Allcargo Logistics Limited (ALLCARGO) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Allcargo Logistics for Q1 FY '25 Results Conference Call hosted by PhillipCapital (India) Private Limited. [Operator Instructions] Please note that this conference is being recorded. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. I now hand the conference over to Mr. Vikram Suryavanshi from PhillipCapital (India) Private Limited. Thank you. And over to you, Mr. Vikram.

Thank you, Priya. Good morning, and very warm welcome to everyone. Thank you for being on the call of Allcargo Logistics. We are happy to have the management with us here today for question-and-answer session with the investment community. Management is represented by Mr. Ravi Jakhar, Group Chief Strategy Officer; and Mr. Deepal Shah, Group Chief Financial Officer. Before we start with the question-and-answer session, we'll have opening comments from the management. Now, I hand over the call to Mr. Ravi Jakhar for opening comments. Over to you, sir.

Thank you, and welcome, everyone. Good morning. I'm happy to share updates about the company and the underlying operating businesses with you. And before we take on questions, I would like to summarize the business outlook and then hand over to my colleague, Deepal, to talk through some of the financial highlights. So this has been a good quarter, and we have had sequential improvements across all the businesses. The flagship business, which is international supply chain has seen a good momentum, which we have been expecting for some time. And now in this quarter, we have seen improvement in volumes. We expect the improvements to be more substantial in the months to follow, as we have seen the demand starting to pick up only towards the mid of June, something that you've highlighted in some of our monthly updates as well. For the quarter gone by, we saw the LCL business increased by almost 6% compared to the previous quarter. We also witnessed the FCL business up 9% as compared to the last year. Now when these volumes have gone up, this is meant that our utilizations have improved on the LCL side. So we have on the utilization index, we have each container utilized 4% better as compared to last year. We have also been able to increase the share of 46 containers by almost 9%, which are operationally more efficient. And we've also been able to reduce the transshipment requirement. So all these things combined have allowed us to improve the margins in the business. And therefore, that has contributed to the positive growth in EBITDA, which on a consolidated basis is at about 34% compared to the previous quarter on the back of 13% expansion in the consolidated revenue. On the international supply chain business, we have been noticing that for the month of July as well as August, the volumes have been stronger and we see a similar demand outlook for September and October. Therefore, our general belief is that market should see continued sustained recovery in trade volumes until the end of the year. Coming to the Domestic business. On the Express business, we have seen that operational efficiencies, which have been achieved early part of this calendar year have sustained and that has allowed us to continually improve the operating margins in the Express business. And as an outcome of that, the EBITDA for the quarter is almost 33% higher than the previous quarter. We believe that on the back of these operational improvement, the commercial growth will also take care. The industry itself is expected to grow at a robust pace, and that should help companies expand its commercial operations, increased the volumes and revenues, and on the back of the sustained operating efficiencies, we should see a continued improvement in margins and profit bottom line numbers in the FCL business as well. Contract Logistics business, we have continued to maintain the expansion mode, which meant that the white spaces have been more or less consistent. But as far as revenue is concerned, we have increased almost 13% as compared to the previous quarter. We increased almost 22% compared to the previous year. And this is primarily on the back of renewed contracts. And now, we are expanding the other domains. So if you see the distribution of our business, it is almost equal across the main stay chemical domain, the e-commerce business and now auto and other industries also contribute to almost 1/3 of this business. So the business has now been diversified. We have marquee clients working with us and a lot of new contracts being signed. And I see that's a healthy pipeline, which is visible. So we believe that for the coming quarters, the contract logistics business should also see a sustained growth. So, as a combination of these 3 businesses doing well, we have seen a positive sequential outcome, and we believe the trend should continue. In terms of the macroeconomic environment for the domestic business, we have been experiencing increase in the volumes. And we believe that with the festive season ahead, the volumes on the Express business side should only go up. On the Contract Logistics business, the trend of companies wanting to outsource and move from unorganized to organized. That's something which the underlying current has remained. And therefore, the industry growth continues to be healthy. On the international supply chain business, besides the revival of trade volumes, the company is also focused on 2 key categories of initiatives. One is revenue expanding initiatives, which include launching new products, launching new trade links and also strengthening our presence in certain markets where there's an opportunity. For example, recently, we appointed a new leadership team in Argentina, Uruguay and Paraguay, three markets, where we felt we underrepresented and now we have a very strong commercial team, which has come on more together as one team. And we expect that the volumes in these 3 countries could potentially double from the current labels in next 9 to 12 months. We believe there are other such pockets of opportunity wherein the company's market share is relatively lower, and we continue to work towards such specific opportunities. The second key category of initiatives is on the cost side. There's a continued focus on standardizing our operations, which allows the operations to be outsourced. We have achieved a lot of cost savings as discussed in the past calls through standardization and then outsourcing of operations from the United States into Mexico and we continue to evaluate other such opportunities on how we could standardize operations and then outsource to reduce costs. And the second opportunity in that category is to continue to drive automation because standardization also makes automation more feasible. And the combination of these two things should allow us to maintain our costs against all the inflationary pressures. And as an outcome of that, the business should do well. For that, we brought somebody on the business performance and the market outlook. We'll talk more about some of this in the questions that come across. And on that note, I would request my colleague Deepal to take you through the financial highlights for the quarter gone back. So over to you, Deepal.

