Mahindra Logistics Limited (MAHLOG) Earnings Call Transcript & Summary

Good evening, ladies and gentlemen, and welcome to the Q1 FY '21 Earnings Conference Call of Mahindra Logistics Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Shogun Jain from SGA. Thank you, and over to you, sir.

Thank you. Good evening, everyone, and thank you for joining us on the Mahindra Logistics Limited Q1 FY '21 Earnings Conference Call. We have with us today Mr. Rampraveen Swaminathan, Managing Director and CEO; and Mr. Yogesh Patel, CFO of the company. I hope everyone got an opportunity to go through our financial results and investor presentation uploaded on company's website and stock exchange. We will begin the call with opening remarks from the management, following which we will have the forum open for questions and answers. Before we start, I would like to point out that some statements made in today's call may be forward-looking in nature, and a disclaimer to this effect has been included in the earnings presentation shared with you earlier. I would now like to invite Ram, Managing Director and CEO of Mahindra Logistics Limited, to give his opening remarks. Over to you, Ram.

Thank you, Shogun. Good evening, everyone, and I trust all of you, your dear ones and colleagues are all keeping well and safe. I assume all of you have had the chance to review our results and the presentation, which is attached by now. I'll cover a few things in my remarks today, provide a quick update on how operations are shaping up as lockdowns ease across the country, and I'll follow that up with some remarks on how our end markets are shaping up and how we see the things ramp up over the next few quarters. And then we'll talk about operational and financial highlights for the quarter gone by. As we have detailed before as well, the last few months have been unprecedented in terms of the external environment and the challenges that they have brought. As a B2B company, we obviously saw a very significant reduction in operations with a cessation of operations by many of our customers in April, followed by a slow, gradual resumption in May and a substantial improvement in June. Through the quarter, we continued to face demand and supply side challenges. And we continue to do some of that today as well in the face of multiple ways of local lockdowns. These local lockdowns are disruptive to our customers' operations and in many ways to our operations as well. Consequent to these issues, customer supply chains continue to witness a lot of volatility, and that volatility and regional lockdowns have impacted the return of drivers and warehousing person across many regions in the country. Cross-border logistics, which is largely around international freight forwarding was initially disrupted by COVID-19 as there were challenges around material processing through ports and airports and carrier shortages, both air and sea. This has recovered but the current uncertainty in trade relations may have a continuing impact in the near to medium term. Despite these headwinds, there have been several green shoots and emerging opportunities. While the reverse migration issues continue, there has been a consistent improvement in driver availability and labor availability. By the end of the first quarter, our warehousing and value-added operating locations were back to almost 80% of the pre-COVID utilization levels. Similarly, significant parts of our transportation business, especially on line haul and mid mile have seen a strong recovery. And our last mile and freight forwarding businesses are also back to more consistent near pre-COVID levels. The post-COVID-19 scenario provides immense prospects for logistics and warehousing. And I believe, due to changes in consumption patterns, growing digital channels and adoption of omnichannel distribution models, we will see an inflection point which will drive further growth. These patterns are likely to increase the need for supply chain redesign in almost all industries and will have a positive impact on demand for 3PL and contract logistics services. In warehousing, specific hubs have been a challenge, specific regional hubs, but overall, we are pretty close to our normal operating rhythm. Due to the COVID impact, opening of new operations and sites have been slower. This has, of course, been impacted by cyclones in Eastern India and rains across Western and Southern India in June. So there have been delays, but we have seen continued improvement on new facility construction and ramp-up as well, and we see a positive uptick on that in the coming quarters. Safety and priority have been a big focus for us, and it continues to be so even as we operate today. The company, I think we have moved from just being focused on prevention to actually expanding our support systems to help our employees manage COVID-19 and its impact in the work site as well as at home. So the company has added benefits like insurance for employees who work on sites. We have established a home counseling and home diagnostic medical facility in collaboration with Med-One. So employees who are home quarantine or if their families on home quarantine can actually get those benefits. And we continue to implement very stringent measures across all our sites, right in terms of ensuring that we have the right sanitization, the right lockdown and restart protocols, social distance and norms across all our locations. And I'm pleased to share in almost all our locations now, especially on warehousing, we have redesigned processes to offset any productivity impact of COVID-19 protocols. So overall, I would say a very difficult April, but across the business, a strongly improving end to the quarter across all parts of our operation. Moving on to market, just to talk about our key markets and how they are shaping up in the current environment. Let me start with auto and farm. Obviously, COVID-19 has delayed prospects of recovery in the auto sector, which has been especially hit hard by the pandemic, and all of you have seen virtually 0 sales across all the major industry in April, and again, improving numbers in May and June, but still trailing from the historical demand patterns. Clearly, the way we see urban areas have been more impacted by COVID-19, the lockdown. And our own datasets would indicate that rural India is witnessing a faster recovery and demand is better in Tier 2, Tier 3 cities and smaller towns. And obviously, there is a month-on-month recovery across the board. The auto sector's performance has partially also been impacted beyond demand by supply side constraints, both from suppliers in India and from overseas suppliers of BS VI. In the coming months, those constraints would hopefully get debottlenecked, which should obviously allow some impetus for increased delivery of volumes in the sector. The farm sector has been performing well. A favorable rural demand environment, prospects of better monsoons, increasing credit and obviously, long-term government initiatives to restructure the farm sector, I think, auger well. It is hard, we believe -- with our OEMs and customers, it's hard to see them recover the loss of sales in March and April, but we believe that the industry has generally come back to pre-COVID levels across the board, and that's a positive sign. Moving on to the discrete manufacturing and commodities. Obviously, again, like auto, a sharp drop in manufacturing actively for engineered products and commodities in the first half of the quarter, but we have seen an uptick in June, and many of our customer sites are returning back to normalcy in a scheduled way. So moving out of manufacturing and entering more towards the demand side industries, consumptionable industries. E-com has been -- seen some really strong tailwinds. The outbreak of the pandemic has, as you all know, raised the demand for online shopping and home delivery. And it is expected that there will be a sharp rise in last-mile delivery as people across our nation look at an opportunity to avoid the risk of the virus. And as a result, many companies have started contactless delivery. And there is a clear shift to online channels. This will increase the demand for not only express logistics and last-mile distribution, but should also increase demand for the entire fulfillment chain, including mid-mile transportation, warehousing, sort centers, fulfillment centers and other kinds of value-added requirements of e-commerce players. We also expect to see an uptick in omnichannel business model and demand for services which allow our customers to optimize across multiple supply chains, which cater to online, modern and general trade. And those lines will hopefully increasingly get blurred right across the board. So we have been seeing a strong uptick there, definitely of interest. The consumer, pharma and telecom business, overall, we have seen recoveries in FMCG, personal care and food industries. These have all been obviously essential services in a large way, and therefore were operating through the lockdown. And I think there will be continued increase in growth there. The pandemic has resulted in bursts in demand and fulfillment for PPE products. And this an area which we have been able to capitalize on, especially from our freight forwarding subsidiary loss. FMCG and retail markets to remain under significant pressure of volume growth, along with the challenge of continued transition towards digital channels. As we look forward, many of the players