Allcargo Gati Limited (532345) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Q4 FY 2023 Earnings Conference Call of Gati Limited, hosted by Dolat Capital. 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 the 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] I now hand the conference over to Mr. Abhishek Jain from Dolat Capital. Thank you and over to you, sir.

Thank you, Daryll. Good evening, everyone. On behalf of Dolat Capital, I welcome you all to quarter 4 FY '23 earnings conference call of Gati Limited. We thank the management for providing us the opportunity to host the call. From the management side, we have with us, Mr. Phil, CEO; and Mr. Anish Mathew, CFO of Gati limited. Now, I hand over the call to Mr. Phil for opening remarks, followed by the question-and-answer session. Thank you, and over to you, sir.

Thank you, Abhishek. Good evening, and a very warm welcome to everyone on our quarter 4 FY '23 earnings conference call. We have uploaded our results and earning presentation on the stock exchanges and the 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 now share an overview of the economy, industry, and business, after which I will hand over the call to Anish to discuss the financial performance of the company for the quarter and the year ended March 2023. We start with the global economy. Global economic growth in 2022 slowed down to 3.2% after recording a 6% growth in '21. The degrowth was marked by high inflation, Russia-Ukraine conflict, disruption in food and energy markets and continued instances of COVID-19 pandemic. In 2022, central banks around the world raised interest rates in quick succession to tame inflation. U.S. Fed effected the largest cumulative rate hike in any year since [indiscernible]. On the positive front, supply chain bottlenecks started easing in 2022 due to reduced backlogs and better delivery time. The pressure from these shocks is likely to continue in 2023 with IMF predicting the global growth to slow down to 2.7% in 2023. Though central banks are likely to ease interest rate tightening, while expectations of a soft landing from the base case outlook, but overall uncertainty remains high. In this backdrop, the emerging markets, though not immune to spillover effects, are likely to grow better as developed economies face the direct brunt of a slowdown. Coming to the Indian economy, despite an uncertain economic outlook, Indian economy has exhibited signs of resilience. This is a reflection of strong domestic demand with favorable demographic that acts as a backbone. Strong economic growth in the first quarter of FY '22-'23 helped India overcome the U.K. to become the fifth largest economy after it recovered from COVID-19 pandemic shock. Currently available forecast of India's real GDP growth for '23-'24, including those of the RBI, broadly settle between 6% and 6.5%. This contrasts with the global GDP growth projection of just about 3%. India has emerged as the fastest-growing major economy in the world and is expected to be one of the Top 3 economic powers in the world over the next 10 to 15 years. The government announced Foreign Trade Policy 2023 in March. It aims at reducing transaction costs and encouraged ease of doing business through process re-engineering and automation. Overall aggregate demand conditions remain resilient for the country. Government's thrust on the infrastructure and revival of corporate investments in select sectors augur well for the economy. Investment activity in India is exhibiting buoyancy on the back of strong composite purchasing managers' [ advices reading ]. Merchandise exports have risen by 6% in FY '23 to an all-time high of USD447.5 billion. And services exports remain strong. Overall, merchandise imports also reached an all-time high of USD714.2 billion in FY '23, increasing by 16.5% year-on-year. E-way bill volumes and toll collections remained strong, reaching new highs in March 2023. RBIs monetary policy measures have resulted in headline CPI inflation declining from 7.8% in April '22 to 5.7% in March '23, with further easing expected during the year. We come to the Indian logistics industry. India is poised to be one of the Top 3 economies and a global manufacturing hub in this decade. Logistics plays a pivotal role in powering the growth in EXIM and domestic trade. India improved its logistics ranking of the World Bank to rank 38, moving up 6 places. In September '22, the Prime Minister launched the National Logistics Policy which acts as a guiding document for states, union territories seeking to formulate logistics policy. The National Logistics Policy has outlined the ambition and road map for the Indian logistics sector. The policy is centered around upgradation and digitization of logistics infrastructure and services. Further, with focus on bringing efficiencies and services through processes, digital systems, regulatory frameworks and human resources, the policy puts marked emphasis on streamlining processes for seamless coordination and reduction in the overall logistics cost besides incentivizing employment generation and filling up the workforce. NLP also lays emphasis on the shift towards more energy-efficient modes of transportation and greener fuels to reduce the carbon footprint. Government's thrust on achieving best-in-class logistics costs and improving trade flows is led by flagship programs like Make in India, Prime Minister Gati Shakti, dedicated freight corridors and production-linked incentive plans. Additionally, the emergence of e-commerce provides a strong growth outlook for the sector. Industry preferences are shifting towards integrated supply chain services and other sophisticated solutions such as inventory optimization and data analytics from isolated offerings such as transportation or warehousing. The logistics outlook remain robust with government-led reforms, changing industry preferences and newer business segments. For the financial year March '23, the Express business has recorded a revenue of INR 1,469 crores, witnessing a growth of 18% as compared to the last year. This was accompanied by gross margin expansion by 126 basis points and EBITDA margins expanding by 176 basis points. This performance is a testament of the company's focus on volume growth and operational efficiency. With this, I would now like to share updates on initiatives undertaken under each of our pillars of growth. Sales acceleration. Despite a tough economic scenario, our sales team has been able to deliver a robust performance. This reflects our focus on service levels and customer-centricity. There is continuous effort on increasing our wallet share by farming our existing pool of customers. Apart from focus on increasing wallet share, new business development is also of importance. During the year, we signed 1,669 NPDs, that is new business. We have also put in place a cost standardization and governance mechanism at product level. We have initiated sales training workshops and customer connect program. Other growth levers for us will be the synergies between the contract logistics arm of Allcargo and cross-selling across ECU customer base. There is a strong focus on increasing sales from retail and MSME clients for improving our yield. Infrastructure. At Gati, we are developing robust physical infrastructure at strategic locations to enhance operational efficiencies like quicker transit time, less handling and capability of processing higher loads. In an endeavor to decrease first and last mile turnaround time and cost, while simultaneously increasing booking loads, we have developed 40 new franchisees pan India. During the year, Gati also launched hubs at Guwahati, Nagpur, and Mumbai. The Mumbai hub is spread over 1.15 lakh square feet with 61 bays and dock levelers. To enhance brand visibility, we have also branded 1,000-plus first and last mile vehicles. In the next phase of infrastructure development, we'll be setting up 4 surface transshipment hubs at Bengaluru, Hyderabad, Indore, and Kolkata. We have also mandated GPS in all linehaul and feeder vehicles to enhance visibility, improve performance and optimize productivity via continuous monitoring. In order to ensure cost optimization, we have optimized vehicles and routes. We also identified areas of higher turnaround time and made necessary corrections in order to reduce the same. During the financial year, we have successfully implemented RFQ for our entire linehaul loops. Coming to technology, after successful and smooth deployment of e-dockets in the retail business, we have started our pilot on our credit vertical. We have initiated transformation project to modernize Gati enterprise management system to state-of-the-art technology to enable business to gain market leadership. Gati, with its wide reach and network, is focusing on improving service quality by optimizing vehicles and routing loads to ensure cost optimization. We also remain committed to our ESG journey and aim to convert the entire delivery fleet to electric stroke alternate fuels by 2025. During the year, we achieved the milestone of plying more than 100-plus electric vehicle across India for our first and last mile. We also signed an MoU with Gentari Mobility, a Petronas Group company, for 500 electric vehicles under Vehicle-as-a-Service model. With this, I would now like to hand over the call to Mr. Anish Mathew, our CFO, for financial highlights for quarter 4 financial year '23. Over to you, Anish.