Yes. Thank you, Ravi. I will now discuss the performance for Q1 FY '25. The consolidated revenue for Q1 FY '25 stood at INR 3,813 crores as compared to INR 3,271 crores during Q1 FY '24 and INR 3,398 crores during Q4 FY '24. The EBITDA for Q1 FY '25 stood at INR 133 crores, down 5% as compared to Q1 FY '24 and up by 34% as compared to the quarter ended March '24. The company reported a consolidated PAT of INR 4 crores as against a loss of approximately INR 12 crores reported during quarter 4 FY '24. Consolidated net debt for the quarter ended June '24 stood at INR 424 crores. Moving on to the segmental performance. I will start by discussing the performance of the international supply chain business. The trade environment has been buoyant. Demand has exceeded expectation on the back of strong global growth momentum as compared to 2023. LCL volume for the quarter ended June 2024, stood at 2.25 million CBM, similarly on a Y-o-Y basis and representing a quarter-on-quarter growth of 6%. The FCL volume for the quarter stood at 1,56,000 TEUs, similar to last quarter and up 9% on a Y-o-Y basis. Q1 FY '25, the ISC business reported a revenue of INR 3,320 crores as against INR 2,823 crores in Q1 FY '24 and INR 2,919 crores in Q4 FY '24. The EBITDA for the same period stood at INR 81 crores as against INR 42 crores and INR 111 crores, respectively. Now moving on to the Express business operating under GESCPL brand company, the volumes for Q1 FY '25 stood at 300,000 tonnes as compared to 292,000 tonnes during the same period last year. The quarter reported revenue stood at INR 358 crores as compared to INR 367 crores in the same quarter last year. The EBITDA for the quarter in June 2024 amounted to INR 20 crores as compared to INR 18 crores for Q1 FY '24. Moving on to the contract logistics business which sits under the Allcargo supply chain. The contract logistics revenue stood at INR 91 crores for the current quarter as compared to INR 71 crores for the quarter last year. Clearly, EBITDA for the quarter ended June 2024 stood at INR 29 crores as compared to INR 32 crores for the same period last quarter. In line with the best disclosure practices, we have been consistently providing other key comparative financial and operational indicators in our investor presentation. One can refer that for more detail. With this, I would like to open the floor for question and answers.

[Operator Instructions] The first question is from the line of Rushabh from RBSA Investment Managers LLP.

So with regards to the Express business, we have seen a good churn at this senior level management team. So I just want to understand what changes have been made or what changes will we be making at a broad strategy level, so there is good double-digit volume growth over the next 2, 3 years?

So considering that Gati is separately listed company. I would refrain from going into too much of detail on that, and Gati management team could answer that. But just to state the effects, as you are aware, Gati's Express business has seen an operational turnaround with the cost of operations now matching the best standards in industry, and that's been the primary lever of profitability. Sandeep joined us as a Chief Operating Officer last year in the Gati business, and there's clearly been a strong outcome. We have had senior commercial leaders joining the company recently, and we remain confident that they would see the company toward future growth. So Uday Sharma joined, who's the Chief Commercial Officer. And of course, Phil has retired from the company and would continue to transition the management. So there have been changes which have been made, new people have been brought in and new people would bring in new energy and renewed focus, which should continue to drive the growth momentum which has been built on the back of a significant turnaround of extremely challenging situations. So, I think all the management changes should work well for the business.

And secondly, on the contract logistics side. What is the sustainable EBITDA margins? We have seen a slight dip here. Will you just share next 2 years, what is the outlook here?

So the EBITDA margins have -- I would say, the current quarter decline is not an indication of a trend. On a small base, sometimes we cost reallocations can also have a bearing impact. But fundamentally, the business profile should remain consistent. We don't see a significant upward or downward revision in the margin growth side, that should sustain from a 2- to 3-year horizon. We could potentially build additional revenues from the transport part of the contract logistics where we had certain restrictions, which are now removed which typically comes at a lower margin, but then that would be like an incremental business on top of whatever growth we see today. So if we continue to witness the current growth pattern, the margin profile should remain same. Should there be an accelerated growth on the back of the current contract logistics business with greater contribution from transport than margin percentages could decline, but the absolute margin should grow even better. That's how I would put it.

