Allcargo Logistics Limited (ALLCARGO) Earnings Call Transcript & Summary

Ladies and gentlemen, good afternoon, and welcome to Allcargo Logistics investor earnings call organized by Batlivala & Karani Securities India Pvt. Ltd. [Operator Instructions] Please note that this conference is recorded. I would now like to turn the conference over to Mr. Sailesh Raja. Thank you, and over to you, sir.

Good morning to all. On behalf of B&K Securities, I would like to welcome you to the Allcargo 2Q FY '22 Earnings Call. From the management side, we'll be hearing from Mr. Ravi Jakhar, Chief Strategy Officer; and Mr. Deepal Shah, CFO. So without taking much time, I hand over the call to Mr. Ravi for the initial remarks, and post which, we will open up for the -- floor for Q&A. Over to you, Mr. Ravi.

Yes. Thank you, Sailesh. When the going gets tough, the tough get going. These words ricochet in my mind as I speak about our performance today. Good afternoon, everyone, and welcome to today's earnings conference call. This is Ravi Jakhar here, and I'm the Chief Strategy Officer for Allcargo Logistics, and I have with me on this call my colleague and CFO for Allcargo, Deepal Shah. As the COVID wave continues to subside, I hope all are well in your family and among colleagues. I wish you festive joys and happiness ahead. I also hope that you have had a chance to look at the presentation and the press release uploaded on the stock exchanges and our website. Speaking about performance, last 6 quarters have presented different challenges to us, starting with the COVID pandemic right before we conclude with the acquisition in April 2020 and then port congestions in India, inventory issues across the world, Suez Canal crisis, cyberattack and more recently the second wave of COVID in India. And I'm glad that we have taken every challenge with increased rigor and our teams across the world have held the entrepreneurial spirit and commitment of the highest order in not just navigating through the crisis, but emerging much stronger than before, improving our performance quarter after quarter. Allcargo has embarked upon various transformation initiatives over the last 2 years across the businesses and the results of the same are visible in the performance. Project Voyager with McKinsey for our international supply chain MTO and the CFS business, and Project Avvashya with Alvarez & Marsal for our express logistics and contract logistics businesses are near completion. And we are now steadily progressing on our global IT transformation and finance transformation programs to further strengthen our capabilities and improve efficiency in business. These programs will continue to run through 2022. Service businesses are built by people, and leadership is a key pillar for Allcargo. The record performance has been delivered by exceptional leadership of the management teams across all businesses, and company has put strong focus on attracting and retaining top talent. I'm happy to share that Allcargo and our subsidiaries, ECU Worldwide and Gati, collectively over the last 12 months or so have hired nearly 20 CXO-level resources and brought nearly 100 critical leaders and managers across the globe to drive growth and digital aspirations. In addition, there have been significant additions to data science team, strategy analytics teams to further strengthen the growth capabilities. The digital footprint continues to expand significantly across the group. ECU 360 is now a mature digital platform with front end deployed on the cloud. Data analytics, automation and data integration are used extensively across ECU platforms. Some key projects within digital include data projects, automation, ECU EDI, ECU Click and other apps to improve customer experience and service delivery. Such digital capabilities are now also the focus at Gati, where we have recently implemented the world-class CRM tool in partnership with Salesforce to improve customer service, client management and analytics. With this, I now hand over the line to my colleague, Mr. Deepal Shah, to update you on all the financial and segmental performance across various businesses. Over to you, Deepal.

