Allcargo Logistics Limited (ALLCARGO) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Allcargo Logistics Q2 and H1 FY '25 Earnings Conference Call hosted by B&K Securities. [Operator Instructions] Please note that this conference is being recorded. This conference may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on date of this call. These statements do not guarantee the future performance of the company, and it may involve risks and uncertainties that are difficult to predict. I now hand the conference over to Mr. Sailesh Raja from B&K Securities. Thank you, and over to you, sir.

Thank you, Ashok. Good afternoon to all. On behalf of B&K Securities, I would like to welcome you all to the Allcargo Logistics 2Q FY '25 earnings call. From the management side, we'll be hearing from Mr. Ravi Jakhar, Chief Strategy Officer and Mr. Deepal Shah, Group CFO. Without taking much time, I'll hand over the call to Mr. Ravi for the initial remarks, and post which we will open up for the Q&A. Over to you, sir.

Thanks, Sailesh. It's a pleasure to be on this call and talking to everyone. The second quarter for the financial year '25 has been quite an eventful quarter in many ways. And I would give a bit of a perspective on what's happening across each of the businesses. And then I'll invite my colleague, Deepal, to take you through the financial highlights and talk about the key numbers. But basically, if you look at -- there are 3 businesses that we have been operating, the international supply chain and the domestic supply chain, which comprises express in contract logistics business. On the international supply chain business, we have had the most challenging few quarters until recently. I would say this is possibly the bottom, which could be over the last 2 decades, but that's only a couple of such instances that have happened in terms of the market environment that we face. And I'm really glad that we have been resilient and we have been able to come out well of this period. And when we look at some of our competition and the industry benchmarks, we see that there have been immense challenges in maintaining the profitability, however we have than much better. And that has primarily been driven by being very proactive on cost reduction initiative, on technology initiatives, and constant service delivery to the customers, which has allowed us to maintain and grow the market share, and that has really helped us through tough periods. Now as we look forward, we have seen the beginning of the better times. As we have been reporting on a monthly basis and also for the quarter, we have seen improved volumes over the last quarter as well as over the last year. And with the global economic environment improving, we could potentially see the strengths to follow. There are, of course, several geopolitical events happening around us, and they would shape the future of world trade. But prima facie, we believe that global trade will only continue to strengthen from here. And from a company perspective, we have a very, very sharp regional focus and a unique strategy for each region. We have, in the past, been talking about growing our presence in Latin America where we have been historically having limited market share. And I'm glad that this was the quarter where we actually took significant initiatives. So between July to September this quarter, we onboarded an entire new team in Argentina, Paraguay and Uruguay, which will adds to the business in the region. It is already doing well in the first 2 months of operations, having grown the business significantly, almost doubling the business in 2 months itself. We are also -- this is a quarter when we finalized our joint ventures in Colombia and Ecuador, which will bring in local expertise, and combining with the global network, we expect these markets to also grow faster. And this faster growth in new products and volumes would lead to impact on the financial performance as well as in these countries, particularly considering that at this point in time, Colombia and Ecuador combined, we're not contributing anything on the bottom line. This partnership would leads to that scenario changing. We have more initiatives to be taken, but I'm glad that 6 important markets in Latin America were acted upon with the strategic initiatives in this quarter. When we look at European markets where we have historically enjoyed market leadership for a long period of time, particularly in Western Europe and Northern Europe, we saw a continued strong performance in Northern Europe, in U.K. and France and Scandinavia region as well, which has bounced back well. The larger part of Europe still remains a bit challenging because the economic environment is still subdued and it might take another 6 months before the economic environment starts to improve, and we would see how the Russia-Ukraine conflict plays out with the changed geopolitical dynamics, and that could potentially leads to the revival of European trade. Meanwhile, what we are trying to do is we recognize that Europe, in particular, in the high cost environment, and we are trying to standardize the operating processes further. And we have spoken in the last quarter about our outsourcing from U.S. into Mexico, and we're looking at how we could centralize some of the coal operations in Europe and move them into a low-cost near-shore country, not very far off, so that the time zones could be managed. So that should be our strategy to improve profit margins in Europe since -- as far as the core business is concerned. In this region, we do not see very high growth rates what we could potentially see in Asia, Latin America, Middle East or to an extent, U.S. and China, where our market shares are relatively smaller. Closer to home in India, all the businesses have done fantastic and both LCL and FCL continue to grow steadily. And we maintain our market leadership by far in the LCL business, and we are climbing up in the FCL business significantly as well now comparing with the top 3 in India. On the Asian side, we recognize that there could be changes with the dynamics of U.S.