Allcargo Gati Limited (532345) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Q3 FY '23 Earnings Conference Call of Gati Limited, hosted by ICICI Securities Limited. 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 do not guarantee the future performance of the company and it may involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Amit Dixit from ICICI Securities. Thank you, and over to you, sir.

Yes. Thank you, Seema. Good afternoon, everyone. On behalf of ICICI Securities, I welcome you all to Q3 FY '23 Earnings Conference Call of Gati Limited. We are pleased to have with us management team represented by Mr. Pirojshaw Sarkari, CEO; and Mr. Anish Mathew, CFO for Gati Limited. Without much ado, I will pass on the call to Mr. Sarkari. We will have brief opening remarks from the management followed by a Q&A session. Thank you, and over to you, sir.

Thank you, Amit. Good afternoon, and a very warm welcome to everyone on our quarter 3 FY '23 earnings conference call. We have uploaded our results and earnings presentation on the stock exchanges and company's website. And I hope everyone had an opportunity to go through the same. As mentioned, along with me, I have Mr. Anish Mathew, the Chief Financial Officer of Gati Limited and our Investor Relations team. I will [Technical Difficulty] industry and business overview and then we'll hand over the call to Anish to discuss the financial performance of the company for the quarter ended December 2022. Before I start with the business overview, I would like to share the organizational update. We have appointed Mr. Shrikant Nikam as the Vice President Operations. Shrikant comes with a rich and diversified experience of over 25 years across supply chain and logistics, information technology and industrial engineering domain. In past, he headed diversified businesses in Mahindra Logistics, UPS and Gati. Mr. Charles D'Costa is now heading the Transformation Office as the Chief Transformation Officer to bring in focus on transformation initiatives throughout the organization. Starting with business performance. Gati has recorded its highest ever quarterly operating revenue of INR 441 crores. The company has achieved this feat by bringing in operational efficiency and enhancing customer delight by improving service levels. The team at Gati is committed to improving customer experience, which leads to more wallet share, along with increasing the market share, thus translating into better performance. The logistics industry is poised for exciting times ahead due to its pivotal role in the Indian economy. The demand for logistics services is expected to grow as it will be instrumental in accelerating and sustained GDP growth. The government recognizes the importance of logistics as a sector. The initiative announced in the recent union budget for FY '24 will enhance the logistics competitiveness. Growth in capital expenditures on infrastructure development such as rail, energy, roads are likely to aid in cost-cutting, supporting the national logistics policy. A push to the multimodule connectivity and supply chain development with increased focus on technology and digital enhancement will have multifaceted impact on the industry. The Urban Investment Development Fund will enhance connectivity and provides faster transportation in Tier 2 and Tier 3 cities. Government incentives along with improved [indiscernible] will lead the nation on the path of sustainable growth. Our foundation to growth is dependent on infrastructure amplification, digitization, sales acceleration and consistent efforts to improve our operations. Our twofold focus on customer centricity and cost rationalization has helped us improve our performance. I would now highlight the initiatives during the quarter under each of our pillars. Sales acceleration, during the quarter, the company has elevated 30-plus strategic accounts to key enterprise accounts due to increased wallet share from them. The company has also identified alliance partners for strengthening our pickup and delivery operations. We have started digitized network planning through use of data science and will continue to focus on this. The company has also initiated a nationwide [ rev Q ] for price discovery and negotiations with both old and new network partners. Infrastructure, I am pleased to announce the launch of our much-awaited Super Hub at Mumbai. This hub is a consolidation of 3 hubs in 1 location, which will bring in a lot of operational. The Mumbai Super Hub is spread over an area of more than 100,000 square feet equipped with 62 bays for effective loading and unloading, which can handle 130 vehicles and an average weight per day of more than 1,000 tonnes. With this, 4 of our hubs are now operational at Farukh Nagar in north, Guwahati in north, Nagpur in central and Mumbai. These hubs are well-equipped for effective cross-stocking [Technical Difficulty] and mechanization for loading, unloading, leading to improved turnaround time. Technology...

Sorry to interrupt. Management, sir, I'm sorry to interrupt, sir. You're breaking up, sir.

Sorry?

Your line is breaking up, sir. If you could allow me a moment. Ladies and gentlemen, we have the management line reconnected. Sir, please go ahead.