Thank you, Ravi. Good afternoon, everyone. As Ravi mentioned, the results of the transformation initiatives have now started showing results, which is visible on the performance of the company and its subsidiary [indiscernible]. Allcargo Logistics reported its highest ever business performance for the quarter with consolidated revenues higher by 113% year-on-year at INR 4,978 crores versus INR 2,337 crores in the corresponding period last year. EBITDA was higher by INR 144 crores -- 124% on a year-on-year basis at INR 363 crores as against INR 162 crores in the corresponding period during the last year. PAT stood at INR 264 crores, a growth of 355%. The profitability in the last quarter was also higher on account of exceptional income of INR 43 crores and INR 24 crores from the share of profit from associates and JVs. Exceptional income is largely driven by gains on sale of Gati Limited's subsidiary, Gati Kausar. You all would know Allcargo has 3 business divisions, namely, the MTO, that is the international supply chain; the CFS/ICD operations and the express logistics. India supply chain business is part of Allcargo stand-alone, while international subsidiaries are under the Allcargo Belgium, which is a 100% subsidiary of Allcargo. Now I would like to discuss the performance of each business segment in detail for the quarter, starting with the MTO business, that is the international supply chain business. The MTO business witness sustained growth on back of volume growth and expansion of market share in favorable market conditions. Addressing your question on FCL and LCL breakup, which we have now started to report, separate volumes and highlight growth in each of them. We continue to consolidate our leadership in the global LCL market commanding approximately 40% market share. As you are all aware, this is a very fragmented market. LCL volumes for the quarter grew by 23% year-on-year and FCL volume grew by 29% year-on-year. MTO segment reported a revenue of INR 4,384 crores, higher by 138% year-on-year against INR 1,841 crores from the previous quarter. EBITDA stood at INR 307 crores, a growth of 182% compared to INR 109 crores in the corresponding quarter last year. On Q2 annualized numbers, ROCE stands at its highest levels of 56% in the MTO segment. Now coming to the CFS segment. CFS and ICD segment business continues to deliver good performance, and the economic environment is constantly improving with month-on-month improvements in business. While analyzing CFS numbers, we need to understand that last year same quarter there were ground rentals -- there were very good ground rentals as part of the income, which aided the margin and profitability. CFS volumes, excluding Speedy, stood at around 79,794 TEUs, growth of 35% year-on-year against 59,031 TEUS for same quarter last year. We expect the deal with Speedy to be completed in this quarter, and we may probably have a consolidated number going forward in the following quarters. CFS/ICD vertical reported revenue of INR 107 crores, a growth of 10.5% year-on-year against INR 96 crores in the corresponding quarter. EBITDA stood at INR 33 crores compared to last Q2 FY '21 of INR 38 crores. Coming to Gati, which is the express logistics business. Whilst we do have a separate call for Gati and questions related to Gati we will request to be taken up in that call, we'll just give you a high-level highlight on the numbers. Gati core express business under GKEPL reported highest ever tonnage of 2 lakhs 60,000 metric tons, a growth of 30% against the volume in the corresponding period last year. Revenue of INR 334 crores, higher by 40% year-on-year against INR 238 crores Q2 FY '21. Project and equipment business, that is the P&E business, revenue stood at INR 92 crores as compared to INR 69 crores in this previous period last year, a growth of 34% year-on-year. The growth was largely related to improved utilization, which increased from 61% last year to 75% year-on-year. Given the improved utilization, the EBIT for the segment grew by 42% Y-o-Y at INR 9 crores. Coming to the Logistics Park segment. Logistics Park, primarily, as you're aware, it's more of rental income, grew nearly 2x backed by completion of the warehouses -- many of the phases of the warehouses to the same period last year. And the segment continues to maintain its quarterly revenue run rate of INR 20 crores. EBITDA for the segment is still robust at INR 16 crores. Contract Logistics -- the Contract Logistics business, which is the JV -- the ACCI, the subsidiary, which is a JV, which holds the Contract Logistics business continues to demonstrate resilience with revenue and profit showing significant growth in the quarter. And we are working with a partner in terms of how we're going to move forward with the 61% shareholding with them. We have worked on a demerger scheme where the contracts logistics after demerger will move into a separate entity, which is a supply chain private limited we apply it to NCLT for the same. The idea is that these 2 businesses are separate, and you'd like to manage them separately into separate buckets of companies. Now I hand over the line back to Ravi to brief you on the other updates of the business. Thank you, everyone, for listening patiently. Ravi, over to you.