Thank you, Phil. Good evening, everyone and a very warm welcome to our Q4 FY 2023 earnings call. I'll take you through the highlights of financial results for the fourth quarter of FY 2023. I would like to start with the highlights of our Express business. The quarter gone by saw weakness in initial months, followed by a strong March. The overall weakness in consumer durables and automobile sector, notwithstanding the unseasonal rains, dampened the sentiment a bit. Total tonnage handled for Q4 FY '23 stood at 2,84,602 metric tonnes as compared to 2,56,906 metric tonnes for Q4 FY '22, reporting a year-on-year growth of 11 percentage. Revenue from Express business stood at INR 356 crores in Q4 FY '23 as compared to INR [ 328 ] crores in Q4 FY '22, registering a growth of 11 percentage. Gross margin for Q4 FY '23 stood at 27.1 percentage as compared to 26.2 percentage for Q4 FY '22. EBITDA for the quarter stood at INR 12 crores, registering a growth of 199 percentage over Q4 FY '22. I would like to highlight here that depreciation on RoU assets for financial year 2023 was INR 45 crores and interest expenditure on lease obligation was INR 17 crores. I would like -- I'd also like to mention here that we have added 530 new customers during the quarter ended March 2023, including 419 MSME accounts. For the full year, Express business volumes stood at 11,33,034 metric tonnes, registering a growth of 17 percentage over FY '22 volumes. Revenue for the full year stood at INR 1,469 crores as compared to INR 1,242 crores in FY 2022. Express business gross margin stood at 28 percentage for financial year 2023 as compared to 26.6 percentage for financial year 2022. EBITDA stood at INR 72 crores as compared to INR 36 crores in financial year 2022. EBITDA growth has come on the backdrop of gross profit expansion, volume uptick and operational efficiency. Tonnage handled by Surface Express business for FY '23 stood at 11,23,121 metric tonnes as compared to 9,58,711 metric tonnes for FY '22, registering a growth of 17 percentage. Tonnage handled by Air Express business stood at 9,903 metric tonnes for FY '23, registering a growth of 40 percentage as compared to FY '22. Our client mix for KEA, SME and retail stood at 61 percentage, 21 and 18 percentage, respectively, for the year ended March 2023. On a consolidated basis, Gati reported revenue of INR 1,723 crores in FY '23 as against INR 1,490 crores in FY '22, delivering a growth of 16 percentage. Reported EBITDA stood at INR 74 crores for the year ended March 2023 as against INR 34 crores for the previous year, registering a growth of over 100 percentage. Pre-exceptional PBT stood at INR 4 crores as compared to a loss during the financial year 2022. I'm pleased to state that for FY '23, the business generated operating cash flow after working capital changes on Ind AS [ 20 ] of INR 23 crores as against negative cash flow of INR 23 crores in FY '22. And the total debt, net of cash and cash equivalents on a consolidated basis, has come down from INR [ 152 ] crores as of March 2022 to INR 72 crores as of March 2023. We remain confident on the growth of Gati and are dedicated to improving efficiencies across the value chain. 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 questions and answers.

