Allcargo Gati Limited (532345) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Gati Limited Q3 FY '21 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. I now hand the conference over to Mr. Ravi Jakhar Chief Strategy Officer, Gati Limited. Thank you, and over to you, Mr. Jakhar.

Yes. Thank you, and good morning, everyone, and thank you for joining us on Gati Quarter 3 FY '21 earnings conference call. I'm Ravi Jakhar, Chief Strategy Officer for Allcargo Logistics, and I have with me my colleagues, Mr. Bala Aghoramurthy, Deputy Managing Director for Gati KWE; and Mr. Rohan Mittal, CFO for the company. I hope all of you are doing well and keeping safe along with your dear ones and colleagues. I also hope that you've had a chance to look at our results and the results presentation, which has been uploaded on the stock exchanges and the company website. Over the last quarter, we have seen good indications on the macroeconomic side. We all have heard about increasing GST collections, automobile sales have been good. Across most sectors that we operate in, there has been an optimism and environment of increasing confidence. Now with the vaccination drives having also initiated, we believe that this would only lead to increased confidence, which will reflect in consumer spending, and hopefully the economic revival which everybody is expecting should continue to be on track. So amidst this environment, we on the business side have continued to do our best. And to take you further through the numbers, I will invite my colleague, Rohan, and we can get back to questions. And with Bala, Rohan and myself, we'll be more than happy to answer all the questions and provide information that we can. So over to you, Rohan, to take us all through the third quarter performance in the financial terms and explain the key outliers. Thank you.

Thanks, Ravi, and good morning to everybody who's joined. Let me just start with a few updates on the transformation program, and then we'll quickly touch upon the headline numbers. As we had mentioned during the previous call, the transformation program is predominantly revolving around 6 pillars: that's sales acceleration; cost control; building the right lean and agile team and digital revamp of our tech architecture; asset monetization to repay debt; tight control on working capital, CapEx; and ensure that we remain free cash flow positive and the ROC achieves the right target numbers. So those are the 6 broad pillars that we are working on under the transformation program. Happy to report that we've made progress against all 6 points. Consol sales is up on a quarter-on-quarter basis. Our B2B sales is up on a Y-on-Y basis as well, pre-COVID to COVID level. On a YTD basis, our fixed costs are down by almost 14%, 15%. We continue to make significant upgrades to our tech architecture. For example, recently, we've just signed up for a new CRM which is amongst the best in the world. We continue to make serious efforts on cost rationalization. For example, payroll is down on a year-on-year basis. We've moved almost INR 67 crores worth of assets into assets held for sale. These are already getting monetized. The proceeds are expected to come in Q4 or probably some spillover in Q1. And entire proceeds will be used for debt repayment; term loans, working capital put together. Our return on capital has started increasing now. In our flagship subsidiary, we are already touching 20% ROC, excluding goodwill. As far as headline numbers are concerned, our total revenue for Q3 FY '21 was about INR 401 crores. This was a quarter-on-quarter growth of almost 16.2%. If you deep dive into the results, our flagship B2B Express business registered a Y-on-Y growth as well of almost 6%. We've maintained our gross margins in Q3 FY '21 at about 24.8%. Our EBITDA for the quarter stood at about INR 25 crores, which is slightly higher than the previous quarter. Our PBT before exceptional items was about INR 4.9 crores compared to INR 1.9 crores in the previous quarter. We have booked exceptional book losses of about INR 20 crores in this quarter, which is basically on the asset monetization program that is happening. After exceptional items, our PBT is negative, right? To reiterate, these are onetime book losses on the assets which have been moved to assets held for sale. Gross debt at the end of December 2020 stood at about INR 330 crores. Out of this gross debt of INR 330 crores, about INR 225 crores is a short-term liquidity that we've taken from Allcargo. The balance is external debt. If we were to exclude the Allcargo short-term liquidity infusion, then our gross debt is down by 25% on a Y-on-Y basis. With this, I'll hand it back over to Ravi and see if there are any questions around this. Thank you.

Yes. Yes. Thanks, Rohan. So we already had a long description of our business, [ which we get ] after a long time. And now we have had the opportunity to connect in 3 months' time. So these are the updates that we had to share on the quarter performance. I think we can get into a more interactive discussion from here on and happy to answer the questions that our friends may have.

[Operator Instructions] First question is from the line of Ujwal from Quest Investment.