Thank you, Deepal. So before we move on to the questions and answer, I would like to share some key updates on our acquisitions. With Speedy Multimodes, we have now concluded the diligence and we expect to sign the share purchase agreement in the month of November. I'm glad to share that it is going to be a highly value-accretive transaction for the company. In terms of volumes, it stands to add almost 40% or higher volumes to the Allcargo's current CFS volumes as an asset located closest to the India's gateway port, JNPT in JNPT area and other asset-light facility in Mundra. These would be key additions to the group CFS business. And we are able to acquire 85% in Speedy Multimodes INR 402 crores equity consideration. And it is an extremely value-accretive deal wherein the Speedy Multimodes, the acquired company, would have cash and fixed deposits of almost INR 53 crores and would add to the EBITDA. For the last 6 months, April 2021 to September 2021, the company has recorded an EBITDA of INR 21.5 crores and we believe that the performance should improve for levels under Allcargo post acquisition. On the other acquisition, which was more of a joint venture setup in Korea. We earlier used to have 2 partners and we decided to partner with one of them and set up our own company, wherein we are almost half -- it's almost a 50-50 partnership. That joint venture was set up with minimal capital deployed of less than just a token capital worth USD 1 million. And the business is already clocking almost USD 300,000 to USD 400,000 in EBITDA on a monthly basis. In the third and perhaps the most significant acquisition that we conducted recently for Nordicon. Nordicon continues to perform exceedingly well under the ECU's ownership. And the business has expanded almost 5x to 6x when compared with 2019 levels. And the way the deal was structured, acquiring 65% shareholding, it has allowed us to do a structure, which allowed it to be more value accretive for us. And therefore, for a transaction for which we paid nearly EUR 32 million for the entire 100% valuation of which we acquired 65%, the company is already doing almost close to $1 million in EBITDA every month. We are extremely delighted with Nordicon's performance. I would also like to highlight that while some of their business lanes got integrated with ECU Worldwide network over a month ago, most of the network integration happened from 1st November after they served the notice period. And therefore, some of the incremental gains, which should happen at the other ECU offices on the other side of the network would only start to appear from November onwards. In addition to these acquisitions, we have always stressed upon the importance of focus on being asset-light and digitally enabled. And through various disclosures made by way of investor presentations to stock exchanges, we have spoken about our focus on asset-light businesses. And in that regard, we are evaluating some options for divestment of the working capital-intensive Project Logistics business. And as we have more concrete developments, we'll keep everyone updated. But I would like to reiterate that we continue to be aligned with this strategy, and we have also appointed advisers to evaluate various options for restructuring business in the most efficient way as we disclosed in the investor presentation uploaded on the exchanges. So these are some of the critical updates we wanted to share with you, and happy to answer any questions that you have for us today. Thank you very much.

Just to add that the whole restructuring bit is more strategic and more on at a very high evaluation stage and should not be kind of considered as conclusive at this stage. Just to -- it's more directional in nature that we are approaching. And from a good governance perspective, we wanted to just give a high-level understanding to our shareholders of the direction that the company is taking in terms of restructuring. Thank you so much.

[Operator Instructions] We have a first question from Mr. Sunny Gosar from MK Ventures.

First of all, congratulations on a very strong set of numbers. So I have 2 broad questions. First of all, basically, I would like to get your view on the MTO business. So as per a ballpark calculation, the current quarter's EBIT per TEU is almost 10,500 to 11,000 per TEU versus our historical average of about 4,000 to 4,500 per TEU. So I would like to get a view in terms of what part of this jump is sustainable. And how do you see the trends playing out over the next few quarters? And basically, as the logistics -- global logistics and container situation stabilizes, what is the medium-term sustainable EBIT per TEU which this business can basically be looked at over the next, say, 2 to 3 years.

Right. So happy to provide you a perspective on the international supply chain business. So as you would notice, there are 2 things which are helping the business. One, of course, is the tailwind from the overall environment. But more importantly, on the back of transformation, which involves sales acceleration and acquisitions, you would have noticed that there's a strong growth in volumes. From a global scale wherein the trade continues to grow in lower single-digit numbers with many geographies seeing contractions as well in global trade, our international supply chain business has demonstrated almost 23% year-on-year increase in volumes on LCL and 29% increase in FCL year-on-year in volumes. These volume growth numbers drive an expansion of gross margin while the SG&A costs do not go up, and that operating leverage comes straight to EBIT and reflects in the higher EBIT per TEU margins. Now coming to the gross margin itself, there is a higher operating freight environment, but it does not mean that as the freight goes up, our gross margin goes up in same proportion or vice versa. In fact, as we run the world's most largest complex LCL network, we are mostly focusing on the value addition of consolidation. And what that means is that naturally when there is a freight movement up or down, it does impact, but not in the same proportions. So therefore, when the face rate goes up, gross margin does not go up in the same proportion. And therefore, the gross margin percentage for us comes down and the reverse happens in a changed scenario. To make it more simple, I would say that if you notice that our revenue has increased to almost double while volumes have, let's say, expanded 25%, naturally that about 70% or -- 65%, 70% multiplier impact is coming on account of the average -- weighted average freight rate movement. Now when the freight rates have moved from 1 to 1.6, 1.7, our gross margin would have slightly improved. Now this 1.7 level of freight rate in our numbers, as you would see, based on market research, based on our own intelligence, based on inventory situation, we believe that we do not see a significant correction in the short term. However, over the next 3 to 4 years, it should find a new normal, which should still be higher than the original level of 1. Maybe this 1.6, 1.7 multiplier goes to a 1.3 multiplier over the next 3 to 4 years is what the broad sense we have. And as the freight rates go down, because we would continue to protect the gross margin largely, you would see that the revenue per TEU might go down slightly, but the gross margin percentage would increase as a result. So I would say that there would be a minimal impact on the gross margin as the operating freight environment changes, which we do not see changing significantly anyways in the near future. So that's what is happening. And on the back of that, the whole transformation-led sales acceleration should continue to drive volume expansion, which should more than take care of any marginal downward corrections in gross margin. And given that the SG&A costs do not need to go up from these levels significantly, we should continue to see improved operating leverage for the business in the international supply chain MTO segment, which should continue to drive sustained strong EBIT margins.

