Allcargo Gati Limited (532345) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q1 FY '22 Earnings Conference Call of Gati Limited hosted by Equirus Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Depesh Kashyap from Equirus Securities. Thank you, and over to you, sir.

Yes. Thank you, Stephen. Good afternoon, everyone. On behalf of Equirus Securities, I welcome you all to 1Q FY '22 Earnings Conference Call of Gati Limited. From the management, we have with us Mr. Pirojshaw Sarkari, CEO of Gati Limited; and Mr. Ravi Jakhar, the Chief Strategy Officer of Allcargo Logistics. We'll begin the call with opening remarks from the management, and then we can open the lines for Q&A. I now hand over the call to Mr. Ravi for your opening remarks. Over to you, sir.

Yes. Hi. Thank you. So good afternoon, everyone, and thank you for joining us on Gati Limited Quarter 1 FY '22 Earnings Conference Call. I'm Ravi Jakhar, Chief Strategy Officer for Allcargo Logistics. And I have with me my colleague, Mr. Pirojshaw Sarkari, Phil, who is the CEO for Gati. I trust all of you and your dear ones and colleagues are well and everyone is keeping safe. I also hope you've had a chance to look at the results, which have been uploaded and the earnings presentation, which has been also uploaded on the exchanges as well as on the company website. I would like to start with providing a business update, key highlights on the transformation program and some key operational and financial performance highlights for the quarter gone by the first quarter of FY '22. So we have all seen that the second wave of COVID pandemic has been more fatal and has caused disruptions. However, at this time, we are more prepared, and therefore, we have been able to manage some of the trade activities better, and therefore, it did not come to an absolute sell-in like it happened in the last year. However, having said that, it has indeed been an impact of the lockdowns across the country and the logistics and supply chain sector has indeed been in some stress, particularly in the months of April and May, where the second wave was at its peak. And during the month of June, we had seen the improvement and we just continue to sustain, and we see a near normal situation at this point in time in terms of the cargo movements. And against this backdrop, despite disruptions and in challenging market conditions, I would say we, at Gati, have managed to mitigate disruptions faced by the entire economy and delivered a resilient performance. Gati-KWE volumes were at 178,000 metric tonnes, which was lower by 15% compared to the normalized average quarterly run rate of 210,000 metric tonnes. So this 15% decline is largely on account of lockdowns, and therefore, reduced movements. So that's been the situation. And I said this has primarily been limited to the first quarter, and situation seems to be much improved now. With regards to the funds inclusion, Allcargo, as on 30 June 2021 has invested INR 27.5 crores in Gati through preferential allotment, which has led its ownership increase to 47.3%. Allcargo would invest further amounts by way of -- against warrants, which have also been issued. The synergies that Allcargo continues to strengthen through the cross-sell program Sangam, which has been growing well now and both Allcargo and Gati businesses are benefiting by collaborating with each other. And there's been a steady start, and we believe it can gain significance in the times to come. Moving to our discussion on how we've been progressing on the transformation program. And we have captured this in some of our last quarterly calls as well. And I'm happy to provide the update around 4 key pillars that we monitor: balance sheet restructuring, focus on debt reduction, profitability and digitization. On the balance sheet restructuring, we have taken -- we've done various activities and taken initiatives, and we are now focused on quality of cash flows and the devotion of our attention to core business, which is express, supply chain and e-commerce logistics, has allowed us to gain strength. As has been intimated, we have exited the cold chain business and the other noncore operations also are at an absolute minimum level at this point in time. On the debt reduction side, we have further reduced the debt by another INR 11 crores during the quarter. This is in addition to the impact of more than INR 100 crores, which has come in by way of exit from the cold chain business. And this has allowed us to bring down the overall debt as well as the interest cost as well. In terms of the cost of borrowing also continues to improve. And now the average cost of borrowing has come down to 7.6% at GKEPL level and 9.2% at Gati level, who will remain in -- on a constant dialogue with bankers, and we expect to continue to bring it down further in the coming quarters. On