Mahindra Logistics Limited (MAHLOG) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q2 and H1 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 thanks for joining us on the Mahindra Logistics Q2 FY '21 Earnings conference. We have with us Mr. Rampraveen Swaminathan, MD and Mr. Yogesh Patel, CFO of the company. I hope you 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 open remarks from the management team following which we will open for a Q&A session. Before we start, I'd 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, CEO of Mahindra Logistics Limited to give his opening remarks. Over to you, sir.

Shogun, thank you very much. Good evening, everyone. I trust that you all and your colleagues and dear ones as well and keeping safe. I will begin with a quick overview of our external environment and trends we see in our end markets. We'll follow that with a detail around and commentary around our financial and business performance and our strategy execution. On our financial results, I'll keep my comments largely to the second quarter only as the first quarter, given the pandemic, was a unique situation. In the last quarter, even currently, we continue to see a recovery of activity across all segments. While the pandemic is far from over and we have a long way to go, there is a clear and increasing activity across all our end segments and markets. As things are starting to come back to normal, we are seeing more consistent month-on-month movements, though it by varies a bit by end market. As we look at our end markets, we see the following trends. Let me first move to auto, farm and engineering. We are continuing to see strength in the farm sector, the positive trends we saw in the first quarter continued through the second quarter, and we expect to see the same in the short term. Given the strong demand, companies are looking at supply chains, both inbound and outbound, with a strong focus on reducing shortages and improving delivery while continuing the focus on cost. We continue to expect a favorable environment in the near term. And interesting change has happened in the industry is an increasing shift towards rail-based shipments on longer routes combined with last-mile delivery solutions using surface road transport. We have also been developing and leveraging the solution. In fact, we have not only started rail movements for farm in India, but also have started cross borders services for Bangladesh. On the auto side, we continue to see positive month-on-month movement, though we are kind of -- second -- Q2 was lower than last year. This continues for passenger vehicles, it obviously continues for smaller commercial vehicles and SUVs. Demand from rural and smaller cities remained strong and 2-wheeler volumes have been also very positive. However, the medium and heavy commercial vehicles market is still very weak, and we continue to believe it will be several quarters before it can come back to normalized levels. Some OEMs have got diesel-based product lines, continue to see supply chain challenges really as a hangover extension of the BSIV, BSVI transition. As we have said earlier, we expect things to improve with the festive season. And especially with stronger demand and believing OEMs debottlenecking some of their supply chain constraints. And we expect that the second half will be a far better demand environment for the automotive segment, at least, 2-wheelers and passenger cars. The manufacturing and engineering sector is also seeing a strong improvement, though we see lower traction in capital goods. In general, we see improvement. Our customers, again, are strongly focused on improving delivery performance. We are working with very lean supply chains and reducing transportation costs. Through the quarter, we have been able to ramp up some of the accounts which we won last quarter and also win some new network transportation and consolidation contracts, both from engineering products, some capital goods and related items. Moving on to e-commerce, there is a story, which I think has been well covered. The pandemic has continued to accelerate the adoption of digital channels, and that has translated an upsurge in e-commerce. There has been a sharp growth in overall volume of e-commerce marketplaces with leading marketplaces growing by over 40% year-on-year. The segment's growth has accelerated the demand for transportation and fulfillment logistics including sortation, fulfillment centers, returns processing and last-mile delivery. Post the outbreak of the pandemic, there has been a perceptible growth in demand for essential products through the e-commerce channel. And we have continued to see that trend in Q2 as well. We also see strong demand from Tier 2 and Tier 3 cities and towns accelerating in the last 6 months. And again same patterns, we expect to continue. While there are some part of the demand has been a blip because of pent-up volumes, I think we are now consistently seeing a strong growth trajectory right post that -- post that onetime growth as well. For us, we have seen strong growth in volume in our sort centers and fulfillment centers combined with new launches of sites in areas like grocery and a continued growth in our transportation and milk run business. During the quarter, we also commenced what we call as Flex fulfillment solutions, which are short-term warehousing-based sort center and fulfillment center solutions. So we have launched that in 12 locations across India with over 1 million square feet of warehousing space, which are largely short-term contracts in nature. Moving on to the consumer side. Overall, our consumer customers in FMCG, durables, pharma and telecom have seen a continued recovery in volumes. The one -- the slowest probably has been on the telecom side. Volumes have generally shown a strong return, and there has been continued growth as brands also go online and try to design omnichannel solutions. The slowdown in imports from China is also creating more an impetus for more local manufacturing. The outbreak of COVID-19 continues to be a wakeup call for pharma companies to diversify their supply chains geographically and develop local sourcing units and also adopt alternative strategies for reducing dependency on a single source. We see positive impacts of that both to our domestic supply chain business as well to our cross-border and logistics on our freight forwarding business. As we look into the festive season, I believe this recovery will continue to accelerate. Many of our customers are evaluating their supply chain design, as they focus on increasing in-country manufacturing and the shift to digital. And they are looking at evolving logistics and supply chain options for the same. We are also working with some customers in the pharma industry to evolve options for logistics solutions for future COVID-19 vaccine. Moving on to commodities. Again, on the commodities side, which for us is largely mining and metals and minerals. We continue to see some positive month-on-month improvement and a broader improving trend. And we expect that this will continue to be an improving trend in the coming quarters and will accelerate once a broader recovery takes place. Our last mid-market, of course, is mobility, and that's a part of our business, which remains under a fair amount of stress. Obviously, it is a business, which largely serves the IT and IT-enabled services and financial services industries. As most companies in IT and ITES continue to follow work for -- from home policies, we have not seen a large recovery in this segment. Overall trip levels are back to around 25% but are far from our target levels. Sequentially, we have seen an improvement but obviously, though it is -- we have some distance to go. As part of our response, we have been reworking our supply contracts, reducing cost and rightsizing the business in the short term. We've also tried to expand our focus on manufacturing and e-commerce and expand our bus-based mobility services business and also launch services for on call -- new services, which is on call and B2B2C. These initiatives are helping us reduce the impact of the sharp decline in volume. But we -- as I said, a full recovery will be closely linked to the development of a vaccine and the return of confidence in shared mobility. And we think it may be 3 to 4 quarters before we can see a consistent recovery. Moving from markets to our service lines. Let me begin first with our transportation-based service lines, which includes line haul, mid-mile transportation, distribution and express. We continue to see improving stability in our line haul and long distance transportation, lockdown-driven disruptions, which we talked about last quarter, have come down significantly, though there are isolated issues in some areas. That said, there continue to be challenges on fuel price increases. And as volumes increase