Sure, sir. And basically, what -- do you have any thoughts in terms of how is the global logistics scenario? And how long do you expect things to come back to more normalized levels? What is your reading on that part?

So as we mentioned, we -- while there could be some amount of softening, we do not see a significant softening happening in the near future. We believe that from -- 12 months from here, you could see some downward trend in the freight rates, which can take another 2 to 3 years to settle in, but they would settle at a higher level because the levels prior to COVID were not sustainable and which is what led to significant challenges for various shipping lines and led to the whole consolidation of the industry as companies were incurring significant losses. So we do not see the industry going back to those loss-making situations for the shipping lines. And therefore, the freight rates are likely to stay above the pre-COVID levels, but they should see some softening on a gradual way over the next 3 years. That is what is our reading based upon market research and advice that we receive and what we see from our side.

Sure, sir. My second question is on the net debt position. So my understanding is the net debt as of September is about INR 1,300 crores. So considering the strong operating cash flow that we have plus any cash inflows that we generate from, say, divestment of our cargo logistics business at some point in time and the proceeds from the Blackstone deal, what is the outlook on debt over the next 18 to 24 months? And do we intend to become net debt free? Or is there any internal goal to become net debt free by any particular time frame over the next 18 to 24 months?

Yes. So I would just make a quick comment and then hand over to my colleague, Deepal, for a more elaborate explanation. As you are aware that the freight rates have gone up by that 1.7 multiplier, it also means that the working capital has also gone up, which has utilized some of the cash and we have also concluded the Nordicon acquisition, Korea joint venture, which has all largely been managed through internal accruals without increasing the debt position of the company. So these are some of the key factors, but to give you more perspective on what is our strategy for the debt in the next 12 months or so, I would request Deepal to take this question.

Thank you, Ravi. So whilst we are very focused in reducing our debt from where we are today, and that's our endeavor, and once -- yes, you're right, once the Blackstone deal is consummated, we will have lower debt from where we are today. Also, please note that we are sitting on an expanded working capital because of higher level of business and because of higher freight rates. So should the freight rates continue to be buoyant, we may continue to have a higher working capital requirement to fund that. That's the situation that we are in. If the freight rates kind of come down, working capital will kind of shrink because some of these are just temporary facilities, which may kind of reduce the debt as soon as we are able to recover the money from the customers. Also please note that our recoveries and our DSOs are very robust. So there is no money, which from a working capital perspective, which is getting stuck with customers, which is not coming back. So there is no worry on that as well. As far as funding of these are concerned, we are extremely cautious about how we're going to fund our working capital. So there are temporary spikes, which we are funding through temporary means. If the spikes -- if the freight rates continue to be permanent in nature as we go along, we will find permanent ways of funding them. And yes, even if the Blackstone deal -- I just wanted to clarify, the Blackstone deal is we are on top of it and we should be able to finish it by the year end. There are regulatory approvals, which are beyond our control, which are almost around the corner. Once those are available, that will shrink. But to comfort you, most of our debt for these long term will be LRD debt on the warehouses. So this will be self-funded debt, which will be 12- to 14-year debt. So from a funding perspective or from a serviceability perspective, we do not believe there to be any challenge on any of these debt numbers that we have. So I thought I'll just give you an overall picture one how the debt is expected to move. Last line that in long run, we will plan to have only on the asset-heavy business, we plan to have only the LRDs wherever the asset-heavy business is there. And for the rest of the businesses, it will be purely working capital revolver facilities, which can be kind of managed with the working -- with the level of business that we have. So I just wanted to give you an overview of our approach to the full debt positioning of the company.

We have our next question from [ Mr. Srinath Krishnan ].

My question is related to the recent press release that you stated that you're engaging with Jefferies for possible stake sale in ECU line. Considering the fact that the cash flow increase is largely driven by transformation efforts, what is the rationale for sort of stake sale? And if you generate close to -- I mean, in the first half, you have generated approximately INR 400 crores of cash flow. In case you're looking at large inorganic acquisition, what would be the white spaces that could be filled as a result of that acquisition?