-China trade changing, but we have seen that in the past as well about 5 years ago -- 5, 5.5 years ago, we had seen that there were tariffs and sanctions and sudden initiatives being implemented. And that had led to an increased trade from China to Vietnam. We were seeing imports into Vietnam office growing and also exports out of Vietnam into U.S. So we believe that structurally trade flows will continue. The trade gains can change, but as a company, we are well present across the world, and that should work out well for us. Today, when we look at the competitive landscape, there is nobody close to our entity ECU Worldwide from a technology and network perspective, and that's something which should continue to create the flywheel of success wherein these capabilities lead to higher volume and market share. Higher volume and market share continue to keep us more competitive and we continue to drive growth. So as the economic environment is now starting to improve and we remain hopeful of a better environment than the calendar year 2025, I think that business is well placed to continue to show momentum and growth. On the second business, in Express, we are now already at par with the best in the industry as far as the cost of operations is concerned. We have recently announced a general price increase, which will align us to improve the revenues and therefore improve deposit margins. And a lot of the turnaround work which was done over the years is now concluded on the operational side, and we have had some great leaders joining in the business to drive commercial operations, and we remain very confident of Express business, which has constantly shown significant improvement in the EBITDA over the last 3 quarters if we compare the December quarter versus the September quarter. That progress is already visible and the impact can be seen. The third business of Contract Logistics. In that business, we built on a legacy Chemical contract logistics business and expanded into new horizons, new domains. And today, when we look at the split of business, we are very pleased to note that despite continued growth, chemical logistics today comprises only 23% of our business, which means that company has been successful in expanding its business into new domains, auto and engineering, which is now as big as the chemical in terms of the total revenue mix. And the largest section for us now is our e-commerce business. And this is a business which is a high-growth business. And at the same time, we are not compromising the profitability. So this is a business where in largely at any customer level, at any location level, we remain positive. We are investing in the capacity, which means that historically our white space was possibly in the range of 3% to 4%. Now that is 10% to 11%, but that is required as we drive growth and momentum. But in terms of the businesses, which is aligned with the fast-growing industries, today, we manage significant capacities in warehouses and back stores for some of the fastest-growing quick commerce companies. And we are also working for various e-commerce companies. So this is a business which is now aligned very well to the growing e-commerce market while remaining the strong foot in chemical business where we retain the market leadership in India and a rapid growth in auto and engineering as well. So this is a business which we've seen a considerable growth. If you look at the performance on a quarterly basis, we have grown from a revenue of about INR 76 crore to INR 111 crores year-on-year, which is a significant growth, and we believe that this momentum can continue for the next few years because the opportunities are significant to expand the contract logistics business footprint, particularly in e-commerce, auto, engineering and other industries that we are now expanding into. So on an overall basis, if I look at various businesses, the management is confident that we are well placed vis-a-vis competitive landscape. We believe that the market environment is either good in Indian businesses or significantly improving in the global business. And we believe that our investments in technology and focus on cost reduction, operating costs in case of the Gati business and SG&A costs in case of ECU Worldwide international business should work well for us. On the corporate side, we are also glad that this quarter has seen movement in our restructuring scheme, which we received no objection from the exchanges and the scheme has now been filed with NCLT. So we believe that we would conclude the process in the estimated time lines. And by April 2025, we should have the international and domestic businesses demerged and listed separately. So that is the broad summary. I would now request my colleague Deepal to take you through the financial highlights, and we will then open the floor for questions. Thank you. Over to you, Deepal.