the profitability side, we aim stringent cost control measures, coupled with expansion in margins, which has led to improvement in profitability. While there is certain element of operating deleverage in the existing quarter, the margins also remained impacted by transformation onetime expenses. We continue to generate similar turnaround at significantly less number of headcount. This remains a constant endeavor to build in certain consistency in margins, which we believe would be achieved from the second quarter, assuming there are no further COVID disruptions, which cannot be anticipated at this point in time. As we have stated, 2 to 3 quarters of normal operations should allow us to grow and expand business to bring margins to double-digit numbers. As we've spoken, we remain on path to achieving that, except for the disruption of this 1 quarter, largely caused by the second wave of the COVID pandemic. On the digitization, our WhatsApp chatbot Genie has received tremendous response from customers, the ease that it offers for activities such as track and trace, pickup registration, complaints, et cetera, has truly delighted customers. The response to implementation of digital payment system remains very robust, and we are now seeing nearly 30% of the cash collections coming in through digital platforms. So there has again been a good strong progress across this. Coming to the financial performance for the quarter ended 30th June 2021. Consolidated revenue for the quarter is INR 291 crores, a year-on-year growth of 78.7%. The month of May was more significantly impacted as almost -- most of the states were in lockdown. And last year, it was an even more severe impact. And therefore, when you compare it to the previous year, there's actually a very high 78.7% growth on that. Revenue from Express and supply chain management divisions contributed to 82% and fuel stations contributed to 18% revenue for the quarter. Our gross margin stood at 23.6% for the quarter as compared to 25.4% for the preceding quarter. The margins were again significantly impacted, particularly in the month of May with exceptional movements in the cost structures given lockdown and challenging situations. Otherwise, we are nearing 28% to 30% kind of a gross margin level in the normal times or near normal times, if we look at the most recent levels. EBITDA for the quarter stood at INR 1 crore as compared to negative INR 22 crores in Q1 FY '21. Preexceptional PBT loss at minus INR 11 crores as compared to loss of minus INR 40 crores in Q1 FY '21. While reported loss stood at INR 21 crores, adjusting for the costs, the loss narrows down to INR 8 crores. And this is being highlighted because the Gati Kausar is no longer part of the company and has already been divested, and therefore, would not have an impact in the coming quarters. Some key highlights about our core Express business, which is housed under GKEPL. The excess revenues for the quarter 1 FY '22 is INR 237 crores, a growth of 139% year-on-year. However, comparing it with the last year, as I mentioned, is not appropriate. And if you look at the FY '20 average numbers, it is a degrowth of about 4%. So considering that there is a significant impact of lockdown, managing 96% of the average for FY '20 has been a strong resilient performance against challenging backdrop. The positive momentum that we were seeing in the Q4 FY '21 had continued in the month of April, but towards the end of April and particularly in the month of May, which is the weakest link in the quarter, we found challenges. We continue to improve through the exit and in the current quarter has continued -- we have seen that improvement sustained on a month-on-month basis. Surface continues to remain the biggest contributor with revenues of INR 218 crores, which is almost 92% of exit business. And air and supply chain management contributed 3% and 5%, respectively. Debt in GKEPL was further reduced by and average interest cost was brought down from 8.2% to 7.6%. As I mentioned earlier, we continue to look for further improvements on this. As we've been highlighting over the past few quarters that we seek to strengthen the leadership team of Gati. We have inducted several key leaders in the company. And now we welcome Mr. Pirojshaw Sarkari, Phil, who's the veteran in logistics industry. Phil, as everybody knows him on the street, is a chartered accountant by profession. In his illustrious carrier trajectory, Phil had set up the UPS business and organization in India and served as its MD and country head until 2010. He then joined Mahindra Logistics as its CEO. And at Mahindra Logistics, he built and focused on a great organizational culture. I have finished with my financial highlights, and I would now request Phil to comment on his journey and his views as the CEO for Gati. Phil, over to you.

