, and stevedoring services.
TCI Seaways division has seven ships with a total capacity of 91,880 DWT, out of which three are deployed in the Chennai-Andaman-Chennai and Vizag-Andaman- Vizag coastal sectors. The cargo on the east coast to Port Blair largely consists of cattle, perishables, and reefer and general cargo to the island; it ferries back betel nuts, coconut powder and household goods to the mainland from Andaman. Its other four ships are deployed on the west coast, providing services for container cargo from Kandla and Mundra to south Kochi and Tuticorin. The management plans to add one vessel every 15-18 months. The profits from shipping operations have benefits of tonnage tax (it is a fixed tax, based on capacity of fleet and not on the reported The profits from shipping operations profit) resulting in lower effective tax for the company. EBITDA margins in shipping have benefits of tonnage tax (it is a are 25-30% compared with margins of 10-12% in SCM and 3-4% in freight. The fixed tax based on capacity of fleet and growth in shipping will also support margin improvement and lower effective tax for not on the reported profit) and effective the company. The utilization level in shipping has come down to c.50% in June 2020 tax rate on shipping profits is c.4-5%, resulting in lower effective tax for the due to Covid-19 and lockdown has impact the movement of Tiles and Marbles which company is major commodity moved thorough coastal shipping.
Shipping revenue supported by fleet addition Shipping EBITDA margin trend
Revenue (Rs mn) YoY growth -RHS EBITDA (Rs mn) EBITDA (%) - RHS 5000 70 1200 35 60 30 4000 50 1000 40 25 800 3000 30 20 20 600 2000 10 15 400 0 10 1000 -10 200 5 -20 0 -30 0 0 FY15 FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E FY15 FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E
Source: Company, PhillipCapital India Research Estimates
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TRANSPORT CORPORATION OF INDIA INITIATING COVERAGE
Key financials TCI’s revenue CAGR looks low at 2.4% to Rs 27.2bn over FY15-20 due to the de- merger of its express business in FY16 into TCI Express, a separate listed entity. Excluding this express business, revenue CAGR was 9.1% over FY15-20. Revenue from the freight segment grew 10% to Rs 14.4bn over FY15-20. Capacity addition in shipping resulted in revenue CAGR of 24.7% to Rs 3.6bn while revenue CAGR from SCM was 4% to Rs 9.5bn. We believe the company has a strong infrastructure base and systems in place for high growth in the medium to long term. However, economic weakness (particularly the auto sector) and Covid depressed the performance in FY20. It lost c.Rs 1bn revenue due to the lockdown in March 2020. FY21 financials will also be negatively affected. TCI has maintained health liquidity to face the current challenging environment. Its working capital utilization has come down to 45% in June 2020 from 73% in FY20 (out of its total limit of Rs 2.8bn). It has taken board approval to raise Rs 2bn to improve liquidity in case the Covid-19 situation worsens. We expect lower revenue CAGR of 4.2% to Rs 30.7bn over FY20-23.
Key revenue assumptions Year FY15 FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E CAGR FY15-20 CAGR FY20-23 Revenue 24167 25214 19427 23461 27537 27178 20968 27647 30740 2.4% 4.2% Revenue (Ex XPS) 17565 18545 19427 23461 27537 27178 20968 27647 30740 9.1% 4.2% EBITDA 1932 1968 1607 2127 2495 2405 1434 2274 2658 4.5% 3.4% EBITDA (Ex XPS) 1412 1422 1607 2127 2495 2405 1434 2274 2658 11.2% 3.4% Freight 8908 9685 10590 11992 13988 14351 11044 14552 15622 10.0% 2.9% SCM 7813 7802 7374 9126 10241 9490 7082 9553 11441 4.0% 6.4% Shipping 1220 1411 1639 2564 3593 3677 2897 3670 3817 24.7% 1.2% Source: Company, PhillipCapital India Research Estimates
Operating profits and margin The company has been able to improve margins in its freight business with a focus on the high-margin LTL business. Margins in SCM were dented due to slowdown in the auto segment. Improvement in margins is supported by growth in the high-margin shipping business.
EBITDA and margin trend PAT CAGR of 13.4% to Rs 1.5bn over FY15-20
Profit (Rs mn) YoY growth (%) - RHS EBITDA (Rs mn) EBITDA margins (%) - RHS 3000 10 1800 150 9 1600 2500 8 1400 100 7 2000 1200 6 50 1000 1500 5 800 4 0 1000 600 3 400 2 -50 500 1 200 0 0 0 -100 FY15 FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E FY15 FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E
Source: Company, PhillipCapital India Research Estimates
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TRANSPORT CORPORATION OF INDIA INITIATING COVERAGE
Capacity expansion in SCM and coastal shipping TCI has increased capital expenditure to capitalize on the opportunities in warehousing, supply chain and shipping. Its freight division is asset light, while capex is mainly in supply chain and shipping for the addition of network hubs, warehouse and handling equipment. We have assumed capex of Rs 4.3bn over FY20-23 compared to total capital expenditure of Rs 5.2bn over FY17-20. With cash profit of c.Rs 5.8bn over FY21-23, the D/E is likely to remain comfortable at 0.4x, while debt-to-EBITDA would be below 2x. .
Strong cash flows to support capex Capex break up at FY17-20 Handling Hubs 2500 Capex (Rs mn) Cash profit equipments /Warehousin 5% g 21% 2000
Trucks 1500 25%
1000
500 Ships 30% 0 Contianers FY15 FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E 19%
Source: Company, PhillipCapital India Research Estimates
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TRANSPORT CORPORATION OF INDIA INITIATING COVERAGE
Working capital to remain range bound TCI has a gross working capital (ex-cash) of Rs 6.3bn in FY20, which is c.23% of sales and net working capital of Rs 4.3bn, i.e., c.16% of sales. Freight business is working-capital-heavy compared to supply chain and shipping. The company has controlled working capital in challenging time. Total receivable days are c.65 in FY20, which should increase to c.76 days mainly due to decline in revenue due to Covid-19. We expect gross and net working capital to remain at c.25% and c.18% of sales respectively.
Working capital trend
Gross WC (Ex Cash) NWC (Ex -Cash) NWC as % of sales - RHS 9000 21 8000 20 7000 19 6000 18 5000 17 4000 16 3000 15 2000 14 1000 13 0 12 FY15 FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E
Source: Company, PhillipCapital India Research Estimates
Return ratios TCI’s RoCE improved from 10.5% in FY17 to touch 14.1% in FY19 due to improvement in margins while it impacted in FY20 due to Covid-19 to 12.5%. Its gross asset turnover remained at c.3x (sales / gross fixed asset). With capex in warehousing and fleet addition, RoCE will fall in the short term to c.12% in FY22.
Return ratios to decline due to lower asset tun
RoCE (Pre tax) ROE 18 16 14 12 10 8 6 4 2 0 FY15 FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E
Source: Company, PhillipCapital India Research Estimates
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TRANSPORT CORPORATION OF INDIA INITIATING COVERAGE
Segmental return ratios are comparable Asset turn (x) EBIT margins (%) RoCE % 4.0 25.0 18.0 3.5 16.0 3.0 20.0 14.0 2.5 12.0 15.0 2.0 10.0 1.5 8.0 10.0 1.0 6.0
0.5 5.0 4.0 2.0 0.0 Freight SCM Seaways 0.0 0.0 Company Company Freight SCM Seaways Company Freight SCM Seaways
Source: Company, PhillipCapital India Research Estimates
Valuation
TCI is trading at 10.7x FY22 earnings of Rs 15.6 per share. It has a strong history of maintaining growth in different economic cycles due to diverse business segments and customers. It is best placed to provide cost-effective solutions to customized needs of its clients due to a national network (historical asset base at strategic locations) and multimodal capabilities. The level playing field for organized players after GST and E-way bill will help the company to increase its market share in logistics. We value the company at 15x FY22 with a target of Rs 235.