in a market of tight liquidity, many of our transporters are having significant working capital challenges. These are creating volatility in line haul movement and has had some impact from a cost perspective on a network optimization perspective. On the express distribution last-mile side, there continues to be a strong growth in volume, and we have been able to meet customer requirements with adequate levels of supply. Our freight forwarding business, which is our next service line, which is through our subsidiary called LORDS, is continued to grow. As you have noted, we had a strong growth in Q1, and we continue to have good growth in Q2 as well. While demand is consistent and we have been able to execute our segment strategy, both in terms of geographical segments, end market focus as well as a balance of imported and export, we have seen a large amount of volatility as carrier availability has been very tight. As a result of that, we have actually seen a fair amount of volatility on the cost side. And though we have done a fair amount of work to mitigate it, it has had some impact on our gross margins for Q2. And lastly, our warehouse and integrated solutions, our value-added services business. That's pretty much back to pre-COVID levels and actually growing beyond that. While we have seen some impact on a -- negative impact on auto customers, demand for fulfillment solutions from e-comm and consumer is growing much faster. And we see a very strong uptick, both in terms of operations as well as in terms of order intake. During the quarter, we added 0.8 million or 800,000 square feet of BTS multiuser capacity, which will be used for new accounts as well as consolidation of existing -- some of our existing smaller businesses. We've also, as I said earlier, commenced our Flex solutions for our e-commerce customers. And for those solutions, we have commissioned nearly 1 million square feet of short-term warehousing space. As you would have probably noticed from some of our press releases, in preparation for the upcoming festive peak, we have added nearly 10,000 third-party employees to support an acceleration in demand. Now with that, let me move on to our financial performance for the quarter. Revenue for the second quarter of FY '21 stood at INR 833 crores compared to INR 852 crores for the same quarter last year, down by 2%. Revenue right from the supply chain business contributed 97% and the enterprise mobility business was only around 3%. Our gross margins for Q2 FY '21 stood at 9.9% as compared to 10.2% for the same quarter in the previous year, a decrease of 28 basis points. The drop in gross margin was primarily due to some onetime costs as we streamlined operations. And we also had a spike in cost because of the large number of projects which we started off. We also had some impact because of higher freight costs and the lower gross margin in mobility and the impact of our freight forwarding in LORDS businesses. We expect most of these to get normalized in the coming quarter, that especially in terms of our onetime costs as we expect that to be able to come back, right? Service mix, which is something which I know we all monitor was actually very -- was positive for the quarter as we have seen continuing growth in warehousing and value-added services, though it was -- impact offset by these onetime costs and transportation cost increases. EBITDA for the quarter stood at INR 46 crores compared to INR 40 crores for Q2 of FY '20. As all of you would have noticed, we continued to do strong control of our overhead expenses. And those showed a positive trend compared to last year, but consistent with previous quarters, and we hope to be able to maintain that run rate. PBT was up 14% from INR 18 crores last year to INR 20 crores in Q2 FY '21. And PAT was up by 32% right to INR 15 crores for the quarter. As some of you, we have noted, we did benefit from higher other income during the quarter due to interest earned on tax refunds. This obviously was a positive element for us. However, at the PAT level, net of that impact, we think our profits will roughly been in line with the same level as last year despite some of the other factors I have already covered. Our proportion of revenue from the Mahindra Group was precisely 50% for the quarter compared to 51% in the preceding year. Let me also share a little bit more detail around our segmental revenues. As I already said, revenue from supply chain segment grew from INR 755 crores to INR 804 crores, up 6% compared to last year, while the mobility business was down 71% from the same quarter in the prior year. The supply chain revenue was positively impacted as we saw the acceleration from the non-M&M SCM side, though there was some impact of the auto industry, which is still a strong and large vertical for us. Our revenue from the Mahindra Group supply chain business decreased marginally from INR 421 crores to INR 416 crores. This -- within this, there were 2 parts. Obviously, the auto business did very well -- sorry, I correct myself, the farm sector did show very strong trends. The auto volume was down. And then that's something which I said earlier, we expect to see correction going forward. Our non-M&M SCM business grew from INR 334 crores for the same period last year to INR 387 crores in Q2 FY '21, which was really driven by the factors we already mentioned, strong growth in e-commerce, consumer and freight forwarding despite a slowdown in telecom and auto. These verticals grew combined at 33% during the period, and were able to offset some of the headwinds, which we have seen in auto and telecom. Growth in e-commerce and consumer was due to increase in demand and deeper penetration and expansion of our services base. Our warehousing and value-added services for non-M&M SCM business has grown from INR 114 crores in Q2 FY '20 to INR 134 crores in Q3 FY '21, registering a growth of 18%. Share of warehousing and value-added services in the non-M&M business reached 35%. Of the non-M&M SCM business, the e-commerce and consumer business collectively comprised 50% of our revenue. Our cash and cash equivalents at the end of September 2020 stood at INR 190 crores. And we continued to have -- drive and control right on our overall operating cash environment and manage our cash flows for the period. So overall, as I said, a period of recovery, as we've seen a stronger growth environment, and we continued to execute our strategy. As we move forward, we see 5 key trends in the supply chain business. The growth in fulfillment, logistics and warehousing services, increased adoption of multimodal transportation systems, increase in omnichannel distribution models, especially in e-comm and consumer, higher level of service integration and demand for integrated solutions and a greater adoption of technology in creating the customer value proposition. Our strategy, which we have shared with you earlier, is really focused on leveraging the strength, and we believe it augurs well for us. We continue to expand -- the quarter just past, we continue to expand our services especially on express and freight forwarding. Our focus on integrated solutions continues, and we believe that industry trends will help accelerate this. Operational excellence with a higher productivity focus and expanding our warehousing remains a key area of activity. In addition to the 2 new BTSs, we have launched, we have upcoming programs, upcoming locations in Mumbai and Pune, which are under construction, which will go live in the remaining part of this financial year and other sites which are actively planning. Our digitization and technology is the fourth big lever we continue to execute on. During the quarter, we made good progress in launching our new system for our procurement and materials management. We upgraded our transport management system and drove an integrated architecture and integrated several of our systems together. We upgraded some of our labor management systems and launched some other feature upgrades across our architecture. We are set to launch a new HRMS and warehouse management system in the balance of this financial year. Over 75% of our line haul fleets are now on our track and trace platforms. And all these initiatives we think will continue to enhance our value proposition as we go forward. Overall, I think as we entered the COVID period, we kind of defined key horizons for the business, resilience, restart and reimagine. And most of last quarter was very focused on restarting our business and kind of reimagining and getting back to a growth curve. We continue to remain focused on executing that strategy, expanding our share of customers, while adding new accounts. With an improving environment and a stronger predicted recovery in automotive, we believe we are well positioned to expand our right to win and grow. With this, I will open the floor for questions and answers.