in the industry will have to redesign their supply chains to invest and grow in digital channels. And this will create some engaging business models and opportunities, I think, for the logistics and supply chain industry. So overall, if I have to characterize the demand environment, I think there are obviously positives for us as we look at it from e-commerce, consumer, pharma, right. The farm sector is definitely been carrying good tailwinds. And we are working -- obviously, we have opportunities as we work with customers in auto and manufacturing as they start coming back to a more consistent rhythm of operations. Now before I go into specific financials, let me just talk about a few -- just have a few highlights on our strategy execution and some key elements of our business which may be of interest to you. And let me begin with customer acquisition. So customer acquisition was strong for us in the second half of the quarter. We did have our order entry rates in the second half of the quarter were pretty much in line with prior years. And that momentum was something which we could see clearly. We did invest and then settled large contracts during the quarter that included the secured distribution and inbound transportation with a leading steel company. We also won a large contract for inbound transportation with one of the country's largest manufacturers of decorative and automotive glass. And we continued our focus on fulfillment services, logistics services and had some strong wins with our e-commerce customers or fulfillment centers, expanding grocery operations and heavy and bulky product distribution in the second half of the year. We continue to expand both with existing customers and new customers in FMCG and personal care. So overall, I think, as I said, we had a good momentum on customer acquisition. Expanding solutions remains the key lever for us, and we continue to invest in expanding our customer base, right by providing them solutions. In addition to earlier order acquisitions, we have seen strong growth in setting up flexible or short-term capacity solutions for customers. These are typically short-term processing facilities, which operate for 3 to 6 months and help our customers essentially manage the delays in existing projects or deal with surge demand. And we've seen a very healthy level of interest and growth in that. And during the second and third quarter, we'll be adding several subcenters in addition to the ones we started this quarter. So we remain extremely optimistic about that. We also continue to grow and expand our cross-border solution base, which is reflected in the growth of our freight forwarding business in the quarter, which actually grew on a year-on-year basis despite the COVID lockdown. During the quarter, we continued to expand on launches. Obviously, several launches were delayed because of the COVID situation, but we did go live for several customers for one of the country's leading independent engine manufacturers. We have commenced supporting them on BS VI engine distribution and BMI operations. We also went live with inbound and outbound distribution solutions for a very large international elevator manufacturer with a strong presence in India. And we started stores and line feed operations for the leading fuel systems manufacturer in Western India. So several launches continue to happen through the quarter. They did not add enough from a revenue perspective given the low industrial activity, but they are generally -- things are continued to do right through the quarter. We also launched several new transportation contracts, as many customers were looking at support on that. From an operational expansion -- excellence and expansion perspective, we have used the pandemic to focus on cost and productivity across all our sites. We have had a challenge during the quarter of increasing COVID costs right across all our operations. And we obviously had many of our sites, especially warehousing and value-added sites run at less than optimal levels from a utilization perspective, but our cost improvement initiatives helped to offset all that and helped maintain consistent gross margins there. We are continuing to expand our build-to-suit or multi-user warehousing facilities. So 3 of our new facilities which are under construction or under commissioning. They have been delayed through this quarter, but they -- but we remain on target to go live in late Q2 and Q3 with these facilities. And they will add nearly 1 million square feet of sustainable warehousing capacity to our network, and they're all largely contracted out already. From a technology perspective, during this quarter, we went live with SAP HANA for our finance, a project which we call Nucleus. We are virtually at the launch with our new materials management system, which is also SAP based. And we continue to scale up and add capabilities to our transport management and warehouse management solutions. So the challenging period, but we continued to stay focus, I think, on strategy execution. So let me just come now finally before I wrap to some financial highlights. COVID-19 obviously had a big impact on revenue and profits. All of you have already seen that. And it affected both parts of our business, both in terms of supply chain and enterprise mobility, whereas customers implemented work from home has been particularly challenging periods. Revenue stood at INR 410 crores as compared to INR 899 crores for the same period last year, down by 54%. While that was an overall number, I think if you break that down into a monthly basis, you'll see a very different trend where April was around INR 77 crores. It grew by 50% to INR 120 crores in May, and June ended at INR 215 crores, which is close to 70% to 75% of our normal kind of run rate. So it was getting -- making the right traction. Revenue from supply chain management services contributed 96%, and enterprise mobility, which was obviously worse, it contributed only 4% of Q1 FY '21 revenues. Gross margins were pretty flat year-on-year from -- they're roughly at 9.7% comparable to last year. We obviously had a positive benefit in mix as share of warehousing improved. And that -- but that was offset to some extent by warehouses operated at lower than your target levels. We also had through the quarter the challenges of offsetting of COVID cost increases. And in our transportation services, there was a sharp decline in revenue, but we obviously retained all our manpower and paid salaries fully for all of them. So there was a decline in transportation margin profile. And -- but that was compensated by warehousing and the cost reduction work. So overall, gross margin was consistent for the quarter. Despite all those challenges, as we have noted before, we did report a marginally positive EBITDA of INR 60 lakhs for the current quarter, and we reported a net loss of INR 16.6 crores at a PAT level for Q1 FY '21. Proportion of revenue from Mahindra Group stood at 42% for the quarter compared to 56% in Q1 FY '20. Some more details from a segmental perspective, though revenue from the supply chain segment stood at INR 393 crores or 96% of our overall revenue. Enterprise mobility, of course, stood at INR 18 crores or 4% of our entire -- of our overall revenue. Our revenue from Mahindra Group supply chain businesses, largely auto and farm, stood at INR 172 crores. This was down 62% year-on-year due to the lockdown and obviously the slowdown in the industry. Our non-M&M businesses on the supply chain side were INR 220 crores for Q1. This was largely -- very significantly a neutral impact. And year-on-year, non-M&M SCM businesses degrew by 29%. On e-commerce, consumer and pharma, we obviously continue to add more customers and increase our client acquisition there. Our warehousing and value-added services for the non-Mahindra SCM business stood at INR 85 crores compared to INR 96 crores for the corresponding quarter last year. This was down roughly -- only down 12%. And needs to be considered in the fact that we have obviously a very significant part of that quarter, more than 1 month, which was almost a complete shutdown. Our share of warehousing and value-added services in non-M&M SCM stood at 39% in Q1 '21. Net cash and cash equivalents at the end of June 2021 -- 2020 stood at INR 188 crores, with a positive net working capital position for the period. Through the quarter, I think our teams did a really good job starting actually in March in their effort to pivot around cash. And that we included working closely with that customers but also our suppliers. And therefore, we were able to show up any significant increase in our net cash and cash equivalents. And therefore did not have to resort to drawdowns or usage of any of the additional approvals the Board had provided. Overall, I think it was a challenging quarter, as I have shared in my remarks in the press release. We believe it is a quarter where we -- our team and organization are pretty resilient in some challenging times. And as I said at the end of the -- in the last earnings call, the challenge for the quarter was not be just about managing through the quarter, but also setting it up well to recover in the remaining 3 quarters. And I think we are well placed as we gear up to capitalize on new opportunities coming our way, leveraging both our solution-driven approach and a more technology-led approach to our business. So with that, let me open up the floor for questions and answers. Thank you.