Next question will be from the line of Ravi Singh from Cosmic Horizon Capital.

In the MTO business in the pre-COVID time, we used to do an EBIT per LCL continue volume of about 0.44x, which has risen quite sharply during COVID time, and now it's close to about 0.15x. Now with container shortages and the huge increase that we have seen recently in the long-term freight rates, can the EBIT per LCL at least shoot up to the pre-COVID levels of 0.44x if not higher?

So a couple of comments here. The LCL and the FCL business composition as well as the trade lane composition has significantly changed over the years. So -- and also it represents the mix. So therefore, we have always advised against comparing on EBIT per TEU basis. We have shared the guidance in terms of what drives the operations profitability. And typically, 1/3, 2/3 or roughly 70-30 is the percentage of gross profit contribution from the LCL and the FCL business. That's what we are maintained. So if one was to try and estimate the profitability scenarios, one could look at that split of GP. We've been sharing the volume details. On the FCL business, freight rates are going up or down has somewhat direct vary, not exactly in the same proportion, but to some extent on the profitability. On the LCL business, the key drivers are utilization and the 40-feet container usage, both of which are again shared on a monthly basis. So, from hereon, what we see is that we have great confidence on the volume growth and utilization and 40-feet container usage remaining same which means that the operating profile of the LCL business should improve from here. And in this business, as you could see, the SG&A cost is a significant multiplier of bottom line. So that is something which we are confident again of continuing with all the initiatives that I spoke about. So, effectively, there's a significant operating leverage that kicks in. And therefore, if one is analyzing the EBIT per CBM in the LCL business or EBIT per TEU in the FCL business and some kind of a blended number on that, you would see that marginal improvements in gross profit can have much more significant positive impacts on the bottom line on a per unit basis. So business fundamentally tracks gross profit per CGM, for LCL and gross profit per TEU for FCL, that is how the company management are driven. And I would say that from current levels, one could expect the SG&A cost to be largely contained, keeping them well below inflation rate because inflation will have a natural impact, but we intend to offset that to some extent with the automation initiated. Now on the back of that, we have shared some guidance on the volume expansion. So one could play out the operating leverage and make some estimates. But yes, fundamentally, we should move towards levels broadly in the range or maybe perhaps higher as the business will revise over the next 2, 3 quarters.

It makes sense. And also all the cost initiatives on the employee cost front, is that all done? Or is there some more impact that can flow through in the next quarter?

So that is largely behind us. And like I said, there have been increases and there have been reductions and that is how we have been able to contain the cost otherwise in a normal operating environment, the cost would have gone up. So that's the reason why all the corporate cost reductions and automation initiatives and outgrowth initiatives have come in handy to maintain the cost. And now we have seen the revival in business. This quarter, we have seen some growth in volumes, and we are seeing even better trends in the recent months. We would have the monthly updates for the month of July, perhaps with the next 5, 6 days we should be out. So one could see there should be a continued also trend on the business that should translate into profitability as well.

Sir. And lastly, just in the first 5 months of this financial year, you've seen a record 74 million TEUs of container movement globally which has beaten the previous 2021 record of about 73.9 million TEUs. And many analysts world over believe that this was on -- usually on account of front loading of demand and the Christmas and the New Year stocking, which generally happens around Q3 had been preponed to Q2. So does this imply that somewhere down the line demand could taper off and freight rates could cool off from here on?

So one, typically, whenever we look at the container statistics, which are usually shared, I'm not sure which numbers you're referring to, but there is also a mix of empty and laden containers, so laden containers typically demonstrate a movement of inventory, while there's a lot of empty containers which basically are based on the [ reposition ] required for these trade lanes. In terms of the demand, we have seen sharp pickups and which have led to a significant expansion in freight rate pay from April until June, July. And then there has been a marginal decline on some trade lanes and marginal increase. It's not been a constant increase and now we believe the freight rate should remain stable or more or less range bound until the end of the year. Now beyond that, there is no visibility at this point in time, but particularly around the Chinese New Year around February, there has been a little bit of a flatness. There could be some decline as well. But right now, the biggest challenge is the -- on the supply side with the whole red sea crisis, the additional turnaround transit time also the U.S. ports have been congested. So all these factors have been leading to a bit of a supply shortage as well. And we cannot really comment about the geopolitical situation, but at least the immediate future, we don't see things changing that end. By the time things improve on the supply side, we believe the demand should get better because the current demand update is largely from select markets in Asia, U.S. to an extend and in South America. European economies have remained subdued, and we have not seen momentum or growth in those markets, which potentially could follow in 2025. So it's more like a combination of all these factors should potentially create a sustained demand for the remaining 3 quarters of this financial year. That is what our broad estimate is based on all the geopolitical development and we trade in sites that we follow.