[Operator Instructions] The first question is from the line of Rohil Gandhi from PPFAS Mutual Fund.

Hello, am I audible?

Yes, you are. Please go ahead.

So my first question is with respect to the warehousing business. So if you see in the last 3 years, the business has grown very well. No queries relating to that, but the area managed if we see from FY '18, it's grown only at around 3%, 4%. So can you just talk a little bit more on that aspect because you've always alluded to the fact that grade A warehouses are in high demand currently and like there's a shortage. So can you just talk on that aspect, please?

Really, it's hard for me to comment to the exact 3% that will not be in line with what we think we've been disclosing. So I will ask Yogesh to separately connect with you on that.

Sure. So actually, based on your numbers, so in FY '18, the warehousing space managed was around 14.3 million square feet, which had risen to 16.3 million square feet last year. So I was talking based on those numbers. So there wasn't a significant addition to the total warehousing space that you've been managing. Whereas the total business in terms of revenue and everything has grown at a very healthy rate. So my question was more relating to that.

Good question. Then I'll get Yogesh to connect with you on the details. But last year, you may notice, we added 1.8 million square feet, which was -- which is roughly the range of what we've said we'll kind of add every year. Now what's happening beneath that, Rohil, is actually 3 parts to our warehousing and managed value-add services. So there is stockyards, which is really the facilities we operate for automotive customers where we have -- in-plant services where very often -- there is -- the warehouse is actually owned by the customer, and we provide services. And then we have our external warehouses and which includes our built-to-suite our multiuser facilities. So one of the reasons why -- what you're seeing is that as the automotive slowdowns happen, there has been some decline in our stockyard space under current management. There has been some decline, obviously, in the stores and line feed operations we've had. And those have actually been offset by increase in external warehousing and DBS and which is the reason why what we are seeing is that even though your overall warehousing is growing, let's say, at 10%, you will see our revenues are actually growing faster than that. Because what's actually happening is that we are replacing storage. We are having some amount of delta within the space. And the new capacity we are adding is far more value-added than the capacity, which has been dropped off. And that is the reason why you will see the revenue per square feet is actually showing a positive trend, and therefore, revenue growth overall is faster than area covered. Now that's the headline message, Rohil. But however, Yogesh -- if you have questions, just reach out to us separately, and we can walk through things. I think that makes underlying trend, which is driving that.

Also, can you just talk about this, the Flex model with respect to the warehousing business that you just spoke of, how would that be different? And would that have any different economics and what that was just...

So we don't actually count Flex in our warehousing space technically, right? Short-term warehousing capacity, so it's not longer-term capacity. And what actually happens in a Flex solution, it's actually helping customers who are looking at expanding into a certain geography or who are seeing a spike in demand by creating a rapidly flexible model of capacity. So typically, these are sites which are sortation of fulfillment sites, which we bring on in several within, let's say, within 3, 4 weeks. And we take down within 3, 4 weeks as well, right? So these are very rapid models, which escalate and bring down very quickly, which we bring up and take down very quickly. And obviously, because we are managing capacity on a short-term basis, we are able to see a unique model, which our customers are able to get and also slightly better margins on that business and better return on capital employed in that business. And coming out of this pandemic, we saw some demand because of pent-up volume, but we have also seen a larger demand as companies sort of expand their network or try to meet seasonal requirements because you don't need to put an entire facility for 12 months. So you are actually going to see demand only for 4, right? And so we are able to create a solution where, for our customers, they don't get stuck with long term capacity. And for us, we are actually able to create these solutions, which give us better returns.

Understood. Also, could you please talk about, so in the last 6 months since the pandemic has begun rather, how have been the new business wins and the inquiries that have been happening? And if you can, in some context, compare it to what that was last year, that would be very helpful.

Yes. I would say, obviously, we had a pretty sticky first quarter in terms of demand because a lot of companies are obviously refigured what they want to do. Even our e-commerce customers, we're really just focused on figuring how to reconvert towards more essential services, right? Because a lot of e-commerce, you know is things like mobile, electronics, apparel and so on. So Q1 was not -- was obviously a challenging quarter in that sense. But we have seen a strong improvement in demand since the second half of Q1 through the second quarter. And if I compare this to the same time last year, I think order intake is up, right? Not very significant, but it's up in line with our revenue, right? And what's happened more importantly is the nature of the order intake is a bit different. So what we are seeing more now is actually demand for more of solutions, right, which is either even on the transportation side, it's consolidation, network optimization. On the fulfillment side, it's warehousing, sortation centers, and a lot of integrated distribution. So I think the nature of demand, I think post pandemic has changed, which is a reflection of some of the trends which I talked about earlier on. We'll see how that plays out. And our own hypothesis is it will probably continue to be there because the pandemic has made people start designing their supply chains based on fulfillment and not manufacturing, right? So that's been one that has definitely accelerated. And people try to put more inventory closer to customers. Resilience of your supply chain is a much bigger factor. So those things are impacting the kind of business which is coming in rather than the absolute business. But absolute order levels have also grown on the supply chain side, on the mobility side, of course, and I won't repeat my earlier comments. I think they were fairly elaborate.

