Mahindra Logistics Limited (MAHLOG) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Mahindra Logistics Limited Q2 FY '22 Earnings Conference Call. 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 Q2 FY '22 Earnings Conference Call. We have with us 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 the 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 a Q&A session. 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, sir.

Good evening. Thank you, Shogun, and good evening, everyone. I trust all of you and your dear ones and your colleagues are well and staying safe. I hope all of you have had a chance to look at our results for Q2 F '22 and the presentation which has been uploaded on the stock exchanges on the company's website. I'll begin my remarks by providing an overview of the sector, how end markets are working, the operating environment we are and our financial results for the quarter, which has gone by. As you look at where we are today with the reduction of the spread of COVID pandemic, we have seen positive trends in most markets with a notable exception of the automotive segment. These positive trends have accelerated through second quarter. The strong growth and acceleration statistics have resulted in opening up of more areas and travel restrictions have come down, resulting in higher economic recovery, business travel and distribution spending. These trends have had a positive impact on overall economic environment and a few of the new logistics as evidenced in the growth of [indiscernible] builds and the trends in petroleum product consumption in the country in the last quarter. The recent announcement of the [indiscernible] program by the honorable Prime Minster marks a comprehensive vision for individual and multimodal logistics transformation in the country. With stronger focus on productivity and integrated planning combined with faster approvals and digitization can be a catalyst for accelerating the sector's transformation. The Rail Ministry recently announced a 500 multimodal hubs will be developed under this initiative. And further, they are looking at adding nearly INR 50,000 crores of extra investment in the sector over the next 5 years. All of these promise significant potential to accelerate the reforms that have already been happening in the sector over the last 5 years. In addition to supply chains at logistics, the mobility sector has also started showing green shoots. There has been a margin uptick in return to office in the BFSI and IT segment, though it's early days yet and different firms are talking different strategies. Air travel is now back to an estimated 60% of pre-COVID levels, and this is likely to further go up due to the upcoming festive season. These trends should start driving increasing growth, first in services to airport cabs and ride sharing and thereafter broadly across B2B and B2C mobility services. Globally, cross-border logistics remain in significant challenges as there are large scale stoppages of containers and volatility in fleet availability and costs more in terms of ocean and air movement. These are impacting our domestic businesses significantly in terms of their ability to respond like in the midst of a highly integrated global supply chains. And we do not see any short-term relief as capacity is likely to be constrained over the next 12 to 18 months. Uncertainties due to change in trade patterns and geopolitical shifts will further increase the volatility. Let me talk about individual sectors in greater retail and being with the auto and manufacturing segment, which is our largest end market in our business. The auto and manufacturing segment, especially the automotive segment continued to see significant pressures during the quarter. The global semiconductor shortages have impacted all the OEMs in India as well and resulted in sharp drop in volumes, especially in September 2021. This is probably more true for companies using diesel engines compared to gasoline engines. As a result, several OEMs took or extended NPDs in September due to the supply scenario. This resulted in significant demand and operational challenges for logistics companies, which operate in this market with high variability volumes and higher retention time of leads. The M&HCV segment continues to see low volumes driven by the environment. And we are seeing very limited improvement in Q2 with our OEM customers. On a positive note, the 2-wheeler industry started showing growth spurts [indiscernible] cost pressure to the commodities contains. For us, this has been a challenging time with inconsistent volumes. Lower demand volatility has been greater operational costs and resistance in absorbing fuel price movements during the quarter. Moving on to the farm sector, the farm sector continues to maintain positive movement with the overall macros remaining favorable. We continue to see positive trends for our customers. During the quarter, we did see more muted sales from a tractor and farm equipment shipment perspective but production remains consistent with a strong seasonal demand outlook in the upcoming festive months and in the calendar year. The e-commerce -- moving on to e-commerce. As all of you are aware, there has been sharp growth in overall volumes of the e-commerce market places. We continue to witness healthy demand traction from Tier 2 and Tier 3 cities and towns. Through this year, an interesting pattern we have seen is a significant end by marketplaces to focus on having more suppliers on their systems and platforms. The pent-up demand we saw during Q2 however, was not up to the same scale as last year. And [indiscernible] supply chains are also impacted the