One-year forward PE chart P/BV trend Price (Rs.) Price (Rs.) 600 500 450 3X 500 400 2.5X 350 400 25X 300 2X 300 20X 250 1.5X 15X 200 200 150 10X 100 100 50
- -
Jul-11 Jul-14 Jul-17 Jul-20 Jul-11 Jul-14 Jul-17 Jul-20
Jan-10 Jan-13 Jan-16 Jan-19 Jan-10 Jan-13 Jan-16 Jan-19
Oct-10 Oct-19 Oct-13 Oct-16 Oct-10 Oct-13 Oct-16 Oct-19
Apr-15 Apr-12 Apr-15 Apr-18 Apr-09 Apr-12 Apr-18 Apr-09 Source: Company, PhillipCapital India Research Estimates
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Financials
Income Statement Cash Flow Y/E Mar, Rs mn FY20 FY21E FY22E FY23E Y/E Mar, Rs mn FY20 FY21E FY22E FY23E Net sales 27,178 20,968 27,647 30,740 Pre-tax profit 1,340 468 1,235 1,585 Growth, % -1 -23 32 11 Depreciation 825 812 873 905 Other income 0 0 0 0 Chg in working capital -315 5 -694 -555 Total income 27,178 20,968 27,647 30,740 Total tax paid -417 -89 -210 -269 Freight expense -22,143 -17,089 -22,533 -25,053 Cash flow from operating activities 1,432 1,197 1,204 1,666 Employee expenses -1,572 -1,174 -1,548 -1,721 Capital expenditure -1,216 -1,065 -1,320 -1,800 Other Operating expenses -1,058 -1,271 -1,293 -1,307 Chg in investments 112 -179 -197 -65 EBITDA (Core) 2,405 1,434 2,274 2,658 Cash flow from investing activities -1,104 -1,244 -1,517 -1,865 Growth, % (3.6) (40.4) 58.6 16.9 Free cash flow 329 -48 -313 -200 Margin, % 8.9 6.8 8.2 8.6 Equity raised/(repaid) 496 470 470 470 Depreciation -825 -812 -873 -905 Debt raised/(repaid) -405 155 277 149 EBIT 1,580 622 1,401 1,753 Dividend (incl. tax) -101 -128 -127 -126 Growth, % (8.2) (60.7) 125.3 25.1 Cash flow from financing activities 246 622 796 696 Margin, % 5.8 3.0 5.1 5.7 Net chg in cash 575 575 484 496 Interest paid -343 -348 -371 -383 Other Non-Operating Income 201 195 204 215 Non-recurring Items -99 0 0 0 Valuation Ratios Pre-tax profit 1,340 468 1,235 1,585 Y/E Mar, Rs mn FY20 FY21E FY22E FY23E Tax provided -159 -89 -210 -269 Per Share data Profit after tax 1,181 379 1,025 1,316 EPS (INR) 19.9 6.6 15.6 19.8 Others (Minorities, Associates) 252 126 176 202 Growth, % 4.7 (67.0) 137.9 26.4 Net Profit 1,432 505 1,201 1,518 Book NAV/share (INR) 133.3 138.1 151.9 169.9 Growth, % 4.9 (67.0) 137.9 26.4 FDEPS (INR) 19.9 6.6 15.6 19.8 Net Profit (adjusted) 1,531 505 1,201 1,518 CEPS (INR) 32.0 17.1 27.0 31.6 Unadj. shares (m) 77 77 77 77 CFPS (INR) 19.1 13.0 13.0 18.9 DPS (INR) 1.5 1.5 1.5 1.5 Return ratios Balance Sheet Return on assets (%) 9.5 4.4 8.1 8.9 Y/E Mar, Rs mn FY20 FY21E FY22E FY23E Return on equity (%) 15.0 4.8 10.3 11.6 Cash & bank 259 364 378 403 Return on capital employed (%) 10.9 5.0 9.0 10.0 Debtors 4,873 4,366 5,302 5,895 Turnover ratios Inventory 66 72 80 88 Asset turnover (x) 2.3 1.7 2.1 2.2 Loans & advances 268 300 336 376 Sales/Total assets (x) 1.7 1.3 1.6 1.6 Other current assets 1,121 1,143 1,257 1,383 Sales/Net FA (x) 3.6 2.7 3.4 3.5 Total current assets 6,586 6,245 7,353 8,145 Working capital/Sales (x) 0.2 0.2 0.2 0.2 Investments 1,799 1,978 2,175 2,240 Receivable days 65.4 76.0 70.0 70.0 Gross fixed assets 10,527 11,624 12,944 14,744 Inventory days 0.9 1.3 1.1 1.0 Less: Depreciation -3,043 -3,855 -4,728 -5,633 Payable days 9.4 9.7 9.8 9.9 Add: Capital WIP 216 183 183 183 Working capital days 57.6 74.4 65.5 65.3 Net fixed assets 7,699 7,952 8,399 9,294 Liquidity ratios Non-current assets 234 234 234 234 Current ratio (x) 3.2 3.9 3.6 3.6 Total assets 16,319 16,410 18,161 19,914 Quick ratio (x) 3.2 3.8 3.6 3.6 Interest cover (x) 4.6 1.8 3.8 4.6 Current liabilities 1,934 1,494 1,894 2,105 Total debt/Equity (%) 41.0 41.1 39.7 36.6 Provisions 102 112 124 136 Net debt/Equity (%) 38.5 37.6 36.5 33.6 Total current liabilities 2,036 1,606 2,017 2,241 Valuation Non-current liabilities 3,988 4,142 4,420 4,569 PER (x) 8.4 25.4 10.7 8.4 Total liabilities 6,024 5,748 6,437 6,810 PEG (x) - y-o-y growth 1.8 (0.4) 0.1 0.3 Paid-up capital 154 154 154 154 Price/Book (x) 1.3 1.2 1.1 1.0 Reserves & surplus 10,085 10,451 11,514 12,894 EV/Net sales (x) 0.6 0.8 0.6 0.6 Shareholders’ equity 10,295 10,662 11,724 13,104 EV/EBITDA (x) 7.0 11.7 7.5 6.5 Total equity & liabilities 16,319 16,410 18,161 19,914 EV/EBIT (x) 10.6 27.0 12.2 9.8
Source: Company, PhillipCapital India Research Estimates
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INSTITUTIONAL EQUITY RESEARCH
Allcargo Logistics (AGLL IN)
On express mode
INDIA | LOGISTICS | Company Update 20 July 2020
AGLL is one of the largest players (consolidators) in less than container load (LCL or Neutral (Maintain) multiple-cargo loads) in the world with services spread across 90 countries and shipments CMP RS 93 across 4,000+ port pairs. AGLL is expanding its business network into contract logistics, TARGET RS 95 (+2%) warehousing and express distribution – to strength domestic operations and benefit from the network effect. COMPANY DATA O/S SHARES (MN) : 246 Multimodal Transport Operations (MTO) and CFS to take a hit due to COVID-19 MARKET CAP (RSBN) : 23 MTO business accounts for c.88% of its FY20 consolidated revenue and c.54% of EBITDA. It MARKET CAP (USDBN) : 0.8 is asset light with high returns on capital; segment RoCE was c.26% in 9MFY20. Its volume 52 - WK HI/LO (RS) : 123 / 52 significantly outperformed market growth with its focus on market share gain and FCL (full LIQUIDITY 3M (USDMN) : 0.3 PAR VALUE (RS) : 1 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. SHARE HOLDING PATTERN, % CFS business contributes to c.7% of AGLL’s revenue and c.30% of EBITDA. It has a presence Mar 20 Dec 19 Sep 19 across key container ports in India (i.e., JNPT, Chennai, and Mundra) that collectively handle PROMOTERS : 70.0 70.0 70.0 75%+ of India’s container cargo. Even the CFS business has outperformed the market with FII / NRI : 13.2 12.2 12.1 5.8% CAGR over FY16-19 and stable volume in 9MFY20, despite negative impact of DPD FI / MF : 3.7 3.9 3.9 NON PRO : 4.4 4.7 4.8 (Direct port Delivery) and the economic slowdown. Both MTO and CFS businesses are PUBLIC & OTHERS : 8.7 9.2 9.2 dependent on containerized trade growth globally, which will see pressure with COVID-19 and the global trade slowdown. PRICE VS. SENSEX 180 Acquisition of Gati to complement domestic supply chain business 150 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 120 express logistics with an already established pan-India network and strong brand name. The 90 acquisition will help AGLL to provide a unique offering – complete supply chain and last mile 60 – 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 30 business 5x due to better operating margins. It has invested Rs 1bn as capital into Gati, and 0 appointed two directors on its board. It expects significant improvement in Gati’s operating Apr-16 Apr-18 Apr-20 Allcargo BSE Sensex 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. Source: Phillip Capital India Research
Deleveraging of balance sheet through stale sale and sale of low RoCE assets KEY FINANCIALS AGLL has expanded scale and service offerings to customers aided by an expansion in Rs mn FY20 FY21E FY22E contract logistics, warehousing and last-mile delivery capabilities. It is developing its land- Net Sales 73,462 62,051 71,757 bank into warehousing and logistics parks and targeting 6mn sq. ft. development by FY21 EBIDTA 5,035 3,556 4,941 Net Profit 1,683 967 1,952 with a total capital expenditure of c.Rs 110bn (Rs c.Rs 8.7bn spent so far). The business EPS, Rs 6.8 3.9 7.9 expansion has resulted in higher gross debt – Rs 4.4bn in FY18, c.Rs 10.1bn in 9MFY20. PER, x 13.6 23.7 11.8 Meanwhile, there profitability of the existing business is under pressure and some expansion EV/EBIDTA, x 6.5 7.7 5.9 would have back-ended cash flows. To deleverage its balance sheet and unlock value, AGLL P/BV, x 1.1 1.1 1.0 entered into a definitive agreement with Blackstone to sell 90% stake in a warehousing SPV ROE, % 7.8 4.4 8.5 for Rs 3.8bn, through which it will reduce its consolidated debt by c.Rs 4bn and improve the Debt/Equity (%) 61.4 34.6 37.7 group’s liquidity position. AGLL will continue to have the AMC of this warehousing business, Source: PhillipCapital India Research Est. 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 Vikram Suryavanshi, Research Analyst (022 6246 4111) which the company plan to sell for which it expects to garner c. Rs 1bn. [email protected]
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.
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ALLCARGO LOGISTICS COMPANY UPDATE
Financials
Consolidated Income Statement Cash Flow Y/E Mar, Rs mn FY20 FY21e FY22e FY23e Y/E Mar, Rs mn FY20 FY21e FY22e FY23e Net sales 73,462 62,051 71,757 79,152 Pre-tax profit 2,507 1,359 2,672 3,356 Growth, % 6.5 -15.5 15.6 10.3 Depreciation 2,316 2,084 2,170 2,336 Total income 73,462 62,051 71,757 79,152 Chg in working capital -2,749 -343 -2,620 -2,033 Employee expenses -11,122 -10,010 -11,011 -11,892 Total tax paid -652 -324 -646 -798 Other Operating expenses -57,306 -48,485 -55,806 -61,548 Cash flow from operating activities 1,423 2,776 1,576 2,860 EBITDA (Core) 5,035 3,556 4,941 5,712 Capital expenditure -5,044 1,706 -2,595 -2,296 Growth, % 12.2 (29.4) 38.9 15.6 Chg in investments -2,658 1,500 228 -43 Margin, % 6.9 5.7 6.9 7.2 Cash flow from investing activities -7,642 3,268 -2,280 -2,175 Depreciation -2,316 -2,084 -2,170 -2,336 Free cash flow -6,219 6,044 -704 686 EBIT 2,719 1,472 2,771 3,376 Equity raised/(repaid) 20 150 150 150 Growth, % (7.1) (45.8) 88.2 21.8 Debt raised/(repaid) 7,222 -5,607 1,088 876 Margin, % 3.7 2.4 3.9 4.3 Dividend (incl. tax) 403 403 604 604 Interest paid -685 -546 -594 -634 Cash flow from financing activities 7,590 -5,054 1,843 1,630 Other Non-Operating Income 413 371 409 449 Net chg in cash 1,371 990 1,138 2,316 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 Valuation Ratios Others (Minorities, Associates) -113 -68 -73 -79 FY20 FY21e FY22e FY23e Net Profit 1,683 967 1,952 2,479 Per Share data Growth, % (30.4) (42.5) 101.9 27.0 EPS (INR) 6.8 3.9 7.9 10.0 Net Profit (adjusted) 1,683 967 1,952 2,479 Growth, % (30.4) (42.5) 101.9 27.0 Unadj. shares (m) 246 246 246 246 Book NAV/share (INR) 87.0 88.5 92.9 99.5 Wtd avg shares (m) 247 247 247 247 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 Balance Sheet DPS (INR) (2.0) (2.0) (3.0) (3.0) Y/E Mar, Rs mn FY20 FY21e FY22e FY23e Return ratios Cash & bank 3,080 2,874 2,302 2,829 Return on assets (%) 4.9 2.7 4.8 5.6 Debtors 11,501 11,156 12,829 13,599 Return on equity (%) 7.8 4.4 8.5 10.1 Inventory 78 101 131 170 Return on capital employed (%) 7.6 4.8 8.4 9.5 Loans & advances 1,062 1,147 1,239 1,338 Turnover ratios Other current assets 7,444 8,933 10,720 12,864 Asset turnover (x) 3.5 2.9 3.4 3.4 Total current assets 23,164 24,211 27,221 30,800 Sales/Total assets (x) 1.6 1.3 1.5 1.5 Investments 6,063 4,563 4,335 4,378 Sales/Net FA (x) 3.9 3.4 4.3 4.7 Gross fixed assets 33,856 31,356 33,156 34,656 Working capital/Sales (x) 0.1 0.1 0.1 0.1 Less: Depreciation -16,199 -17,542 -18,972 -20,568 Fixed capital/Sales (x) 0.2 0.2 0.2 0.2 Add: Capital WIP 2,690 2,744 2,798 2,854 Receivable days 57.1 65.6 65.3 62.7 Net fixed assets 20,347 16,557 16,982 16,942 Inventory days 0.4 0.6 0.7 0.8 Total assets 51,600 47,398 50,645 54,270 Payable days 49.0 60.7 56.3 54.3 Current liabilities 15,406 16,268 17,179 18,141 Working capital days 23.2 29.8 39.4 45.3 Provisions 463 510 561 617 Liquidity ratios Total current liabilities 15,870 16,778 17,740 18,758 Current ratio (x) 1.5 1.5 1.6 1.7 Non-current liabilities 14,007 8,441 9,571 10,490 Quick ratio (x) 1.5 1.5 1.6 1.7 Total liabilities 29,877 25,220 27,311 29,248 Interest cover (x) 4.0 2.7 4.7 5.3 Paid-up capital 491 491 491 491 Dividend cover (x) (3.4) (2.0) (2.6) Reserves & surplus 20,965 21,352 22,435 24,044 Total debt/Equity (%) 61.4 34.6 37.7 38.8 Shareholders’ equity 21,723 22,178 23,334 25,022 Net debt/Equity (%) 47.0 21.5 27.7 27.3 Total equity & liabilities 51,600 47,398 50,645 54,270 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 Source: Company, PhillipCapital India Research Estimates 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
