Growth of Logistics Sector in India

CFS/ICD operators will benefit from revival in India’s international trade volumes

Notwithstanding the slowdown in the Indian logistics industry since FY13, Sudarshan Shreenivas, Associate Director, India Ratings & Research Pvt Ltd (Ind-Ra) believes that the long-term prospects for the industry remain bright. Ind-Ra believes that the implementation of Goods and Services Tax (GST) would cause a spurt in investments in the logistics sector, with the large players investing in hub and spoke transportation infrastructure on pan India basis.

Sudarshan Shreenivas
Sudarshan Shreenivas

 

Despite the anemic economic growth rates, the dominant themes in the economy namely domestic consumption (both Brick and Mortar and On-line), financial growing inclusion and infrastructure development remains unchanged. Logistics service providers contributing to the dominant themes may show much healthier growth than plan vanilla logistics players.

Brick-Mortar Retail Play: The agri and cold chain logistics services is one of the fastest industry segments, where the demand is driven by the large demand-supply mismatch and growth in organized retail in the country. Although the segment has attracted large investment in the past five years (including significant proportion of private equity investment), the business opportunities in the segment remain under-exploited considering the large contribution of agriculture and related activities to the economy (13.7 percent of FY13 GDP). Permitting FDI in multi-brand retail throughout the country would lead to the creation of an efficient and robust back-end supply chain. In such a scenario, the large investments in logistics and warehousing infrastructure by foreign players would lead to further the growth of the Indian logistics sector.

E-tailing Play: The explosion of e-tailing in recent past has given rise to new service requirements, which in turn has led to the demand for specialist logistics companies dedicated to this space. Try and buy option, cash collection on delivery and committed delivery date and time are some of the new service demand trends to have emerged. Courier companies or transportation firms with traditional service offerings simply cannot cater to this requirement.

Financial Inclusion Play: Specialty segments that are slated to grow at a fast pace include cash management services and document storage. Demand for cash management services is expected to grow exponentially in the medium term given the directive of Ministry of Finance to banks to expand their reach into Tier II – Tier IV cities and towns which is expected to lead to the doubling of the country’s ATM population to around 250,000 in the next two years. While PSU banks are expected to establish 65,000 ATMS, Ministry of Finance has granted approval for 50,000 ATMS under “White Label” (ATMs are those set up by an independent private party such as Tata Communications Payment Solutions Ltd (TCPSL) where the debt/credit card of any bank can be used), while another 15,000-20,000 ATMs are expected to be established by various private banks.

Infrastructure Heavy Play: Certain segments of the logistics industry which appear to have borne the brunt of the on-going slowdown are the container freight stations/inland container depots (CFS/ICD), container train operators (CTOs) and companies catering to specific sectors such as steel. CFS/ICD companies typically have high leverage (defined as adjusted debt/EBITDA) owing to the large borrowings to fund the establishment of the necessary infrastructure; with the slowdown in container volumes from FY13 translating into lower margins, leverage has increased. Over the long term, Ind-Ra believes that CFS/ICD operators would benefit from the revival in India’s international trade volumes; however the kind of revenue growth and EBITDA margins witnessed till around FY12 may not be replicated in future given the heightened competition. Margins in the CTO segment would continue to be under pressure in the foreseeable future due to competition from the industry leader – Container Corporation of India. Survival in this segment would depend on high efficiency of operations leading private industry players to persist with load sharing to ensure high utilisation of rakes.

Emerging Niche: The demand for document storage is being driven by high lease rents and space constraints in offices in urban areas which would compel customers (particular in banking, financial services and insurance). In addition, the need to have disaster management systems in place is also leading large banks and corporates to store one set of all critical documents at an alternate secure location.

The Tried and Tested: Companies in the road transportation, freight forwarding and courier businesses differ from others in the logistics space in terms of their business model which typically is asset-light, with most operating premises taken on lease. The advantage is that it allows for a rapid scale up of operations when demand for services is strong and a scaling down when service demand is muted.  Hence with the uptick in demand from sectors such as manufacturing and mining, significant growth can be expected in the revenues of basic logistics providers.

 

Conclusion: The ability to offer value-added or end-to-end logistics solutions while maintaining high operational efficiency is emerging as a key success factor for logistics industry participants. The larger companies in various industry segments have a competitive advantage over smaller players in terms of superior infrastructure enabling them to offer complete end to end logistics solutions (enabling higher bargaining power and greater share of client’s wallet) or value added services such as time-definite delivery solutions (enabling higher margins). Ind-Ra believes that the implementation of GST would cause a spurt in investments in the logistics sector, with the large players investing in hub and spoke transportation infrastructure on pan India basis.

 

 

 

 

 

 

 

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