The next question will be from the line of Rajesh Agarwal from Moneyore.

Sir, any one-off this quarter in terms of expenditure?

Nothing significant that needs to be highlighted. Deepal, do you have any comments on that?

Yes, nothing -- no one-offs.

One from INR 32 crores we bought for that COVID relief for employees, that was there in this quarter?

No, no, it was not. It was there in the last quarter June of '23.

So all the costs has been appropriated and everything, any increase in cost or anything in rationalization in the cost side?

Yes. So thank people for confirming on the no one-offs. And like I said, on the cost side, we have done a lot of cost reduction initiatives, which are allowed us to maintain the cost of site inflationary increases. So no significant additions or reductions you expected there. Focused largely to drive gross profits to drive the bottom line.

So any operating leverage from here will drive to the bottom line?

Yes. That is exactly the strategy and expecting.

Sir, one question. What we have done, right? Apart from the automation and digital, which we are talking about is the business becomes more a sustainable model, it doesn't become a one-off because of the freight rate or supply shortage of containers, we benefit. And when that is over, we don't benefit. So is there any strategically we can do our 6% EBITDA or something like that, the business can become more sustainable?

So I think the best part and the most beautiful aspect of our business is that it is a very, very unique niche business, which is not replicable. The business that is -- the flagship in rational supply chain is less than container route consolidation. In here, we operate 2,500 direct trade lanes, which means that it's like how you book an Uber, you could book at EQ container, you could book 1 cubic-meter of cargo share to make it simple for understanding. If could just book on cubic meter of cargo every week across 2,500 trade lanes. It's like vast trade lane network. To give you an example, this is a bigger network than any shipping line in the world. That's the kind of scale we have created globally. And that is the reason why some of the largest forwarders globally also are our customers, which means that even DHL, [ Kuehne+Nagel ], DSV and the likes of these large forwarders, and they have requirements, even they end up being customers for Q1. It's a very, very robust strong network. And being a cross-border chain is also requires operational engagement on both origin and destination. So it's a very unique business. We have our own offices in almost every country that matters, barring Russia in terms of scale and size. And so this network, this well-established direct services are the fundamental ground, which creates very high-entry value. So on top of that, what we're trying to do constantly is our customers are mostly forwarders who are well educated. Our vendors are shipping lines, which are also well managed. What we need to do is we need to create the digital layer, which is like the physical infrastructure on ground to manage consolidation and containers and the digital network to bring all these stakeholders together and provide seamless visibility. And that's where all the automation, the data analytics on route optimization, all of tools come into play. We are the only company in the world which is almost 70% of its export bookings coming in through digital channel. To all these differentiations on an already unique niche business model creates very high entry barriers and very high [ defensibility ] in the business.

Sir, why didn't we benefit after the freight rates came down, our container utilization came down, why we didn't benefit if it?

No. So that is exactly the counterproductive thing. Because as you can imagine, the cost of operating the business is the cost of container and the revenue comes in from every cubic meter that we carry. Now, when the economic downturn happened, and on the back of that, this was a very unique dual event when we say this also rapidly collapsed in the utilization is also came down. We were in a situation where each container, the cost of carrying the container as well as the freight rate is to a large extent in the LCL business passed on, right? But if you're not carrying enough cargo, then we don't make money. So it's like any airline business. If you have vacant seats, you don't make money. If you have full [indiscernible], then you make money. Exactly, the same way in containers.

So do we enter into the contract -- annually contract with the shipping line -- contain -- so much container will upload for LCL and all?

There is a combination of rolling contracts, spot buying, minimum commitments and sometimes it's more of the volume incentives, like when we cross certain thresholds, we get such additional volume incentives, et cetera. And these are initiatives which go back 30 years. So it's not exactly that we have contractual obligations on the buying side, but we have strong comfort. I mean to give you an example, in the worst crisis of container shortage in the history, in the big peak of COVID as well as in the recent times, we are always able to find space for our customers across the world. So that's been a strong testament to our operational capabilities.

So if the scenario is normal, geopolitical and another things, utilization of container, then we'll make money? We will make more bottom line?

Absolutely. The bottom line should grow as long as we are able to improve the utilization, which should be on the back of volumes. So as the economic growth revised, which we are seeing right now and should continue as the whole -- the interest rates coming down, the consumption should go up. So the whole macroeconomic environment [indiscernible] last 12 months, but things are looking better. Europe possibly will take some time longer. But on an overall basis, we see enough contributions coming in from different quarters of the world to drive economic growth, up the trade volumes and all of those directly contribute to us.

Next question will be from the line of Radha from B&K Securities.