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Container Corporation (CCRI IN)
Thinking out of the box
INDIA | LOGISTICS | Company Update 20 July 2020
Container Corporation of India (CONCOR) is at the cusp of becoming a true multi modal BUY (Maintain) logistics solution provider by launching several new initiatives in coastal shipping, CMP RS 448 distribution logistics, first-mile last-mile connectivity, and IT initiatives to support business TARGET RS 525 (+17%) growth. Its pan-India presence with aggressive expansion plans (ahead of competitors) should help the company to grow faster and improve asset turnover. COMPANY DATA O/S SHARES (MN) : 609 Container remains attractive cargo, and Concor enjoys near monopoly MARKET CAP (RSBN) : 273 We believe CONCOR is uniquely placed to capitalize growth opportunities in containers and MARKET CAP (USDBN) : 3.6 bulk-supply chains. We believe substantial incremental demand will come from a shift of 52 - WK HI/LO (RS) : 665 / 263 LIQUIDITY 3M (USDMN) : 11.1 general cargo to the containerized form in break bulk (unitised cargo), as is the case globally. PAR VALUE (RS) : 1 CONCOR is working to develop solutions for transportation of bulk commodities through standard containers using flexi packaging. It enjoys significant competitive advantages and SHARE HOLDING PATTERN, % economies of scale over private players. It has 83 terminals, 15,498 wagons including 13,417 Mar 20 Dec 19 Sep 19 PROMOTERS : 54.8 54.8 54.8 high-speed wagons, and 25,682 containers. It plans to increase terminals to 100 and 20 FII / NRI : 27.2 27.5 28.7 distribution centres. Its second-largest competitor is just 1/10th of its size despite the FI / MF : 13.4 13.2 12.2 government allowing 15 private players to enter containerized transportation in 2007. NON PRO : 1.4 1.3 1.4 PUBLIC & OTHERS : 3.2 3.2 2.9
Asset turnaround to improve after DFCs, DMICDC PRICE VS. SENSEX CONCOR’s capital expenditure over FY14-20 was Rs 57.8bn (average annual capex of Rs 200 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 160 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 120 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 80 network for consolidation and distribution of containers across the country. 40 Jun-16 Jun-17 Jun-18 Jun-19 Jun-20 Strong balance sheet to help navigate through current challenging times Container Corp BSE Sensex 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 Source: Phillip Capital India Research estimate a fall of 17.5% in FY21 and growth of 20% in FY22. CONCOR is debt free with a cash KEY FINANCIALS balance of c.Rs 35bn, which will help it to grow in the current challenging times, while most Rs mn FY20 FY21E FY22E other players have leveraged balance sheets. It is worth noting that the government has Net Sales 64,737 54,084 66,039 disallowed CONCOR’s claim of Rs 8.6bn out of total claim of Rs 10.4 under the SEIS export EBIDTA 16,748 9,992 15,100 incentive till FY16-19. While CONCOR has not accounted for SEIS income in FY20, it is Net Profit 10,085 5,335 8,821 hopeful of receiving c.Rs 1.7bn, and is awaiting clarity on the disallowed claim. EPS, Rs 16.6 8.8 14.5 PER, x 27.1 51.2 30.9 Government planning strategic stake with management control EV/EBIDTA, x 15.2 24.8 16.5 The government has decided to sell 30% stake out of the total 54.8% in Concor to a strategic P/BV, x 2.7 2.6 2.5 partner along with transfer of management control. We believe privatization will create ROE, % 10.0 5.2 8.2 Debt/Equity (%) 3.2 3.1 3.0 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 Source: PhillipCapital India Research Est. 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. Vikram Suryavanshi, Research Analyst (022 6246 4111) Outlook and valuation [email protected] 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.
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CONTAINER CORPORATION COMPANY UPDATE
Financials
Consolidated Income Statement Cash Flow Y/E Mar, Rs mn FY20 FY21e FY22e FY23e Y/E Mar, Rs mn FY20 FY21e FY22e FY23e Net sales 64,737 54,084 66,039 80,040 Pre-tax profit 7,727 7,113 11,761 17,243 Growth, % -1 -16 22 21 Depreciation 5,130 5,324 5,831 6,459 Total income 64,737 54,084 66,039 80,040 Chg in working capital 36,535 159 162 165 Terminal and Service Charges -34,984 -29,386 -34,382 -39,540 Total tax paid -3,905 -1,778 -2,940 -4,311 Employee expenses -3,135 -2,978 -3,336 -3,736 Cash flow from operating activities 45,487 10,819 14,814 19,555 Other Operating expenses -9,870 -11,727 -13,221 -15,601 Capital expenditure -13,599 -3,560 -6,000 -6,300 EBITDA (Core) 16,748 9,992 15,100 21,163 Chg in investments 1,362 0 -5,000 0 Growth, % 19.0 (40.3) 51.1 40.2 Cash flow from investing activities -12,236 -3,560 -11,000 -6,300 Margin, % 25.9 18.5 22.9 26.4 Free cash flow 33,251 7,259 3,814 13,255 Depreciation -5,130 -5,324 -5,831 -6,459 Debt raised/(repaid) -4,073 0 0 0 EBIT 11,618 4,668 9,269 14,704 Dividend (incl. tax) -2,566 -2,809 -4,644 -6,809 Growth, % 18.2 (59.8) 98.6 58.6 Cash flow from financing activities -6,640 -2,809 -4,639 -6,807 Margin, % 17.9 8.6 14.0 18.4 Net chg in cash 26,611 4,450 -825 6,448 Interest paid -361 -288 -297 -306 Pre-tax profit 7,727 7,113 11,761 17,243 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 Valuation Ratios Profit after tax 3,757 5,335 8,821 12,932 FY20 FY21e FY22e FY23e Net Profit 3,757 5,335 8,821 12,932 Per Share data Growth, % (17.0) (47.1) 65.3 46.6 EPS (INR) 16.6 8.8 14.5 21.2 Net Profit (adjusted) 10,085 5,335 8,821 12,932 Growth, % (17.0) (47.1) 65.3 46.6 Unadj. shares (m) 609 609 609 609 Book NAV/share (INR) 165.2 169.3 176.2 186.2 Wtd avg shares (m) 609 609 609 609 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 Balance Sheet DPS (INR) 3.6 3.9 6.5 9.6 Y/E Mar, Rs mn FY20 FY21e FY22e FY23e Return ratios Cash & bank 21,686 28,543 27,713 34,160 Return on assets (%) 3.4 4.8 7.6 10.5 Debtors 1,591 1,750 1,925 2,118 Return on equity (%) 10.0 5.2 8.2 11.4 Inventory 261 287 316 347 Return on capital employed (%) 14.2 7.1 11.2 15.4 Loans & advances 815 847 881 917 Turnover ratios Other current assets 5,277 5,541 5,818 6,109 Asset turnover (x) 1.0 1.0 1.3 1.6 Total current assets 29,630 36,969 36,654 43,651 Sales/Total assets (x) 0.6 0.5 0.6 0.6 Investments 24,492 24,492 29,492 29,492 Sales/Net FA (x) 1.2 1.0 1.2 1.5 Gross fixed assets 85,763 91,198 98,698 1,06,198 Working capital/Sales (x) (0.0) (0.1) (0.1) (0.0) Less: Depreciation -38,476 -43,800 -49,631 -56,090 Receivable days 9.0 11.8 10.6 9.7 Add: Capital WIP 9,375 7,500 6,000 4,800 Inventory days 1.5 1.9 1.7 1.6 Net fixed assets 56,662 54,897 55,067 54,908 Payable days 11.8 13.8 12.7 11.8 Total assets 1,10,784 1,16,359 1,21,212 1,28,051 Working capital days (17.7) (21.9) (18.5) (15.8) Liquidity ratios Current liabilities 11,092 11,678 12,295 12,945 Current ratio (x) 2.7 3.2 3.0 3.4 Provisions 692 747 807 872 Quick ratio (x) 2.6 3.1 3.0 3.3 Total current liabilities 11,784 12,425 13,102 13,817 Dividend cover (x) 4.6 2.2 2.2 2.2 Non-current liabilities 760 760 761 761 Total debt/Equity (%) 3.2 3.1 3.0 2.9 Total liabilities 12,544 13,186 13,863 14,578 Net debt/Equity (%) (18.3) (24.5) (22.8) (27.2) Paid-up capital 3,047 3,047 3,047 3,047 Valuation Reserves & surplus 97,600 1,00,127 1,04,308 1,10,432 PER (x) 27.1 51.2 30.9 21.1 Shareholders’ equity 1,00,647 1,03,173 1,07,355 1,13,479 PEG (x) - y-o-y growth (1.6) (1.1) 0.5 0.5 Total equity & liabilities 1,13,191 1,16,359 1,21,217 1,28,051 Price/Book (x) 2.7 2.6 2.5 2.4 Yield (%) 0.8 0.9 1.5 2.1 Source: Company, PhillipCapital India Research Estimates 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
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Gateway Distriparks Ltd (GDPL IN)
De-leveraging remains focus
INDIA | LOGISTICS | Company Update 20 July 2020
