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 Page | 3 | PHILLIPCAPITAL INDIA RESEARCH 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.