Sir, sequentially, despite the rise in volume, we have seen that our operating costs have remained elevated. Could you please highlight what are the reasons for this? Because last 2 years, we have taken a lot of initiatives on the cost front. So when can we see the benefits of that come into our book?

So a significant part our operating cost is ocean freight. So naturally, [indiscernible] ocean freight operating costs will also go up. But like I mentioned, just play, which is why if you look at on the consolidated basis, a 12% increase in revenue sequentially has led to a 34% increase in EBITDA. So the operating costs would not come down. They would come down or go up with the freight rate but what we're expecting is that the volume should go up. Gross profit per unit volume, which is what we call a yield in this business should remain consistent or we had never to improve. When increased volume and improved yield should lead to a higher gross profit. And all of that by containing SG&A should come down to the bottom. That's how the business strategy is being worked upon.

Okay, sir. And secondly, what is the volume growth that you are targeting for FY '25 for the international supply chain business?

So, at this point in time, we are not sharing any specific guidance, but we would like to reiterate that we continue to expand market share, which means that we would grow faster than the market in both LCL and FCL business for FY '25.

Okay. And sir, in contract logistics business, we have gained wallet share from customers in this quarter. But despite that, we are seeing that EBITDA has dropped, so what are the reasons for this and what is the PAT for the contract logistics business in this quarter and [indiscernible].

The contract logistics business is typically driven by contracts bearing from 1 year to 3 years in contract life. And therefore, quarterly trends could have a little bit of deviation based on how the white space is moving because we're constantly investing in acquiring additional capacity, which naturally remains vacant for some time and then customers fill in. There could be some potential variances, but typically, revenue growth and the revenue mix is an indicator of profitability. In this case, revenue growth looks strong. The revenue mix has remained consistent. So profitability should remain consistent in terms of margin profile and should improve in terms of absolute amounts.

And what are the current volumes from the 3 regions that you mentioned, Argentina, Uruguay, and Paraguay. Also, in this subsidiary, are these regions being recorded?

So the international business is -- sorry, international supply chain business outside of India is all under subsidiaries below EQ worldwide NV, which is the Belgian entity. That is where we record. We don't share country specific volumes.

Sir, last question, you mentioned about the net debt. So could you mention the net debt from each business segment? And what is the target net debt for this year and next year?

I will request my colleague, Deepal to comment on that.

Target net debt, it depends upon each business. In some businesses, they want to just have some leverage for working capital requirements. But if you want the breakup, we can share the breakup. So as far as ECU is concerned, which is the largest business outside of India. The net debt is [ INR 133 crores ]. Allcargo Logistics which will be stand-alone, but in a way a Holdco holds a net debt of INR 524 crores. Gati typically is at INR 195 crores net cash available because we had and the QIP money being [indiscernible] and ASCPL is at around INR 24 crores of net debt, which is used for CapEx requirements and the long-term borrowings. And there are a cash of around close to INR 52 crores in other subsidiaries adding up to INR 424 crores of net debt.

Sir, any substantial or any CapEx plan for this year and next year?

No. The only -- I think -- so, Gati, you already have the QIP proceeds where we are going to be investing in some hubs and also into the technology. Apart from that, in Allcargo particularly, we do not have any -- or Allcargo [ ECU ] we don't have any large CapEx requirements, only maintenance CapEx, et cetera, which is expected. So the summary is we expect the debt to go down from here, not go up only subject to working capital debt which if the freight rates go up and that, of course, will increase our business on the earnings as well but if that's the case, the only working capital debt may kind of go up a little bit depending on how freight rates perform. But just [indiscernible] in spite of the working capital debt going up, our DSOs and all have been raised on and win controls. So there isn't any additional exposure. It's only the additional business that we are reaching in terms of revenue which will be followed by profits come along.

The next question will be from the line of Dheeresh K. Pathak from WhiteOak.

Basic question, just to improve my understanding. So LCL volumes measure in CBM and FCL in TEU, why is that?

So the FCL is measured in TEUs, which is a 20 feet equivalent unit because we typically carry the full container load, which means that the customer either books 1, 2, 5 or 10 containers with us. This container could be a 40 feet container or a 20-feet container and that is why globally the container business is measured in TEUs. The reason why we measure LCL in CBM is because customer does not bring in the entire cargo, customer brings in a part of the cargo. So cargo brought in is like 1 cubic meter or 2 cubic meters or 0.5 cubic meter. And therefore, the bookings are always in cubic meters. And all these shipments together fill up the container. That is how the less than container load consolidation business works, and hence, the unit of measure is always cubic meters in LCL and TEUs in FCL.

So is it a fair understanding that in FCL, the revenue and cost are both on TEU basis, but in LCL the revenue is in cubic meter, but cost in TEU?