availability in some categories such as high end electronic appliances. However, on the latter part of the quarter, we saw very strong traction, and we hope that this will be maintained through the festive season, which largely this year will come in Q3. We continue to see strong demand for electrification in the last month and continue the growth in EDEL, which is electrical EV-based solution. Our consumer sectors are doing well during the pandemic period. Obviously, essential products were stronger, but now with more discretionary spend coming in, we are seeing upticks across FMCG, personal care and food categories. The industry did have some disruption in the first quarter, but post our [indiscernible] customer sentiments have improved. Rural demand has been resilient. Overall, contributing to more and more customers in the industry focusing on launching new products in the market and also focusing on cost saving initiatives. In electronic appliance and durable, there is a significant impact of cross-border logistics as many manufacturers in these spaces depend on imports of components. As a result, we are seeing further intention by these companies towards optimizing the supply chain and improving that [indiscernible] companies continue to expand their footprint in new cities and markets as well. And as the transformed consumer value buying behavior, there has been a clear shift towards omnichannel requirements during this period with many companies piloting omnichannel distribution models. As all of you are aware, last year, we won a significant program with Bajaj Electricals to provide them end-to-end supply chain logistics. That program has been in implementation for most of this calendar year. And we continue to scale up, and we remain on target for full impact -- full ramp-up from Q3 of this year, as we have indicated before. We have completed commissioning most the network of distribution fulfillment centers and have activated new delivery lanes across the country. In terms of enterprise mobility, the mobility, of course, has been the most significantly impacted by the pandemic. Our traditional customers in BFSI and IT, IT-enabled services continue to pursue work-from-home policies due to the impact of wave 2. However, we have started seeing uptake in that segment as well on a sequential basis and expect improvements by Q4 F '21 as vaccination lines mature and mitigating measures for future waves are implemented more broadly. For our business, we continue to focus on expanding in markets such as e-commerce and manufacturing, which has helped us in the quarter under review to register strong year-on-year growth. Given the pandemic, the market has moved significantly towards safety. And while this [indiscernible] before, we have absolutely it significantly, especially for our enterprise customers. Our continued long-term focus on expanding safety proposition has helped us gain share with some of our existing customers even though the volumes have dropped significantly. We are focused on evaluating measures and strategies to expand our services portfolio in areas such as on call, outstation, airport services, et cetera, and we remain optimistic about the opportunities around consolidation and growth in an F'24 and beyond window in this market. Let me now talk about financial performance for the quarter ended 30th September 2021. Revenue for Q2 F '22 increased by 22% at a consolidated level to INR 1,019 crores as compared to the same period last year. Revenue from the supply chain businesses contributed 96% and enterprise mobility contributed to 4% of our total revenue basket for the quarter. Gross margin for the quarter stood at 9.8%, down 10 basis points compared to the same period last year. EBITDA for the quarter stood at INR 52 crores, up approximately 14% from INR 46 crores for the corresponding quarter last year. PBT was down by 39% from INR 20 crores in Q2 FY '21 to INR 12 crores in Q2 FY '22. And PAT was down by 37% in the quarter, which has just gone by. Compared to last year, we did see some headwinds during the quarter and these included obviously the continued growth of fuel prices during the quarter between June and September. While the scope of the increase has started maturing, the continuing increase and the demand environment, especially in auto, made it challenging for us to be able to pass through the increase in the quarter, which has just gone by. Additionally, due to the trailing impact of wave 2, several of our new projects, which were launched during the quarter were delayed, and we had to deal with higher operating and launch costs on account of the same. Lower demand in automotive segments also affected our margins and capability during the quarter. Year-on-year, we also saw -- we also had -- we didn't have the benefit of the significant level of other income we had in the same quarter last year. Last year, we had significant level of tax refunds, which are contributed to the other income line. And obviously, that was not there -- was down significantly during the second quarter of this year and impacted reported earnings. Proportion of revenues from the Mahindra Group comprised of 48% in the second quarter of F '22 compared to 51% last year. Let me talk a little bit about the segment performance for the quarter. Revenue from supply chain increased from -- supply chain increased from INR 804 crores to INR 978 crores for the quarter. Corresponding revenues from the Enterprise Mobility segment stood at INR 41 crores for second quarter, up by 42% year-on-year. The supply chain businesses continue to see an uptick due to the growing demand of e-commerce, consumer -- e-commerce and consumer markets