[Operator Instructions] The first question is from the line of Amit Dixit from ICICI Securities.

I have a couple of questions. The first one is on the realization. So if I look at the Surface Express realization, there has been a fall Q-o-Q while volume has gone up. In the last quarter, you mentioned that the letters have been sent to the customers for a possible increase in April. Now how do we look at it? Is it because of our endeavor to increase volume or there is increased competitive intensity? Also, if you could highlight the market acceptance of the increase that you have discussed in the letter, that would be great.

Okay. So I said the letters that were sent out were basically for the new financial year starting from April, which is April '23. To answer your question, of course, in an endeavor to grow the business, the top line and also look at the mix, these numbers will keep changing, but the whole strategy is to grow the business. As our retail or SME mix improves, the yield will also improve. Key accounts, basically the increases that we send out via letters only happen as and when the contracts come up for renewal.

So sir, on the whole, what kind of on-an-average uptick in realization we can expect in this year? I'm not asking for a quarter or so, I'm asking for the whole year FY '24.

So that is very difficult to predict at this point of time because it all depends on what kind of customers and what kind of volume we attract. So the mix of that will kind of look at the yield.

Okay. The second question is on the EBITDA margin. Now on the last call, we indicated that we should look at that number of 9% by end of -- by actually end of Q4 FY '23 -- sorry, by Q2 FY '24. In light of the performance in this quarter and the outlook that we see, would you like to push it ahead further?

So I will speak to what we had said at the beginning, which is, we are focused on this company becoming a INR 3,000 crore organization by 2026 with an EBITDA of 10%-plus. And we will work towards that quarter-on-quarter and make sure that we deliver that number.

But in more near term, let us say, in FY '24, what kind of margin should we work with because the margin has been quite volatile through FY '23?