[Operator Instructions] The next question is from the line of Anmol Grover from Albatross Capital.

My question is, what are we doing to accelerate the growth of our non-auto segment?

Obviously, it's a long question. This is a golden question because there are many questions built into it. But really, I think it begins with 2 fundamental things. I think one is we are -- I think we've got 4 strategic platforms we're trying to execute on. The one is expand the range of our services. So if you see what we are doing in terms of growing our freight forwarding business or express business or a part truckload business. These are all driven by the non-auto kind of segment, both in consumer and e-comm. The second thing which we've done obviously is investing in more of integrated solutions. So a lot of the business which we're doing increasingly is integrated solutions. For example, we talked about even on earlier calls, we talked about a pharma customer in north. Last quarter, we went live with a very big personal care products company in Hyderabad, again, integrated distribution, right? We've gone ahead with a company which makes capital goods, right, in Kolkata, which again is an integrated solutions business. So I think one of the things we're really trying to invest on is being a multi-stack service provider, integrating our transportation and warehousing capabilities together and doing more of processing, not just doing more of storage, but actually do more of processing. So we do sortation centers or FCs, they're doing just more than this rerouting material, they're picking, packing, breaking bulk, doing more of processing in-house. Those are all things which actually become more value-added returns processing. So second big piece is driving more of solutions. And the third one, obviously, is driving more of operational capabilities. So being able to bring in more automation, innovation to solve our customer problems, executing -- learning to execute and create new formats. So for example, the Flex solution I talked to you about, we are doing a significant number of projects taking volume up and down very, very quickly. Now we're hiring thousands of people in a short window of time. So that's all about building a lot of operational capabilities to support this growth. And the fourth thing is leveraging technology to kind of create this proposition. So those are 4 things which we are doing to help create solutions, which helps in these markets we are focusing on. But clearly, our focus market, while we are very strong in auto, the real focus is to get into these consumer markets and e-commerce and general manufacturing. Because those are places that we think there's a large opportunity, right, both in terms of supply complexity, right, where we can create solutions and overall size of wallet, right? So it's a combination of those, it actually makes it attractive. And that's kind of the big area to try and re-pivot the business. That's been going on for some time. So it's not just this quarter or next quarter. It's something that continues to make traction on, and we believe we'll accelerate that going forward.

Okay. So in addition to that, I want to ask a much broader question regarding if you can share some more light on the aspiration of INR 10,000 crores revenue that you have for the next 4, 5 years?

Yes. So I think -- I would say this, I said this last time as well there was a similar question, which came up. Our INR 10,000 crore target is -- I think the market for logistics is a very large one. But even though the 3PL market itself is around INR 60,000 crores to INR 70,000 crores. What we address is 3PL plus a bit of transportation. If you see our annual report, I think we articulated that our addressable market is INR 120,000 crores. So the headroom to grow is there. The challenge is to create strategically viable models, which are both profitable and accessible, right? And we think that this 4-pronged strategy we have, using our strategic -- the underlying strategic enablers, will allow us to create that growth. As you look at the INR 10,000 crore target, you're really having to look at it saying the 3 basic broad assumptions there. The first one is the economy will come back to a recovery, especially in the auto side. Look, that's one assumption, which we think over the next 5 years will play out, we should be able to get back and at least get back to a 7%, 8%, 6%, 7% kind of growth level. The second big factor is that India, with the national logistics policy coming out with increasing formalization, which will allow the share of 3PL will increase, especially now with COVID, GST, et cetera, the policy environment will play favorably. And third one is the firm will execute its strategy, right? Combined these 3 multipliers, we see the INR 10,000 crore is a very, very reasonable aspiration, for us to shoot at.

The next question is from the line of Ankur Periwal from Axis Capital.

So in your earlier answer to one of the questions, you did mention change in the in the overall strategy of the clients here, wherein probably they are trying to be more closer to the customer. And commensurately, our Flex solution offering there. So 2 questions related to that. So one is if I take a step back, on the one side, we have a longer-term arrangements wherein we are trying to work with the consumer-facing companies and we're looking at the long-term arrangement there. And on the second side, we have this Flex solution. So now this Flex is only to address the seasonal volatility that we are seeing for the customers? Or it is more structural wherein you're trying to scale up or like push the outsourcing factor at a much faster pace across the customer and which can be sort of feeding into the longer-term revenue growth potential as well?

Ankur, great question. I think the way we designed this, when we started this off was to really serve 3 needs, right? The first one is the obvious seasonal need. Your demand comes up and down. And so as you know, in commerce, a consumer and festive season, you can see a 3x, 5x growth. And we are trying to create solutions which are more capital-efficient for our customers and return efficient for us. Okay, because we have a fundamental belief that you got to ultimately create customer value, right? So that was one. The second reason was to do network expansion, right? Which is really -- you can't add a truckload of capacity overnight, right? So if you look at -- as companies kind of densify the network, reach more pin codes, drive depth in their fulfillment locations, it's not really do that in a short window of time, especially trying to do it across India. And the third one was to basically deal with demand uncertainty, which is to actually say that I don't know if my network design is optimized right now. So I would like to put up some short-term capacity and let my architecture become more stable, right, once I see several seasons of demand. And what we are actually seeing play out, Ankur, is a little bit of all 3. Right, when post-COVID happened and there was a little bit of a pent-up demand upsurge, in several cases, next to an existing sort center of ours, we put a small Flex, right, because the volume was very high. As you start preparing for festive, we are actually putting flexes with customers in kind of new locations, not locations we are covered earlier. That's just because they've probably already did some expansions, they don't have the capacity or the bandwidth to go put a new one, right? And in some cases, a customer is probably expanding and doing some new things. So they actually say that, listen, we would like to take a short-term facility and figure out how the factory turns up before we actually firm it into a longer-term arrangement. So I think -- so Flex provides, I think, a customer-led solution for all 3 needs. And I think it's hard -- and what we're actually seeing on the ground is a little bit of each one of them. It's not like it's all wedded to one thing, Ankur, right? So we are seeing a combination of all 3 of them playing out. And probably 3, 4 months from now when the peak is over, we'll actually be in a better position to see how much of that gets converted into long-term requirements because some of our customers are already talking about saying, let's make the Flex a long-term site. So you will see, I think a combination of this, I think the right thing that -- I think the -- I've always maintained as a company, our goal in our kinf of Holy Grail is to take a slew of services and stitch them into a solution, which makes best sense for a customer, right? And so we are company-led in the services, but we are customer-led in our solutions. And I think Flex essentially provides us the flexibility to do that, right? So I will stop there, Ankur. If you have any follow-ups, I'll take that.