Thank you. So on the technology front, we have completed 100% deployment of digital dockets with retail customers, which brings about better visibility, transparency, compliances of processes. I would also like to highlight that during the quarter, Gati started electric vehicles for first mile and last mile delivery at Delhi, Noida, Kolkata, Bangalore and Hyderabad. This has been done with a focus on ESG and also to supplement the cost reduction program. The industry is witnessing a shift from unorganized to organized sector and we at Gati Limited are constantly working towards increasing our market share. We are devoted to seize the opportunity saved by improved demand, incentive policy and government push to the [Technical Difficulty] and retail sector. These factors will lead us to achieve the right target customer. Lastly, we remain aligned with our vision to maximize value creation for every stratum of society. With this, I would like to hand over the call to Mr. Anish Mathew, our CFO, for financial highlights for quarter 3 FY '23. Over to you, Anish.

Thank you, Phil. Good afternoon, everyone, and a very warm welcome to our Q3 FY '23 earnings call. I'll take you through the highlights of financial results for the third quarter of FY '23. I will take you through the highlights of our Express business first. For Q3 FY '23, total tonnage handled stood at 287,000 tonnes -- metric tonne as against 269,000 metric tonne in Q2 FY '23. Revenue from operations for the same period stood at INR 379 crores, depicting a growth of 8 percentage as compared to the same period last year. Gross profit for the same period stood at INR 105 crores as against INR 90 crores for Q3 FY '22, registering a year-on-year growth of 18 percentage. EBITDA for Q3 FY '23 stood at INR 21 crores as compared to INR 16 crores for Q3 FY '22, depicting a growth of 30%. For 9 months ending December 22, [ GKPL ] has recorded a revenue of INR 1,113 crores, up 21% year-on-year. Gross profit and EBITDA for the same period stood at INR 315 crores and INR 60 crores respectively, as against INR 247 crores and INR 32 crores. GKPL has reported a pre-exceptional PBT of INR 12 crores for 9 months FY '23 as against a loss during 9 months FY '22. We have witnessed improvement in EBITDA margin on a YTD basis. EBITDA margin for 9 months FY '23 stood at 5.4% as against 3.4% for the last year. The margin improvement is on account of our sustained sales acceleration and cost control efforts. For Q3 FY '23, tonnage handled by the surplus Express business stood at 284,228 metric tonnes, thus reporting a growth of 8 percentage over Q3 FY '22. Tonnage handled by Air Express business too reported a growth of 6% during the same period and stood at 2,443 metric tonnes for Q3 FY '23. On a consol basis, Gati reported 9 months FY '23 revenue of INR 1,308 crores as against INR 1,100 crores for 9 months FY '22. Reported EBITDA stood at INR 59 crores as against INR 30 crores for the previous year. Pre-exceptional PBT stood at INR 11 crores for 9 months ending December 22 as against the loss for the 9 months ended December '21. I am pleased to state that net debt on a consolidated basis has reduced. It has come down from INR 152 crore as of March '22 to INR 73 crores as of December 2022. We remain confident on our ability to staff the growing demand with Gati's wide network and digital advancements. We have been consistently providing other key comparative financial performance indicators in our investor presentation. One can refer that for more details. With this, I would like to open the floor for question and answers.

[Operator Instructions] We take our first question from the line of Alok Deora from Motilal Oswal.

So just had a couple of questions. So first is on the demand trends, if you can indicate, although this quarter, we have done pretty good volume. How is the demand trends being especially in December and January because we are getting some mixed signals about some pockets witnessing some sort of a soft demand and others are doing pretty okay. Just some color on that.

So January, as you know, for the Express business has generally been a soft month. I would say the softest month in the year. Basically, a lot of the large organizations kind of those which closed their books in December, restarting January, festive season getting over, et cetera. So January has been a very slow month, but February for the first few days has come back to the pre-December days also. So we are seeing a very good first week of February and hopefully, that should continue. Certain sectors, of course, are looking very positive, like the automotive sector, for example, looks positive. Whereas there is a little sluggishness in the FMCG and consumables segment. But having said that, about Gati in particular, we are still a small market share player. And therefore, we should be able to capture the share in this last quarter.

Sure. And also, so we are done with 3 quarters out of this year and you're targeting to clock around 9% to 10% sort of EBITDA margin by end of this year. So right now if you just take the Express business, we are at nearly 5.4% for the third quarter and 9 months. So any view on the outlook? Or we still maintain the 9% number?

So basically, the way we are looking at 9% number was more to do with normal operations. As you know, Gati has a lot of historic baggage that we are unearthing as we kind of continue our journey, my journey has been now 16, 17 months and that cleanup is simultaneously required. On a normal basis, our gross margins in the business had gone up. They are now hovering around 28%, 29%. So we will end March with what we have said, which is 30%, but there is a cleanup also simultaneously to be done.