Thank you, Ravi. I will now discuss the performance for Q2 FY '25. The consolidated revenue for Q2 FY '25 stood at INR 4,301 crores as compared to INR 3,307 crores for Q2 FY '24, representing a growth of 30%. For the Q1 FY '25, the revenue stood at INR 3,813 crores. The consolidated operating EBITDA for Q2 FY '25 stood at INR 135 crores as compared to INR 118 crores for Q2 FY '24, representing a growth of 14%. For Q1 FY '25, the same stood at INR 133 crores. The company has reported a profit after tax of INR 38 crores during the quarter, representing a growth of over 130% as compared to the same period last year. The consolidated debt -- net debt for the quarter ended September '24 stood at INR 553 crores. So net debt has gone up mainly on account of working capital increase. Moving to the segmental performance, I'll start by discussing the performance of the International Supply Chain business. The LCL volume, the less than container volume for the quarter ended September '24 stood at 2.37 million CBM, depicting a 4% growth over the quarter ended September '23, and 5% over the previous quarter, that is the June quarter 2024. FCL volumes for the quarter stood at 164,000 TEUs, up 7% over the same period last year, and 5% over the quarter ended June '24. Air volume for the quarter ended September '24 stood at 2.65 million kgs. This represents a growth of 14% as compared to last year, and a marginal decline of 4% as compared to the last quarter. Volume growth also witnessed during the quarter on the back of improved global trade and company's growth initiatives, a seasonal decline was experienced across regions towards the end of the quarter. For Q2 FY '25, the ISC business reported a revenue of INR 3,770 crores, representing a growth of 35% as compared to the same period last year. For the previous quarter, ISC segment revenue stood at INR 3,320 crores. EBITDA for Q2 FY '25 stood at INR 79 crores as compared to INR 65 crores during Q2 FY '24, representing a growth of 22%. Q1 FY '25, the same stood at INR 81 crores. Moving on to Express business, operating under the GESCPL brand -- GESCPL company, the volumes for Q2 FY '25 stood at 317,000 tonnes as compared to 333,000 tonnes during the same period last year. For the quarter reported, revenues stood at INR 374 crores as compared to INR 385 crores in the same quarter last year. The EBITDA for the quarter ended September 2024 amounted to INR 19 crores as compared to INR 15 crores for the same period last year. Moving on to the Contract Logistics business, which sits under the Allcargo supply chain company, wholly owned subsidiary of Allcargo Logistics. Contract Logistics revenue for Q2 FY '25 stood at INR 111 crores as compared to INR 76 crores for the same period last year, representing a growth of 45%. For the Q1 FY '25, the revenue stood at INR 91 crores. The growth has come on back of new client additions. EBITDA for Q2 FY '25 stood at INR 32 crores as compared to INR 36 crores during Q2 FY '24. For Q1 FY '25, the same stood at INR 29 crores. In line with this disclosure practices, we have been consistently providing other key comparative financial performances and operational indicators in our investor presentation. One can refer that for more details. With this, I would like to open the floor for questions and answers, if any.

[Operator Instructions] The first question is from the line of [ Radha from Gargi Investments ].

Sir, my first question is that in this quarter we have given geography wise gross profit contribution for the international supply chain business. So we appreciate the better disclosure efforts of the company. However, can you please help us with the similar numbers for H2 FY '24 as well as first half of FY '24?

Yes. So this was requested by several shareholders and analysts, and that's why we thought of including in this because we want the information to be distributed equally to everyone. And therefore, we have shared the geography split. We can possibly share the historic split as well. So I will ask the team to take note of this and add the trends in contributions of regions as well. We will include that going forward. But from a broad financial perspective, I can share the comment that historically, Europe used to be a significant contributor of gross profit, and in the subdued environment we have been finding that Europe has not contributed that well. Within Americas, Latin America has remained steady, but the U.S. contribution has gone down, which we expect to revise. So I would believe that Americas and Europe should see growth in the -- Americas rather should see some growth in passengers because Europe may still not grow at the same rate as which other countries would grow. So I would imagine Europe should remain steady. It would remain low compared to what it was last year or 2 years ago. Americas with North America now improving should increase, and [ the issues ] in Latin America as well.