GDPL is an established port-related container logistics player with exposure to CFS and BUY (Maintain) container rail movement. It has created a strong asset-based network, which will be a CMP RS 89 / TARGET Rs 122 (+37%) beneficiary of secular growth in container trade. However, the recent slowdown will be a challenge for the company due to high leverage. SEBI CATEGORY: SMALL CAP COMPANY DATA Strong asset base for end-to-end container logistics O/S SHARES (MN) : 109 GDPL is one of India’s largest private CFS operators with a total handling capacity of 660,000 MARKET CAP (RSBN) : 10 TEU p.a., with five CFS facilities at Mumbai, Chennai, Vizag, Krishnapatnam, and Kochi, MARKET CAP (USDBN) : 0.2 52 - WK HI/LO (RS) : 141 / 73 covering major container trade in India. Its rail business provides intermodal rail 2IQUIDITY 3M (USDMN) : 0.2 transportation services for exim containers between its rail-linked ICDs at Gurgaon, PAR VALUE (RS) : 10 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 SHARE HOLDING PATTERN, % up new terminals at major manufacturing zones in north and west India. Its capex in rail is Jun 20 Mar 20 Dec19 likely to be c.Rs 1.2bn over the next two years, mainly for development of satellite terminals PROMOTERS : 30.2 30.2 30.0 FII / NRI : 27.3 27.6 27.2 to expand rail operations and handling equipment. FI / MF : 28.5 29.1 28.7 NON PRO : 5.1 4.9 5.2 DPD, SEIS uncertainty, and increased competition in rail are near-term headwinds PUBLIC & OTHERS : 8.9 8.3 9.0 CFS has faced challenges over the past few years with increased competition and slowdown PRICE VS. SENSEX 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 180 growth despite aggressive expansion at different ports. While the impact of DPD has 160 bottomed out on GDPL’s CFS business, overall gloomy macroeconomic scenario and trade 140 120 impact due to COVID -19 remain concern areas in the short term. Also, GDPL received a 100 notice from the additional director of foreign trade in 3QFY20 for SEIS (Service Exports from 80 India Scheme) claims of Rs 1bn, accounted for in FY16-18, for which the management will 60 provide additional supporting documents, and is hopeful of receiving the benefit. 40 20 De-leveraging with the sale of Chandra CFS and fund raising 0 GDPL increased its shareholding in Gateway Rail (GRFL) from 50.01% to 99.93% at the end of Apr-16 Apr-18 Apr-20 Gateway BSE Sensex 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 Source: Phillip Capital India Research sheet, GDPL sold its Chandra CFS in Chennai for c.Rs 470mn in 2QFY20 and signed a KEY FINANCIALS definitive agreement to sell its 40.2% stake in Snowman to Adani Ports for c.Rs 2.96bn (at Rs Rs mn FY20 FY21E FY22E 44 per share) in 3QFY20. However, the deal was cancelled and now GDPL has announced Net Sales 12920 10455 12667 plans to raise Rs 1.5bn to repay high cost NCDs due for payment in April 2021. EBIDTA 3134 2068 2641 Net Profit 1004 163 633 Higher operating leverage in rail and overall leverage to impact earnings in FY21 EPS, Rs 9.2 1.5 5.8 GDPL reported 12% volume decline in CFS and growth of 8.5% in rail business in FY20. Its PER, x 9.6 59.4 15.3 performance significantly depends on container-handling volume at ports; we expect EV/EBIDTA, x 5.5 7.5 5.6 volume decline of 23% in CFS and 12% in rail business in FY21 due to Covid-19. This volume PBV, x 0.7 0.7 0.7 fall will impact profitability due to high operating leverage in the rail business. We expect ROE, % 7.6 1.2 4.6 EBITDA at -34%/+28% in FY21/22 to Rs 2bn/2.6bn; profits at Rs 163mn in FY21 (sharp drop) Debt/Equity (%) 58.8 43.1 37.8 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 Vikram Suryavanshi, Research Analyst have valued its rail business at 9x FY22 EV/EBITDA and CFS at 7x; our SOTP-based valuation (022 6246 4111)[email protected] is at Rs 122 (unchanged).
Page | 95 | PHILLIPCAPITAL INDIA RESEARCH
GATEWAY DISTRIPARKS LTD COMPANY UPDATE
Financials
Income Statement Cash Flow Y/E Mar, Rs mn FY20 FY21e FY22e FY23e Y/E Mar, Rs mn FY20 FY21e FY22e FY23e Net sales 12,920 10,455 12,667 14,556 Pre-tax profit 942 217 844 1,338 Growth, % 200 -19 21 15 Depreciation 1,333 1,336 1,368 1,410 Total income 12,920 10,455 12,667 14,556 Chg in working capital -1,026 668 -104 1,858 Raw material expenses 0 0 0 0 Total tax paid -333 -54 -211 0 Employee expenses -598 -645 -678 -712 Cash flow from operating activities 916 2,167 1,897 4,607 Other Operating expenses -9,188 -7,742 -9,348 -10,753 Capital expenditure -738 -700 -600 -801 EBITDA (Core) 3,134 2,068 2,641 3,091 Chg in investments 1,292 42 -55 -57 Growth, % 280.4 (34.0) 27.7 17.0 Cash flow from investing activities 545 -658 -655 -858 Margin, % 24.3 19.8 20.8 21.2 Free cash flow 1,460 1,509 1,243 3,749 Depreciation -1,333 -1,336 -1,368 -1,410 Equity raised/(repaid) 44 -50 0 0 EBIT 1,801 732 1,273 1,680 Debt raised/(repaid) -636 -1,837 -674 -647 Growth, % 261.4 (59.4) 74.0 32.0 Dividend (incl. tax) -577 -128 -513 -641 Margin, % 13.9 7.0 10.1 11.5 Cash flow from financing activities -1,161 -2,015 -1,187 -1,289 Interest paid -1,026 -681 -621 -562 Net chg in cash 299 -506 55 2,460 Other Non-Operating Income 176 167 192 221 Pre-tax profit 950 217 844 1,338 Tax provided 63 -54 -211 0 Valuation Ratios Profit after tax 1,013 163 633 1,338 FY20 FY21e FY22e FY23e Others (Minorities, Associates) -9 0 0 0 Per Share data Net Profit 1,004 163 633 1,338 EPS (INR) 9.2 1.5 5.8 12.3 Growth, % 18.5 (83.8) 288.7 111.3 Growth, % 18.5 (83.8) 288.7 111.3 Net Profit (adjusted) 1,004 163 633 1,338 Book NAV/share (INR) 121.1 126.0 127.1 130.5 Unadj. shares (m) 109 109 109 109 FDEPS (INR) 9.2 1.5 5.8 12.3 FY20 has Impact of consolidation of rail financials CEPS (INR) 21.5 13.8 18.4 25.3
CFPS (INR) 23.6 18.8 16.1 20.8 Balance Sheet DPS (INR) 4.5 1.0 4.0 5.0 Y/E Mar, Rs mn FY20 FY21e FY22e FY23e Return ratios Cash & bank 86 128 184 147 Return on assets (%) 8.7 3.6 5.6 9.0 Debtors 1,298 1,401 1,514 1,816 Return on equity (%) 7.6 1.2 4.6 9.4 Loans & advances 13 15 17 19 Return on capital employed (%) 8.8 4.3 7.1 9.3 Other current assets 1,490 894 1,028 1,182 Turnover ratios Total current assets 2,886 2,438 2,742 3,164 Asset turnover (x) 0.9 0.8 1.0 1.2 Investments 1,258 1,215 1,270 1,327 Sales/Total assets (x) 0.6 0.4 0.6 0.7 Gross fixed assets 16,769 17,469 18,069 18,870 Sales/Net FA (x) 0.9 0.7 0.9 1.1 Less: Depreciation -2,444 -3,780 -5,148 -6,558 Working capital/Sales (x) 0.1 0.1 0.1 0.1 Add: Capital WIP 54 54 54 54 Fixed capital/Sales (x) 1.4 1.6 1.3 1.1 Net fixed assets 14,379 13,743 12,975 12,366 Receivable days 36.7 48.9 43.6 45.5 Non-current assets 5,274 5,315 5,356 3,236 Payable days 33.9 43.5 38.2 35.1 Total assets 23,796 22,711 22,343 22,256 Working capital days 47.8 38.1 36.5 41.4 Liquidity ratios Current liabilities 1,107 1,218 1,290 1,366 Current ratio (x) 2.6 2.0 2.1 2.3 Provisions 335 368 405 445 Quick ratio (x) 2.6 2.0 2.1 2.3 Total current liabilities 1,442 1,586 1,695 1,812 Interest cover (x) 1.8 1.1 2.1 3.0 Non-current liabilities 9,075 7,313 6,716 6,149 Dividend cover (x) 2.1 1.5 1.5 2.5 Total liabilities 10,517 8,899 8,411 7,961 Total debt/Equity (%) 58.8 43.1 37.8 32.3 Paid-up capital 1,087 1,087 1,087 1,087 Net debt/Equity (%) 58.1 42.2 36.5 31.3 Reserves & surplus 12,080 12,613 12,734 13,096 Valuation Shareholders’ equity 13,278 13,812 13,932 14,295 PER (x) 9.6 59.4 15.3 7.2 Total equity & liabilities 23,796 22,711 22,343 22,256 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 Source: Company, PhillipCapital India Research Estimates 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
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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 Neutral (Maintain) facilities in Mumbai and Vapi. It has significantly outperformed industry growth, along CMP RS 28 / TARGET Rs 27 (-3%) 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 SEBI CATEGORY: SMALL CAP strong business model offering cost benefits to its customers. COMPANY DATA O/S SHARES (MN) : 151 Differentiated services in a crowded market MARKET CAP (RSBN) : 4 NACO has one of the highest CFS capacities in the industry at 1mn TEU per annum; it has MARKET CAP (USDBN) : 0.1 52 - WK HI/LO (RS) : 43 / 13 facilities at Mumbai and Vapi and caters to JNPT and Hazira ports. Rail connectivity allows LIQUIDITY 3M (USDMN) : 0.2 transportation of cargo from inland destinations on the Indian rail network, increasing PAR VALUE (RS) : 10 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. SHARE HOLDING PATTERN, % Other CFS players are mainly import oriented. Also, NACO is also one of largest agri-cargo Mar 20 Dec 19 Sep 19 exporters. (2) Value-added services with container repair and empty storage. Its Mumbai PROMOTERS : 69.0 69.0 69.0 FII / NRI : 0.2 0.2 0.2 CFS has a unit for the inspection and approval of agricultural cargo set up by the FI / MF : 7.8 8.2 8.2 government’s plant and quarantine authorities (Ministry of Agriculture). Importers and NON PRO : 10.7 10.3 9.7 exports in Gujarat can save c.20-25% by transporting goods through rail from its Vapi ICD, PUBLIC & OTHERS : 12.3 12.4 12.9 compared to road transport due to lower rail transport cost. PRICE VS. SENSEX Focus on trains operations with end-to-end services 180 NACO has received a Container Terminal Operator (CTO) license, paid Rs 100mn as license 160 fees, and acquired two rakes (trains) in 4QFY20. Its capex in FY20 was c.1.6bn, mainly for 140 scaling up rail operations including TXR – train examination facility – and acquisition of two 120 trains. It is handling rail operations with 7 trains (5 leased and 2 owned). It handled 767 100 80 trains at JNPT and 1,368 trains at Vapi in FY20. It is focusing on client development and end- 60 to-end delivery of containers as a long-term strategy. It has set up a fully-integrated logistics 40 park close to its ICD at Vapi at an estimated cost of Rs 3.14bn, which complements its ICD 20 business, giving customers the flexibility of storage at affordable costs, along with value- 0 added activities. Vapi-Valsad-Daman-Silvassa-Surat-Ankleswar-Bharuch-Baroda belt is one of Apr-16 Apr-18 Apr-20 the largest and vibrant industrial clusters in India, covering industries such as chemicals, Navkar BSE Sensex textiles, engineering, food products, steel, and paper. The total addressable container Source: Phillip Capital India Research market in Gujarat is 1.5mn TEU p.a.; NACO is currently working with 40 shipping lines in its Vapi ICD. KEY FINANCIALS Rs mn FY20 FY21E FY22E Short-term impact on profitability – operational flexibility to help Net Sales 5,671 4,108 5,263 NCACO has started handing DPD containers at JNPT. It should benefit from marketing efforts EBIDTA 1,663 1,056 1,568 at Vapi and its focus on domestic train operations. It saw 5% growth in container handing in Net Profit 452 115 512 FY20 supported by 52% growth at Vapi to 127,915 TEU. It is expanding domestic train EPS, Rs 3.0 0.8 3.4 movement (15% of total FY20 revenue) which offers significant growth potential. We expect PER, x 9.3 36.5 8.2 EV/EBIDTA, x 5.8 8.7 5.7 -17%/+23% movement in container volume in FY21/22. The fall in exim trade will be PBV, x 0.2 0.2 0.2 compensated to an extent by domestic movement and market share gain in Vapi. We see ROE, % 251.0 63.7 275.0 FY21/22 EBITDA at Rs 1.0/1.6bn with debt at Rs 4.5bn in FYXX; debt/EBITDA at 2.8x. It has Debt/Equity (%) 30.3 29.4 27.6 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 Vikram Suryavanshi, Research Analyst growth in Vapi has improved its cash flow. Strong asset base and operational expertise will (022 6246 4111) [email protected] help it to expand its rail operations. We maintain FY22 target PE of 8x; target at Rs 27.