[Operator Instructions] Our first question is from the line of Dipesh Kashyap from Equirus.

Will it be possible to tell us how much was the warehousing contribution month-wise, please?

I'm not -- I don't have the numbers of live. Yogesh, do you have any data, or could you mail it separately to him?

Yes, we'll have to do it separately, Ram. I mean, we have not cut it out monthly.

Sir, just if you can give a color here, you said like 80% utilization level in the month of June. So just if you can highlight like what was in April and May in the warehousing?

Yes. So I think if you look at it, I think obviously, warehousing operations were, from a utilization perspective, probably were 40% to 45% -- 35% to 40% -- 30%, 35% in the first half of the quarter. And then they obviously kind of grew and kind of doubled right through the second half and exited at roughly around 80%. Now that's roughly how the off sites are actually used. Obviously, we were supporting essential services in many of them. So roughly 1/3 of them were open even in the first half of the pandemic -- of the lockdown.

Okay. Understood. Sir, what kind of increase in warehousing space do you see for this year? You said another 1 million square feet in the next few months. But for the year, how much space you want to increase?

Yes. I think our approach is -- we are not a real estate company as such. So obviously, our focus is on driving solutions and providing obviously warehousing and value-added services are an important part of that. We have been historically been targeting the 1.5 million to 2 million square feet range site as the band for the year. As we've already released shares with you, we added 0.25 million square feet of warehousing space, went live in the first quarter. But not obviously the -- product peak levels but did go live. We expect to add roughly 1 million more. And obviously, there are several other projects in the pipeline as well. But that should be -- so I think the 1.5 million-ish range plus range is something which we'll definitely be looking at targeting for the year.

Great, sir. So on the transportation revenue side, just wanted to understand, did you take any price increase in the quarter as the freight rates have increased and also diesel cost, so which has improved your gross margins?

Yes. So I think most of our -- we've said as you discussed earlier, most of our customers do have contracts with diesel, especially priced in or indexing into those contracts. So when prices go favorably, they actually get most of the benefit of that, that flows through to them. But as prices become unfavorable in any way, they also -- and they also go back to them. So during the quarter, we did see obviously some level of increase. But really, the most precipitated increase really has happened around June. And our contract -- and that's where the sharpest increase has been there. As the way contracts actually normally have fortnightly or a monthly reset. So I think a bulk of those fuel-led adjustments will probably end up showing only towards the tail end of the quarter or probably in just the second quarter onwards.

Okay. Understood. And Yogesh, sir, just a question for you, please. The depreciation cost has reduced by INR 4 crores quarter-on-quarter. Is it linked to any rental waivers in the quarter? And how should we think about it going ahead?

So some part of it is linked to it. But -- I mean, if you would see our financials also, we have a note included over there that because of the negotiation of rentals and as much as accounting standards allow us, almost INR 1 crore has been booked from a 116 adjustment itself. Other than that, there would be no other -- I mean, you've seen, I mean, late last year when we adopted 116 itself, the way the accounting happens is, June -- our facility which is newer, you book in a higher cost, which becomes -- which reduces year-on-year. So from a -- I mean, tenure perspective, as facilities become older, your charge comes lower in the subsequent years.