Yes. So let me give you a perspective on ECU. There are 2 opportunities for growth at ECU Worldwide. One, as you know, that while we are the largest in the world with a market share of about 13% to 14% now, there is still a headroom for growth and this growth can happen by way of acquisitions. And this is a business, which provides significant economies of scale because the way density continues to increase as we handle more and more volumes. Our procurement continues to improve significantly, driving overall expansion in margins. And therefore, it is important that we continue to look at acquisitive growth, which we have done historically. There could be some potential opportunities that may come our way for transformational acquisition growth. That is one. Second, on the digital aspirations. As you know, globally, the freight industry and the supply chain is getting digitized with players like Flexport focusing entirely on digital freight forwarding. And we believe that with all the initiatives that we have taken up at ECU, there could be opportunities to accelerate those digital initiatives and move towards being significantly a key player in the digital ecosystem. We also believe that there are opportunities in adjoining areas, how we have built up a credible FCL business on the back of an LCL business over the last 4 to 5 years. We see similar opportunities in an asset-light air business. And some of these could also be led by acquisitions. So these are some of the key potential utilization for fund raise for which we are, again, I would like to reiterate, we are evaluating options and preparing ourselves for any such opportunities that may come our way for growth in ECU Worldwide, in the digital ecosystem and through consolidation.

You rightly mentioned that you have built a strong FCL platform, right, on the LCL. Do you think it will be difficult to build a product without acquisitions? It would be time consuming. Or are there entry barriers, which would prevent you from doing the same?

So you need certain scale. So while LC and FCL were on the same backbone of ocean freight, air is carried on a different network altogether. And therefore, organic growth initiatives, while are underway, might see some of [ stickles ] and hurdles. And given our aspirations to deliver value, we would like to explore opportunities for acquisition, which come in, in a way where there could be value-accretive acquisitions. So we are open to exploring opportunities and want to be in a state of readiness for evaluating such opportunities for ECU Worldwide.

My final question on the restructuring. More from a business perspective, you have split the CFS. I understand CFS is asset-light, whereas the Logistics Park is asset-heavy. But are there any business synergies between the CFS and possibly in the future that could emerge between the CFS and Logistics Park?

So CFS and Logistics Parks are 2 absolutely independent businesses. Logistics Parks business is where we construct warehouses, which are given out on lease to companies like, on one hand, to the e-commerce players like Decathlon, Amazon and Flipkart. On the other hand, it could be contract logistics companies, such as our own ACCI. So that business is very different from the container freight stations, wherein we are operating and facilitating EXIM trade exit, and we continue to focus on going into more asset-light operating contract kind of opportunities in CFS. And the focus there is not on capital-intensive leasing, but on operational management of warehouses and container yards to facilitate EXIM trade and create opportunities from there. We do not see significant synergies. I would also like to further clarify since you provided the context on restructuring. On restructuring, at this point in time, we have appointed advisers to evaluate what should be done in this more of at a strategic level. And as we get more clarity and we evaluate options of what would be ideal, we would share details with all shareholders.

[Operator Instructions] We have a question from Mr. Keshav Garg Krom CCIPL.

Sir, firstly, sir, many congratulations for excellent numbers. Sir, I wanted to understand that in our MTO segment on the consolidated basis, we did around INR 263 crore PBIT this quarter. So you think that going forward, this number on a quarterly run rate basis is sustainable for us?

Yes. So as I mentioned, we would continue to see strong volume growth. We could see some softening on the freight rates. A combination of the both should lead to a potential healthy revenue going forward. And gross margin percentages remaining steady with an operating leverage on top of the same SG&A cost, EBIT should continue to sustain. That is what would be the expectation from our side. We are not in a position to completely comment upon how the operating freight environment would be. But like I mentioned, we have significant resilience in the way the business operates whereby our dependence on the ocean freight rates is not absolute, but it's only relative to a degree. So therefore, there is a strong volume expansion, transformation-led growth, controlled SG&A cost leading to an operating leverage, which should allow us to continue to sustain the momentum.

Great. Also, sir, in your investor presentation, in Page #4, other digital transformation, it shows that our ECU 360 bookings now it's almost 1/3 of our total business if I'm interpreting it correctly. So what impact -- is this also showing -- is this also reflecting in our profitability numbers apart from the volume growth and the freight environment? Is this also contributing to our basically margin and high profitability?

Yes. So I would say that directionally, the digitization on customer bookings would also help. But to answer whether it is helping right now, it is not making a significant impact because what happens is that many of these digital initiatives lead to, let's say, 8%, 10%, 12% efficiencies. And in a largely spread out business, where you have resources working on multiple things, it may not lead to a head count reduction if they only lead to a partial head count reduction. But as this 30%, 32% number moves towards 60%, 70% number and the business continues to grow at that consolidated scale, we will be able to drive more operational business without having to hire additional head count. So that is the way it would lead to improvement in profitability over the 2- to 3-year horizon. But has it already led into operational profitability and financial impact of that, the answer would be no. There won't be any significant impact at this point in time.