Page | 97 | PHILLIPCAPITAL INDIA RESEARCH Please see penultimate page for additional important disclosures. PhillipCapital (India) Private Limited. (“PHILLIPCAP”) is a foreign broker-dealer unregistered in the USA. PHILLIPCAP research is prepared by research analysts who are not registered in the USA. PHILLIPCAP research is distributed in the USA pursuant to Rule 15a-6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities Inc, an SEC registered and FINRA-member broker-dealer.
NAVKAR CORPORATION COMPANY UPDATE
Financials
Income Statement Cash Flow Y/E Mar, Rs mn FY20 FY21e FY22e FY23e Y/E Mar, Rs mn FY20 FY21e FY22e FY23e Net sales 5,671 4,108 5,263 5,874 Pre-tax profit 774 154 683 874 Growth, % 17.5 -27.6 28.1 11.6 Depreciation 421 442 447 452 Operating expenses -2,968 -2,156 -2,695 -3,007 Chg in working capital -31 -196 -207 -152 Employee expenses -356 -329 -358 -399 Total tax paid -104 337 -171 -219 Other Operating expenses -684 -567 -642 -717 Cash flow from operating activities 1,059 737 752 955 EBITDA (Core) 1,663 1,056 1,568 1,750 Capital expenditure -1,701 -178 -497 -497 Growth, % 9 -37 49 12 Chg in investments -17 -68 -75 -83 Margin, % 29 26 30 30 Other investing activities 0 0 0 0 Depreciation -421 -442 -447 -452 Cash flow from investing activities -1,718 -246 -572 -580 EBIT 1,242 613 1,121 1,299 Free cash flow -659 490 179 375 Growth, % 10.3 -50.6 82.8 15.8 Debt raised/(repaid) 578 -127 -188 -102 Margin, % 21.9 14.9 21.3 22.1 Dividend (incl. tax) 0 0 0 -179 Interest paid -476 -479 -463 -453 Cash flow from financing activities 578 -127 -188 -281 Other Non-Operating Income 8 20 24 29 Net chg in cash -81 363 -9 94 Pre-tax profit 774 154 683 874 Tax provided -323 -38 -171 -219 Profit after tax 452 115 512 656 Valuation Ratios Net Profit 452 115 512 656 FY20 FY21e FY22e FY23e Growth, % -14.5 -74.5 344.0 28.0 Per Share data Net Profit (adjusted) 452 115 512 656 EPS (INR) 3.0 0.8 3.4 4.4 Unadj. shares (m) 151 151 151 151 Growth, % (14.5) (74.5) 344.0 28.0 Wtd avg shares (m) 151 151 151 151 Book NAV/share (INR) 119.5 120.3 123.7 126.9 FDEPS (INR) 3.0 0.8 3.4 4.4 CEPS (INR) 5.8 3.7 6.4 7.4 Balance Sheet CFPS (INR) 7.0 4.8 4.8 6.2 Y/E Mar, Rs mn FY20 FY21e FY22e FY23e DPS (INR) - - - 1.0 Cash & bank 24 387 377 471 Return ratios Debtors 800 822 1,053 1,175 Return on assets (%) 540.3 267.8 474.4 538.6 Inventory 97 104 113 122 Return on equity (%) 251.0 63.7 275.0 343.3 Loans & advances 5 5 5 6 Return on capital employed (%) 541.9 270.2 482.0 550.0 Other current assets 703 773 835 902 Turnover ratios Total current assets 1,629 2,091 2,383 2,675 Asset turnover (x) 0.3 0.2 0.2 0.3 Investments 684 753 828 911 Sales/Total assets (x) 0.2 0.2 0.2 0.2 Gross fixed assets 23,142 23,642 24,142 24,642 Sales/Net FA (x) 0.3 0.2 0.2 0.3 Less: Depreciation -2,038 -2,481 -2,927 -3,379 Working capital/Sales (x) 0.2 0.3 0.2 0.2 Add: Capital WIP 460 138 135 133 Receivable days 51.5 73.0 73.0 73.0 Net fixed assets 21,564 21,300 21,350 21,396 Inventory days 6.2 9.3 7.8 7.6 Total assets 23,877 24,143 24,561 24,981 Payable days 30.6 24.6 26.0 26.0 Working capital days 55.5 94.2 88.0 88.3 Current liabilities 743 645 738 782 Liquidity ratios Provisions 62 64 65 66 Current ratio (x) 2.2 3.2 3.2 3.4 Total current liabilities 805 708 802 849 Quick ratio (x) 2.1 3.1 3.1 3.3 Non-current liabilities 5,079 5,328 5,139 5,037 Interest cover (x) 2.6 1.3 2.4 2.9 Total liabilities 5,885 6,036 5,942 5,886 Total debt/Equity (%) 30.3 29.4 27.6 26.4 Paid-up capital 1,505 1,505 1,505 1,505 Net debt/Equity (%) 30.2 27.3 25.6 23.9 Reserves & surplus 16,487 16,602 17,114 17,590 Valuation Shareholders’ equity 17,992 18,107 18,619 19,095 PER (x) 9.3 36.5 8.2 6.4 Total equity & liabilities 23,877 24,143 24,561 24,981 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 Source: Company, PhillipCapital India Research Estimates 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
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VRL Logistics (VRLL IN)
High operating leverage
INDIA | LOGISTICS | Company Update 20 July 2020
Parcel delivery service provider with pan-India last-mile connectivity. Operates through BUY (Maintain) mainly an owned fleet supplemented by third-party hired vehicles. VRLL has strong brand CMP RS 153 equity backed by 40+ years of operations. It would be one of the major beneficiaries of TARGET RS 195 (+27%) GST implementation and economic recovery.
COMPANY DATA Market leader in less-than truck load with a pan-India network O/S SHARES (MN) : 291 Goods transportation (GT) is c.82% of VRLL’s revenue while passenger buses account for MARKET CAP (RSBN) : 55 c.16%. It operates its own fleet of 5,091 vehicles (4,754 goods carriers and 337 passenger MARKET CAP (USDBN) : 0.8 buses) with 693 branches. Its network: 47 transit hubs in 22 states and 5 union territories, 52 - WK HI/LO (RS) : 340 / 187 providing general‐parcel (LTL: less than truck load) and priority‐parcel deliveries, and courier LIQUIDITY 3M (USDMN) : 0.5 PAR VALUE (RS) : 1 and full‐truckload (FTL) services. Its hub‐and‐spoke model enables it to facilitate last‐mile connectivity to remote areas in India. SHARE HOLDING PATTERN, % Mar 20 Dec 19 Sep 19 High operating leverage with an asset-ownership model PROMOTERS : 68.1 68.1 68.1 For c.90% of its transportation, it uses its owned fleet, and for 8-10%, outside vehicles, FII / NRI : 4.7 5.0 5.5 depending on the market situation. It also owns buses in the passenger segment. The asset- FI / MF : 21.4 21.2 20.4 NON PRO : 1.5 1.4 1.4 ownership model helps it to control costs, customise vehicles for the parcels business, and PUBLIC & OTHERS : 4.4 4.4 4.7 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 PRICE VS. SENSEX for captive consumption, which provide cost advantages of Rs 2-3 per litre; it uses c.20-30% 180 bio-diesel, which also significantly reduces fuel costs. VRL also benefits from higher volume 160 discounts for purchases of spare parts, tyres, and other consumables due to its large fleet. A 140 significant part of the driver salaries it pays is variable (linked to km operated), which helps 120 100 VRLL to control costs during weak demand scenarios. 80 60 Axle loading norm, e-way bill and GST, are positive for the company 40 Road transport has benefitted by the recent upward revision in ‘safe axle weights’ by 20 the government (by 15-20%) for goods transport vehicles, creating c.6-7% additional 0 Apr-16 Apr-18 Apr-20 capacity for VRLL and reducing operating costs and capex needs. The company mainly VRL Logistics BSE Sensex 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 Source: Phillip Capital India Research
lower prices pre-BS-VI norms. It has postponed FY21’s capital expenditure plan (c.Rs KEY FINANCIALS 700mn including c.Rs 400mn for buses) due to Covid-19. Rs mn FY20 FY21E FY22E The company mainly caters to less than truck load (LTL), which accounts for 87% of its Net Sales 21,185 14,808 21,407 GT revenue. Post GST, there has been a gradual shift to LTL from FTL, mainly as EBIDTA 2,983 1,251 3,249 customers prefer sending smaller quicker truckloads directly to their distributors rather Net Profit 901 -475 981 than waiting at multiple warehouses in every state. EPS, Rs 10.0 (5.3) 10.9 We believe VRL would be a major beneficiary of economic recovery, resulting in volume PER, x 15.3 (29.1) 14.1 recovery and margin improvement. 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 COVID -19 lockdown – short-term earnings impact Debt/Equity (%) 71.6 78.2 69.8 VRLL has a very well diversified customer base; its largest/top-10 customers contributed Source: PhillipCapital India Research Est. 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 Vikram Suryavanshi, Research Analyst hit operations in the short term. Due to social distancing norms, the bus segment can (022 6246 4111) operate at only up to 50% capacity, marring this segment. [email protected]
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.