Okay. Great. And sir, lastly, can you please tell me the employee ESOP expense in the quarter, please?

Sorry Dipesh, I -- Yogesh, can you take this?

I didn't hear the question. I ask Depesh to just repeat it once.

Yes. Yogesh, sir, I'm saying, can you give me the employee ESOP expense in the quarter, please?

It was around INR 2 crores -- INR 2.17 crores.

Our next question is from the line of Abhijit Mitra from ICICI Securities.

I have two questions. First, mostly on the bookkeeping side. If you can just take me through your working capital metrics, at the end of the first quarter, your net cash -- net debt position, the CapEx that you have incurred for Q1, and which you intend to spend for the full year?

Okay. Yogesh, you want to take the first half, working capital and start with the overall CapEx, I'll add to that.

Sure, Ram. So Abhijit from a working capital perspective, we did substantially better in terms of managing working capital position. And our working capital deployed would have shrunk by about close to INR 100 crores in the quarter, which has reflected in the additional cash equivalent amount, which kind of Ram mentioned in the opening speech as well. And second point, you mentioned this is our CapEx. So CapEx from an incurring perspective, obviously, we were cognizant both from a perspective of sustaining the disruption period and -- conservation of cash at that amount of time. However, as businesses ramped up and whatever was required for that business has been incurred. So from a spend perspective, it has been pretty low in first quarter, but the deployment of CapEx had picked up towards end of the quarter. So our full year outlook what we had looked for in line with what we've done last year should hold good. From a quarter perspective, we would have almost probably less than 5% of our -- that number would have spent in first quarter.

Okay. Okay. And just to understand on the normalization of the business over the rest of the 3 quarters, and what's your sort of thought on that? So we keep on looking at ex-Mahindra, the ratio of transportation to warehousing business. That has shrunk to almost 1.6x in Q1. So how -- where do you see it ending the year with, because most of your new customer wins is in the distribution side is what I could make out. So would it sort of go back to 2x sort of number as the year comes to an end? Where do you see it ending?

I'm sorry, what is the one -- can you just repeat the 1.6x, what exactly is that reference?

So is ex Mahindra, the ratio between transportation to warehousing. Typically, we understand that it would be closer to maybe 2, 2.5 or maybe 3 even, but it has sort of shrunk to 1.6 mainly because of the resilience on the warehousing segment that we have seen in this quarter. How do you see this by changing -- that of ratio changing over the course of the year?

Yes. So I would say that the share of transportation, obviously, as you start -- when you see a drop in activity, the first thing which normally gets knocked off is transportation because nobody pays for transportation services till you actually move it. On the warehousing and distribution by nature, it's a fast, secure set of operations. And the solutions we give, the way the contracts are structured are obviously a little bit different. Now given that, therefore, every time there is a significant dip in overall activity, I think you will see that, that resilience will naturally start showing up. Now I look at our business in two ways, Abhijit. There's one about the current baseline, all our existing customers. Our recovery is partially driven by those customers coming back to normalcy. As those customers come back to normalcy on the non-M&M side, you will actually start seeing the share of transportation will recover or will rise up, right? This has been a much lower level of transportation than would normally be in Q1, right? And as you will see a bit of that balance, obviously, come through with a higher share of transportation. The profile of the transportation now is a lot more of integrated distribution. So where they have been warehousing and transport together. So that should be one element of recovery which will come back. On the newer accounts, obviously, I think there will be a probably a higher weightage of warehousing on new businesses we had, a slightly higher -- the profile, the balance will be more gear towards warehousing than towards transportation, at least in the first few months as businesses start -- as volumes start picking up. Most warehousing and value-added services actually don't start at 100% volume on day 1. So it normally does take time. But I think, overall, the ratio will get reset more in favor of transportation over the next 3 quarters.

[Operator Instructions] Our next question is from the line of Ankita Shah from Elara Capital.

Sir, you mentioned during the presentation that there was a decline in transport margin profile, but your warehousing margins have helped the overall gross margin. So can you help me, how has the transport margins and warehousing margins move for us?

Yes. So it's hard to -- obviously, without getting into specifics, if we just talk about directionally, obviously, I think you saw that as a company, we decided that we will maintain all our resources and all our operating sites through the lockdown period. And typically, what happens is even in our transportation accounts, there are managers or resources who work both in our MLL employees as well as -- and then there are some third-party employees as well who are contractor who work in supporting transportation operation. So typically, what happens is your volume falls precipitously, that is cost to us we still bore. And therefore, the transportation margins come down to that extent, right? Because all our sites, we still have all these resources -- all our resources fully taken care of through the entire lockdown period. So if our volume comes down from 100 to 40, 100 to 35, 40, while the transaction margin at a gross contribution might still be the same, you obviously are paying for all these resources, your gross margin comes down. And that is essentially something which happened out this quarter in the transportation side. That's purely a volume-led issue. And as I said, once the volume comes back, like we saw in June, as the transportation volume started coming back, we obviously saw that getting reset completely. right? But that was an impact for us, especially in the first half of the month. And that is the reason -- that said that decline -- that was one challenge. The second challenge was, as you know, we were implementing safety norms across all our sites. And those things would add -- there is COVID and safety-related costs which will increase in the quarter, starting from simple things like sanitization of different facilities, PPE material, self protocols, disinfecting tunnels, so on and so forth. So all those things will add some costs, but those were balanced out, obviously, by the inherently better margin profile of warehousing. And that was the offset which allowed us to retain gross margins at a weighted average level on the overall mix?

Okay. I was looking more from the quantitative perspective actually.

Well, I'd love to give you more detail I think if you can reach out to us probably separately. I'm not sure even Yogesh would have the detail immediately right away, but do reach out to us and we'll be happy to support you in the best way possible.

Okay. Sir, how has -- how -- sorry, I missed the cash number and the debt number, can you repeat that?