and our growing services portfolio in terms of freight forward, express and EDEL. Our revenue from the Mahindra Group supply chain businesses increased from INR 416 crores in Q2 F '21 to INR 484 crores. That growth was significantly driven by the growth in the agri business or the farm sector of M&M. our non-M&M businesses grew from INR 387 crores to INR 495 crores in Q2 F '22 or 28% year-on-year increase, where we saw a healthy recovery compared to last year due to increase in demand in the markets I mentioned, e-commerce and consumer, appliances and durables and increased growth in services of warehousing, freight forwarding and last-mile delivery express. Our warehousing and value-added services for non-M&M businesses, which is a key lever of our focus on integrated solutions, has grown from INR 134 crores to INR 168 crores in Q2 F '22, registering a growth of 26%. Share of warehousing value-added services in non-M&M and SCM had 34% in Q2 and is comparable to the same period last year. During the quarter, we added nearly 1.3 million square feet of additional warehousing space, which is in line with the targets and the -- which we have communicated to all of you in earlier calls. A key driver for growth during the quarter was acquisition of new business and expansion of current accounts. During the quarter, we continued to see traction, winning new projects with consumer e-commerce customers in both existing and new customers, and we continue to increase penetration in the electric vehicle segment of the automotive industry, which we believe has very high prospects in the coming years. During the quarter, we also continue to see strong traction with our solution format, so that's grocery and small pack fulfillment centers, sort centers or integrated warehousing and distribution for our consumer customers. Some examples of that, we went live with expansion of a temp control warehouse and distribution solution, some leading pharma company in North India. We also commenced warehousing based inbound manufacturing solutions for a 2-wheeler electric vehicle manufacturer in the southern region of India. Like last year, we have secured orders for our Flex solution in e-commerce going into the festive season and we have added [ nearly a million ] square feet of temporary solutions for the same. The revenues for those who obviously flow through in the coming quarter as in the coming quarter is where most of the festive season is concentrated. In addition to that, the services that will continue to see strong growth -- in our growth services freight forwarding has been a notable growth area for us. Through the quarter, we see strong traction there, both in terms of penetration in accounts, in manufacturing and pharma. We've also launched chartered services, which have seen some really positive traction through the quarter. And we believe that given the penetration of those accounts, we are upbeat about continued growth there. We've also seen strong traction in our Express business. That correlates very strongly to our integrated solutions approach as we do integrate warehousing and distribution [indiscernible] business is a key lever of enablement there that we have now expanded our network. We are serving more than 5,000 pin codes to our own network. And we continue to expand lane density across the network as well. [indiscernible] which is our electric vehicle based last-mile service business continues to grow, right? We continue to expand fleet there and have continued to optimize our utilization levels across the entire fleet. We also now launched working with our customers' higher fleet sizes, right? We're working with customers and OEMs. So we are actually able to further drive our cost optimization on last-mile delivery plans. Overall, it's been a [indiscernible] between strong momentum that's coming out of the wave 2, right, in terms of revenue growth. Before I open up for questions, let me briefly also talk about the Medicine From The Sky project. Some of you have noted in the press that we partnered and associated with the Medicines From The Sky project by the Telangana Government and the World Economic Forum to deliver vaccines to the unmanned aerial drones, unmanned aerial vehicles, right, in the state of Telangana. The pilot was successfully conducted in one district of Telangana. We have conducted trials for the drone delivery operations in partnership with a technical associate of ours [indiscernible] and successfully delivered medicines as part of those pilots to multiple locations in the Vikarabad district of Telangana. We've also been working with our partners for deployment of different types of drones and payloads, and that work will continue to go on. While the program is in the final stage, we see some exciting long-term opportunities for UAVs in logistic applications, both in terms of last-mile and distributed delivery but also in terms of optimization opportunity inside our operating environment in our warehouses for areas like operations like inventory management and so on. So really excited about the opportunity. As we look out to the second half, we are expecting healthy demand on the back of the festive season. While things remain volatile at the end secularly has been positive, in our discussions with various automotive OEMs, there is a sense that the semiconductor crisis is receding, and we hope to see some uptick in both in M&M and non-M&M auto businesses in the second half of the year. Some of the cost challenges, which I mentioned earlier in my comments, have already been addressed, and we are targeting a recovery on that front in the coming quarters. With this, I'll open up the floor for questions.