Yes. Very glad to see the measures being taken by the management, corrective measures, and we are already seeing those signs. So sir, if you can throw some light on the core Express business, if you see the peers like TCI, the growth rates are stunning. Even in terms of margins, they are seeing a lot of expansion. So if you can throw some light in terms of growth numbers, how we are seeing that panning out over the coming quarters or year? What are we doing to expedite that growth rate? And even in terms of margins, if you can talk how our margins have moved? Because I think Q-on-Q, the margins have been more or less flattish kind. So where do we see the core Express business margins going from hereon?

So Bala, can you take that?

Yes. Thank you, Ravi. Thank you, Ujwal, for the question. Let me take that. So firstly, the core B2B business that we have in our GKE subsidiary, let's look at it in 3 parts. One is the surface Express, then there is an air Express and then there is warehousing yes, the SCM business. The way I want to explain it to you, our surface Express has taken off. The air Express is on the runway, awaiting a takeoff. The SCM business is slightly on the sluggish side. So that is the way we have seen it. When I say Surface Express has taken off, in the 3 months of the quarter, we actually had very happy double-digit growth in both October and December. November was a single-digit growth. If you look at the composite versus competition -- and I'm not going to comment on any single name, I'm saying competition in general -- versus competition, our top line, our revenue line has actually competitively grown better than the industry itself. So that is on the top line. On the gross margin, the way I want to put it, Express business is always a balance between customer service and costs. And you have to be taking one step in customer service and one step in cost, it has to keep alternating for us to build a healthy business. You are right in calling out that the gross margin has been flattish, but that is because we have strategically chosen the step to be taken right now was the customers service step. The cost element is not lost on us. We are very clear about what needs to be done. And the next step is going to be in that as well. So with this alternate between customer service and costs, we are very confident that we will see tremendous improvement going forward as well.

Ujwal?

Sir, can you give us a rough breakup in terms of surface Express, air Express and warehousing in terms of what percentage of revenue that would be?

No. Actually, we have never done that breakup, Ujwal, and you will excuse us from providing that level of breakup, yes. Having said that, surface Express is, of course, the big portion, the vast majority of our GKE business will be in the surface Express.

Okay, sir. And in terms of warehousing, you did mention it is a bit sluggish. So why is that? So, sir, what is driving it? And how do we remediate that?

Yes. So on the warehousing business, we have 2 kinds of customers. One is the large customer who probably has a dedicated warehouse space in a dedicated facility, then there are other customers who take distributed warehouse space across the networks that we have, right? So we did see a little bit of sluggishness on the SME side. It is not so much to do with the large KEA accounts, the Key Enterprise Accounts. It is more to see on the SME side. But the confidence that I would like to give you now, with Allcargo as a parent company, we actually have access to a much larger capability pool on warehousing and SCM. The Allcargo SCM business is 5x that of the Gati's SCM business, right? So with such access to capability, we are working to rebuild the Gati warehousing business in a stronger manner going forward. When I say sluggishness, I'm referring specifically to a little bit of the SME sluggishness that is known to everyone across the board. It is only going to recover over a period of time.

Right, sir. Sir, also, can you throw some light on Gati Kausar? Does it need more investments into the business? Or are we planning to move out of that business, because already the balance sheet does not seem to be supportive of the business from hereon. So any plans of capital infusion over there? Or how do we see we taking this business forward?

I'm going to request my colleague, Rohan, to comment on this one, please.

Ujwal. So you're absolutely right. There are some plans that we are trying to put into action. There are no plans to infuse further capital in the business. We are looking at restructuring the entire balance sheet to take care of the shareholder loans because that's the majority, right, of what's causing stress in the balance sheet today. So we are in active discussions with the shareholders to try and restructure the balance sheet. Due to the stage at which we are, we are not able to share more insights on this right now. But we're confident that something -- some headway should come through in the next few months or so.

Sure. But we do continue to look forward for this business. So we are positive on the business, and we will look to restructure the business and move ahead with it, right?

So the business is EBITDA positive, right? And it's been turned around in FY '19, FY '20. It continues to remain EBITDA positive. In terms of further plans, I think the more important thing is to first restructure to the balance sheet before we talk about anything else. So allow us to come out with an official response on that as soon as the discussions are over, and then we can talk about the business probably subsequently.

Sure. And lastly, before I jump back in the queue, can you talk about the e-commerce business and how are we positioning over there as against competitors? And how do you see per se this business profitable growth over the next 2, 3 years? Can you throw some light, please?

I'll request Bala to take this up. Bala, over to you.