Yes. That's helpful. And just secondly, you typically do mention the logos or the new client additions that we have done over the quarter. So what has been -- how has been the last quarter on that aspect? And on the client-specific wrap up that we would assume for the client added over the last few quarters.

I think we've seen, I think, on our demand pattern, which I think might even be more interesting for all of you. I think one is you've seen the overall order intake has been positive, Ankur. It's actually grown year-on-year. I mentioned that where somebody was asking the question as well. We have seen a strong growth. Clearly, we've seen in terms of logos and end markets, obviously, the e-comm business continues to be a large part of our demand, followed by consumer and by manufacturing, actually, right, where we have seen a fair amount of demand from a manufacturing perspective. What is interesting, I think, is actually if you look at the service level, service solutions split, there is obviously more solutions which have come in. But on the services side, we have seen an uptick in transportation, especially around network consolidation contracts where customers are trying to say, listen, how do I combine my inbound and outbound to become more efficient, can you help us create new solutions. So we actually see a bit of an uptick on the transportation solutions side as well. But those are 3 things. If you are looking at more specific client details, of course, we've won a large contract with a glass company. We have won a large contract in -- in the western part of India within capital goods, electrical goods company. We've just commissioned a distribution solution out of Kolkata for, again, a capital goods manufacturer, somebody -- a company which global multinational -- which makes products for transportation, the rail -- metro rail market, right? So we cannot kick that off. We're going live with the power tools manufacturer, which is a fast-growing segment, actually, with power -- with a distribution solution for a power tools manufacturer out of Chennai at our new BTS, right, just before Diwali, we'll go live with them, right? So we've done a series of different kinds of contracts which are coming. During the quarter, also, we won a very large contract for doing end-to-end solutions, logistics fulfillment for a very large consumer durables company. And that actually will be an end-to-end contract where we will do supplier picks and actually do complete value chain delivering into distributors. That's a large project with several warehouses across India to be established. And more than 1 million, 1.5 million square feet of warehousing space when it's all done. It will take 5 to 6 months before it goes live because that's a long gestation project, given the scale of it. So a lot of -- I think the positive movement in multiple ways. I think our freight forwarding business also continues to show a lot of robustness. We don't talk about it. Again so much there. But again, existing logos with higher penetration there. We have started doing for several of our pharma clients movements to multiple parts of the Americas now. So just many more happening, Ankur, both with existing logos and some new logos, but the spread is widening, which I think is a -- which I think is a positive trend overall. And it's a reflection I think of a broader recovery.

The next question is from the line of Krupashankar NJ from Spark Capital Advisors.

My first question was on the nonautomotive business. So clearly, you have generated revenues of close to about INR 317 crores for the quarter. Just wanted to understand what would be the composition of e-commerce? And there's the reason why we're asking this question is that we see that in the future, e-commerce business like Amazon, would like to take most of their operations in also, especially on the logistic side of things. So just want to understand how we are placed in the overall e-commerce value chain. And if the composition will help us analyzing it better?

Yes. So I think overall, one thing I would say that we reported -- I think I shared in my comments this time that e-commerce and consumer together are 50% of our non-M&M supply chain business, right? And part of the reason why I think that metric brings a reasonable amount of sense is I think the lines between these segments are getting more blurred, Krupa. And I think what you'll see is as more consumer brands go online, I think there's just going to be a far more greater alignment in the way delivery and fulfillment happens. Whether you're an online marketplace or whether you're going through general trade or modern trade, I think it's all going to get much more omnichannel as you go forward. But collectively, e-commerce and consumer are around 50% of our non-M&M SCM business for the quarter, we just went by. I have noted -- I think you've discussed even earlier how e-comm companies might play out in terms of their strategy. And what I think we have said a couple of times before as well, but I'll repeat it again, is that we are -- a large part of our business is kind of inside the fence. So we operate in 2 ways in e-comm. We are a white label fulfillment and transportation logistics service provider. In which case, what that means is a customer comes and operates on our network, our technology, our infrastructure. And really, they give inventory to us and we reach it to a place. And everything in between is really MLL, right? The second one, which is a larger part of our business is what we call inside the fence or inside the box where we are actually part of the marketplace's network. And I think what people don't always -- I think if you peel the onion on most of these e-comm companies, I think what you will see is that even though they manage this and supervise their network, typically within their network, there's a fair amount of outsourcing done, and there's a fair amount of partnerships which exists, right? And those include for transportation or sort centers, right, or large FCs, right? Again, the individual companies have their own approach on things like small-packet FC. But there's a wide variety of models which exist inside this and one of the things which we have strategically been pivotal a lot on is that model because we think it is in our belief that model actually builds deeper partnerships with our customers. And it's been successful for us in terms of our product line expansion. So we have -- we started off, obviously, doing in a small packet or we expanded into heavy and bulky. We've now done doing grocery. We are expanding into wholesale. We are doing some pilots in pharma. We're doing milk runs and integration of transportation and fulfillment centers together. So I think what it's allowed us to do is an offering expansion, working with our customers inside their cloud. And in that sense, therefore, we are -- our network is part of their network when they define it. It's a lot of our Flex solutions, actually, the strength of our Flex solutions is there ability to be able to be a successful part of our customers' network, that allows rapid deployment. So that at least is just one reason why we obviously take your comments on board, and we obviously notice that differencing in different parts of the world as well. But that's how we are trying to address it right now.