[Operator Instructions] We have the first question from the line of [indiscernible] from [indiscernible] Capital Advisors.

I have a couple of questions. The first one would be, I understand your warehousing sales have increased, but the overall warehousing sales in management has come down. So I just wanted to understand what is happening over there. That's the first question. Secondly, I want to understand -- I was looking at the expenditure as a percentage of sale numbers. If I see that number sequentially on a half-yearly basis, that is basically comparing H2 FY '21 versus H1 FY '22. That percentage number has come -- has increased from 4.9% to 5.8%. I think in the earlier call, the CFO guided for a number between 4% and 4.5%. So I want to understand how you look at this number and how you would give any guidance on what we expect.

Yogesh, do you want to take the second question first, and then I add commentary to that and then answer the first question?

Sure thing. So if I heard the question right, our share of unallocable expenses have been same or a tad 10, 15 basis points higher versus last year's, right?

Yes, that's correct. They have increased basically, yes, correct.

So on that piece, I mean, the way that portion of expenses is whatever gets directly attributable to a segment comes and reports under a segment piece and central costs usually are what comes as unallocable piece or mostly the functional cost. What we have kind of said in terms of a full scale or standardize those percentage would be coming down. He is also absolutely right understanding, and we stand by it. Given in this quarter, what has played out basically is I mean, given -- if you look at the overall numbers, I mean, it's in that fourth quarter range, what you would have seen as well. And in that case, I mean the percentage stands there. I mean as the revenue would increase, there would be nonlinear change in this segment of cost, and hence, the percentage would come down. Given the scale what we are in line of first quarter, you would see a percentage similar to that adjusting just for inflation changes.

So let me just add to that. Thanks, Yogesh. Just adding to the we are investing, as you would know more highly areas like technology, both in IT and automation. We're also testing more in building out some of our warehousing, infrastructure in terms of the overall network. Those investments are not linear in nature. They are step-ups. So obviously, the step-up is kind of all is precluding the demand growth or volume growth. But as Yogesh mentioned, as the volume increase and comes back, there follows these actions. We do expect to be in the percentage side, which I indicated earlier on over the next 12 to 24 months from a planning perspective. In terms of warehousing space itself, I think what we have done this time has provided all of you a little bit more granularity, right? For most of our history, we have combined stock yards and the warehousing operations we've done for stores in line and fully managed warehouses in one bucket. Our strategic focus, as you're all aware, has been really around growing our own warehousing network. And in line with and kind of dealing low-value warehousing services [indiscernible] like stockyards. So in line with the strategy, you will see that not only this year -- this quarter alone, but for the last couple of years, we have been tapping that. As automotive volumes have come down, there has also been precipitated drive from our customers to kind of reduce those stockyard spaces. For long term, however, our overall warehousing space, which is both BTS, we spoke and our stores in line feed space continues to kind of grow. And that's where both revenue and yield improvement will come from. So from a long-term perspective, we expect that from a mix level, stockyards will continue to come down as a percentage of our mix, right? And that will both drive yield per square feet, revenue per square feet and overall revenues, which is something which we have hinted to before as well. So, I don't know if I answered your question.