Sir, second question is that in this first half you can see that the short-term debt in the quarter is INR 1,200 crores, which is the highlight it has ever been. If I see the numbers on a full year basis, it is even higher than for your FY '22 levels were in trade rates were all-time high. So I just wanted to know why has shortened that increase and by the year-end what would be your net debt target?

Deepal, if you would come on the short-term debt and provide a perspective on how it is?

Sure. So you mentioned that the short-term debt has gone up to INR 1,200 crores, that is not correct. The gross debt is INR 1,362 crores, Short-term debt is around only INR 850 crores out of it, almost INR 495 crores is long-term debt. So I don't know where you got the INR 1,200 crores of short-term debt number. Secondly, yes, like we mentioned -- I did mention in my speech that there were freight rates, which had gone up for which some additional working capital was used. So these are temporarily -- these kind of goal back-to-back with the freight rates. So once the freight rates deflate, I mean go down, the working capital debt will also deflate. And that's what -- what we have seen also through '22 -- '21/'22, where short-term debt had gone up for working capital and then towards the end of '23, it had again deflated. So this is -- the freight rates are cyclical in nature, and the short-term debt kind of [ edge ] that from an amount perspective. Ravi, go ahead.

Just to add, directionally we should see this net debt number going down towards the end of the year. Broadly, my personal estimate would be around 20% lower than where we sit today.

Yes, Ravi, we are seeing some freight rates also kind of come down a little in some of the trade lines. So yes, you're right. It can.

So the cash generation in the business will also bring this down with some money for them to come with the non-core asset disposals.

Sir, regarding the non-core asset disposal, so that stake in HORCL, [ we have taken ], I think about INR 115 crores. So how would you utilize [indiscernible] from there?

Sorry. I think you're asking the impact on HORCL, though I couldn't hear your question completely clearly.

Sir, the capital allocation plan for the money that we receive from stakes from HORCL.

So there is no -- as you are aware, all the businesses are asset-light and do not require any significant capital. So we have been using capital to retire debt or to provide dividends to the shareholders and the company has maintained a distribution of cash flows by way of dividends as you would have seen in the quarter gone by as well. There are no significant CapEx plans. Even on the expansion, 1 significant change which has happened, I would say, in a way in our strategy is that we are now investing in people in a way rather than acquiring companies. And therefore, some of those investments also in a way flow through the P&L. So what I mean to say is, for an instance, instead of acquiring a company, we have now onboarded this entire team. I was talking about an example in Argentina, Paraguay and Uruguay, this certainly means that in the first couple of months, entire SG&A goes out without any business. And then as the business starts to come in, it is still a buildup phase. But that is the kind of investment which we are putting in to drive the business growth, but that flows to the P&L itself because all those investments are now in staff costs and expenses as compared to acquiring any companies. So therefore, from a CapEx point of view, there's no significant CapEx beyond the ordinary CapEx that we've been doing from a layout perspective.

The next question is from the line of Sunny Gosar from MK Ventures. [Operator Instructions].

My first question is regarding the International Supply Chain business. So basically, this quarter saw a good bounce back in terms of the volume performance and also the corresponding improvement in the gross profit. However, the flow through to EBITDA could not be seen and it looks like that part of that impact is from the acquisition maybe that you've done in Latin America or South America. So is it possible to give some perspective in terms of how much negative drag on EBITDA was there from the acquisition? And what we could also see from the P&L is that your employee cost has increased by INR 32 crores on a Q-o-Q basis. So is this relating to that acquisition. So any perspective on this would be really helpful.