Thank you. Thank you, Rohan. So the e-commerce business offers tremendous potential without any doubt. That's the way we see it. Even in our last call, we actually said we have reviewed our strategy on e-commerce. We had specifically said we will focus on the larger-weight segment, the white goods, the greater than, let's say, 7 to 10 kg weight range, yes. And that is what we have done. If you see our Q2 to Q3 e-commerce performance, we probably did a 4 to 5x in -- 4x sorry. 4x, we did a 4x between Q2 to Q3, and that was played exactly to a strategy that we called out between our results in Q1, yes? We are going to further invest in the direction of large-weight segment for sure. And we are hoping to gain over a period of next 2, 3, 4 quarters in this segment. On the smaller-weight segment, we are continuing to engage on what needs to be a disruptive play. It will take some time to crystallize and materialize for that to kind of show through in the market. But suffice to say, for the time being, we are very well concentrated on the higher-weight segment. The return to profitability is because of our change of strategy to remain focused, for a short period of time until full clarity on the rest of the portfolio, to remain focused for this short period on the white goods and the larger-weight segment.

Sir, just if you can throw some light in terms of profitability. So if smaller-weight segment is X profitable, how big is or how large is the large-weighted segment?

So you're talking about industry profitability, I assume, because we are not doing the smaller-weight segments now. In general, the profitability of the larger-weight segment is kind of much better. The smaller one, unless you are going to play on scale, you need to be clear on whether it is a play on scale or whether there is any structural disruption you are going to bring on cost terms. So the smaller-weight segments definitely offer much lower profitability than the larger ones. We are not into the smaller ones as we speak today. And so I'm just making a general comment, not with reference to that.

[Operator Instructions] The next question is from the line of [ Amit Shah from Ace Securities ].

Sir, I have a few questions. So first would be what is the competition dynamics in the Express e-commerce and warehousing side? Are we gaining market share in these segments?

Let me take that, Amit, you have an interesting name. Let me take that. The market share data, while there's no independent industry market share reports that are done, basis our performance and a look at what a few people have reported, we do believe we are gaining and have gained in market share in Q3. That is our belief just by looking at numbers of competition and ourself in Express. I'm talking about specifically on surface Express. air Express, of course, there is at least 2 big air freighter companies, big daddies in Air Express. I'm talking about surface Express, I do believe we have gained in market share versus competition.

Okay. Okay, sir. And on e-commerce. Sir, as e-commerce, we talk for a year since pandemic hit this country, e-commerce is witnessing robust growth even on the logistics space. So sir, is our growth in line with the market?

E-commerce again, Amit, we have to separate out the large-weight segment from the smaller one. Gati is currently playing only in the larger-weight segment. We are not playing in the smaller one. The post-COVID growth, a lot of it was actually in the smaller-weight segment. So I think it is unfair to make a comparison in a area where we don't play. On the larger-weight segment, in the festival period our customer clientele remained the same as what it was last year. In terms of share, et cetera, actually, we are happy about what we have done, simply because we have been able to report a more profitable performance, as you can see in our Q3 results on e-commerce as well. So our focus has been to not get into a price war with people and to incur losses. That has been the way we have played it. In terms of market share, large-weight segment, I think the numbers will be comparable as what it was last year.

And go forward, what are you seeing in this segment?

Sorry, just please repeat, I couldn't hear.

Sir, going forward, in this segment, sir, how are you looking at this segment?

So going forward, our intent is to continue to invest and gain in this larger-weight segment for sure. The segment itself is very seasonal. There is a higher degree of seasonality in the white goods. Usually, the Q3 quarter is a higher quarter versus the remaining quarter simply because of the sales activation that the lead players make, hence, subject to the seasonality. But in a competitive manner, we do hope to gain as we go forward.

Okay. Sir, and my last question. Sir, as I'm aware that we are into some B2B segment and supply chain business, are we seeing any plans to -- for play into B2C side?

In supply chain business, meaning, you mean warehousing and stuff?

Yes.

Okay. So actually, our supply chain business already includes sort centers in the SCM business of GKE. Even though it caters to the e-commerce market, because it is a B2B business it already includes, thus we are already in the play. We don't do fulfillment centers. So we don't do e-commerce warehousing. We don't do e-commerce fulfillment center, but we are very much into e-commerce sort centers at Gati.

[Operator Instructions] The next question is from the line of Depesh from Equirus.

Yes. Sir, firstly, just want to clarify the segmental breakup that you've given on exchange filings. So the Express business and your stand-alone business basically means the e-commerce logistics, and at consol level, you basically add the Gati KWE and Gati Kausar numbers. Is that understanding correct, sir?