Yes. Also, if I could squeeze in one more question. Also when I compare the revenue growth rate, again, sequentially for the half year, H1 '22 versus H2 FY '21 the [indiscernible] segment has degrown. So do you attribute that entire with effective demand last year? Or is it more -- something more to it, which I'm not looking over here?

I'm not sure how to make that. I think on H1 basis, Yogesh, you have to help me here, but I think H1 basis has also grown significantly right?

[indiscernible] basis.

Okay. Can you just come back to the question, right, okay. Can you just come back to the question?

Yes. So I meant -- I was comparing the revenue growth sequentially but on half yearly basis, basically H2 FY '21 versus H1 FY '22. So the SCM segment revenues have degrown by number. So I want to understand if that is entirely to the festive demand last year or there is more to it? If there is more to it, that's the reason for degrowth?

We'll just come back to you on that question. We need to pull out the data because that's not the way what I'm seeing, but just hang on we'll come back to that.

Ram, if I just add here to just clarify. So H1 of last year was INR 1,196 crores, which is INR 1,818 crores in H1 of this year. So this is the growth of almost 52%. However, H2 of last financial year, if you look at it to H1 of this year, definitely, there was a -- I mean, a festive peak of Q3, what you would have seen in the second half of the same would have played a role. However, growth what you see is in this first half versus last year in addition to disruptions, we've got a part compensated means added by new wins and additional businesses what we have signed up for.

The next question is from the line of Vikram Vilas Suryavanshi from Phillip Capital India Private Limited.

What was the growth in the freight forwarding and express business in this quarter? And is there any change in CapEx plan looking at the slight headwinds, will the execution of CapEx will slow down? So if you can highlight on CapEx plan and cash balance.

So Yogesh, why don't you give CapEx plan and balance first and I'll come back to the segment growth numbers and plans for those.

Vikram, on CapEx for this year, what we had kind of guided as we started the year itself, given the additional warehouse space, what we are adding is at an accelerated pace than what we have seen in the previous years would have a little bit higher CapEx. So what we were looking for is between INR 80 crores to INR 90 crores for this financial year. And right now, I mean, middle of the year, we still stay on track for that.

Okay. Vikram, your other question, freight forwarding growth year-on-year in Q2 of last year compared Q2 of this year was approximately 75%, right, in terms of year-on-year growth. And express growth was around 30-odd percent year-on-year, slightly above 30%.

Okay. So this freight forwarding at a very high growth maybe also because of these high grade rates? Or we have seen significant growth even in volume also?

It's a combination of 3 things. It is one, obviously, the overall increase in freight rates themselves, which have gone up quite significantly year-on-year as well. The second thing which has happened for us to drive growth is really the penetration in some markets as we continue right in the rest of our business. And that's particularly, I would say, around engineered products and pharma. And the third piece has been the launch of newer services like charters, which have helped us grow.

Understood, sir. And this execution of this 4 million square foot warehouse in particularly in Hyderabad [indiscernible] are on track and when we can see that to complete?

They are on track. I think if you -- we expect, as I said earlier, by Q2 of next year for us to be able to complete all that capacity. All the capacity in Q2 of next year.

[Operator Instructions] The next question is from the line of Prateek Kumar from Antique Stockbroking.

I have one question. So I wanted to ask that what has been scaling like company's margins. Like if we see PBT margin focusing on EBITDA margins because of major Ind AS impact, which has been seen there and probably that is also continuing to have impact on depreciation. So just focus on PBT margins. So that margins have come down from 4% in like a IP would like -- we had like 4% kind of margins in 2019 continuously slipping every quarter. And now except for that 1Q '21, the margins this quarter are like at all-time low. So what is particularly -- I mean we had a thought that because of better warehousing mix, better customer mix out of Mahindra, our margins will directionally improve. But margin seems to slip every quarter on a PBT basis. So can you highlight something on this?