So Yogesh, you want to just give a quick overview on cash? I mean debt, I don't think is still relevant, but definitely on cash balance.

Right. So Ankita, our net cash surplus balance as of June end was INR 188 crores.

Okay. And debt?

So this is -- this does not have -- this is net balance

Okay. You're not giving the gross debt number?

So I mean you know we do not borrow as such at all. However, for the purpose of this COVID disruption period, we were just making sure that we would have some lines active and drawn down, mostly our short-term working capital WCDL lines itself, which we had drawn down as of June, but this was in addition to -- which have -- I mean there was a short-term borrowing just kept as is.

Ankita, I think as I mentioned in the last earnings call as well, at the end of Q4, the Board and the management team, we felt that from a safety perspective, we should actually draw down certain funds and keep it for a what if situation. And so as Yogesh mentioned, we build on those funds and basically park them on the side. And as from a safety measure and those funds were never used. So the INR 188 crores cash balance is excluding that order. And therefore, it's comparable to Q4 of last year.

Yes, sure. Understood. And how has been July month for you? Has it again on a month-on-month basis being better than what it was in June?

I would say the improvement trend continues. Ankita, I think July, obviously, there is -- there have been more local-level lockdowns in the first few days of July. So things are a continuous vortex of change. But overall, I think if I step back and look at overall picture, I think that trend of continues -- the improving trend which we saw in June is sustaining itself. But there are obviously -- we are seeing the impact, obviously, of more and more smaller lockdowns and disruptions. And these will be the nature of, I think, the remaining part of this year, at least

We'll take our next question from the line of Aditya Mongia from Kotak Securities.

I had two questions from my side. The first question was more on e-commerce. I wanted to take a sense from you as to what kind of [indiscernible] happening in your business over time in e-com? And within that, is there a scope of you doing more work than you were doing right now? Let's say, on sales or anywhere when you think what you [indiscernible]

Aditya, I'm sorry. I hope you are well. I'm sorry, I couldn't really clearly hear your question. Would it be possible for you to repeat it if it's on?

Am I audible to you now?

Yes, this is better.

Fair. So the question that I was asking was, do you -- I just wanted to get a sense, this is more in reference to, let's say, the cold chain business. And so what kind of business potential do you see for yourself over there? On an overall basis as well as let's say within the e-com vertical of cold chain becoming bigger part of what you do?

Okay. So I guess the question I heard was about what we see as prospects for cold chain business. And so Aditya, I think -- so obviously, the -- very honestly, the last time -- so we do a periodical review of all our markets. We started doing that to look at things, what is the value proposition which we have and what's the attractiveness of the market given both -- on multiple parameters. And I think we have looked at cold chain refers at least once since the last 12 months, pre-COVID. And I think we kind of concluded that it's an interesting and good to have for some of our customers, but it does not one where we were looking at business to supply-led kind of expansion. Now that said, I think post-COVID, it will probably be something which will merit our review at some stage earlier rather than later because post-COVID, I think supply chains and the nature of supply chains will change. I also feel the government's investment -- impetus on establishing warehousing and supply chain for rural India will also in some ways play into it. I think there might be some emerging opportunities around -- in multiple ways. So it's a fair point. I think thus far we've not really -- we've not looked at it beyond -- being a part of our bouquet. Because if we want to -- if you have pharma customer so you want -- not with an asset-based play in that at all, because we're building capacity ahead of demand. But that's something which Aditya is an interesting question, very interesting, something we should probably look back -- look and hopefully, have a chance to give you a more updated view of it whenever we speak next.

Sure, Ram. And my second question. That question was more on gross margin. I want to check with you whether -- if there is a volume impact that limits your gross margin expansion, [indiscernible] or not. Why I'm asking you this is, I would have assumed that given the quarter gone by and given the mix of revenues, it was further away from M&M and further away from transportation, there would have been a bigger swing factor in terms of gross margins of 50 to 60 basis points has actually transpired on a Y-o-Y basis. So just wanted to understand your thoughts whether the decline of [indiscernible] volumes had a role to play in gross margin, essentially it is not very clear how you define that...

Yes. So I think to make a fair point, I would say, Aditya, if you look at the overall mix, I think last year, on the supply chain side business, which is I think where your principal question is, your warehousing and value-added services overall, they're roughly around 20% of our revenue. And this quarter, given the compression in transportation, they were a little bit north of 30%. So we had roughly a 10% to 12% mid-teens kind of shift in our mix, right? From a lower margin, historically -- intrinsically lower margin profile to a higher margin profile. And therefore, it's a very valid question that our blended average margins should have actually improved. I think there are 3 factors which limited that. And I think first one is what you already called out. Obviously, our margins are best in warehousing when you are operating at peak capacities, which is what we typically tend to operate our facility at. Through the quarter, especially in the first half of the quarter, many of our facilities are not working at peak levels. And of course, we still had people whom we were and resources we are paying for. So those capacities -- facilities are not at peak levels. So there were -- there was volume-led limitations to the margin profile in the quarter. The second thing was, obviously, we had COVID-related costs, which were a factor across all parts of our business. And I think we have now found more innovative and continuing ways to limit that. But obviously, we had a big splurge upfront as you are getting all kinds of expenses in place, sometimes in facilities. Every time you have an alert, you try and take down facilities and redo. So there is kind of costs which came in. And so that was something which was there. And the third thing, because we literally, for example, sanitize and disinfected every facility, extensively before we reopened. We now do it on a daily basis for parts of each warehouse or facility. So it actually adds up to something. So that was the second factor. And the third factor which was there was while the warehousing margin profile was still very strong, it's pretty positive despite these things, I think we did also have the impact of the lower-than-normal transportation margins because of the factor which I said earlier -- to the earlier question, where transportation are slightly lower than what they normally would be because we had the people and the site costs for each of these accounts without any business, especially in the first -- or very, very low business in the first half of the quarter. So collectively, I think they added up to essentially being at flat profiles. I think if you play this forward, Aditya and say that our sites start getting back to a peak level of operations as our transport gets back to a much healthier place. And then you have a 10% to 12% shift in your mix of the basket, then you would actually see that margin improvement, which a little bit of what we demonstrated last year on a full year basis. And hopefully, it's something which we can see play out as the strategy gets executed.