So all I can say is the whole focus is now on growing the top line. We spent 1.5 years since I have come into this organization on making sure that our service stands up with competition, which I can tell you that in the last 4 months, we have now brought our service to a level. Now it is for us to grow the top line. And as previously stated by us, [Technical difficulty] grow the top line, we are going to leverage our fixed costs, both of [indiscernible]. So basically, that is the whole leverage game that we will have to play to get the margins [ up an go ].

We have the next question from the line of Alok Deora from Motilal Oswal Financial Services.

Sir, just a question on related to the previous questions. So sir, I just wanted to understand how do we see these margins moving now? Because initially, a few quarters back, we had a 9% sort of a margin guidance for end of this year. And now in the last, I think, call we had mentioned about that being shifted by 2 quarters. But right now, whatever margin performance we see, I mean, what's the realistic guidance we have for a 10% sort of margins because -- and some road map on that because since many quarters, we are in this kind of a range? Just some update on that if you can provide?

So I just answered this question -- exactly the same question by your predecessor. Do you want me to repeat the answer or you heard my answer?

The line for the current participant in the queue seems to have disconnected, sir. Would you like to proceed with answering the question or should we move on to the next participant?

No, I answered the same question the first time around.

We will proceed with the next question, which will be from the line of Aman Vij from Astute Investment Management.

My question is on the industry growth. So in terms of volumes, how do you see this year panning out for the industry, FY '24? And as for us also, what kind of volume growth are we targeting for this year?

So we are basically looking at the logistics industry growing at 9% this year. And express logistics generally grows at about 1.5x the logistics industry growth. So I would say anywhere between 13% to 14% should be the express logistics [Technical difficulty] for 2, 3 years, our growth should be greater than that.

Sure, sir. Sir, this number you're talking about is volume or value?

I'm talking in terms of both volume and value.

Okay. My second question is, sir, for, say, April month, E-way bill had grown at, say, 15%-plus. And the [indiscernible] was -- our growth was mostly flattish. So any reason, was it an aberration? Or is E-way bill the right way to look at the growth of the industry and our company as well? If you can talk about the same.

So I haven't really looked at the April month, but March month E-way bill really went up and so did our top line for the month of March after a slowdown in the months of January and February. In fact, the industry -- express industry itself for this April was down, and we were with the industry. But with the E-way bill, I haven't compared it for April.

Okay, okay. Because E-way bills were up by almost 12% to 15% year-on-year, April versus April, while our press release had talked about flattish. So I just wanted your take. So has the things improved or is it still a little tough in May as well?

May month has been far better than April.

[Operator Instructions] The next question is from the line of Viraj Mehta from Equirus PMS. We will proceed with the next question, which will be from the line of Abhijit Mitra from Aionios Alpha Investment Management.

So I was just trying to make out 2 numbers. First of all, what are the reasons, Top 3 business as per your gross margin and EBITDA margin, to decline significantly in this quarter? That's point #1 -- question #1. Second question is that over the last 3, 4 quarters, we also have been sort of making a point on your depreciation staying flat, but the depreciation keeps moving up. So even this quarter also it has moved up by almost 20% Q-o-Q. So what used to be a INR 10 crore run rate quarterly is almost a INR 18 crore run rate quarterly. So if you can also sort of suggest any expectations of depreciation moving ahead, that would be great.

Anish, you would like to take this call?

Yes. On the depreciation part, actually, so for this quarter, there is a one-off charge to the tune of around INR 3 crore on account of change in estimate with respect to some commercial vehicles which we were having. So we used to have commercial vehicles, so we decided not to kind of own the commercial vehicle. So we terminated that lease agreement with the financier. So that resulted in kind of accelerated depreciation of around INR 3 crore for this quarter. So this is the one-off. So going forward, we won't be having this charge.

So INR 15 crore is the more stable run rate on a quarterly basis?

Yes, right. Yes.

Got it. Got it. And my first question is to sort of just list out the factors which led to this drop in margins.

As far as we are concerned, the margin of quarter 4 FY '23 has increased over quarter 4 of FY '22. Your question was more to do quarter-over-quarter, right?

Yes, yes.

So like I always said, the margin gets leveraged because of volume. And our volumes fell in the Jan and Feb months tremendously, although in March, there was a big recovery. But when, for a period, if the volumes fall, the margins tend to also fall along with that.