Okay. If possible, can you share perhaps how many fulfillment centers you are managing for our e-commerce clientele?

Absolutely. If you can reach out probably separately to our Investor Relations team, we will provide you some more granularity.

My second question was on the express logistics business because we have been talking about it as providing as an allied service. So again, coming out, we are seeing that the ground express logistics business has gained a lot of traction post GST. Is there any possibility you will be providing that as a stand-alone service going forward? Or is there any such plans in place?

Yes. So I think -- I think PTL is an offering for us overall as an individual offering. It requires -- it is a service line offering for us as well. And what we do there, I think, is you don't see it because we really sell it as part of an overall portfolio of services. And we also -- we are also market-driven of structure. So we have a consumer business and e-comm business. And those businesses sell everything. They don't just sell line haul. They don't just sell warehousing, they don't just sell fulfillment or solutions. They sell everything. They sell express. They are in the wholesale band, right? And that's kind of our strategic choice that we are -- that's kind of our portal. So our businesses are portal to which all our services get blended into an integrated solution. So we don't see -- we don't call out express separately, but we do obviously provide express both as part of an overall solution, but also as a stand-alone. And in fact, for many of our industrial clients, our express business actually operates just as a stand-alone service. For industrial -- for some of our consumer businesses, which are like we work with a leading firm, which makes hobs and chimneys and stoves, right? And all of that -- all we work with the several smaller brands, brands on the consumer side, electrical, durables side, all of those essentially are just pure PTL or express, there's no real broader solution there. It's just not something we call out, right, though specifically as a line item.

Okay. And last question, if I may -- last question. Is there any onetime surcharge on services or transportation, anything provided over the last 6 months? Any COVID surcharge, for example?

So I think you're just in that lockdown -- preunlock 1, when things were really tightened down. Obviously, I think many of people are able to pull out and push through and kind of a pricing action around the COVID surcharge. And of course, the different numbers which have floated around the industry. But in the contracted performance market where we have been, I think we are seeing premium price more because there have been emergencies and exigence situations, but not necessarily a secular kind of COVID surcharge. Now it's still there. I mean you have parts of India where because of COVID [Foreign Language] and we actually do get -- we are able to price differently for those markets. But I think by and large, it's kind of -- it's kind of normalized now. The bigger issue is now, Krupa, just the increase in fuel prices, overall demand and supply patterns.

The next question is from the line of Ankita Shah from Elara Capital.

My question again was on the B2C side. Basically, the 50% of our business is from e-commerce, as you've mentioned. But I wanted to understand how much would be our market share in the outsourced B2C logistics function? So how much these guys outsource and how much will be our share roughly? Or is it in market share in this outsourced business operations in the e-commerce side? And second question on this is, we've seen a lot of companies in B2C are not very profitable because which are very highly competitive business segment. And because of the high network costs and it's not very profitable. So I just wanted to understand how would be our gross margins in this segment versus any other like auto, pharma or other segments that we would be catering to?

Let me try and answer the first one. I'll kind of get Yogesh to probably elaborate a little bit on margin. We we have reasonably positive margin story, but he will add more detail and color on. But I think if you look at the nature of our business, I think we -- the way you could divide your e-comm supply chain into really 3 parts. You have the suppliers inbound, which is into your FCs, fulfillment centers, we have fulfillment all the way to sort centers, right, which is inter-unit movements and your sort centers and then you have last mile, which is from there to a delivery station. Then the person comes and delivers it to you home. Look at our business, where -- so as you pointed out clearly that the economics on the last-mile delivery have been the largest challenge, both just given often the individual transaction costs in the last mile, the market network is fine and therefore, it is -- different companies have different approaches, obviously, to do that. At Mahindra Logistics, we are in the last mile, we participate very selectively. And we largely participate there on large product delivery. So we don't do small packet delivery in a large way. It's really your traditional B2C, the person whom you associate with the most, the person who carries the bag, sitting on a bike and driving and comes and delivers stuff. So that we don't really do a lot of. What we do is TVs, washing machines, refrigerators, right, which are largely more complex in some ways. You have a delivery associate who comes and delivers, can commission the product, unpack it, look at sustainability and recycling and so on and so forth. So that's a place where we do a lot of that. A lot of the rest of our business actually is on the rest of the fulfillment chain on the sort. And there, we sell multiple product lines. We do smaller packets, we do large and bulky items, we do groceries. So we do a wide variety of product categories there. And that's the bulk of our business, along with the transportation, which is between these milk runs and so on. And therefore, the context and the controls of our business are probably a bit similar to what might be a general configuration, which is there. In the places, we -- in the segments we serve, it's hard to get a real market share estimate, but I think we are a very strong player in the segments we serve and our market share have been pretty -- should be reasonably favorable. And it depends on client to client and customer to customers. It's hard to actually say this is an overall market trend, right? It's also not per piece delivery. It's larger volumes with some amount of investment. But I would say our market share is generally a very comfortable position. I'm not at liberty really to call that out word giving that specific number.

If I look at the 2 major outsourcing companies, Amazon and Flipkart, then a comfortable market share would be close to double-digit, 10% or more than that? So just some color on that. If we take only the large 2 outsourcing companies as -- for the discussion sake.

Definitely in the higher teens.

Higher teen.

Services and segments. So now coming to the gross margin, if we can hand it over to Yogesh. Do you want to give a flavor for gross margin? I think Ankita's question is also relative to other segments.

Ankita, on e-commerce per se, I mean, if you were to see our business, I mean, the way we look at it is from a service line component perspective. So transportation business, the threshold or yardstick is to make sure that the margins what I would do business for is this is in line with what my expected margin for that services is. Whether you are doing a particular size of volume or environment, definitely choose to do a business. I mean, somewhere you will make from a threshold a bit higher or a bit lower. Ultimately, it will come down to the our average expected transportation led margin, which you are aware.