Okay, sir. And sir, lastly, wanted to understand that regarding the divestment of our Projects & Engineering Solution business. Sir, you think that this is the right time for this because the economy might be in an up cycle and if the CapEx cycle restarts, then maybe we might be exiting this business at the -- maybe after going through all the pain of past many years in the down cycle and just at the cusp of the up cycle. Sir, it was just a thought. I mean you know the business much better. So just want to hear your views on the same.

Yes. So I would like to clarify the statements we have made categorically state, we are evaluating the divestment of Project Logistics business and not the entire P&E segment. The equipment business, which contributes to almost more than 3/4 of the EBITDA for the company, would continue to remain. We're only talking about the Project Logistics business divestment, which we believe has become marginal business and has its set of challenges in working capital and does not align with the overall asset-light strategy that we have. So therefore, the equipment business, which can potentially benefit from the improved environment, and as we have seen the equipment utilization, in particular, has gone up from 61% last year to 75%, that business continues to be with the company. We're only talking about the Project Logistics part of the P&E segment, which is more of a working capital intensive and requires significant management bandwidth, given the complexities of the business and is working capital intensive. And it does not align with the long-term goals and which is where we've been looking at divesting the business.

We have our next question from Mr. Ravi Mehta from Deep Financial Consultants.

Congrats on a good set of numbers. One small clarification. Was going through Slide #8, so when you are talking of this acquisition of Speedy Multimodes, wanted to understand if it's an asset-light business. Then the EBITDA, what you are mentioning in the presentation, does it -- is interested for the Ind AS or that needs to be done and it would be a lower number?

No. So this is an asset-light in the sense that it does not own the real estate capital, and therefore, we have been able to acquire the business in a value-accretive manner. The JNPT CFS is on a long-term lease from the JNPT Port Trust itself and the Mundra is on a long-term lease from another government entity. And in terms of the EBITDA performance, this is the impact, which should come. So like I said, the last 6 months, EBITDA has been INR 21.5 crores. And as we conclude the share purchase agreement in this month, the slightly higher than this because we believe there will be some synergies and improvement from this number as we acquire the business formally. So this number should remain steady or grow from either in terms of additional contribution to our performance.

Okay, okay. So I was just wanting to clarify that Ind AS 16, you adjust the lease payments in depreciation. So just wanted to understand if there is any adjustment to be done or it has all been factored in this number.

Right, right. I understand, I understand. So the business EBITDA impact we're talking about?

Yes. Sure.

Ravi, Deepal here. So the depreciation -- so impact of 116 will not happen in EBIT in any of the companies. The depreciation will happen -- there will be higher -- PBT will be impacted, not the EBITDA. So EBITDA will not have a 116 impact in that sense.

Okay. And also one small follow up to the earlier comment that the equipment business may remain in the company and you're planning to divest the Project Logistics. So in that case, that equipment business is also an asset-heavy because you will have to have the fleet of cranes in your books. So just -- so any change of thought or...

Yes. So let me clarify. There's no change in thought. We continue to look at being asset-light. And therefore, in the long run, that business also does not align with the group philosophy. But we have to wait for the right opportunity. So at this point in time, we have some opportunities to have some discussions on the Project Logistics business, which are underway, and we wanted to keep our shareholders aware as things progress. And as and when we have the right opportunity, we would consider divesting equipment business as well. From the long-term perspective, we are very categorically focused on businesses where we can be the market leader in the market that we operate, whether it is at the global level or at the country level and which are asset-light and which have a significant play of digital.

We have our next question from [ Mr. Pankaj Sara from Shearwater Partners ].

My question is on the gross margin side. You mentioned that there is not a one-to-one correlation between the freight rate and the gross margin. So if the freight rates are up by 1.6, 1.7x, it does not mean the gross margin will be up by the same factor. Sir, I'd like to understand the cost side of the gross margin better. What are the levers on the cost side that can go up and down so that even if, let's say, the freight rate stays at current level, what kind of potential move the gross margin up and down depending on the cost factor?