Okay. So just conceptually, just to understand the point a bit better, so sequentially, the drop in volumes is only 1%, but because of the timing of that volume drop, you are saying that cost incidence is higher. I mean, is this the way one should look at the business going forward as well? As in, there would be months where volumes might be flat and that would create such a huge incidence on your overall margins that the margins drop, in a way, [indiscernible] even if volumes in the subsequent months pick up. How to sort of conceptually understand this?

Yes. So there is a certain fixed cost to any business. So if the volume drops below the average fixed cost that we need to leverage through our top line, then, of course, the margin will drop.

Got it. So your March margin should be significantly higher than your Jan and Feb margin. Is that the way to look at it?

Yes.

We have the next question from the line of Rajat Setiya from iThought PMS.

Sir, in terms of our volumes, how much of the volumes would be coming in from the new hubs that we have built so far as a percentage of the total tonnage in the surface business?

So Gati works on a zonal structure. And if you look at our zones, the main hubs for North Zone is in Farukh Nagar, Delhi and the main hub for West Zone is in Bombay. I would say that if we look at the volumes running through these 2 hubs itself would be about 20% of our total country's volume. And therefore, including the other 2, which we have completed in the last year, which is Guwahati and Nagpur, there would be about -- anywhere between 22% to 25% volume running through these hubs.

Understood, sir. Sir, second question is about the historic margins that you referred to in the last call. So how exactly is it affecting our company? In terms of gross margins, we are already near the ideal gross margin for surface logistics business, which is around 30%, we're just 2% away from there. However, we are getting hit in the EBITDA. So what exactly -- in what way is it hurting us, the historic target? What exactly was it, if you can elaborate?

So basically, the gross margins, as far as we are concerned at Gati, the ideal gross margin that we would look at would be anywhere between 30% to 32%. And therefore, these deductions have still a direct hit on our gross margins. This was basically a period where we had taken up to clean up the past. I think gradually, we'll be putting that behind us, and we will see this business growing at 29% in the very near future.

Sir, I mean, how is -- I mean, if there was a pricing issue historically, then that would reflect in the gross margins. But we are getting hit below gross margin. So what exactly is that issue? If you can help us understand.

So there are various issues that we have. And when we look at creating what we call ECLM provisions in our books, which is below the gross margin, those get created when the collections do not come in on time and collections do not come in on time when there are discrepancies with the customer. So it's a multiple effect that happens to the P&L.

So what percentage of the cost or the -- as a percentage of revenue, how much cost would you attribute to such historic actions?

So there is no fixed percentage. It moves from month to month. And -- but it was pretty substantial in lieu of the revenue that we are generating on a monthly basis. And therefore, it did affect both gross margin as well as EBITDA.

[ So, I guess, I can kind of add a flavor ]. So actually the total ECL provision, which we have made for this financial year is almost like INR 24 crore, that's substantially a very, very high number. And in comparison to this number, last year, it was INR 15 crore. So that's basically based on the aging. And if you look at the quarter 4, all the efforts which were kind of putting into collection has kind of started building the reserves. So we have seen substantial reduction in provision for this quarter. However, we also saw a slight increase in that deduction, which is what Phil was kind of talking. And that kind of sits in the top line because while we have made a provision, when you issue credit notes, that would need [ to get assessed ] within the top line. So while we saw a decline in the top line, partly driven by the credit note issued, and we have also seen a softening of the ECL provision, which is coming in EBITDA line. But net-net, if you look at for the year as a whole, INR 24 crore is a huge and substantial amount for us to kind of have and provision the books. As we kind of are putting all the efforts, I'm sure, this will come in as a reversal in the coming quarters or maybe in the next financial year.

So this is the only hit, because of the past actions, or there is something else as well?

Can you just repeat? I could not hear you properly.

Is this the only hit that we have taken in the P&L this year because of the legacy problems or if there was something else also?

Right. Yes, yes. We are carrying a good amount of provision in the books as a reserve -- I wouldn't say reserve, I would say these are provision as per Ind AS accounting standards. So as we kind of bring down the DSO, this will kind of -- so bringing down DSO would mean, you got to kind of collect the money, and that will kind of -- itself will unwind the provision which you're carrying on the books.

[Operator Instructions] The next question is from the line of Nemish Shah from Emkay Investment Managers.