Yes. I mean, so that's -- my question was that only that -- so adjusted for the cleanup which is required, so 9% could be kind of more possible -- could be more possible in the mid FY '24 or something? Or I mean, just some -- because I think in last quarter we were pretty aligned to the 9% sort of a margin by end of this year?

Yes. I would tend to say more in the second quarter of next year.

Got it. Got it. Just last question. Sir, any price hikes you have taken during -- because last time you mentioned you would be considering some price hikes. Anything we have taken because we have seen players like Blue Dart and all taking annual price increases. Anything we have done on that side?

Yes. So we have put out a price increase of 8%. The letters have been sent out to the customers and our sales force is out there. We tend to kind of initiate the new pricing from 1st of April.

We take the next question from the line of Viraj Mehta from Equirus PMS.

Sir, as you discussed in the last call itself, we were looking for a margin closer to 9% by Q4. But now there is new evidence that you are seeing in terms of cleanup. Our worry as an investor is that if in the fifth or sixth quarter of your assignment, you're still dealing with cleanup, how long can this cleanup last?

So the point is that when I say cleanup, we are dealing with some very large customers where there is some baggage that has been carried forward and it takes time for us as new management to be able to agree with that baggage that the customer has carried forward with Gati. We are dealing with it and that is why the movement of the 9% from March of this year to say second quarter of next year. But there's a lot that has already been achieved. So I wouldn't say that this should take more than, say, we are shifting it by 1 quarter.

Okay. Sir, my second question is regarding the sales target that you had given in terms of when you joined and even probably still 3 or 6 months back in terms of the INR 3,000 crore target. But the volume growth and the value growth that we are seeing seem significantly lower than the growth targets that we have put for ourselves. Would you like to comment on that, please?

No, I would disagree on that. I think our growth targets are well in place. I will still continue to say that we will do INR 3,000 crores by FY '26, which is the target I expect for myself, that is infrastructure that is coming up and that will accelerate our growth.

Sure. And sir, as far as expenses of the new 2 hubs that we have put in, in terms of both cash and noncash regarding depreciation and new employees that you would have had, all of that has come in with P&L. So is that a fair assessment to have?

Yes.

So going forward, whatever is the gross margin that we'll see will come down to the PBT level for us, that is fair?

Yes.

The next question is from the line of Mr. Ravi Mehta from Deep Financials.

Just one question on the margins front that when we see sequential growth in volumes and even realizations per tonne, was there some one-off expense in this quarter which led to lower sequential margins because even we have done good at the gross margin level you commented?

So if it is not ordinary course of business expenditure, we will also show it separately, more to do with deduction happen because of historic baggage and therefore goes down.

And customer mix was also same, if I see on a H1 and 9-month basis and still there was a higher realization. So is it the yield benefit that you were talking in the last quarter?

So over the last 9 months, our yield has definitely increased, but it has not increased to the extent that we would have liked it to increase. In fact, any new initiative that is taken always initially kind of yield with the customer of those which we took months was the e-docket. So I think we are the first ones in India to come out with the e-docket for the scale business. And when you do that, you generally tend to see nervousness amongst the customers because it's something new. And therefore, you lose a bit of yield and business. But then once everybody understands that it is for the benefit and brings about a lot of transparency in the business, business starts picking up again.

We take the next question from the line of Dhaval Shah from Girik Capital.

Yes. Sir, I would like to understand regarding the demand supply dynamics of fleet in the industry, given all the large logistic companies are adding trucks, at least in digital space, we understand the either own asset or outsource. Plus we see overall volumes of EVs in the country also growing very well. That will also be adding on the unlisted side. So how do you see this entire freight rates and demand supply of trucks versus the corresponding demand which will come over next quarter or 2 or 1 year? How do you see that?

So one of the major reasons for large logistics companies looking at bringing in newer businesses because of the infrastructure getting far better. And when infrastructure gets better, you'd rather have a new, more powerful asset that is put on the road and go with the old 8-year-old or 10-year-old asset. Just one primary reason of that change, not so much because demand is increasing in the market in a big way. I think it is more about getting yourselves ready for the future demand as well as being able to cut cost because of the number of turns that you can give the asset, if it is a newer asset and had better power.

Understood, sir, understood. And sir, in terms of your own competitive intensity, how do you see that shaping up over the -- currently and your outlook on that?

So I think as our infrastructure is coming up, clearly see that our service is getting better and that is one thing that brings confidence back to our customers and brings the brand back to where it was. We are still by far second player in the market. And the gap between us and the first player is tremendously high. And therefore, for us, we concentrate on being closer to the customer and giving them better service and other market share, as you know, over the last 9 months itself has increased by about 200 to 250 basis points.