Yes, that is correct. And which is why the utilization, which is cubic meters per TEU plays an impact on profitability.

Understood. And on Slide 14, the chart on the right-hand side, which shows container utilization index and 40 feet container usage index, what is the difference like between the 2 charts?

Yes. So container utilization is how many cubic meters are we putting inside the container. The 40-feet container usage index is of all the containers that we are using, how many of them are 40 feet and how many of them are 20 feet. So what happens is a 40-feet container as the name suggests, typically has twice the volume of a 20-feet container. However, the costs are not double. They're typically 1.6 to 1.7x. And therefore, the objective is to always carry the LCL cargo in 40-feet containers, but if you do not have enough cargo, like typically to give you a ballpark idea, 25 to 27 cubic meters of a cargo is typically carried in a 20-feet container. So if you have 45, 50, 55 cubic meter, you tend to carry them in a 40-feet container. And that is how largely the business operates. But sometimes, if you say you only have 20 or 22 or 18 cubic meters of cargo, then you would carry that in a 20-feet container. Now from a business standpoint, 40 feet container means lower cost per cubic meter because the cost is not double, but the volume is double. And therefore, as the business is performing well, the volumes are higher, we are able to use more and more 40-feet containers. So the graph at the bottom suggests how is our 40-feet continue mix improving or deteriorating? So that's the difference. One is, how many cubic meters are we putting inside each container. And the second one represents what percentage of containers are 40-feet in the overall mix.

And this includes -- this is only from an LCL business point of view, not FCL. Both the charts on the right-hand side do not represent FCL?

Yes, both the charts are relevant from LCL point of view, only, that's right.

LCL point of view, okay. And some on gross profit, let's say, Q1 FY '25 is INR 647 crores and then the EBITDA, the chart below is INR 81 crores. So the difference between that is all overhead cost, fixed overhead cost?

Yes. Between the gross profit and the EBITDA would be the overhead costs, the admin cost [indiscernible].

So that is a lot of overhead cost. So where does it -- like, is it semi-fixed or is totally fixed, like what is the nature of this fixed cost?

So I would say there is some degree of variability based on the performance. But to a large extent, these are staff costs, warehouse lease, office rentals, et cetera, and kind of it. And which is why I was mentioning earlier that the SG&A component is significantly high compared to the bottom line, and therefore, improvement in gross profit have a far more profound impact on the bottom line. And therefore, there's a huge operating leverage at play. And hence, the endeavor is to always continue to outperform market and as soon as -- whenever we see the macroeconomic environment supporting the business, we see a good revival in the performance. And naturally [indiscernible] driven business.

Just to get a good understanding. So this fixed cost is, let's say, INR 2,200 crore annualized run rate, if I did the math right, of this INR 2,200 crore [Technical Difficulty].

I lost you. I'm not sure if it's a connection at mine or yours.

The line for the current participant seems to have disconnected. We will move to the next question. The next question is from the line of Sukant Garg from Equible Research Private Limited.

I just wanted to know more about the cash flow situation because cash flow situation deteriorates as we compare it from June because in June, the profit, the operating margin and the cash flow [indiscernible] compared to the financial results now it is being used.

Deepal, you want to respond on that?

So I couldn't actually hear him very clearly. So it's regarding cash flow, so what is the specific question sir? Can you please repeat that, your voice was echoing in a way. I couldn't hear it very clearly.

Yes. So I just wanted to know that if our cash flow situation has been a little less -- better than what we have in Q1 FY '24 because if I see the operating margins, the operating margins have been -- came down a little bit from June '23 to June '24 from Q1 last year to Q1 this year.

Yes. So if you look at the results for Q1 FY '24 versus the results for Q1 FY '25, there is a change in the results as far as the EBITDA margins -- I mean, the amount is concerned. Keeping that in mind, the cash flow has to some extent, the EBIT margins -- to that extent the cash is marginally impacted Also, what has happened is that if you compare the freight rates in Q1 of '23 versus Q1 of '24, which is now, you will see that the freight rates have also gone up a little bit. So there has been some additional investment in working capital, but we have sufficient cash and lines available for us to cater to these requirements. There is no other issue.

But do we recover that in Q2 or Q3 onwards, we have sufficient planning for that?

The operating cash, if you go back and look at the cycle 2 to 3 years back, what has typically happened is that whenever the freight rates have gone up, many times this came with a better margin over a period of time. And if that happens, the cash is -- obviously the freight rate is pass-through, so we will definitely recover all the cash back. So the working capital expands when the freight rates go up and they contract when the freight rates come down, and that cash has been replenished back to the lines that we have with the institutions. That is how the whole cycle works. But what it means behind is a better business opportunity to cater to and better margins and profits in times of higher freight rates.