Yes. So the increase in staff cost is primarily driven by one, like you rightly mentioned, onboarding new people such as about 30-plus people in the Argentina region that I mentioned about. And a few more people in other geographies as well, which have been onboarded for growth. The second impact is a lot of countries have July to June cycles wherein the bonuses are paid in the July to September quarter. So that is the second contributor as well. And the third is there have been also one-off severance costs. So we have had the severance costs in letting go people. I'm not able to exactly quantify how much of this quarter. But over the last 2 quarters the severance cost of key leadership changes that we've done itself should be in the magnitude of over USD 2 million. So you're talking about roughly about INR 18 crores, INR 20 crores kind of an impact distributed over the last couple of quarters on the severance cost paid as well. So these are some of the costs which are reflecting in the increased staff costs. Having said that, like I mentioned earlier, there's a very sharp focus to retain these costs at the optimal level, and that's where we're looking at outsourcing centralization of European operations. And we are also -- we have already rolled out the financial system, which was required to centralize finance but that is something which we contributed recently across key markets. And now we're already working on a program to bring down the finance cost by way of outsourcing some of the financials as well. So our intent is to not allow the staff cost to grow. Whatever investments we need to make for growth would be counter acted upon by a reduction in staff cost by way of outsourcing or tech automation, et cetera. That's the broad strategy at our end so that whatever growth we can achieve in volumes and gross profits can slow down through the EBITDA, but there would be time delays in account of impact of cost saving actions versus investments that we put in.

Got it. That's quite helpful. Sir, 2 questions relating to this. Is the severance cost largely behind? Or could there be more in the coming quarters as well?

So I would say we could have more severance costs, but what we would do is we would provide -- perhaps going forward specific carve-out on the severance cost number. And the way we look at the severance cost is it's not a liability, but an investment, I explain what I mean by that. So if we have a situation wherein we have been able to drive tech automation or we believe that the business can be made more efficient for whatever reason we can reduce the headcount in a particular country. And as you would know, in Europe and Latin America and some of these countries, the severance cost could be significant, particularly for long-serving employees. But the way we look at this is even if you are paying 6 months to 12 months, even say, 18 months in some cases, worth of payments for severance, it is almost like an investment which pays back within 6 to 18 months, and therefore, is a great investment. So we would continue to reduce head count, wherever possible, wherever we see it's not a replacement of cost, but it is actual savings, and there could be 6, 12, 18 months' time line, which would be there, but that's the investment we need to make the company more efficient in the long run. But like I mentioned, next quarter onwards, we will carve out the severance cost to provide clarity on that.

Just to add, Ravi, severance cost is $1 million for this quarter, almost $1 million, just to add the exact number.

That's helpful. And basically, going forward, how should we look at the fixed cost on a quarterly basis. So the base is somewhere around INR 600 crore -- for the International Supply Chain business is about INR 600 crore to INR 610 crores. So is this for at least next few quarters kind of a big number and any improvement in gross profit from hereon will go through to the EBITDA? Or there would be some more additions to the fixed cost in the next few quarters.

So like I said, there would be no additions to fixed cost, but it is almost like the intent is to keep them in equilibrium so that the gross profit can slow down. The negative impact would be -- in terms of from a cost perspective, would be the investments in people. The second would be severance costs and restructuring. And third negative impact would be appraisals and linked pay role improvements for people, which means higher cost for the company. The way to offset that is outsourcing tech automation and the business that comes from investments in people. So that is how I would see that the intent would be to not allow the cost to grow at a higher percentage. Intend would be to control it to the similar base levels, and therefore the gross profit didn't slow down. But there could be a gap of a quarter here or there in terms of how it plays out.

And one last question before I get back to the queue. So you mentioned about non-core asset monetization and the sale of like 1 asset which realized about INR 100 crores, INR 110 crores. So are there some identified pool of non-core assets? And is it possible to quantify assuming that they get liquidated over the coming quarters, what could be the quantum of non-core asset utilization?

Across Allcargo on a consolidated basis, which includes Allcargo and Gati as well. Broadly, there could be non-core cash flows coming into the extent of INR 75 crores to INR 100 crores, that's the broad estimate.

That's helpful. And I must appreciate that the level of disclosures has improved significantly over the last many quarters. And I hope it keeps improving going forward because it helps us to understand the business much better.

The way we would continue to work on that is, if we see a request from 1 or 2 persons, we try to answer them on the call or during the meeting. If we see the same request from more than 5 or 6 key people, we include that in the presentation. And we'll continue to do that.