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VRL LOGISTICS COMPANY UPDATE
Financials
Income Statement Cash Flow Y/E Mar, Rs mn FY20 FY21 FY22e FY23e Y/E Mar, Rs mn FY20 FY21 FY22e FY23e Net sales 21,185 14,808 21,407 23,886 Pre-tax profit 1,043 -633 1,308 1,673 Growth, % 0.4 -30.1 44.6 11.6 Depreciation 1,675 1,612 1,667 1,792 Freight -14,103 -9,848 -13,914 -15,526 Chg in working capital -2,436 -223 22 -75 Employee expenses -3,805 -3,554 -4,067 -4,299 Total tax paid -142 158 -327 -418 Other Operating expenses -294 -156 -176 -341 Other operating activities 0 0 0 0 EBITDA (Core) 2,983 1,251 3,249 3,719 Cash flow from operating activities 140 914 2,670 2,972 Growth, % 22.2 (58.1) 159.8 14.5 Capital expenditure -1,946 -865 -2,085 -2,205 Margin, % 14.1 8.4 15.2 15.6 Chg in investments 0 0 0 0 Depreciation -1,675 -1,612 -1,667 -1,792 Cash flow from investing activities -1,946 -865 -2,085 -2,205 EBIT 1,307 -362 1,582 1,927 Free cash flow -1,806 50 585 767 Growth, % (8.8) (127.7) (537.5) 21.8 Equity raised/(repaid) 629 -767 100 100 Margin, % 6.2 (2.4) 7.4 8.1 Debt raised/(repaid) 2,910 34 -29 -204 Interest paid -367 -380 -388 -374 Dividend (incl. tax) 634 2 273 273 Other Non-Operating Income 103 108 114 119 Cash flow from financing activities 4,173 -731 344 169 Pre-tax profit 1,043 -633 1,308 1,673 Net chg in cash 2,367 -681 929 936 Tax provided -142 158 -327 -418 Profit after tax 901 -475 981 1,255 Net Profit 901 -475 981 1,255 Valuation Ratios Growth, % (2.0) (152.7) (306.6) 27.9 FY20 FY21 FY22e FY23e Net Profit (adjusted) 901 -475 981 1,255 Per Share data Unadj. shares (m) 90 90 90 90 EPS (INR) 10.0 (5.3) 10.9 13.9 Wtd avg shares (m) 90 90 90 90 Growth, % (2.0) (152.7) (306.6) 27.9 Book NAV/share (INR) 69.1 63.8 71.1 81.3 FDEPS (INR) 10.0 (5.3) 10.9 13.9 Balance Sheet CEPS (INR) 28.5 12.6 29.3 33.7 Y/E Mar, Rs mn FY20 FY21 FY22e FY23e CFPS (INR) 25.8 8.9 28.3 31.6 Cash & bank 134 215 443 678 DPS (INR) (7.0) (0.0) (3.0) (3.0) Debtors 823 823 892 995 Return ratios Inventory 293 165 238 265 Return on assets (%) 11.6 (0.8) 11.6 12.9 Loans & advances 426 451 477 505 Return on equity (%) 14.4 (8.2) 15.3 17.1 Other current assets 415 435 457 480 Return on capital employed (%) 12.4 (4.4) 17.7 20.0 Total current assets 2,091 2,088 2,507 2,924 Turnover ratios Investments 1 1 1 1 Asset turnover (x) 2.5 1.8 2.6 2.7 Gross fixed assets 12,451 12,651 14,051 15,551 Sales/Net FA (x) 2.8 2.0 3.0 3.1 Less: Depreciation -4,794 -5,743 -6,726 -7,815 Working capital/Sales (x) 0.1 0.1 0.1 0.1 Add: Capital WIP 68 70 71 72 Fixed capital/Sales (x) 0.4 0.5 0.3 0.3 Net fixed assets 7,725 6,978 7,396 7,809 Receivable days 14.2 20.3 15.2 15.2 Total assets 12,113 11,363 12,199 13,029 Inventory days 5.0 4.1 4.1 4.1 Payable days 0.7 1.7 1.8 1.8 Current liabilities 732 391 565 630 Working capital days 21.1 36.5 25.6 24.7 Provisions 347 382 420 462 Liquidity ratios Total current liabilities 1,079 773 985 1,092 Current ratio (x) 2.9 5.3 4.4 4.6 Non-current liabilities 4,791 4,825 4,796 4,592 Quick ratio (x) 2.5 4.9 4.0 4.2 Total liabilities 5,870 5,598 5,781 5,684 Interest cover (x) 3.6 (1.0) 4.1 5.2 Paid-up capital 903 903 903 903 Total debt/Equity (%) 71.6 78.2 69.8 58.2 Reserves & surplus 4,828 5,217 5,870 6,797 Net debt/Equity (%) 69.5 74.4 62.9 48.9 Shareholders’ equity 6,243 5,765 6,419 7,345 Valuation Total equity & liabilities 12,113 11,363 12,199 13,029 PER (x) 15.3 (29.1) 14.1 11.0 Source: Company, PhillipCapital India Research Estimates 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
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(BDE IN) Blue Dart Delivering leadership 20 July 2020 INDIA | LOGISTICS | Company Update BDE is a leading express-service provider in India with more than 30 years of operational Not rated experience. BDE has a domestic network covering 34,854 locations and more than 220 CMP RS 1963 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 COMPANY DATA and infrastructure support. O/S SHARES (MN) : 24 MARKET CAP (RSBN) : 47 Unparalleled reach and network MARKET CAP (USDBN) : 0.6 It is a dominant leader in the domestic air-express industry with c.50% market share; c.15% 52 - WK HI/LO (RS) : 3068 / 1875 LIQUIDITY 3M (USDMN) : 0.4 of the ‘ground’ segment. It has a fleet of six Boeing 757 freighters offering a revenue PAR VALUE (RS) : 10 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 SHARE HOLDING PATTERN, % in FY20. All its aircraft are owned through a subsidiary – Bludart Aviation – which runs Mar 20 Dec 19 Sep 19 scheduled services; 80% of its vehicle fleet is outsourced. BDE is increasing its coverage and PROMOTERS : 75.0 75.0 75.0 footprint in tier-2 and 3 cities with a focus on small and medium enterprises. It has FII / NRI : 2.7 3.7 4.6 FI / MF : 10.9 9.9 9.3 warehouses at 85 locations in India and bonded warehouses in 7 major metros – namely NON PRO : 1.7 1.8 1.5 Ahmadabad, Bangalore, Chennai, Delhi, Mumbai, Kolkata, and Hyderabad. BDE has started PUBLIC & OTHERS : 9.7 9.7 9.6 an e-fulfilment centre at Gurgaon and Bangalore and is expanding to other regions too. PRICE VS. SENSEX Organized express market will remain attractive, due to growth in e-commerce and retail 180 The express industry’s growth has a strong co‐relation with GDP growth (1.8‐2.0x). The size 160 is c.Rs 170bn, with organized at c.Rs 109bn, of which c.Rs 50bn is air and c.Rs 59bn is 140 120 ground. The organized express market will see 10-12% CAGR driven by: (1) trade changing to 100 parcel movement after GST from full load earlier, and (2) growth in e-commerce. BDE 80 derives c.75% revenue from air and the rest from surface. It gets c.94% revenue from 60 institutional clients; it has c.40,000 such customers who sign annual contracts, giving BDE 40 strong revenue sustainability. Retail customers (walk ins) account for c.6% of its revenue, 20 0 which is a high-margin business. E-commerce revenue share is c.18%; this promises to be a Apr-16 Apr-17 Apr-18 Apr-19 high-growth business with a projected 25-30% industry growth over the next five years. Bluedart BSE Sensex
Presently, there is higher competitive pressure in express cargo, particularly air express Source: Phillip Capital India Research
BDE’s revenue CAGR over FY15-20 was 7% to Rs 31.7bn; PAT was -29% to Rs 222mn. The KEY FINANCIALS economic slowdown due to Covid-19 resulted in a PBT fall of c.80% to Rs 250mn; adjusting Y/E Mar FY18 FY19 FY20 for AS-116, PBT decline was 32%. EBITDA margins declined from a high of 14.9% in FY14 to EPS (Rs) 61.0 37.8 9.4 touch 9% in FY19. It reported EBITDA margin of 14.9% in FY20 due to Ind AS 116 accounting Cash EPS (Rs) 109.3 91.8 74.6 benefit of c.Rs 2bn while adjusted margins were at 8.7%. It has a high fixed-cost base due to Book Value (Rs) 224.2 243.5 206.9 its air-cargo business. The sharp decline is mainly due to increased competition from new Dividend (Rs / Share) 12.5 12.5 0.0 players and a shift in volume to surface express cargo from air express. With economic P/E (X) 32.2 51.9 209.3 slowdown, the cost-conscious customers and e-commerce players have made do with P/BV (x) 8.8 8.1 9.5 elongated delivery dates for their product deliveries to save on air-express costs, which are EV/EBITDA 13.7 17.0 18.1 RoCE (%) 29.4 18.2 8.4 +3x of surface express costs. BDE’s air express business has a high fixed cost of c.75% due to RoE (%) 27.2 15.5 4.5 own leased aircrafts, but provides significant operating leverage – when demand recovers. Source: PhillipCapital India Research Est. 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 Vikram Suryavanshi, Research Analyst We believe that with its strong customer relationships, network, and technology support, (022 6246 4111) Blue Dart will be a major beneficiary of the growing express business. It trades at 209x its [email protected] FY20 EPS and 37x EV/EBITDA.