Absolutely right.

Okay. Great. So just to follow up on that, sir, why is your e-commerce numbers saw such a sharp decline Y-o-Y? I think you're talking about the small and the larger packages that you were talking about in the last question, but such a 75% drop Y-o-Y. And secondly, the margins in the e-commerce logistics has sharply improved to like 12% versus a decline -- a negative number last year, versus when I see your B2B Express business, the margins are lower at 4%. So like I understand that the B2B business have higher margins, but it is looking reverse here. So can you please help me understand that?

Now, firstly, versus last year, our e-commerce portfolio this year is very different. Last year, we were playing both in the smaller segments and in the larger segment. And we did take a hit. While we didn't have this investor's call last year, I'm saying in the numbers that we reported, you would have seen a loss being reported in some of those quarters on the Gati stand-alone side. So this year, we have deliberately pulled out of the smaller-weight segments, which were kind of not margin accretive for us. Hence, there is a sharp drop in the e-commerce top line business that you see. Having said that, the profitability in general, I'm saying e-commerce going forward, what you should expect within Gati, we will not do loss-making e-commerce business. We will only do what delivers an incremental profit for us. On B2B, our profit margin, in general -- I didn't understand the 4% reference that you have made, if you can clarify that, I can help a little better. The B2B margins have been flattish, like we discussed a little earlier. Flattish, when I say flattish, I'm talking about the 7% range. And we are working to get that to improve in the quarters ahead.

Okay. Sir, but your stand-alone EBIT margins are at 12%, which is like mainly the B2C e-commerce logistics, and your B2B, you're talking about liquidation of margins, so...

Okay. Okay. So let me explain that. The stand-alone includes fuel business, which is a significant portion of the revenue stream there. And also, it includes e-commerce. So that's probably what you are trying to say.

No. Sir, I'm talking about on the segmental e-commerce, the EBIT number that you've given, INR 13.8 million on a revenue of INR 113.8 million. So that comes around 12% EBIT margin, which is very, very high as compared to your B2B number which is you were talking about around 7%. So how come the e-commerce is doing such a high EBIT margin is my question, sir.

Okay. So in e-commerce, we have carefully picked and chosen what portfolio we want to play in, both in terms of weight segment and also in terms of geographies of play. Last year, for example, we would have been playing across the country. This year, we specifically picked locations where we think it is, both from a service perspective, the customer will be happy; and from a cost and profitability perspective, we will be happy. So we specifically carefully picked location by location to see how to play that game. And because it was a festival period, there goes a lot of advanced planning into it. So what you are seeing is a reflection of that advanced planning resulting in the P&L, and I'm happy that you picked that piece up in the manner that you did. On the B2B business, it is, of course, a combination of everything that we are speaking. It is surface Express, it is air Express, it is SCM. It is a combination of all of that. We have not called out surface by itself separate.

Got it, sir. Yes. Yes. Sir, the last question basically is that our listed peer in the B2B Express business has seen a stellar increase in the gross margins. Now a part of the reason that they highlight is the increase in the tonnage per truck as the vendors have increased the size of the containers. So just wanted understand your thoughts on the same. And are you discussing with your vendors to increase the container size so that you can also get these margin benefits?

So I don't want to dissect a competitors' performance. We respect competition. We take inspiration from it, and we will actually work towards the same. I mentioned before that in Q3, we chose to take the step on customer service. We said we will hold cost and profitability in that space. Hence, we took the step on customer service. If you compared our performance on revenue versus the competition, you will see we have done definitely a step ahead, and that is the reason why I say confidently that we have gained in market share. Now we are equally, very carefully, very clearly working on the cost side. So there are multiple actions. CFO Rohan, he mentioned to you about our transformation project. There are multiple actions on that front. I don't want to call out one single action. So the action that you refer to is part of it, but there are literally 15, 20, 30 different things that we are working on, and we hope to have that reflected in the P&L in the coming quarters.

The next question is from the line of Chintan Desai from Param Capital.

Sir, I have 2 questions. One is on the employee expenditure.

[Operator Instructions]

Hello? Is it audible? Okay. Sir, my -- I have a couple of questions. One is on the employee expenditure, where our employee expense have increased probably due to the new hires, which we planned. So on this, wanted to understand what would be the run rate going ahead. And coupled with this, just can you give us some flavor on the new customer acquisitions? And how has been our increased share of wallet among existing customers?