Mr. Mongia, may we request that you to return to the queue, please, as there are several participants waiting. We'll take the next question from the line of Anmol Grover from Albatross Capital.

Sir, my question is regarding the vision statement that you given in the annual report. And I know it's a vision statement, but really like it if you could give some sort of road map for that vision statement? And my second question would be that how does the auto sector in that revenue mix of your going forward given the uncertainty regarding -- uncertainty in the auto sector?

Anmol, I hope you are well as well. So obviously a question which we can discuss for a long time. But obviously, our vision statement, I think, reflects 2 key elements. The first one is an updated planning frame, the window. So it's vary from '20, '21 to '25, '26. And it's consistent to what we think are things that we can accomplish both given a set of assumptions on the external environment and the way we hope our strategy will play out over this 5 to 6 years of window. So clearly, it is a -- I mean, gross level it's a 24%, 25 percentage annual growth rate, right? If you really look at it at an overall level, mid-20s, right? And therefore, one could say that it is work -- it's a number which is based on 3, 4 assumptions. One, I think, is at an overall level we expect the economy to be a lot more favorable towards 3PL, right? So logistics will continue to be an important driver. In fact, the post-COVID I think the need for resilience and smarter supply chain actually has increased and has now become much more of a CFO conversation than it ever was earlier. So I think there's a natural lift we will get. We expect that, obviously, there's a lift in warehousing and those kind of solutions and demand for those. And I think there will be increased formalization of the logistics sector, right? So those are 3 structural factors that we think will contribute to a broader demand -- to demand growth. Overall, obviously, the economy should come back, and we expect that like most economists are projecting probably not a big correction or improvement in the near term, but despite all the significant short-term headwinds, I think the medium term, like beyond '21, '22 still seems like that market and demand will return. So I think the second thing, it reflects, obviously, is there optimism not just around structure, but around economy as a whole. I think you had a question about how auto fits into that. So I think we see the auto business as equal -- there will be a correction, right? And we think demand will come back. We had the last 18 to 24 months, we had several things, BS VI -- several factors have driven it -- the increasing registration prices and excess inventory, which was premanufactured in some ways by company. So as those things level out, we think the corrections will come. And even now if you look at the rural demand is better than obviously urban demand is. So we expect that to correct itself. Whether it comes back to a shady and very significant growth or not are multiple scenarios we have looked at. So there is -- so inbuilt is our view about how the economy will move, which I think is fairly consistent with what many external sources would play out. Our view of the formalization of the sector and that being very positive, and obviously, our own strategy. So the first to obviously set us an entitlement of what we can aim for. And then our strategy has looked at how we are going to focus and grow in that. A large part of that is, I think, continue to expand, right, broadly on consumption-based industries, broadly on outbound and distribution-based logistics services and solutions as opposed to growth -- after expense trend, which we'll continue to invest in. So those are 3 levers. Obviously, we have articulated a little bit more about our strategy, like in the annual report, but we feel confident that executing that strategy with these macroeconomic assumptions, give us a shot to actually look at aggressive growth in our business. And that's really, I think, some ways what our vision is, right? So it's really about looking at something -- at creating a step change in what you can hopefully do, and the team can hopefully accomplish. I think the statement is really a reflection of that aspiration.

[Operator Instructions] Our next question is from the line of Krupashankar NJ from Spark Capital.

I had two questions. First, on the express logistics business. So can you highlight as to what is our plan over there? And how long do you think it will require Mahindra Logistics to scale up the express logistics operations? Because as far as I understand, it can be quite beneficial for your transportation margins, is my understanding correct? Can you just highlight something on that?

Why don't you say the second question also Krupa, and then we can answer -- I'll answer both of them, and we will have time for others also.

Sure. The second question was on the e-commerce side of things. So how has e-commerce done over this period? And is there any highlight on what would have been the contribution or -- it was overall non-Mahindra operations during the first quarter?

Yes. So let me answer both of them in obviously the best way possible, Krupa. So I hope first you are well. I think our express business is something which is part of and -- we run the business like a bouquet of offering for services, which are then integrated to our market. So you heard that before. And so express is an important part of it. Today, we do serve 14,000 to 15,000 pin codes. We do actually support air and sea and -- so air and road options, right? And we operate north of 30 hubs across India with scheduled line hauls between them. So the business has been evolving at a fairly reasonable clip. Over the last 12 months, we have been investing on expanding it. The network business -- our approach to network is to take a value-led approach and not a capacity-led approach. It is the -- the network businesses are like an airline industry. You have to put the infrastructure in and still -- and run the line, and sometimes -- and then work the yield. So we have instead of trying to take a V-shaped approach, have tried to take a much more broader approach, which is more linear in nature and more deliberate in its build-out. But the intent very clearly is over the same planning periods, which I think we answered in the earlier question, to be able to build out our express capabilities because they remain very intrinsic to both our current offering and where we see demand in the future, not just with express as a plain pure play express offering, but also as the ability to bring 3PL as an interesting part of our option for our customer, whom you serve across the board. As far as the e-commerce piece is concerned, obviously, e-com in the first half of this quarter did have a lot of issues because, as you know, the definition of essential services is very unclear on the ground, and the reward of what works on e-commerce is really food, groceries and those kind of personal products, those kind of things be allowed, but a lot of other things were considered nonessential in many areas. But by June, we actually did see a significant uptick. So I would say -- if I had to call it -- if I do the headline on that, Krupa, I would say June e-com of 2020 was better than June of '19. And we are very positive about the continued opportunities in that space.