Yes. So basically, just to understand, if you look at from an LCL perspective, let us say the freight rate is about $100 and we have 20 parcels in there, which we are carrying at a rate of $7 each, which is $140. Now as our cost for the full container increases from $100 to $200, it does not mean that we increase our margins from $4 to $8 because we increased from $7 to $14. Usually, the way business operates, it focuses on protecting the gross margin per CBM. That is how globally the budgeting is done. That's how the teams are aligned. So when the freight rate goes down or the freight rate goes up, they continue to focus on the gross margin per CBM and which is why the gross margin remains stable in a normal operating environment wherein freight rates may go up by 20% or may go down by 20%. Now when the freight rates have gone up significantly, like we see in our case, almost 1.7 to 1.8 multiplier, naturally some tailwinds play a role. And therefore, it does not come in absolutely same but gets expanded. But it does not get expanded anywhere close to the same relative proportion. And which is why if you would see, the gross margin percentage, you would see that it has come down. That's only because the additional cost, which we have to accrue does not mean that we are able to multiply our revenue also in the same proportion. And that's exactly what plays out in the reverse cycle as well.

Okay. So does this mean that you have contracts -- obviously, you would have contracts in place with the carriers. And so the benefit of -- so what you're saying is that up and down of, let's say, 10%, 20% wouldn't matter [ given sphere ] of the contract. So does this mean that the contracts are reset every few months or every few years? And what is the -- so what are the estimation factors built in that? Is there a correlation between if the freight rate goes up beyond 20%, then you would bring a new rate to imply a better gross margin? Just trying to understand the contract duration.

Yes. So contracts vary from 3-month contracts to 6-month and 1-year contracts. These are not like much longer than that on the carrier procurement side. And the customer side on the LCL is largely spot market. What I'm trying to highlight is that fundamentally, the business operates, keeping consolidation and service in mind. And therefore, the business operates on a gross margin per CBM is the key metric. That's what people try to drive at the ground level and that is what leads to a steady performance. Now with the increase freight rate, there is naturally an opportunity to expand upon that to some extent, but it is not same proportionate is what I'm trying to highlight. It's not -- it's a contractual obligation, but it's the nature of business how it operates that all the reductions or escalations do not lead to a same proportionate reduction or escalation. So whenever you would find an increase or decrease in freight rates, you would not find the correlation to be seen between our cost and sales and therefore the gross margin percentage changes. So like I said, as the freight rate moved from 100 to 170 , the gross margin did not move by 1.7x. It moved by a lower number. And then it moves back from 170 to 130, it would again move back in a similarly lower proportion. And it will not move back to 100, but to 130 and that also over 3 to 4 years. That's the broad assumption we have around how freight rates would move and how our margins would play out. And given that the volume expansion and other things are going to be more significant, we believe that the impact would not be significant. And hence, the confidence on sustained performance in the times to come.

We have our next question from Mr. Prateek Kumar from Antique Stockbroking. [Operator Instructions]

My first question is on the MTO segment. So I mean we mentioned that -- I mean that use of technology or digital in the overall scheme of things have significantly increased and Flexport is one of the leading players in global digital freight forwarder. So how are their market share? Like when you say 13%, 14% market share for us, how are their market share? And is this -- is there anything now, I mean, with significant ramp-up of ECU Worldwide system, is there something that they are doing, which we are steadily trying to ramp up?

Yes. So let me highlight that as far as the -- I'll try to give a quick picture. Globally, the ocean freight operates as FCL and LCL. 93% approximately by value is the full container load wherein it's a more -- easier supply chain. You're moving a full container, it can be booked by a forwarder or by someone like us or by the shipping line itself. And then there's LCL, which is about 7% in value terms, wherein people do not have enough cargo to fill in the container and they come to companies like ourselves who are running a global LCL consolidation network, which means that we operate regular services, weekly services to 2,400 -- close to 2,400 direct port -- direct trade lanes. So these customers get to book the cargo on a scheduled service just like how a full container customer can get by way of shipping line schedules. Now in this business, we are the pioneers in digitization and none of the competitors, neither anybody has the scale that we have globally, not as anybody have the kind of digital intervention that we are working upon. So we have a leadership on digital as well as far as the LCL consolidation is concerned. But if you look at the freight environment at large, there are freight forwarders. There are shipping lines. Shipping lines are looking at digital interventions. Freight forwarders, while the legacy forwarders are also trying to digitize, there is a new set of forwarders emerging like I took an example of Flexport who have minimal share at this point in time, but they are growing significantly. As the industry landscape changes, we believe that ultimately the successful model would be hybrid, which means that a digitally enabled company, which has feet on the ground because you have to move cargo, you cannot just move in megabytes. And some of the companies like Flexport are digital first and now they are trying to build up an operational footprint across the world. Companies like us at ECU Worldwide, we have a very robust, strong global footprint. And over the last 3 years or so, we have been investing behind digital to ensure that we are a significant player in a fully digitized trade ecosystem. So it's not exactly in the right competition on the LCL consolidation where we have been threatened by a digital player. We are preparing for a future 5 years from now, wherein supply chains would flatten and the digital ecosystem would be dominated by hybrid players and that's what we're preparing for. At this point in time, on the consolidation market, we are market leaders, not just from scale, but also on the digital journey.