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BLUE DART COMPANY UPDATE
Financials
Income Statement Balance Sheet Y/E Mar, Rs mn FY17 FY18 FY19 FY20 Y/E Mar, Rs mn FY17 FY18 FY19 FY20 Net sales 26,895 27,992 31,744 31,751 Equity 237 237 237 237 Growth, % 4.9 4.1 13.4 0.0 Reserves 4057 5081 5540 4671 Shareholders’ Equity 4294 5318 5777 4908 Freight and Handling 14,041 14,789 17,662 16,561 Employee expenses 5,549 5,845 6,984 7,335 Long term borrowing 3193 3167 4316 4150 Other Operating expenses 3,888 3,846 4,244 3,114 Short term borrowing 1732 974 712 225 EBITDA (Core) 3,417 3,513 2,855 4,742 Current maturity 0 0 0 0 Growth, % (10.5) 2.8 (18.7) 66.1 Total Loan 4925 4141 5028 4375 Margin, % 12.7 12.5 9.0 14.9 Deferred tax -557 -692 -1096 -1707 Other income 262 207 192 155 Capital Employed 8663 8767 9709 16885 Depreciation 1,038 1,145 1,279 3,473 EBIT 2,641 2,575 1,768 1,424 Gross block 5844 6956 9302 12675 Interest paid 450 405 427 1,174 Tangible Assets 4098 4648 5885 6617 Pre-tax profit 2,191 2,170 1,341 250 Intangible Assets 913 934 1039 990 Tax provided 793 723 444 27 Capital work in Progress 363 593 526 160 Profit after tax 1,398 1,447 898 222 Others (Minorities, Associates) 0 0 0 0 Non-current investments 562 558 569 596 Net Profit 1,398 1,447 898 222 Non-current assets 104 203 366 61 Growth, % (27.5) 3.5 (38.0) (75.2) Current investments 544 266 298 191 Extraordinary - - - (641.1) Net Profit (adjusted) 1,398 1,447 898 (419) Current assets 6830 7132 8334 7022 Unadj. shares (m) 24 24 24 24 Inventory 247 213 260 270 Trade Receivables 3607 4223 4910 5282 Source: Company, PhillipCapital India Research Estimates Cash 2568 2287 2687 1000 Loans and Advances 11 10 9 8 Other current assets 398 400 467 462 Current Liabilities 4752 5567 7308 7816 Trade Payable 2721 3684 4343 4010 Other current liabilities 1042 1006 1895 2290 Provisions 988 877 1071 1515 Net Working capital 2079 1566 1026 -793 Capital Employed 8663 8767 9709 16885
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INSTITUTIONAL EQUITY RESEARCH
Future Supply Chain Solutions Ltd (FSCSL IN)
Expanding sector focus
INDIA | LOGISTICS | Company Update 20 July 2020
FSCSL is one of India’s leading third-party (3PL) logistics operators with c.80% revenue Not rated coming from contract logistics. It provides services for express and temperature-controlled CMP Rs 164 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 COMPANY DATA major beneficiary of the growing logistics outsourcing in India. O/S SHARES (MN) : 44 MARKET CAP (RSBN) : 7 Diversifying focus to high-growth sectors: FSC has consciously developed domain expertise MARKET CAP (USDBN) : 0.1 in the supply-chain segment in several consumption-driven sectors including fashion, food, 52 - WK HI/LO (RS) : 632 / 81 FMCG, furniture, consumer durables, and electronics. These sectors are less cyclical and are LIQUIDITY 3M (USDMN) : 0.2 seeing strong secular growth in the long term, unlike many others such as manufacturing or PAR VALUE (RS) : 10 industrials. Around 85-90% of FSC’s business is driven by consumption-driven sectors. SHARE HOLDING PATTERN, % Outsourcing of SCM and other logistics services should rise in the future, with a change in Mar 20 Dec 19 Sep 19 tax structure. 3PL providers, such as FSC, are able perform SCM more efficiently than PROMOTERS : 47.9 47.9 52.4 customers’ in-house operations, because of domain expertise, technology adoption due to FII / NRI : 8.2 8.3 10.4 scale, efficient management of operations, and flexible employee-cost structures. FI / MF : 10.2 10.8 12.0 NON PRO : 28.4 28.2 20.3 India food-grid: Redefining food and FMCG supply-chain in India: India’s food and FMCG PUBLIC & OTHERS : 5.3 4.8 4.9 supply chain is highly inefficient and faces formidable challenges in terms of inventory PRICE VS. SENSEX 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 140 Grid (IFG). Under this, manufacturers will get clear visibility in terms of stock availability, and 120 consumers will get quicker delivery of products. The expansion of IFG is on an asset-light 100 model with leased facilities (each distribution centre will be c.200,000 sq. ft.) while FSC will 80 invest in handling equipment and racking systems. Each distribution centre will cater to a 60 100-200km catchment; initially, major customers will be Big Bazar/Easy Day. 40 20 Nippon Express to provide global expertise with client addition: Nippon Express has 0 acquired 22% stake in FSC in December 2019 through its subsidiary Nippon Express (South Dec-17 Dec-18 Dec-19 Asia & Oceania) Pte ltd. The proceeds will be used for capital expenditure, debt reduction, FSC BSE Sensex and working capital requirements. FSC and Nippon Express have signed a business collaboration agreement (BCA) to jointly explore growth opportunities for new and existing Source: Phillip Capital India Research customers, based on a strategic partnership. Nippon Express will offer FSC’s integrated KEY FINANCIALS service to Japanese and other foreign customers, while FSC will provide Nippon Express’ Y/E Mar FY17 FY18 FY19 global logistics services to Indian customers. Nippon will introduce latest global technologies EPS (Rs) 10.4 6.9 14.0 and process improvements and Kaizen activity at FSC. Cash EPS (Rs) 14.8 18.3 24.4 Book Value (Rs) 66.7 109.5 123.6 Earnings growth through cost rationalization and productivity: FSCSL has increased its Dividend (Rs / Share) 0.0 1.0 1.3 focus on operational efficiency through project Lakshya, which aims for transport cost P/E (X) 15.7 23.6 11.7 savings, network and warehouse redesign and consolidation, and revisiting customer P/BV (x) 2.5 1.5 1.3 contracts. It has scaled down its loss-making last-mile-delivery business since 3QFY20, and EV/EBITDA 9.8 8.5 7.2 there will be no material impact on earnings from now. Considering customer rationalization RoCE (%) 18.8 8.3 9.9 and warehousing consolidation, revenue growth will be muted in the short term, with RoE (%) 15.6 6.3 11.3 improvement in margins and earnings. Source: PhillipCapital India Research Est.
Valuations: Strong infrastructure for consumer-driven sectors and partnerships with Nippon Vikram Suryavanshi (+ 9122 6246 4111) [email protected] 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.
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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’ Focus on complex supply chain solutions supply-chain requirements, with a value proposition, rather than just bulk in consumer centric businesses transportation. It has developed warehouse-management and transport- Contract logistics Express buisness Cold chain Other management systems, with strong domain expertise in consumption-driven businesses, which tend to have huge complexities in their supply chains. FSC has set 4% 2% 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 12% providing faster service.
Contract logistics constitutes c.82% of its revenue and express logistics c.12%; the 82% rest comes mainly from temperature-controlled logistics. It offers last-mile connectivity through its group company – Leanbox Logistics Solutions. Source: Company, PhillipCapital India Research
Integrated services
Contract logistics Express logistics Temperature-controlled 1. Automated warehousing 2. Transportation and distribution 3. Value-added services 4. Reverse logistics
Source: Company, PhillipCapital India Research
. In contract logistics, the company offer these services: (1) Integrated built-to-suit and automated warehousing. (2) Transportation and distribution. (3) Value- added services such as kitting, packaging, and bundling. And (4) Reverse logistics. The focus is more on warehousing management and distribution while transportation from factory to warehouse, a low-margin and competitive business, is normally done by suppliers. . Express business offers services for time-definite full-and-part truck loads, and point-to-point services. It works with a hub-and-spoke distribution model with real-time shipment tracking. Express business covers 11,434 pin codes across countries with 13 hubs and 126 branches, and helps cross-sell services to customers. . Temperature-controlled business accounts for c.4% of revenue, provides warehousing, and reefer transportation. Temperature-controlled business will provide strategic support to group companies’ requirements, and is focused on frozen foods and is not in the commodity business.
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FUTURE SUPPLY CHAIN SOLUTIONS LTD COMPANY UPDATE
FSC state-of-the art distribution centre at MIHAN, Nagpur
High-speed Cross-belt Sorter System Operational since July 2017. The first-of-its-kind in India Improved efficiency and throughput Sorting capacity – Unit sorter: 16,000 units per hour – Case sorter: 2,000 cases per hour – 400 destinations Length of the conveyor belt is 2.6 km
Dynamic Put-to-Light Sortation System Improved speed of sortation by almost 40% from manual sortation methods Expanded ordinary processing capacity of distribution centres Enables accuracy of packing and labelling
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FUTURE SUPPLY CHAIN SOLUTIONS LTD COMPANY UPDATE
Financials
Income Statement Balance Sheet Y/E Mar, Rs mn FY17 FY18 FY19 FY20E Y/E Mar, Rs mn FY17 FY18 FY19 FY20E Net sales 5,612 9,378 12,284 11,483 Equity 391 401 401 439 Growth, % 7.9 67.1 31.0 -6.5 Reserves 6362 6192 2835 3904 Shareholders’ Equity 6599 6430 3073 4141 Cost of logistics 3,753 6,442 8,860 7,039 Minority interest 0 0 0 124 Employee expenses 565 1,118 1,173 1,006 Other expense 551 977 1,040 1,022 Long term borrowing 735 268 2187 1087 EBITDA (Core) 743 841 1,211 2,416 Short term borrowing 20 580 620 770 Growth, % 6.3 13.3 43.9 99.5 Current maturity 0 0 0 0 Margin, % 13.2 9.0 9.9 21.0 Total Loan 755 848 2807 1857 Other income 158 126 58 180 Lease liability 0 0 0 2995 Depreciation 191 497 454 1,603 Capital Employed 3775 5651 8229 12797 EBIT 709 470 815 992 Interest paid 128 160 178 757 Gross block 1666 4094 5546 6646 Pre-tax profit 582 311 636 235 Tangible Assets 1288 3163 4178 4774 Tax provided 124 0 0 0 Intangible Assets 10 22 18 18 Profit after tax 457 311 636 235 Capital work in Progress 698 25 639 750 Minorities, Associates 0 -6 -21 -173 Right to use asset 0 0 0 2562 Net Profit 457 305 615 62 Goodwill 0 0 0 0 Growth, % 55.7 (33.4) 101.9 (89.9) Non-current investments 227 94 73 77 Net Profit (adjusted) 457 305 615 62 Non-current assets 0 771 1214 1457 Unadj. shares (m) 391 401 401 439 Current assets 2863 3654 5141 6138 Source: Company, PhillipCapital India Research Estimates Inventory 0 0 55 60 Trade Receivables 2167 2596 3696 3775 Cash 470 797 1243 1853 Loans and Advances 61 112 50 100 Other current assets 165 149 97 350 Current liabilities 1311 2078 3034 2979 Trade Payable 978 1795 2618 2517 Other current liabilities 306 205 291 320 Provisions 28 78 125 142 Net Working capital 1552 1576 2106 3159 Capital Employed 3774 5651 8229 12797
Page | 106 | PHILLIPCAPITAL INDIA RESEARCH INSTITUTIONAL EQUITY RESEARCH
TCI Express Ltd (TCIEXP IN)
Fulfilling the need for urgency
INDIA | LOGISTICS | Company Update 20 July 2020
Despite a weak macro-economic environment impacting major sectors of the economy, TCIEXP is the Not Rated fastest growing express-service company in India. It has one of the largest hub-and-spoke networks CMP RS 672 in the country, and its asset light-model helps it to drive strong cash flows. COMPANY DATA Strong distribution infrastructure – key advantage O/S SHARES (MN) : 38 TCIEXP was established in 1996 as one of the divisions of TCI Limited and hived off to MARKET CAP (RSBN) : 26 become TCIEXP, an independent company, in 2016. It addresses the time-critical needs of MARKET CAP (USDBN) : 0.3 industrial customers for whom delays could result in major business losses in the event of 52 - WK HI/LO (RS) : 950 / 491 LIQUIDITY 3M (USDMN) : 0.4 stock loss. TCI Express has developed a pan-India network for express door-to-door delivery PAR VALUE (RS) : 1 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 SHARE HOLDING PATTERN, % vehicles and has established 28 strategically-located sorting centres, acting like hubs, to Mar 20 Dec 19 Sep 19 enhance operational efficiency. It also provides international delivery to c.202 countries PROMOTERS : 66.9 66.9 66.9 through its IATA-approved agent network. Network-effect and scale gives it operational FII / NRI : 4.2 5.1 5.2 FI / MF : 6.7 5.4 4.8 efficiency, and also helps it to get a larger share of its customers’ cargo. NON PRO : 6.5 6.5 6.8 PUBLIC & OTHERS : 15.6 16.1 16.3 Asset light model with high return ratio TCIEXP works with vendor-managed trucks for its transportation needs. It mainly invests on PRICE VS. SENSEX strategic hubs and branches, and development and implementation of IT and handling 370 equipment. It has an asset turnaround of 3.5x on capital employed of Rs 2.5bn and gross 320 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 270 are based on per-km running for long distances, fixed for shorter distances. It has flexibility 220 in pricing services and vendors have fuel-escalation clauses. The asset-light business helps it 170 to scale up operations according to demand and reduce its balance-sheet risk. 120
70 Sticky customers with focus on service Jan-17 Jan-18 Jan-19 Jan-20 It focuses on tier-2 and 3 cities, and provides services to industry verticals such as TCI Exp BSE Sensex 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, Source: Phillip Capital India Research including surface express (86%), air express (9%), and reverse logistics. The 5% B2C revenue KEY FINANCIALS is from e-commerce, where it providing last-mile and cash on delivery to leverage its Y/E Mar FY18 FY19 FY20 network. It also focuses on value-added services including COD, Sunday delivery, ODA – out EPS (Rs) 15.3 19.0 23.3 of delivery area, and customized solutions. Its revenue growth was driven primarily by an Cash EPS (Rs) 16.7 20.7 25.3 increase in Small and Medium Enterprises (SME) customers and branch expansion (added 70 Book Value (Rs) 54.0 69.8 88.1 in FY20). Its strong performance is a result of operational efficiency initiatives and better Dividend (Rs / Share) 2.5 3.0 4.0 working-capital management. P/E (X) 43.9 35.3 28.9 P/BV (x) 12.4 9.6 7.6 Operating leverage with capex in developing hubs, efficiency EV/EBITDA 28.7 21.5 21.1 RoCE (%) 34.9 41.3 34.6 TCIEXP is expanding the size of sorting centres with automation, and also owns some of the RoE (%) 28.4 27.3 26.4 facilities at strategic locations. It had a capital expenditure of Rs 320mn in FY20 for setting Source: PhillipCapital India Research Est. 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. Vikram Suryavanshi, Research Analyst (022 6246 4111) Valuations [email protected] 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.