Okay. On the employee expenditure, I think 9 months into the year, we are approximately 15% to 20% lower than our last year. Despite the new hires, we will continue to see the 15% to 20% lower than our last year's. So that's the way you must understand the employee space. At the end of the year, you will see the same 15% to 20% reduction on a year-on-year basis. In terms of customer acquisition and market share, a lot of our effort in Q2 was to come back from the COVID, in Q3 was to expand the business. So we have signed up quite a few new contracts, including in the large enterprise accounts and also in the SME accounts. So a sizable 3-digit number of contracts has been signed up to in the last quarter. That is the reason why we are very confident about the revenue buoyancy that we are showing. It is definitely a market share gain even in Q3, and I am confident we will continue to see that pattern play out over the next many quarters.

Okay, sir. Sir, and just last question on other expenditure. Any onetime cost which is there? Or this would be the run rate we would see going ahead?

I'm going to invite Rohan to please pick that up.

Are you referring to the exceptional items? Or are you referring to any other item when you're talking about...

No. Any other items in the other expenditure? Any onetime costs that you have taken.

No, no, no. Nothing major. There were some outstanding legal cases, which were completely closed in Q3. So that was also closed. So there's no -- you can assume the run rate that you're now seeing in Q3 as the standard run rate that we will be maintaining. Having said that, we continue to work on further cost rationalization and other expenses, so it should only stay where it is right now or marginally come down further.

The next question is from the line of Ankit Panchmatia from B&K Securities.

Yes. The question basically pertains to our transformation steps. Could you please throw some light accordingly how -- or where are we? Because I believe it was a 15- to 18-month sort of exercise? And how are we placed in each of the 6 pillars, which we alluded to? It would be much helpful on that.

Sure. I'll take that up, Ankit. So see, we are almost about 45%. As of December, we were almost 40% into the transformation program. I think significant progress has been made against the targets that we had internally set for ourselves. This was a cross-functional transformation program, covering sales, operations, HR, technology, IT, finance, accounts, operation -- overheads, admin expenses. So it covers all aspects of Gati. Some of the important things that we've realized, one, we've done a sales acceleration, focusing on a few segments of clients that were contributing revenue. As I mentioned earlier, our B2B surface Express division has actually recorded a Y-on-Y growth Q3 versus Q3 in sales. So that itself is testimony to the success of the transformation program. Beyond that, I think we've been able to maintain a strict cost control on the fixed expenses, because that was the starting focus. So we've looked at our rental contracts. We've looked at all our vendor contracts. I'm talking about indirect expenses over here. We've looked at all our vendor contracts, et cetera, and we have rationalized costs wherever possible. Those costs that we've rationalized are now somewhat sustainable, right? So that was the second part. The third part was obviously looking at the productivity at an employee level. And therefore there were certain calls that were taken. Also, as we were exiting certain nonprofitable businesses, right, like forwarding, et cetera, the headcount, we were able to bring down the headcount by virtue of closing these businesses, which are not profitable for us. So all that has helped us in rationalizing the payroll as well. At the same time, we've been able to beef up the senior management team with strong industry hires. We've been talking about this in the public media now. Beyond that, what we've also done is we've looked at our whole tech architecture. And we've identified immediate must wins. One of them was CRM that we felt is an important requirement for the organization, and we've signed up with Salesforce to go and execute a Salesforce-based CRM. So that is something which is under the works right now. We're also looking at the rest of the elements of our tech architecture because digital transformation is one of the core pillars of this whole program. Beyond that, we've also looked at how we were consuming working capital, where all reductions could happen what kind of assets need to be monetized. As I mentioned earlier, we've moved almost INR 66 crores, INR 67 crores worth of assets to monetization. And we have some offers against these assets. So all this has actually helped us in bringing our debt down, freeing up free cash flows as well. And the return on capital, as I said, by virtue of this -- all these pillars coming together has improved significantly in our flagship subsidiary. If you have any follow-up questions on the points that I've mentioned, I'm happy to take them up.

No, I'm sure this helps me out. Then I believe there needs some clarification on the stand-alone Express which we report. So what would that include versus consolidated Express division which we report? If that clarification would provide, I think it would help.

Sure. So our stand-alone Express is our B2C Express. Our consolidated Express -- I'm talking about the segmental results -- includes B2C and B2B. So if you substract consol from stand-alone, you're left with the B2B business, basically.

This includes warehousing as well, SCM as well or it is pure Express?

Yes. No, the B2C business is pure Express. The B2B business, which is consol minus stand-alone, includes SCM, the warehousing business.

The next question is from the line of Bharat Sheth from Quest Investment.