Right. Secondly, this Nordicon acquisition got integrated in the consolidated results. How much would be the contribution of volumes from that business? So of the total 243,000 TEUs we have for this quarter?

Yes. So I'll just get back to you with this information. Let me just -- I don't recall the exact numbers. I'll get back to you on this number during the call, yes.

And just one more thing on the Speedy Multimodes acquisition, so I mean, let's assume our average EBIT from CFS segment is around INR 30 crores. So how much that Speedy Multimodes can add to this number on a quarterly basis?

So as I mentioned on the EBITDA level, we expect that there should be over INR 10 crores on a quarterly basis should be the potential number on the EBITDA.

We have our next question from Mr. Chetan Shah from Jeet Capital.

Sir, just one small clarification. In the current quarter's MTO business, how much is the Nordicon's acquisition is there in the EBITDA and top line? If you can give just to get a correct picture about comparison, please?

Yes. That was just the previous question. We'll get back on that number exactly just in a while.

We'll take the next question from Mr. Abhijit Mitra from ICICI Securities.

Congrats on a great set of numbers. My question is more on the MTO side. So just to understand, you have clarified this that this business performance looks sustainable. But if I just look on the per TEU metrics in euros, it's almost -- you used to do around 4,000, 5,000 through cycle or even probably lower EBIT per TEU in euros. Now that number is almost 11,000. So I'm just curious that this kind of cost escalation from the customers and how -- what gives you confidence that there's almost 7,000, 8,000 per TEU euro increase you can sustain through cycle. Some thoughts on that.

Yes, thanks. So as I mentioned, when we are comparing on an EBIT per TEU metric, we need to recognize that this is a relatively lower-margin business, wherein the SG&A costs are a significant percentage in play. And as we get operating leverage by increasing the business while keeping the SG&A costs in check, that allows us to significantly improve the EBITDA margin. That is something which is a sustained trend, which will continue to aid the environment around the freight rates, would lead to some softening which could lead to the tailwind impact which we have also -- which has also enabled us to expand the margins may play down. But as I mentioned, the volume expansion should continue to take care of that. And which is why when I say sustained, I'm not saying that the growth rates of doubling or would sustain, but I'm saying the absolute numbers from this level should be sustained with some softening in the ecosystem tailwinds and continued strengthening of our volumes. And that leads to a significant improvement in EBITDA because those gross margins fall or slip down to EBITDA as we keep the SG&A costs in check. So that's where the confidence is coming from.

Right, right. Just to understand in terms of your realization increase that you are seeing, I mean, that realization jump is also significant. I mean it's almost INR 40,000, INR 50,000 per TEU jump that we are seeing. So that normalization of INR 40,000, INR 50,000 per TEU, this is a 1-year process or it's a 2-year process for you?

So there, again, like I mentioned, that again, is not just led by -- that's a combination of the market environment and the transformational initiatives with a focused sales acceleration on more profitable routes, cutting down of loss-making trade lanes. All of those things are at play in expanding the operating margins and the tailwinds that have been there, we believe them to subside over the next 3 to 4 years, but again, not to the pre-COVID levels. While the transformational impact would continue to play to our advantage in improving the sales acceleration and driving profitability across trade lanes. So if you look, for example, if you would notice, the continued utilization has also steadily improved and that's something which is a pure operational excellence, which also has significant advantage in terms of the bottom line performance. So this is a business of scale. As we continue to expand scale, the operating leverage at multiple levels comes into play.

Sir, this was the last question. I hand over the call to you for closing comments.

Yes. So thank you all for your questions and hope we have been able to answer them adequately. I would like to thank you all for participating on today's call. On the pending question on Nordicon, I would like to state that Nordicon has contributed to approximately USD 3 million in EBITDA in the current results. That has been the number for the 3 months, which we have received from Nordicon. And we believe that we would continue to do well with the acquisitions. We continue to look for opportunities to grow both organically through digitization and by way of inorganic acquisitions, which we would only look at selective value-accretive targets. And if you would look at any of the recent or even the past acquisitions, we have always ensured that the acquisitions have been extremely value-accretive and we will continue to drive that. And thank you very much for joining us on the call today.

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