Thank you, Ravi. That was very generous description of my career, thank you for that. Good afternoon, everyone. It really feels good to be back with you all. I'm sure I have interacted with many of you on the call in my earlier avatar. With India and the world, setting sites on a better, brighter future ahead of these unprecedented challenging times, the current role has provided me an opportunity to participate in an exciting transformation story. The Indian logistics industry is set to grow at 10% CAGR over the next 3 to 5 years, and niche segments like Express is expected to outpace this growth. The increasing demand for on-time deliveries, faster transit times, just-in-time inventory and pan-India reach are long tailwinds for this sector. At the same time, what customer derives is the lower inventory costs, which, in turn, enables them to remain cost competitive in the market. While Gati is an iconic brand and is well known for its industry-leading network infrastructure and pioneers in India's express industry, I believe it has now entered a new intense phase of transformation and accelerated its journey towards operational excellence and unmatched customer service to establish a position of market leadership. Together, Gati and Allcargo are in a formidable position to create synergies and offer all their customers access to an extensive Indian and international network with end-to-end logistics services that only few others will be able to match. With their respective legacy and experience across diverse logistics verticals, Allcargo and Gati can offer their key customers, customized solutions combining both their areas of expertise. Immense synergies could be built from the combination of this global and local leadership. And I look forward to all these opportunities being crystallized by us at Gati. Before I open the floor for questions and answers, just to remind you guys that I have joined on the 9th of this month, so be kind to me. Okay. I would like to open up the floor now.

[Operator Instructions] The first question is from the line of Chetan Shah from Jeet Capital.

Congratulations, sir, for your new assignment and wish you all the best. Sir, just 1 question from my side. As your role in this organization and the kind of restructuring in terms of capping out of noncore business by Allcargo. Could you just give us your picture of your vision? How do you see this company in a short-time horizon? What are your priorities to look at the business? And where do you see that 5 years down the line?

Sure. So when I was discussing this opportunity with the new owners of Allcargo Logistics, I found 2, 3 very interesting aspects. One is that they were very clear that they want to run an asset-light business. And as you all know, that is something that I profess in logistics. Number two, there was large investment that was being made in the digital aspect of this business, and that is very, very essential for any logistics company to be able to grow and expand and transform itself digitally. And number 3 and most important is the synergy that this group can derive between Allcargo and Gati. And therefore, these were kind of the 3 interesting points that got me to take on this role. I think as we move into the future of India and the world, I have said this before that the e-commerce industry has spoiled the customer, even the B2B customers are now looking at time-definite deliveries and faster delivery. And historically, in India, the businessmen have been keeping a lot more inventory than what is required because they did not get time-definite deliveries with visibility of when the goods will arrive. I think this is now an opportunity of reducing their costs by them keeping minimum inventory and getting service, which is time-definite with certainty and of course, visibility. And that is what will reduce the end-to-end cost also for the customers. Express has been morphed into a service that at one point of time was very niche to a service that is now demanded by each and every customer. And I think customers are not just demanding faster deliveries but are also demanding that there is absolute visibility in the entire supply chain. What is also important and what has come out from COVID definitely is the fact that supply chain visibility is gaining more and more importance and dependability on a single supply cluster is going to reduce, and therefore, more and more supply clusters will get developed and therefore, more diversified transportation. So if you put all this together, there is tremendous opportunity for a company like Gati to reinvent itself. I have always -- right from when I started my logistics career, I've always looked up to Gati to be the front runner, whether it was in technology or it was in infrastructure at that point of time. And now it's the time to kind of transform itself, I would say, Gati 2.0 as they would call it, and grow it to the next level.

Understood. Sir, if I may allow to ask 1 follow-up question, a very short one? Sir, you mentioned about 1 of the 3 things you will be looking at. One of that is the integration and synergy with the parent, Allcargo. So if you can help us understand what is the 2 or 3 numerical parameters which you will have in your mind you being coming from a logistics background, which you want to see getting corrected or included in Gati from a short-term 2-, 3-year time horizon and eventually target it for next 4, 5 years time horizon? Just to get a sense that what is your important data part which you would want to see periodically and keep enhancing, improving to improve your gross margin and eventually profitability and a return ratio for Gati on an overall basis?