Okay. Okay. And in the presentation, I've been noticing about where we gave the time line for starting the new hub. There is always a delay of 1 or 2 quarters since last 2, 3 presentation, I'm noticing. So this is happening because of what reasons?

Ease of doing business in India. No, not. Well, our Bangalore hub has got delayed now because of the monsoons in Bangalore. This year, there was unprecedented rain that came in and therefore, construction work had to be halted. In Bombay, it was more to do with more on the ground local situation that arose because of us moving from 3 very old properties to a brand-new property. So each one has its nuances, but then we also don't see opportunities. So if you see my earlier presentations, for example, Guwahati was never there, but we got opportunity and we took that on. But yes, the ones where we have to build out in a big way and not get a ready-made place, these things do happen in India.

Okay. Okay. And sir, connected with this now -- now in the second quarter, our -- sorry, the Mumbai hub went live in the third quarter and then we had a full quarter of Nagpur and Guwahati hubs operational for the third quarter, right? Now -- so with the 3 capacities, our volume growth quarter-on-quarter, like, is it as per your expectation? Or you think it's not and it could have much more? How do you think?

See, actually, if you look at it, Bombay hasn't even completed a full month. And we actually started operations in the beginning of January, if you look at it that way. And for the other 2, it's been kind of 2 months. Now the point is we have to bring back that customer confidence that because of these new hubs now service has improved tremendously and customers wait and watch. So it does take at least 1 full quarter for our customer to get convinced and then give us loads to that area.

Okay. Okay. Okay. Got it. Got it. And sir, lastly, if you can share your strategy and when you -- share of revenue with regards to e-commerce, how it has been for the last 9 months? How do you see going forward? Any tie-ups you are doing because that is that industry is we are currently not going that well, but it's a great tailwind in the future and a big volume contributor to the Express industry. So if you can share your thoughts on that?

So as I've said before also and I reiterate that Gati does not do any B2C business. But e-commerce first mile is B2B and we participate in a big way with all the 3 large players in e-commerce including Reliance. So that's where we play, but we do not play in the B2C segment.

So when you say first mile, what will be the originating and the endpoint of the cargo for you?

So this is from the supplier/vendors of Amazon, Flipkart and Reliance to their warehouses.

To their warehouses.

That's a B2B business.

Okay. Okay. Okay. So for example -- okay, the sorting center/warehouse for Amazon?

Yes. Correct.

Okay. Okay. Okay. And how in terms of profitability, how is that compared to a regular B2B business like regular Express business, what you do?

So again, it again depends on the size of the vendor/manufacturer that we pick up from. If even if any customer, the profitability is better. If it's a large customer, the yield will be lower, but our cost can reduce. So that's how it works in our industry.

Okay. Okay. Okay. And sir, at the INR 3,000 crore top line, what sort of ROCE would you be targeting?

I will let Anish answer that question.

ROCE would be in the range of around 20%, 25%.

20% to 25%. Okay. And how about the debt on the books and all would look as of currently and going forward, how is that going to be?

So the net debt as of December is INR 72 crores.

Net debt?

Net debt. So this is basically offsetting the Gati's cash and cash equivalent which was INR 154 crores as of 31st of March 2022.

[Operator Instructions] We take the next question from the line of [ Asha ] from Elara Capital.

So one question was that in your results in the segment assets and liabilities, there has been a drastic increase in the unallocable assets and allocable liabilities. So could you provide the reason for the same? I mean it was not there in the previous quarter, but it just appeared in this one.

Anish, would you like to take that?

Can I get back to you maybe after this call because I just need -- yes, I'll get back to you on this one, yes.

So the second question is, can you provide any update on the fuel business? Is there any materials in that that is worthwhile sharing us on there?

Fuel business, there is no action as of now. It's continuing as it is. We're just kind of awaiting the approval from the ministry. We are to kind of get the approval from the ministry.

Okay. And is the KWE transaction over completely? Or there's any -- or when will it get over?

Yes, please, [ Gary ].

Yes, the KWE transaction is not yet over, but the Allcargo the shareholders kind of decided to kind of buy out the KWE. The transaction materialized in the coming quarters.

Add to that, the agreement of price is done. It's only the paperwork which is now pending and we believe that in the next quarter or so we should be able to consummate the deal.

The next question is from the line of Saloni Hemnani from Molecule Ventures.

Just a couple of questions. First one, starting with [ Paras ] [indiscernible] hub. It's been a year since Paras [indiscernible] hub been basically launched. So both in terms of volume and margins and volumes stay flat. So what will be the [indiscernible] margins have stayed 5.5%. So how much impact is really coming from the new hub?