Correct. So we think it's similar to what our average transportation and warehousing margins are, it will be in a similar range?

The simplest way to look at it is just similar -- our margins for this segment in line with our overall margins.

Okay. So competition does not impact pricing in this segment for us?

No. So as I said, within e-comm, whether you are considering transportation, the transportation business, Yogesh said, will be comparable to other transportation we do in other segments and warehousing and value-added services will also be comparable to solutions margins we make in other segments. So not a very big difference based on e-commerce and consumer.

Can you expect -- this e-commerce business expected to grow further from here on? Will this share can increase more that 50%?

Yes. So your question is, yes, it's 50% of the existing volume, yes. So in percentage of our overall business is a tricky thing because we expect other things to grow as well. But as you know last year also, we grew our e-commerce and consumer businesses in the north of 20%, 25%. And this year also, if you adjust for the COVID period, we expect similar growth. So we expect it to happen, but that does not mean that we don't expect other businesses to grow, Ankita. So we expect other businesses to grow.

The next question is from the line of Depesh Kashyap from Equirus.

Sir, out of this INR 170 crore revenue from the warehousing, how much will be from the Flex CFC solution in this quarter? Is it possible to highlight that?

Well, actually -- well, to be honest, I don't have an immediate answer. You'll probably have to give us some time to get back to you. A lot of that will actually get monetized, frankly in Q3.

Okay. And sir, how exactly are the arrangements with the landlords and customers different vis-à-vis the normal fulfillment centers?

No, no, yes. So by and large, all of them are back-to-back and aligned, right? So if you look at our Flex centers, most of them would be essentially will be warehousing. The landlord arrangements would also probably be concurrent with our existing -- what the customer contract is. In some cases, it's actually things which you are able to fit into our multiuser site on an existing facility we have. Let's say, if you're doing a Flex for 20,000, 30,000 square feet and if you can do relay out in an existing warehouse, right, and save 20,000, 30,000 square feet for a few months, then we can use that for the Flex as well. So there are multiple models. But by and large, there is no -- I guess if you're asking from a risk perspective, there's no incremental warehousing real estate risk we are taking because of that.

Understood. And sir, typically, how long are these contracts? And what is the kind of CapEx that you do for this?

Sorry?

How long are these contracts? And what is the typical CapEx that you require to do for these contracts?

Yes. So I would say that -- so the CapEx is all really contractually factored and limited lever of that, right? It's very -- it's not a huge amount of CapEx. A lot of that is things we reuse and flex. But by and large, wherever we make the thing is meaningful. It's all factored in the way we do it. Typically, these contracts are all between 3 to 6 months. But as I said earlier, I think Ankur asked the question, I think, from Axis. It depends on what the customer is putting up Flex for. So we have seen also that some of the flexes get extended because demand goes up or mode expansion happens. But by and large, I would say, it's a 3- to 6-month window.

Understood. Sir, in the last call, you talked about adding 1 million square feet by Q3, and you've already done, I think, 0.8 million square feet. So any new targets on the warehouse addition for the second half?

No. I think we -- I think we mentioned earlier that we expect to go live with -- at least with 2 new BTSs, both in Chakan and Pune. We have a new BTS coming what we call BTS3 for there. And we have a new one coming in Bhiwandi, right. Both of those will go live in the rest of this year. They have been a bit delayed because of COVID and weather, right? Both acts of God, I guess, but we expect those to come live towards the rest of this financial year. Is bespoke warehousing addition will continue, right, and we expect several facilities to keep coming up in line with customer contracts. I think I mentioned earlier on, for example, we are kicking off a large supply chain network design for a consumer durables company. That will add more capacity as well. So I would say, overall, what I think Yogesh and I have said in prior meetings is that -- at least is that 1.5 million to 2 million square feet of annual addition is what we think is required to kind of fuel the kind of growth aspirations we have. And we expect to, by and large, be able to execute that. I mean related strategy obviously to enrich our solutions. So not just do basic storage, but also do more processing-based solutions. So our rupees per square feet -- our realization per square feet also increases. And that's actually something which we keep actively trying to do through our solutions.

Sir, lastly, in the opening remarks, you talked about that you're in talks to the pharma companies for the COVID-19 vaccine distribution. Just a rough internal estimate, how big do you think this opportunity can be for Mahindra Logistics?

Frankly, it's not -- our work here is not economics led. What we think is the country has a very large challenge. It's going to have a large challenge on COVID pharma distribution, and especially the last mile and upcountry markets. It's not so much about just moving it from a location internationally into India or moving within large manufacturing facilities in India. It's actually about doing last-mile delivery and vaccination distribution. And the vaccines themselves are a wide variety with different temperature control requirements. So to be honest, at this stage, we have not seen as an economic objective as much as the right thing to do, right? So we are working largely with customers to design what will be the best thing to do for the nation as a whole rather than feel as an economic target. That said, I mean if you look at some -- I think several -- there are several estimates in India will look at vaccinating 25 crore people a year. And if you look at it in last-mile delivery and distribution of its of INR 500 or INR 600 per vaccine, you're looking at a INR 15,000 crore to INR 20,000 crore annual market that in terms of delivery -- or INR 15,000 crore to INR 20,000 crore spend in terms of distribution, delivery of high-value, temp-controlled medication and vaccines. Yes. I guess it's a fairly large level of spend as well. Hopefully, in the coming quarters, we will have better clarity around this.

The next question is from the line of Rajesh Ranganathan from Doric Capital.

We've had a lot of discussions about your opportunity in e-commerce. But there's also a flip side of it, there's a lot of new entrants that have gotten into the logistics space and try to make it more formal professional because of the e-commerce opportunity. And do you see any of these companies expanding their reach into traditional logistics opportunities that you have?

I don't know if you can -- I think everybody who's there -- I mean, we're all competing with across the board. So I wouldn't say there's anything on the traditional view, professional [indiscernible] but I think in the solution spaces and services space, you will find there is a fair amount of existing competition already, which exists. And obviously, several of us exist in different layers. So I don't think there's anything which is -- which I think -- I mean, there's a fair level of competition today. So I don't think competitive intensity is low today, and I don't see it dramatically altering in the future. This is a space which requires us to keep inventing and developing new solutions and formats, investing in being highly productive and trusted partner for our customers. And -- but we continue to invest in doing that to build our right to win.