Our next question is from the line of Kunal Shah from [ Carnelian ].

I have 2-part question. First was we talked about customer remission, which was quite encouraging. So I was trying to understand more as to this customer addition, is it like the services were provided by some other players, and we have got these customers. I mean it's more to do with the vision statement which you talked about, right? So economy is okay, but increasing level of formalization. So is it got something to do with that? Or if you could help throw some light on that particular aspect. The second question being, are we looking at any inorganic opportunities or acquisitions to kind of achieve the vision statement? And are we having any particular kind of opportunity in the foresight?

So let me answer the second one first, Kunal. First, I hope you're well. I think we've always said that from an M&A perspective, we don't want to chase just orders or customer accounts, but actually look at building capability in the context of our overall strategy. And to that extent, I think we communicated before that where we are interested in deepening our capability remains on express, freight forwarding, multimodal solutions for customers and so on. And we tend to look at things, and if something interesting comes up, obviously -- something relevant comes up, we'll obviously share it but more broadly -- now if anything comes to that level. As far as your earlier -- the first part of your question, Kunal, can you just repeat it?

So basically, what I was trying to understand is, the customer acquisition that we have done and the customer addition that we've been doing or business addition that we've been doing it, right? The nature of that addition is more an increasing level of formalization work which businesses were done by somebody else and that has come to our basket now or is like completely new services which were not earlier provided, which has been added. If you could help throw some light on that aspect?

Yes. I tell you -- I think we've had come -- I think the bulk of our demand has been in 2, 3 areas. The first one, I think is we had customer conversion. Essentially customers who are working with probably some other logistics service provider moving to us. And some of that really happened around COVID. So as -- our ability to provide solutions were something which they probably liked and they essentially moved, right? So I'll give an example of a company, for example, needs glass products, right? And that was a company which obviously has an existing service provider, then they moved to us. So really a customer switch. The second piece of the order intake was around new solutions. And those remain in our focus areas. So obviously, customers who were anyway planning for demand -- growth around the festivities, et cetera or expanding distribution centers, sort centers, FCE and so on. And several of those contracts did get closed out right during the quarter, right? That was the second piece. And the third one was some new services which we launched. So we did, for example, win some orders around electric vehicle order -- electrical -- the last mile delivery using EVs in the commercial space. We also expanded some services in the telecom side around managed services for telecom infrastructure. So those are some new services which we announced. And those, obviously, were also orders we booked in. So I would say -- so multiple things. Obviously, some were customers -- customers' accounts that we switched from competition. Some of it was the existing in terms of adding existing or new customers to our -- to the solution area as we are focusing on and some new services which we launched.

Okay. And this one question, if I can add, probably you can correct me if I'm wrong. Somewhere in the annual report I was reading that we envisage when we are trying to provide end-to-end complete services, there was some mention of services like fabrication and all is well, if I'm not wrong, basically. I mean help understand that as well. I mean, from transportation to kind of fabrication and all those kind of services when it comes to completing -- the complete range of services, is that...

Yes, that was specifically in the context of saying that -- I think -- I don't know exactly Kunal given the annual report. But I think one of the initiatives we have is around expanding contract assembly services, especially the auto, engineering, auto and light manufacturing spaces where we do a lot of kitting and part delivery today. And we think there's an opportunity to integrate and probably do component or product assembly on the inbound or postponement manufacturing the outbound. And some of those projects may require your fabricated parts, which we have to source locally and so on. And I think that is probably what it has reference to. So broadly, in that nature of contract assembly, which we have several -- we have some pilots which we are working on this year to build capability in the that space.

Okay. Okay. So basically, it's more to do with assembling kind of services, nothing more where capital and density kind of coming into kind of provide end-to-end services if I understand that correctly?

Yes, you are right. You're right. That will be a good summary. And I'll go back and check what [indiscernible]

We will take our next question from the line of Sayan Das Sharma from BOB Cap.

Sir, a couple of questions. First on the auto vertical. I mean if I look at the different subvertical or subsequents of the auto industry, almost all segments are growing at very different pace right now. So would it be possible for you to share some kind of sense on our exposure on individual segments within the auto industry, move from a non-Mahindra auto client's perspective? And how do you see -- I mean, if tractor continues to grow the way it is growing for the last few months or so, what kind of benefits can we see from that? I mean that will help us determine the near-term growth prospects, while the broad base recovery might take a little longer, sir? Yes, that's my first question.

Can you say the second question as well, if you have a second one, instead of...

Yes, sure. The second question is on the vendor network. Have you done any assessment to get a sense on if any of our vendors that we have, the vendor partners, they are under any kind of financial stress and might see some operational disruption because the way I understand it is that because we do some driver training and impact, so there has been some investments that we have been doing on our vendors. And if there is some churn among those vendors because of the financial stress, they might be forced out of operation, that might lead to some more vendors coming in and from our side some more investments and time and effort towards them. So is that a possibility if you have done that kind of an assessment, sir?