Yes. Let me take that up. I think like Phil mentioned, he has just joined our 9th. Today, we are on 12th. So before comprehensive plans can be laid out from his perspective, I think it will be fair that we wait for some time. But let me say that as far as the company is concerned, we have continued to share this over the last few quarters as well that synergies that we are speaking about are around benefiting on the both backend as well as the customer relationship. There have been initiatives such as Gati kiosk being set up at Allcargo CFSs. There have been back-end synergies in terms of various functions which can have a shared group by center of excellence, which brings down cost and also improve the delivery and impact. And the other aspect is if you look at the potential for growth and the way growth is being driven, we have stated our objective of expanding within a rapidly growing market and gaining market share. All of this requires a great amount of confidence and support from the customers. And that support and confidence also stems from the fact that the customers are able to get a variety of services from 1 single partner. And that is where, through integrated service offerings, various customers experience what is truly an end-to-end partner which could take care of requirements for international supply chain as well as for the domestic supply chain requirements. And therefore, all of these things are helping us at Gati to optimize our cost through back-end synergies, channelize our resources better through cross-sell program and also improve market share on account of stronger consumer -- customer confidence on our capabilities and our ability to expand a much more robust basket of service offerings.

[Operator Instructions] The next question is from the line of Avadhooot Joshi from Newberry Capital.

Two questions from my side. If we look at the employee cost or the number of employees from Q1 FY '21 to Q1 FY '22, we have reduced 400 numbers of employees. However, if you look at the employee expenses, the Y-o-Y, employee expenses gone up by INR 2 crores. I would like to know what could be the reason for that? That's the first question.

Okay. Yes. So on the headcount side, as you would have noticed from the last quarter as well as this quarter, there has been a continuous improvement in terms of making the whole system more efficient, reducing the headcount. And therefore, this would lead to an improved salary costs as well. However, what you see in the trend is because of some anomalies and let me highlight that. In the quarter 1, last year, we had a cost reduction, which was on account of -- given the extreme impact, you may recall in the last year in the month of April, the business was down almost 90%. Company was dealing in a crisis mode. So there were salaries which were held back and they were provided for in the subsequent quarters and they were subsequently restored in the fourth quarter as we came out of the whole challenging times. So therefore, the last quarter numbers were -- the Q1 numbers were lower than what they would have been in the Q4 numbers were slightly higher than what they should have been. So therefore, this is an impact of onetime adjustment of salary reduction and restoration happening in 2 different quarters. Otherwise, from here on, the salary cost that you see on the headcount, these are more normal. There are no exceptional additions or subtractions in this quarter. And these headcount -- these salary cost savings are likely to sustain from here.

Okay, understood. The second question is about, I think we have -- in Gati standalone itself, we have e-commerce business, right?

Yes. So let me explain to you. We have 2 businesses in Gati standalone: fuel stations and e-commerce logistics. Fuel station is the one which is in the process of being divested. And e-commerce logistics is a continuing business. And in GKEPL, we have the Surface Express, Air Express and the Supply Chain Management business.

Correct. So my question is about e-commerce. So I think you would have read about the article in today's PP Prime. So what portion of cash-on-delivery will be there in that e-commerce business? I think only e-commerce business will be having cash-on-delivery. Is that understanding correct?

Yes. So basically, as we have spoken about the same in the last quarter as well, e-commerce currently is a very small part of our business because when we started the transformation journey at Gati, the first objective was to divest from the noncore businesses and build a robust B2B business, which is the main core of the company, and that's what has been the focus. And at this stage, we have -- over the last couple of months in particular, we have been evaluating our e-commerce go-to-market strategy in defining our playbook, which we will -- how we will be operating in the market, what segments will be focusing on. So at this point in time, the business is very insignificant in terms of the overall scale and contribution. And therefore, it would be unfair to draw significant trend from there. In the coming quarters, we expect that as we put our plans together and find the right strategy for growth, we would see expansion in this business. But at this point in time, the quarter gone by, the numbers are fairly insignificant on the e-commerce business.

The next question is from the line of [ Rishab Jawiri ] from MK Investment Managers.