[Operator Instructions] Next question is from the line of Rajesh Agarwal from Moneyore.

When and how do we get an operating leverage in terms of EBITDA going down to the bottom line?

So across each business, the operating leverage is going to play out more in the international business and the Express business. Contract Logistics is more of a similar margin profile to continue. On the Express business, like I mentioned, the staff costs and the G&A cost is already accounted for in terms of the future growth and therefore we do not need to invest further in that. And therefore the increased gross margin and the revenue is leading to operating leverage. So if you see the last 3 quarters, it has consistently played out and we have seen improved EBITDA over the last 2, 3 quarters. And this would continue as we increase the volumes. We have made a monthly disclosure that October was the highest ever monthly volume for the Express business, and therefore, we remain that the trend should continue. And therefore, that should play down to the EBITDA. So we're talking about impact already being visible. As far as the international business is concerned, we have seen in the past in better markets how the staff costs and the fixed costs remain consistent while the improvements in gross profit have slowed down to the bottom line. Last few quarters were bad. We've only seen the recovery in the last 2 quarters beginning. And as I was mentioning just in my previous response, the improvements in gross profit here on should come down to the bottom line.

But the improvement will be substantial? Or what is the time period for that? What is the time period we are targeting?

I would refrain from a specific guidance. But like I have mentioned over the last 2 quarters and we have delivered on that guidance is that we would see sequential improvement.

Sir, how do you see suppose there is a shortage of container in everything. So you don't feel the tendency of the customers moving more to LCL business, which is a good high-margin business for us. Are you seeing the changes in that?

So typically, the way it operates is, whenever customers has not enough load to fill in the container, they operate on the LCL. There are situations wherein if there is lack of availability of containers on a particular trade lane. See, when they try to move to LCL, we also have to accept the booking. If somebody comes in with a 40 cubic meter booking, we generally don't accept that booking because for our business, the business is profitable when we have 3 to 4 cubic meter kind of an average shipment size because money that you make on documentation per below trading, et cetera, is justified that way. So FCL business can't truly translate into LCL, but yes, people ship in smaller loads and therefore the LCL business in such cycle does grow more.

And sir, last question, when that -- suppose -- Trump has come to power now, if the tariff is imposed on China and other emerging countries, how do you see the traffic international cargo moving? And on the volumes, gross profit volumes which we are doing in the U.S.A. now, is it for export from U.S. or import to U.S.?

Yes. So I'm happy to share my personal perspective on it. There's no company view on what the geopolitical environment could shape up. But as far as our U.S. business is concerned, it comprises both export and import. As I was mentioning earlier, we believe that any tariff restrictions which come in particular to a certain country, those tariff restrictions could lead to diverted tariff flows and we might see more cargo coming in from other countries as compared to China for an instance. You have seen that in the past also when such measures were adopted with more cargo flowing through Vietnam, Indonesia and some of the countries near China. From a long-term perspective, most companies have anyways been diversifying supply chain. So that should work well. In terms of any of the manufacturing itself moving into U.S., we believe that it is not the entire ecosystem, which would move. Any manufacturing would still mean that the raw material components will still be coming in. If there was assembling to be done in U.S., you would still have component flowing in. So we have seen over a period of last 3, 4 decades if we go back, changes in manufacturing locations haven't really reduced the trade flow, they've only increased the trade flow because your supply chains become more spread out. The only key impact in the worst case scenario for cross-broader trade could be Mexico to U.S. trade, but that is largely road trade and we do not participate in that as yet.

[Operator Instructions] The next question is from the line of Sara, an Individual Investor.

Sir, if you do a quarter-on-quarter comparison that is from second quarter versus the first quarter of FY '25 for the International Supply Chain business, the company had achieved all-time quarterly volume in second quarter with 5% volume growth. The product mix was also favorable towards LCL, realizations have also gone up 8% quarter-on-quarter. Container utilization index has improved quarter-on-quarter. [ So I think ] container usage has improved quarter-on-quarter. So all dynamics seem favorable for the company. And additionally, the company has done a lot of cost-cutting measures from the last few quarters. However, the EBIT by TEU has come down 17% quarter-on-quarter. Please help us understand what had led to this?