Sure. So let me address that. I think if you look at it so I would say directionally, some of your observations are accurate. They are not -- they are lower than the peaks which we have had in the past. There are 2,3 factors in the quarter itself, Prateek, which have been impactful. And I already mentioned those in my comments. So one thing which has been there for us has been just the quarter-on-quarter increase in accruals, while that's mutated itself given the demand environment is pushing some of our larger segments. We're not able to see the pass-through benefit in the quarter which just went by. Now these increases remain fairly large so they can continue impact over 9 months. And therefore, those have been hard work to pass through in the middle of pandemic waves and so on. But we are not at a point that we pass through most of those. The second one has been that, as I said, in my comments as well, though we had -- in the second quarter each year is normally been we are preparing to launch many projects, especially in line with the festive season and being able to capitalize on that demand in the third quarter onwards. This year, because of the impact of wave 2 and the trailing impact of that, many of those projects got delayed, and we had to actually increase spend to get those capacities in line and alive, in line for the season, right? And that obviously impacted our in the quarter as well. And the third thing, which has been there is just a dip in automotive, the southern dip in automotive, especially in September, both in M&M and non-M&M segments. Actually, especially in the M&M side, it had small challenges in terms of transportation, logistics and optimization. On the non-M&M side, NPDs had a big impact. We have a higher share of warehousing and warehousing based services there. So NPDs actually had -- a large number of NPDs suddenly had a significant impact during the month. That aside, we actually on an underlying level continue to see traction in terms of the very issues you said playing out, Prateek, which is the segment itself playing out, right, and being positive. As 2021 was slightly different, the drop in automotive was very, very sharp. Automotive was 70%, 72% of our business at that time. So we had to do all work to refocus resources, rightsize, organizational direction and so on and there was transition costs in doing that. But right now, I think except for the 3 things which I said, we are generally in the right way, and I'm confident that in the coming quarters, we'll be able to see that recovery playing itself out. There will be some obvious impact of AS 116 because of the way the standard is, the cost charges are front loaded and that does impact earnings compared to the pre Ind As 116 model in the short term. But through the life cycle of the project in latter years, especially that actually something which comes back so it's really a timing issue. So I won't labor much on the impact of that, though it is there in the current -- during the financials in terms of period under review, but on continued basis that will normalize itself, right? The larger challenge has been the point I just elaborated on, Prateek. But in the coming quarters, and I'm all confident that we will basically get the profit recovery back in, right, especially on the back of now sustained momentum of revenue.

My second question is on active growth for 3Q. During the first peak of Internet sale at Amazon Flipkart, it seems the growth was slower than what I think we were expecting at around 20%, 25% versus a base growth of 60%. How are you seeing in terms of impacting for like logistics industry, like in the first month of festive sales?

So festive sales this year, so I would say there's kind of 2 things to look at. I think there's growth, I think growth is there and growth is robust. Is it in line with expectations or what I was expectation of anticipation, I think growth has been in the early part of the season more muted compared to what anticipation was. And I think both those statements basically are accurate. Now what I would -- now why is that happening? I think that's largely been driven by a couple of big factors there. I think one has been that in some categories like larger appliances, et cetera, there have also been supply chain issues. As a lot of electronics is cross-border in nature even today, and there have been challenges in terms of supply. So for that stance, across the industry have taken time to get filled, right? And that's been a challenge in terms of being able to capitalize on the full demand. The second thing, I think is pent-up demand this year in general has not been as strong as was anticipated. I think people are probably anticipating the same kind of pent-up demand, which was there last year. And that's kind of actually not played itself out. So from our perspective, I think what we have been seeing pretty consistently is that we are not focusing just on account expansion, but we're also focusing on category expansion. So we think that we are focusing on category expansion is critical to be able to build counter cyclicality to some of these kind of trends because they will happen. We're not going to have -- you are not going to hit the ball over the park every quarter and every season. So that's an important part of our strategic direction. But it's still very early in the quarter, right? And big part of the festive season is yet to come. So I do see how full our facilities are and what the programs are. So we have update that the latter part of the festive season will probably end up coming much better than the first part -- the first early part of the season. But definitely, we have the first early part where demand was most feeble. We had more table or plateau kind of volume trends rather than sharp peaks. But actually something, hopefully, we're all optimistic to get in the second part of the season.