Hello? Am I audible?

Yes, indeed.

One question on your opening remarks, you mentioned that gross margins would stabilize at about 30% or rather has stabilized about that number and which is also visible over at least 3 years now. You also mentioned about double-digit EBITDA margins. If I understand at least on the Surface, which is your largest product in terms of revenue, our pricing is more or less similar to what probably the competitors are also offering. So where does this EBITDA margin expansion come from? Because the next largest expense head is one employee where you clearly highlighted there has been reduction, but if you could help us understand what more can be done there? And then the other largest cost is rentals and some of the fixed costs. So how do you achieve that number?

Right. So as you rightly pointed out, there are 3 elements, which are important here, the gross margin, EBITDA margin and the cost in between. Now gross margin, like I mentioned, would continue to be sustainable at 28%, 30% level, which we are seeing right now. There's an exceptional decline due to lockdown. The gross margin should remain healthy. The EBITDA margin expansion would primarily come on account of marginal reduction or containing the cost which is between gross margin and the EBITDA, while the revenue base will expand. So with the same cost, we will be doing more business by way of growing, outpacing the market growth, and that is what will be the primary driver going forward because the transformation that impact has largely been achieved. There would still be some more incremental gains in small data and the gross margin and further improvement on the cost side, but a significant impact will come straight away on account of expanded revenue on the same cost base, and therefore, the EBITDA margin percentage will improve naturally.

So if you were to go back to your -- so FY '21 revenues have been achieved with slightly -- or let's say about 400-odd lower employees through the year. With the same employee count, can we go back to FY '18-'19 revenues? Is that what you are suggesting?

Yes, absolutely. With very minimal cost increase, if any, we'd been able to be in a position to significantly grow the revenue, and that exactly is the plan. We do not envisage significant proportionate increase in the staffing costs, while we aspire for a significant growth. And that is what would lead over the next 3 quarters or so to reach a double-digit EBITDA margin. That's what has been our plan, and we've been speaking about it, and it looks achievable.

So let's say, we add another about 4.5 -- or let's say, INR 450 crores of additional revenue over here to reach back to FY '19 number, at about 30% gross margin that would imply about INR 150 crores additional EBITDA, assuming but everything else remains constant, probably even in that case, we probably may not reach a double digit, actually slightly less than a double-digit kind of margin. So would those costs still continue to go down also like employee and other costs?

Yes. So given significant variation...

To reduce them with even INR 1,800 crores, INR 1,900 crores of revenue?

Yes. So given significant variations across quarters during the financial 3 years, you mentioned, I would recommend that you look at the Q4 performance. We have shared an earnings presentation, which details out excluding exceptional items, the margin stood at about 8% that we have spoken about. So now we are speaking about an expansion of 8% to 10%, assuming the cost base does not grow up as the revenue base increases another 20% or so. Naturally, if those numbers will start appearing, right? So you can refer back to the quarter 4 numbers and build assumptions around that in terms of how containment of cost and expansion of revenue would play out, it would actually take it towards a double-digit number.

Sure. And in terms of our revenues, what would be the contribution of top 5 and top 10 customers?

It is fairly diverse. So at Gati, we work across the country, across all category of customers, whether it's pharma, automobile, textile, retail, we work across all category of customers, all regions. So it's extremely diversified.

So both in terms of individual client as well as sector it would be pretty much diverse, is that right?

Absolutely. Absolutely.

Would any single customer be in double digit?

No.

The next question is from the line of Prateek Kumar from Antique Stockbroking.

My first question is just a clarification. You said that our debt reduction is INR 11 crores. Wondering that Gati Kausar was sold at around INR 100 crores, so why the debt reduction is not INR 100 crores?

Yes. So I had mentioned very clearly that the debt reduction is INR 11 crores over and above the debt reduction achieved by way of Gati Kausar. So this is incrementally on top of that. I specifically mentioned that we have seen a further impact of about INR 100 crores, which has come in by way of divesting our shareholding in Gati Kausar. This INR 11 crores is over and above that, like I mentioned everywhere.