Yes. So primarily to add to that, basically, the fundamental driver here is that the ocean freight rates have gone up in the last 3, 4 months, and that has meant a much higher working capital which has been deployed. And therefore, the cash flow has been utilized towards that.

I also mentioned that our DSO just to further -- I did mention earlier also to rub it in again our DSOs have been, they've gone -- they haven't gone up. So the cycle in terms of recovery is fairly consistent. There is no other issue [indiscernible] also increases ocean freight rate.

The next question will be from the line of Dheeresh K. Pathak from WhiteOak.

Okay. So sir, what I was asking earlier, when I was not audible that if I did the math right, there is a fixed cost of about INR 2,200-odd crores based on last quarter's [ generated ] financials. So just to get a better understanding of the business, what would be the broad buckets of where this INR 2,200 crore of fixed cost is incurred, like how much is rental, how much is employee and what might be the other big bucket sub costs?

So we don't share a detailed breakup of the SG&A costs, but I would say the staff cost is the single biggest contributor towards that cost. Second cost would be warehouse and office rentals and lease rental costs that we pay. And then third would be the general administrative costs corresponding to utilities, travel, etc. And a part of that would be variable pay bonus, et cetera, which is linked to the performance. So from a -- in terms of forecasting what the P&L would look like, if you look at the Slide 14, which I think, you only were referring to on the graphs, you also would notice that we share the feed, the LCL and the FCL index, which yield basically means gross profit per unit. So LCL yield is gross profit per cubic meter and the FCL yield is gross profit per TEU. Now, of course, this is on index that we share. But one could clearly see, for instance, the LCL yield is more range bound. And now on the back of increased utilization, we believe we should get back to where we were 12 months ago and then possibly improve from there on. So this number should start looking at beyond 100. And as the volumes grow, the gross profit is nothing but a multiplier of volume and the yield. So that is the way in which one could forecast the future performance. And like I said, to reiterate, we have done enough by way of cost reductions [indiscernible] in automation to keep a check on this SG&A cost. And that is why there's a huge operating leverage at play in this business.

Understood. So the way you're explaining and the way I understood, I would have expected LCL yield to be more volatile because you are booking revenue on CBM and you're incurring cost on TEU, where it seems your FCL yield is more volatile. So are you -- and taking some sort of a market price risk in FCL business versus maybe LCL business, why is that?

I'll tell you why is that? When it comes to an LCL business, the business is about we receive 1 cubic meter of cargo in our warehouse wherein we consolidate that cargo, sometimes you do the door pickup as well, then that cargo is moved on the ocean leg. Subsequently, we have deconsolidation activity in the warehouse, then there's a door delivery for some part of the cargo. So there are multiple activities involved and ocean freight is one component of that. So all the other costs are more consistent and somewhat linked to cubic meter. The ocean freight component is the one which is linked to TEU. And in this business, we have -- the other rates don't vary that much as the ocean -- as much as the ocean freight. And therefore, this is more driven by -- and as we're able to utilize, we're able to save on ocean freight cost because that is like we're able to -- let's say, if we're able to improve the utilization index by like 4% [indiscernible] improve by 10%. That means that we are carrying the 10% additional cargo on the same ocean freight cost. If the ocean freight cost is say 30% of the total cost, we are still saving 3% cost. Now 3% cost in the kind of margin profile that you see impact on the bottom line. And that is how it kind of plays out. On the FCL business, if freight rates are very volatile and that freight rate volatility plays directly into it because in a certain sense, a large part of our revenue and cost, both are only linked to ocean freight. There isn't much of warehouse or origin or destination door activities in the FCL business. And therefore, the volatility of the ocean freight rates is fully reflected in the FCL business. While in LCL business, it is just one contributor and also it is kind of passed on. So typically, as the freight rates go up or down, we don't really end up making more or higher margins based on the freight rates. Naturally, of course, what happens is when the freight rates are high people tend to consolidate more and do the less of FCL. So there is an indirect impact on how utilization goes up. But fundamentally, from a pricing standpoint, it's not that we try to price higher when the freight rates are higher. Typically, the office operates on gross profit by cubic meter. So when the freight rate goes up or down, they typically revise the tariff accordingly. But what happens in FCL, when the freight rate moves from, say, $1,000 to $5,000, we don't maintain the same $200 margin. It may not become exactly that much proportion, but it goes up and down and it varies. So that is the reason why FCL has a greater dependence on the ocean freight, it has lesser complications and outcome of that, the volatility is much higher in the FCL business as compared to LCL.

That's a very good insight you said. So just for my understanding, the LCL invoice for the client, the ocean freight is only 30% to 40% of the total invoice. In FCL it might be 90% the total invoice or 100%, is that a fair understanding.