So 2 points there. One, let me comment that, yes, there has been a continued improvement in utilization in all these sectors, but we're looking at a 12-month trend, we are recovering from the lows. We believe that if the trade flows become more robust, we should see continued upward movement on utilization and yields because utilization is the most critical part that drives the fundamental profitability in our business. And as far as the EBIT is concerned, I would not break it down per TEU because the LCL and FCL business operate on CVM and TEU in a different way. But from an overall perspective, as you have seen, the volume, if you compare, has gone up 4%, similar quarter -- year-on-year while the -- on the quarter-on-quarter, while the gross profit has gone up about 7%, 8%, which means that there has been improved profitability as well on the back of comparatively better utilization. However, as I have explained to you, there have been some one-off costs such as $1 million in severance cost and a few other investments in people, which are also flowing through the P&L and some bonus payments, et cetera, leading to higher staff costs and therefore, the EBIT number is coming down. What we anticipate from here on? Over a longer-term perspective, I'm talking about say one year out when we look at the same quarter next financial year, we should see improved volume and gross profit while we should fundamentally see similar cost savings and therefore that operating leverage should kick in.

Okay. That was helpful. Sir, my next question is, as an investor, this company has so many subsidiaries and associates, operates in so many geographies, and there is no correlation between freight rate also. So the only way for us to estimate future number is on the basis of your guidance in con calls. So in last quarter you had mentioned that there is a lag effect of 4 to 6 weeks, and hence, margins should have improved in the second quarter. However, it hasn't played out that way. So sir, why can't we see improved performance in terms of profitability?

So I'll take the second question first and then comment on the first one. The second part is concerned, the profitability in the business is gross profit per unit of volume of trade that we carry. And I was just explaining that the gross profit has gone -- grown at a faster and higher percentage than the volume growth, which means that there has been an improvement in the gross profit per cubic meter in LCL or the gross profit per TEU in the FCL business as well. That's the first part. So there has been an improvement in that. We're only looking at the EBIT, which has been paid out by SG&A, where we believe, like I mentioned, we should see an improvement on the back of improved overall absolute gross profit, while retaining the SG&A costs at the same level. Coming on the first part, as far as various subsidiaries are concerned, these are operating units, which are required to be established in these countries to conduct business. We cannot operate with limited entities across the world. We are present in more than 65 countries with our own offices, and therefore these operating units are required. From a structural point of view, as you are aware, the scheme of rearrangement is under progress, and that would lead to all the international business coming under one entity. And as far as the domestic business is concerned, there is no need to have these subsidiaries because you can operate all the businesses under one operating unit. And therefore, we would just have 1 listed entity, which will also be the operating entity. So all these subsidiaries will disappear on the domestic business side because there's only one country that we operate in. On the international side, we have no option but to retain operating entities across the world. In terms of following up, I would say that there are multiple factor that you could look at, which impact our business. You can follow the global economic environment, which has a bearing on the global trade. As the inventories build up, we see continued increased flow of trade. That is a significant impact on the volume side. The impact on the cost side is largely driven by inflation. We have several countries in Europe, for example, where in remunerations have to be increased in line with the inflation indices. So I would say the growth in global trade is a common indicator of our business opportunity and inflation is somewhat a reflection on the cost side. And within these 2, we are always trying to see how we can compensate for inflation by way of technology and how we can compensate for any volatility in the market environment by expanding market share. So these are the 2 company-specific initiatives where we are happy to provide guidance. But on the broader basis, we can always follow how global trade is doing and how inflationary trends are being there. And there are several container indices available published by various research agencies, which also provide a perspective on the container freight rates and the volumes which are being moved through global trade corridors.

Sir, that was helpful, but subsidiaries and associates in many geographies are okay. But you haven't mentioned or guided same thing in the last quarter that we will be incurring severance expenses for the second quarter or for the forthcoming quarters.