Prateek, If I just add a point for a little bit more, I mean, since you quoted our IPO level performance at the start. I mean, we listed in November '17, which means '18 and from there till FY '20, if you look at each of the year, we had grown -- I mean, our profitability was higher than at the time when we -- at the PBT level at the time when we went for IPO. So it is, as Ram was explaining, F '20 and F '21, disruptions, which flew in our end markets as well as environment at large impacted and kind of reflected in the results. But I mean till 3 consecutive years, the numbers we did improve on and had stayed at that.

We have the next question from the line of Mukesh Saraf from Spark Capital.

Firstly, on the fuel price hikes that you wanted to pass through, just trying to understand, I mean, the general sense we had is the pass-throughs largely happen automatically. So is there just some change in the way the contracts have been structured? Or is it like a difference between how Mahindra and a non-Mahindra contract is structured? Can you just give us some sense on [indiscernible] of the entire pass-through?

So I mean, there's no difference. Like no material difference between the way customer-to-customer contracts are structured, Mukesh. As you know, any index pricing contract typically have figures in them, right? So the way it would work is if it's 100 -- if index base is 100, if it went up by x percent, it will trigger a price, right? Now typically what happens and very often, the pricing reset is done prospectively and not retrospectively, right? So typically, what happens, Mukesh, is that period -- if you look at fuel prices in India and look at it historically, we end up having a few short increases over a period of time and not a continuous booth moving upwards. So historically, what has happened is we see the sharp bump up, we kind of breach the trigger. And because we breached the trigger, we are able to put the price increases in fairly quickly and the increase is happening in a short windows of time. But you have a few spikes every year and then you do a reset on those spikes. What is a bigger challenge in this year has been just a part of the price increases warming itself out. And as it warms itself off in the window between those figures, you have to -- you do end up having to manage that window. Historically, we also on the buy side actually cost most of these triggers back on the buy side as well. And that's actually how we prove ourselves, Mukesh, right? However, when we do that, sometimes then the escalations are continuing, service levels tend to fall down, right? And because we also have contractual commitments in service, that came off in terms of optimizing the buy price versus ensuring that we maintain the service levels. And then just the continuing spikes have been an operating challenge there given the volatility in demand as well, right? So just mix of those factors [indiscernible]. Structurally, however, there is no change. In fact, there are more safeguards now, as I said. All our contracts do have, in almost all cases, back-to-back parameters to ensure that we are -- triggers are mirrored on the buy side and the sell side. And we do actually track it very closely, almost on a weekly basis given the environment we are in right now, right? But there's been a lot of blocking.

Got it. Got it. So basically, I mean, we are only -- by the end of October. So I mean by now or by the end of this quarter, I mean, if -- I mean, obviously, fuel prices assume flat, you should be able to pass through it entirely?

Yes. So you're right, Mukesh. As I mentioned in my opening comments that most of the times, it gets compensated through timing. It's a timing is a rather [indiscernible] COVID restrictions. So we have then compensated most of those already.

Got it. Got it. And secondly, on the space on the management, the stockyards have come down from 6.5 million to about 4 million square feet. Have we already seen the revenue impact of that in the second quarter? Or does this happen towards the end of the quarter and hence that is actually going to come more from the third quarter?

No, I would say we have seen most of the revenue impact. Obviously, it's a lot of space. We are shutting them over a period of time, Mukesh, but I think most of that has been baked in. Stockyards generally tend to be -- also be a very low revenue yield, right? It's just a large parking lot. It's always [indiscernible] it ends up being cheaper real estate as well.