On the cost side. On the revenue side, typically, it's an all-in integrated quotation, which you log into ECU360, which is a unique platform that we have where you can get an instant quote for moving cargo from anywhere in the world. Typically, if you were the mile cost and you would typically show charges for transport handling, [ tunnel ] handling, you have multiple line items in there, but what I'm trying to explain you is broadly the component of ocean freight would be lesser in the LCL. And it's kind of a pass-through. So the volatility is kind of pass-through and the gross profit largely remains intact or range. Volume is more dependent upon the utilization and operational efficiencies.

Okay. And in FCL, the volatility is somewhat absorbed by you. So you got short volatility in a way of the container freight rates that you globally see, right? You have short volatility. If there's a very sharp upswing or downswing, your yield index will be hurt in that period, right?

No, it typically plays in sync. So typically the yield improves with the higher freight rates and it reduces with the lower freight rates. It's not...

So why has it reduced this period because rates have gone up initially, right, if I understand correctly, yield index was down.

We are comparing it with the -- no, we are comparing it with the last year's similar quarter wherein the -- and there's a bit of a lag effect as well. If you look at sequentially, you would see a different picture. And which is why maybe perhaps we don't -- I think we've not shared the FCL yield, we'll try to see if we can share more further data on this on a more sequential basis.

Next question will be from line of Radha from B&K Securities.

Sir, I wanted to understand that in the internal supply chain business, what percentage of customers are recurring in nature?

I would say roughly about 40% of our business comes from large customers, which are almost all recurring in nature. 60% of the business comes from small customers and I wouldn't put an exact number, but a large majority of those customers are also recurring customers with many having year-long or decade long relationships with us because most of this business is coming in through small and medium forwarders, I talk about the small customers, and they have been working with us for a long period of time. So typically the share sometimes come in from the new trade lanes, new services that are launched and new products that we launch. And naturally, we continue to acquire the new customers as well in some key markets, but a significant proportion, I would say, more than almost like 80%, 90% of this would be a recurring business from the same kind of customers.

Sir, can we, sir, while you were explaining to the last participant that there is some lag effect in the gross margin this quarter and maybe sequentially, it could be better. So is my understanding correct if -- I mean the revenue for this quarter is on the basis of bookings that you might have received last quarter. And hence, we can see the lag effect?

A quarter is typically an average 40 days of sailing from -- if you make an average of Asia, Europe, Asia, America then Transpacific and Transatlantic, there could be typically about 4 to 6 weeks of lag effect in some sense. And which is why, like I mentioned, we look at the month gone by and the current month. We believe that should only improve on both the volume side and the overall parameter.

And also despite a majority of our customers being referral, there is no contractual agreement with them. Is this a fair understanding?

That is right. There are no contractual obligations on either side. But I would say there is a reasonable understanding with many customers and with many vendors, we would typically have volume incentives that play with some of the largest customers in some of the largest vendors that we work with.

[Operator Instructions] The next question is from the line of Dhruv Shah from Ambika Fincap.

Congratulations on a good set of numbers. I just have one question. With the freight rates going up and you're seeing increasing in volume, can we envisage that in a few quarters time we should touch the run rate of what we touched in 2021, '22? Or that will be too much to ask for?

We would refrain from the guidance. But like I said, at least for the quarters -- 4 quarters of this year, starting with the first quarter, we've seen sequential improvement, and we expect the same sequential improvements to continue for the remainder of the year on a quarterly basis. That's the kind of broad outlook that we have at this point in time.

But I don't want a guidance, sir, but are the price almost at the rates at which it was in 2021?

On different trade lane, like I said, the European economies have still remained subdued. So if you look at rates for export out of Europe into Asia are extremely weak, while at the same time rates from Asia to Europe are much higher and rates from Asia and to Latin America, for example, for some of the trade lanes had tax as high as they were during some of the COVID prices were. So there's been a bit of a -- it's not like a secular trend across all trade lanes. There are a combination of trends.

And how much would our revenue be from exports from Europe?

Our business is largely a representation of the global trade. We have a strong business almost in all parts of the world, it's pretty distributed.

Thank you very much. Ladies and gentlemen, that was the last question for today. I now hand the conference over to the management for closing comments.

Thank you, everyone, for joining us in, and we hope we were able to provide insights on the business and respond to your questions. One of the ways to improve disclosures and information from our side is to receive inputs and questions from your side. So please feel free to reach out to our Investor Relations team, come back with your suggestions on what kind of information you would like to see. And we'd be more than happy to continue to improve our disclosures and see how we can help the analyst community as well as our shareholders understand the company and the business better. Thank you very much for joining us today.

Thank you. Thank you very much.

Thank you. On behalf of PhillipCapital (India) Private Limited, that concludes the conference call. Thank you for joining us, and you may now disconnect your lines.