So like I mentioned, the severance cost decisions are taken based on the restructuring or investment decisions that we make like you've done in Latin America. We have spoken about the severance cost in the past as well. I'm not sure if there's a quarter last 1 or the 1 before that because we have had such severance costs in the past as well. And like I mentioned, I would like to reiterate to avoid any confusion. We would continue to look at staff cost reduction wherever we see it's a significant return on investment for us on the back of severance costs, which leads to a reduction in SG&A cost. And if the payback is attractive and if you're able to drive that with technology, we would continue to do that. And so -- like I mentioned earlier, we'll provide a separate carve-out number on that.

Sir, my last question. We're hearing from sources that promoter is wanting to sell some stake in the company. Why is it planning to do this?

I cannot comment upon [indiscernible] and there is no comment that I can provide on that.

Yes, we cannot comment on behalf of the promoter. So, I mean, [indiscernible] company at the moment.

Sir, what is -- how is the outlook in terms of demand for third and fourth quarter?

I already answered that we expect the strong demand environment in some of the select countries to continue. And Europe may take more than 2 quarters to revive, but globally, there's a better momentum in the market.

[Operator Instructions] The next question is from the line of Shivaji Mehta, an Individual Investor.

So we're seeing a huge increase in the number of ships that are getting added to the global capacity in the current year. This combined with the fact that global demand is growing in low single digits. Do you expect -- and also if you kind of add to the fact that with the new U.S. President, if the Middle East wars would probably come to an end somewhere, say in 2025, and the Red Sea port would kind of normalize. Do you think that the freight rates can take a hit going ahead?

So we believe that freight rates will remain range bound. There are various things pointing towards an upward momentum and things pointing towards downward, some of them you appropriately mentioned. What we follow from various maritime research projections is that there's also a lot of capacity coming up for scrapping. And on an overall basis, Drewry, which is a leading maritime research company publishes its expectations on the freight environment and the capacity. So what we read through is that net-net the trade demand should absorb the entire capacity coming in, that's the narrative we've been reading through and taking note of.

That was helpful. And my last question is on the EBIT per TEU. I know you've added the FCL business recently. But if I just do a like-for-like comparison, say, in 2019 or 2018 when you had an EBIT per LCL of about 1.45-ish. Is that something that we would target going ahead also just on the LCL business. If you strip out the FCL business out of the international segment, is that -- are you trending towards those numbers?

I would say we do not see our business in EBIT per TEU because business is conducted in different units. And there is not a measure followed in the company internally. So I cannot relate to those numbers or comment upon that. But like I said, the simple intent going forward is to create volume growth, which exceeds the market growth. So we have seen a flat market wherein we have been growing at about 4% to 5%. We have, in the past quarter, seen a declining market whereas the market declined by 12% to 15%, and we had gone down by 7% to 8%. So you've been kind of consistently been maintaining a delta of 4% to 5%. Historically, if you look at the long-term averages, the global trade on containerized trade has been growing at 3% and LCL at about 5% to 6%. So our intent is to maintain the delta of 4% to 5% on these global trade growth rates. And as the trade revised, our growth rate can move into double-digit for LCL, and FCL we have consistently grown at close to 18% to 20% if you look at even the last 6, 7 years of compounded annual growth rate.

[Operator Instructions] So as there are no further questions from the participants, I would now like to hand the conference over to Mr. Sailesh Raja from B&K Securities. Over to you, sir.

Thank you all for attending this session. We especially thank the Allcargo Logistics team for their time. Ravi, sir, any closing comments would you like to make?

Thanks, Sailesh, for hosting us, and thank you, everyone, for joining in. Like I mentioned, we intend to provide as much disclosure as we can wherever there are confidentiality concerns keeping competitive dynamics, we try to find a workaround and provide at least the lead indicators. So we are happy to get more queries from you with -- from our Investor Relations team and happy to provide you as much perspective as we can. Hope today's call was helpful in this direction. And thanks very much once again for joining us.

Thank you. On behalf of Batlivala & Karani Securities, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.