It seems like we lost the connection for the current participant. We move to the next question from the line of Sriram Rajaram from Ratnatraya Capital.

Sir, my question is on Slide #7, we have the Surface Express revenue and EBITDA. Now the EBITDA -- what would be the normalized EBITDA for the quarter for the fiscal?

So I think I would recommend that from a normalized EBITDA -- yes, I would say that for the normalized EBITDA, it would be better to look at the -- from a normal situation perspectively, it'd better to look at the performance in the quarter gone by because this quarter like I said, has a significant impact on the disruption. And therefore, from a normal business environment if that is what you are intending, it would not be the right look at.

No, no, no. I'm asking you what would be the sustainable number for this quarter? Because for example, for the earlier quarter, you had reported EBITDA of INR 14 crores, but a normalized EBITDA of INR 27 crores that was disclosed in the last presentation. So I just want to get some sense on...

Right, right. Okay, okay, okay. Understood. Yes. So there were some exceptional items in the last quarter, which we had spoken about. So there aren't any significant exceptional items in here. This is largely a -- current EBITDA does not have any exceptional items. It is largely low because of the revenue base. So the significant decline on account of the lockdowns has led to an erosion of EBITDA. And as the revenue comes back to normal levels, the EBITDA would also start coming back to normal level. So there's no exceptional item this time. And therefore, what is reported is what the actual EBITDA also is unlike the last quarter where there were some exceptional items.

Okay. I get that, sir. But then if I look at the tonnage volumes, 200 versus 178 for this quarter. So even if we compare Q2, we have made EBITDA of INR 20-odd crores in Q2, similar tonnage was made in this quarter. So I'm just curious what happened? Is there any pressure on the cost side or something like this? Is there any change in SME mix or corporate? Is that why your realizations were low? I mean any color on that?

No. So there has been no impact on realizations, except like I said, the gross margins were impacted slightly, particularly in the month of May, which has pulled down the overall quarter as well. But if we look at the exit trends within the quarter, the gross margins have returned back to the normal levels, and we see the sustenance in the levels across the current month as well.

The next question is from the line of Neelam Punjabi from Perpetuity Ventures.

Would it be possible for you to break up your revenue for the quarter into April, May and June, what was the revenue number that you did?

So I can comment on the trend. We do not share the monthly numbers. But like I mentioned, May was the most significantly impacted month, and April was when the decline had just started and June has been a month of recovery. So April to May was the sharp decline and June has seen some recovery, particularly towards the last 15 days of June, and that has sustained during the month of July. So if you look at what we were doing in the normal time in January, February, those numbers have been achieved back, let's say, in the last few weeks or so. So if you look at the daily or weekly averages, we are now almost back to the pre-second wave numbers. But May was the worst hit among the 3 months.

Got it. That's helpful. And just 1 more question. If I look at your book, so in the balance sheet, we have goodwill of INR 426 crores, can you just tell me what's that pertaining to?

Yes. I'll just request -- just give me a moment. This is basically, at the consol level, if you look at the goodwill is INR 425 crores, and this is something which has been sitting in from earlier times when Allcargo acquired Gati, it came along with the foreign time. And out of this INR 125 crores is at GKEPL level, which is the main operating subsidiary. So the consol level, this is basically goodwill coming in from prior actions, which has continued to be in the books. At the GKEPL operating level, it is INR 125 crores. And we can share further breakup of this in the subsequent communications for further clarity.

[Operator Instructions] The next question is from the line of Prateek Kumar from Antique Stockbroking.

Yes. Apologies, my call dropped. Sorry, if you have already answered this question, I was asking about your debt level, you said INR 100 crore has already been received that over and above INR 11 crore is the reduction in the overall debt, right?

Yes, sir. So the reduction in debt is INR 11 crores over and above the reduction caused by the Gati Kausar exit. So this is top of that INR 100 crore plus impact coming from Gati Kausar.

So FY '21 net debt of INR 290 crores comes down to around INR 170 crores?

Yes. So there has been an impact of -- a total impact of about INR 110 crores, yes, that's right.

Right. And also, when we...