So you don't believe that a large e-commerce or logistics person have, would help them be more competitive in the general business as well?

Because we have scale and that help us to bid on that. I think it will help. And especially, I think -- but I think a lot of that scale hypothesis is already playing out today. Where -- so what I meant really was it's not that scale is not valuable. It's just that scale is already playing out today. I think if you look at last-mile delivery, the incumbents who are there are also growing at a very rapid pace. So obviously, there is a lot of volume there. I think if you look at upstream fulfillment services, which we do more of, like obviously, we see scale playing out there as well. Even in last-mile delivery, we do on large electronics products and so on, and again, scale does play out. So I'm not denying, actually the scale aspect is really existing. I just see the scale effect is already playing out. I don't see a big such -- a future shift around scale. I think the scale is already playing out. I think the challenge, I think, is to see whether scale actually will dramatically change economics from where it is today.

Sir, this is what we've seen in China is that it has dramatically changed economics. I'm not talking about last-mile delivery. I'm talking about the large logistics back home and the businesses essentially shifted to the newer players who built their business originally on e-commerce and then used that same sort of infrastructure to make it a much larger sort of logistics offering. And costs have dramatically fallen for them on a per package basis. So it certainly has made a difference.

No, I think -- yes, I guess I find it hard to answer the question because there is no -- there's no specific reference point around this. But I would just say that what I said earlier that I think scale to the extent the nature of the curve applies is already playing now. So I don't think there's -- in India, I think, as a country, probably we may not have evolved on a comparable basis to China in volume. I think on a relative basis to the extent where the scale curve is there, we already see the curve playing out. I don't really know whether there's a new company, old company reference is hard to particularly relate with, Rajesh. I think it's -- for us as a example, the e-commerce business for us is 3-year business -- 3-year-old business. So I don't know if I could -- company is 10 years old. So I don't like see a 3-year business or a 10-year business. But I do think the scale effect is real on all layers of the network. And upstream, definitely the margin is up, specifically, the scale is differently there because I feel that it's already playing out.

The next question is from the line of Prateek Kumar from Antique Stockbroking.

I have a question on your gross margins. So you highlighted that in the opening remarks. Can you just elaborate a bit more on the onetime costs you mentioned and the costs related to freight forwarding. I think 2, 3 points to be mentioned, can you elaborate that again, please?

Yes, sure. I think as you know, last year, our gross margin was 10.2%. And this year, it's 9.9%. So we're down 28 bps.

No. I'm just specifically asking about -- I understand the other segment, the mobility, so just on the supply chain segment.

Just on the supply side. So on the supply chain side, I think the big issue really was 2, 3, 4 things. The first one was obviously that we saw lower freight forwarding margins than we did last year. Overall, freight forwarding remained actually profitable for us. But the challenge, which we did see is a lot of volatility in pricing of services. And therefore, the gross margin of that business did see decline. So that was a mixed impact, which is there, Prateek. The second big thing, which was there was on our freight on our transportation line haul and other transportation contracts. Obviously, with a lot of volatility on fuel prices, we had to lead and lack plays as we put those -- as those actions got done most of it, but there are puts and takes into them, sometimes a week, sometimes a month, and that created some impact, given the sharp increase in fuel through the quarter. The third thing which did happen was with this volatility happening, typically, our freight -- on the freight cost side, we do optimization continuously, which is optimizing our network. So we were not able to accomplish the same thing this year, right? And that was the third factor, which was a challenge. And the fourth one is we launched several new sites. And then typically, as you know, Prateek, every time we launch a new site, you have a high -- lower margin level, and then it starts graduating itself, right, over a period of time. So you kind of don't get pickiest margins in the first month or 2.

All right. Understood. And sir, my second question is on your non-Mahindra SCM business. So if I recall, FY '20, as you also mentioned, the e-comm and consumer segments grew by 26% and 33% last year in FY '20.

Yes, right.

Yes. So despite them growing at such a large steep pace, and I'm sure this would have grown at similar pace in this year also or maybe slightly lower, but certainly better than other segments. But you're still saying that these 2 constitute around 50% of the business. How does that tie up? I'm -- I mean is the bulk segment has grown more than auto segment because auto segment mix is only 18% now?

So Prateek, I'm happy to -- I mean Prateek, because -- let me ask Yogesh to throw some more light on it. All the data you said is accurate and if you back calculate it, probably you will establish that we did see year-on-year growth on that. Last year, as you know, we had a significant shrink in the bulk segment. Our non-M&M SCM business on a year-on-year basis in FY '20 just marginally grew over FY '19. What really happened during the year was our bulk business got replaced by growth in the e-commerce and consumer side. This year, if you actually look at it, year-on-year, the second year -- the second quarter has seen 17% growth. So this year, you will actually see that our bulk business is more normalized. And that's essentially what's playing out. In terms of overall business, Yogesh, do you want to kind of talk about this a little bit? I'm not sure about how I make the waterfall in my mind. But if you want to talk about, and Prateek, we can also respond to you separately with more detail.

Yes, sure. So I mean, on that, the way we've maintained also the vertical-wise cut, we have only to a limited extent where we have cut down auto and non-auto, which we have 17%. Ram did mention of my balance almost consumer and e-commerce comes to what. So balance is where your bulk and engineering industries would be. And that's -- I mean, that's a small percentage, which both combined take up.

Ladies and gentlemen, due to time constraint, that was the last question. I now hand the conference over to the management for closing comments.

All right. Thank you. Thank you, everyone. I hope we've been able to answer all your questions satisfactorily as you, however should you have any further clarifications, I think we diluted a couple of them during the call, feel free to reach out to us, our team at SGA who are our investor relations advisers. Thank you once again for taking the time to join us on the call today. And on behalf of Mahindra Logistics, our Board and employees, I'd like to thank you, wish you all a very happy festive season and the very best for the upcoming Diwali. Thank you very much.

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