I mean the second one is easy. So obviously, as part of COVID, we've also done, just as we've done customer risk assessments, we've also done supplier risk assessment. And I think we have established layout plans in the context of that for supply continuity. I think drivers that are specific challenge, which is there for even our vendors and suppliers because COVID kind of situations, the factors of the safety and life -- life and health -- wellness and so on. And there are programs we have done with our partners for drivers. But overall, from a business continuity perspective, we see no aggregate risk in our supplier or partner base at an aggregate level. In terms of the first part of your first question, I think in the non-M&M auto and engineering businesses, we have a presence in -- pretty much in all parts of the -- all ends of it. So we do obviously have a presence in farm. We have a presence in 2-wheelers. We have a presence, obviously, in commercial vehicles and in passenger cars, right, and SUVs. Among the lot, I think our level of weightage is more significantly around the -- is around passenger vehicles. So passenger vehicle carries the largest weightage to it. We have a very couple of -- we have some position in the commercial vehicle space. But to be honest, the commercial vehicle downturn already happened in a large way in the previous fiscal, right? So if there's a fairly big reduction or impact already undergone -- which we under grew last year. We have a reasonable position there. But -- and of course, we have some position in 2-wheelers and a very minor position in farm. And that's why I think on the auto and engineering space, the plan for most of last year initially was to deepen at the component manufacturer level, to broaden our position in auto and -- which we did. We have added quite a few accounts in the last 12 months on the Tier 2 and Tier 1 compose layers. And then the recent -- the last couple of quarters, we've also had to expand now into broader other parts of manufacturers -- forms of light manufacturing. And so a couple of the examples, the elevator company I shared with you are examples of that. They're trying to go into other manufacturing segments. So we have broad -- reducing that exposure to the auto OEM level. But that's kind of where we are placed right now.

Sure, sir. And if I put together both Mahindra anchor and non-anchor auto segment, would it be safe to say that farm would be the largest segment? Is it a fair assumption?

No. I think if you put both of them together, I think you would say a 2-wheeler -- 4 wheelers are the biggest -- cars are -- passenger vehicles are our biggest segment.

Our next question is from the line of Zahid Bagwan from Wealth Managers.

Thank you, sir, for your brief on new client additions this quarter. So just an extension to that, on industry level, is adoption of 3PL seeing increased traction on the non-auto side because of COVID? And for us, are we seeing incremental new business coming up from existing old customers due to supply chain disruption?

I think nobody -- it's an interesting question. I don't think anybody is -- I don't think the need is -- we really wanted the 3PL as a cycle, 3PL. I think what we are seeing -- what has happened with COVID is -- for the industry you are in 2 sets of challenges, right? So there's been big sharp operating challenge where customers have had to deal with vehicles not being there, transport facilities not being available, warehouses moving up and down. And so there is, I believe, the need, the dependence of the supply chain has become, I think, a far more critical issue for managements in many organizations. And therefore, the level of attention it is getting has increased. And the first response definitely is to say, okay, can we go to somebody else who can do it better. And if you are that somebody else, then obviously, actually you are well positioned to do that. You are likely to get business. And I think I mentioned earlier that we did see one part of our new accounts of businesses we added this quarter was actually customers who were switching from others because they said we were able to probably give them a solution which gave them more confidence. So that's one -- that's definitely one thing which customers have been looking at, which is very operational things, saying can I outsource my warehouse, can I get transportation, can you combine both of these and do something which is more interesting, which allows me more flexibility, like more responsiveness, more agility in some ways. The second part of, I think, what's happening in the past in the post-COVID situation, I think customers are looking and saying, how do I build -- supply chains allows me to respond to volatility at a very different level, right? So how do we bring in your far more analytics, data sciences and your technology that capabilities should design supply chain end-to-end in a way which is not just organized around purchase price, say how do I make it out the cheapest, but actually, how do I make it the best in terms of a combination of cost, responsiveness, the scalability, right? They agree to manage across multiple channels, multiple inventory points in your network. So I think -- so that's the second part of the question. I think, very honestly, I would say that a lot of companies are still spending more time dealing with the first part of the issue. I think there is a lot of white boarding and thinking happening on the second part, saying how do I build supply chains for the future, but lot of the practical pieces are really still around the first part. But both of them in some ways, obviously, are very favorable for companies which have capabilities in that area. And as a 3PL company, that's where you want to invest and develop your capabilities, right? You want to be -- at the end, you can't be a great solution provider if you don't have good services, right? This is foundational to being a great solution provider. So I think both of those are inherently positive for 3PL as an industry because they move the conversation from cost to productivity from resource, to results. And I think that's a very positive thing for us as an industry

This was really helpful. And a second question, like companies like FedEx and UPS have applied peak season types of surcharges on large customers to cope up with the demand and for the extra expenses. So have you also taken price increase for a big client in this ongoing quarter apart from the freight expenses?

Now to some extent, I think very honestly, we worked -- I would say that a lot of customers, especially in the express space, right, have taken price increases. But in general, those increases have really been around taking higher -- factoring for higher cost where either you were -- for a line haul you delivered to some place and then there's no return load. Or if your express company, you actually just did not have enough volume, right, on your line and therefore, you had to increase the price, or your driver prices went up and so on and so forth. I think it's largely been compensating for resource enhancement, right? And that is something that I think there are companies who have taken costs up and prices up. We've seen some of that impact as well. But overall, I think we have -- our approach, frankly, has been to work with and for our customers to actually reduce inflation -- inflatary impact for them. I think as a company, we have been made a choice saying that through this period, while we will not obviously -- wherever there are unavoidable cost increases, we pass it on to our customers. For the large part, our approach has been these are tough times for everyone. And therefore, in the spirit of partnership, we actually worked with many of our customers to reduce the impact of the inflation rather than to just pass it on to them and charge it to them. We have, of course, charged it where it was impossible to do anything. And so I think it still in the AGM, our Chairman have also talked about earning trust. And one of the things about earning trust with our customers during this period was actually helping them reduce their total cost of ownership by reducing these inflationary elements. But we have seen some marginal -- some minor impact of it in the last quarter.

Ladies and gentlemen, that was the last question. I now hand the floor back to Mr. Swaminathan Rampraveen for closing comments. Over to you, sir.

Well, thank you. Thank you all for joining us today. I hope we've been able to answer all your questions with the right level of detail and specificity. Now obviously, if any of you need any additional information, you may reach out to SGA, our Investor Relations team or to Yogesh Patel, who is our CFO, or of course to myself. Once again, thank you for your continued interest in our company. Stay safe. Thank you.

Thank you, members of the management. Ladies and gentlemen, on behalf of Mahindra Logistics Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.