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Financials
Income Statement Balance Sheet Y/E Mar, Rs mn FY17 FY18 FY19 FY20 Y/E Mar, Rs mn FY17 FY18 FY19 FY20 Net sales 7,503 8,851 10,238 10,320 Equity 76 76 76 76 Growth, % 13.1 18.0 15.7 0.8 Reserves 1531 1992 2595 3296 Shareholders’ Equity 1607 2068 2671 3372 Cost of logistics 5,766 6,644 7,534 7,342 Long term borrowing 5 17 23 19 Employee expenses 588 725 859 1,018 Short term borrowing 305 382 64 9 Other expense 530 575 656 747 Current maturity 0 0 0 0 EBITDA (Core) 619 907 1,190 1,213 Total Loan 310 398 87 28 Growth, % 13.8 46.5 31.3 1.9 Lease liability 0 0 0 1 Margin, % 8.3 10.2 11.6 11.8 Deferred tax 33 45 43 3 Other income 14 21 32 44 Capital Employed 1951 2511 2802 3404 Depreciation 43 52 65 78 EBIT 590 875 1,157 1,179 Gross block 1135 1781 1960 2138 Interest paid 24 38 38 9 Tangible Assets 955 1602 1716 1816 Pre-tax profit 565 838 1,119 1,170 Intangible Assets 16 18 15 22 Tax provided 190 251 390 279 Capital work in Progress 79 0 14 111 Profit after tax 375 586 729 891 Right to use asset 0 0 0 16 Net Profit 375 586 729 891 Non-current investments 50 52 102 119 Growth, % 30.6 56.4 24.3 22.3 Non-current assets 0 0 0 0 Net Profit (adjusted) 375 584 729 891 Current investments 0 0 13 295 Unadj. shares (m) 38 38 38 38 Current assets 1344 1767 1918 1896 Source: Company, PhillipCapital India Research Estimates Inventory 0 0 0 0 Trade Receivables 1131 1544 1631 1658 Cash 88 122 171 126 Loans and Advances 63 71 85 91 Other current assets 62 30 31 21 Current liabilities 493 927 975 872 Trade Payable 372 646 723 620 Other current liabilities 96 248 212 205 Provisions 24 33 41 47 Net Working capital 852 840 943 1024 Capital Employed 1951 2511 2802 3404
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Annexure: I Indian Logistics: Stock Performance
Container Corporation Blue Dart
700 Concor 9000 Blue Dart 8000 600 7000 500 6000
400 5000 4000 300 3000 200 2000 100 1000
0 0
Apr-20 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 Apr-19
Apr-20 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 Apr-19 Apr-03
Allcargo Logistics Gateway Distriparks
250 allcargo 500 Gateway 450 200 400 350 150 300 250 100 200 150 50 100 50
0 0
Jun-14 Jun-16 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-15 Jun-17 Jun-18 Jun-19 Jun-20
Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 Mar-05
Navkar Corporation VRL Logistics
250 Navkar Corp 500 VRL 450
200 400 350 300 150 250 200 100 150 100 50 50 0 Apr-15 Apr-16 Apr-17 Apr-18 Apr-19 Apr-20 0 Sep-15 Sep-16 Sep-17 Sep-18 Sep-19
Source: Company, PhillipCapital India Research
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Gati Transport Corporation of India
350 Gati 400 Transport corp
300 350 300 250 250 200 200 150 150 100 100
50 50
0 0
Apr-20 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 Apr-19 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 Apr-03
Aegis Logistics Sical Logistics
350 Aegis logistics 600 sical
300 500 250 400 200 300 150 200 100
50 100
0 0
Apr-20 Apr-20 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 Apr-19 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 Apr-19 Apr-03
Patel Integrated Logistics Snowman Logistics
180 patel 140 snowman 160 120 140 100 120 100 80
80 60 60 40 40 20 20
0 0
Jun-17 Jun-19 Jun-15 Jun-16 Jun-18 Jun-20
Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 Apr-19 Apr-20
Sep-14 Sep-15 Sep-16 Sep-17 Sep-18 Sep-19
Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19
Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 Mar-15 Source: Company, PhillipCapital India Research
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TCI Express Mahindra Logistics
1000 TCIEXP IN Equity 700 MAHLOG IN Equity 900 600 800 700 500
600 400 500 400 300 300 200 200 100 100
0 0
Jul-18 Jul-19 Jul-20
Jan-18 Jan-19 Jan-20
Jun-17 Jun-18 Jun-19 Jun-20
Sep-17 Sep-18 Sep-19 Sep-18 Sep-19
Dec-16 Dec-17 Dec-18 Dec-19
Nov-17 Nov-18 Nov-19
Mar-17 Mar-18 Mar-19 Mar-20 Mar-18 Mar-19 Mar-20
May-19 May-20 May-18 Source: Company, PhillipCapital India Research
Future Supply Chain Tiger logistics
800 FSCSL IN Equity 350 TGLI IN Equity
700 300 600 250 500 200 400 150 300 100 200
100 50
0 0
Jun-18 Jun-19 Jun-20
Oct-18 Oct-19
Apr-18 Apr-19 Apr-20
Feb-18 Feb-19 Feb-20 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Sep-18 Sep-19
Dec-17 Dec-18 Dec-19
Aug-18 Aug-19
Mar-14 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 Mar-15 Source: Company, PhillipCapital India Research
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Stock Price, Price Target and Rating History – Container Corp 700 650 600 B (TPN (TP650) 610) 550 B (TP 820) B (TP 8200) N (TP 690) B (TP 900) B (TP 840) M-19 500 B (TP 675) B (TP 840) B (TP 720) 450 B (TP 525) 400 350 300 250 200 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
Stock Price, Price Target and Rating History – Allcargo Logistics 250
200 B (TP 210) B (TP 190) B (TP 180) 150
B (TP 200)B (TP 165) B (TP 170) B (TPB (TP 174) 174) B (TP 170) B (TP 130) 100 B (TP 170) B (TP 125)B (TP 125)
50
0 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-19J-19 J-19 S-19 O-19D-19 J-20 M-20A-20 J-20
Stock Price, Price Target and Rating History – VRL Logistics 500
450 N (TP 411) 400 N (TP 375) N (TP 405) 350 N (TP 350) B (TP 375) 300 B (TP 345) B (TP 370) N (TP 290) 250 B (TP 340)
200
150 B (TP 195)
100
50
0 J-17 S-17 O-17 D-17 J-18 M-18A-18 J-18 J-18 A-18 O-18 N-18 J-19 F-19 A-19M-19 J-19 A-19 O-19 N-19 J-20 F-20 A-20M-20 J-20
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Stock Price, Price Target and Rating History - Gateway Dist. 300
250 N (TP 280) N (TP 265)
200 B (TP 280) B (TP 255) B (TP 255) 150 B (TP 205) B (TPB 188)(TP 190) B (TP 195) 100 N (TP 113) N (TP 100) B (TP 122)
50
0 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
Stock Price, Price Target and Rating History – Navkar Corp 250
B (TP 250) 200 B (TP 240) B (TP 250) B (TP 240) 150 B (TP 240)
B (TP 205) 100
B (TP 105) 50 B (TP 100) B (TP 90) B (TP 43) UR B (TP 46) B (TP 27)
0 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
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%.
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LOGISTICS SECTOR UPDATE indirectly, may fall or rise against the interest of investors. Any recommendation or opinion contained in this research report may become outdated as a consequence of changes in the environment in which the issuer of the securities under analysis operates, in addition to changes in the estimates and forecasts, assumptions and valuation methodology used herein. No part of the content of this research report may be copied, forwarded or duplicated in any form or by any means without the prior written consent of PHILLIPCAP and PHILLIPCAP accepts no liability whatsoever for the actions of third parties in this respect.
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