Sure. Understood. And just one bit, when I look at the non-Mahindra SCM revenue, I see that the transportation within that has probably grown at a slightly faster pace than the warehousing revenue. So -- about 30% versus 25%. Is it that this whole Express business is included in this non-Mahindra transportation? Is that one of the reasons?

What you see there, of course, is pure transportation kind of service lines, which end up being your freight forwarding, express and [indiscernible] last-mile delivery, especially freight forwarding and last-mile tend to actually be a fairly kind of lion's share of wallet to our businesses. So those service lines actually accentuate the gap. So that's one. The second one, I think what you will see, Mukesh, is in general because we carry MGs in all our warehousing-based solutions and services, typically, what happens is that when things go down like you have a big year, big quarter because of wave is down, et cetera. When wave 1 or wave 2 happens, warehouse near ensures much lesser than transportation as well. So when bounce back happens, the bounce back should actually basically mirrors the rate trends.

Right, right, right. Understood that. Because you mentioned the [indiscernible] I noticed, I mean, while the revenue growth is very strong, the margins have come off. So again, is there just a pass-through element which should kind of normalize.

No, I think just to kind of -- because I think one of the somebody on the earlier or I didn't know person has raised this question. And obviously, the market where we have seen some part of our revenue growth is just because of the secular inflation, which has been very sharp in dollar margin, in rupee margin on index revenue base turns out to be smaller percent. Just actually in increasing environment, it has been -- our teams optimized how to percentage margins with clients because your customer is also under significant stress because of inflation.

The next question from the line [indiscernible] from [indiscernible] Capital.

Am I audible?

Yes, you are audible. Please carry on.

I had a few quick questions. In your annual report, you have guided for a 20 million square feet warehousing addition over the next 36 months. I just wanted to check first of all if that guidance is still intact.

I think I clarified this I clarified this I think in the earnings call of the fourth quarter for the quarter -- for the fourth quarter of F '21 that's like -- that 20 million is a 5-year view and an aspiration we have in line with that broader INR 10,000 crore aspiration, right? What was important was that was a figure which we shared in that review that we have contracted 4-plus million already, which is under construction. And as I said earlier in this call as well as well on target.

Got it. Secondly, could you please help me with the split between assets and other PPA items for -- as it stands at the end of the first half?

Yogesh, can you take that, please?

So I was looking for ...

If you can repeat that question, I will request Yogesh to respond to it.

So you're looking for a difference in depreciation for 116 and fixed assets?

So basically, you clubbed your PP&E assets and your write-ups as you reported them together, it was at about INR 409 crores at the end of the first half. I just wanted to understand the split between that, like in a basis ROU versus the other items in PP&E.

So on net block without ROU as of September 30 would be INR 165 crores.

Got it. Got it. Last question on my side. So I was doing a simple calc, I was trying to figure out in terms of lease expense that you're seeing, basically, the item you're booking on cash flow, lease expense per square feet. This has been actually going up over the last few years. It was INR 3.5 crores in 2020, then I see INR 4 crores in 2021. And in the first half, it has breached INR 5 crores. So I understand that when your mix is changing towards a grade A stockyard, logically, that should go up. What I wanted to understand is the entire increase in this first half attributable to the change in mix? Or are the rental rates going up in the incremental capacities that you added?

Yogesh, you want to take that?

Sure. So yes. So the newer warehouses, I mean, if you see the warehouse split itself or a total space, I mean, you did see that stockyards did come down, which is a lower rental space. And relatively, the space which we have added almost 1.3 million in the quarter on a gross basis would be standard warehouse space itself. So the rental for them is, I mean, differentiated and that would be a standard commercial grade usage rental cost. And from that perspective, the blended rental per square feet comes up. So that from that perspective, yes. The absolute amount which is increasing is just reflective of higher absolute space, which we are signing up for.

Got it. So I was more speaking in terms of the per square lease, which has also gone up compared to last year of INR 4 crores versus about INR 5 crores in the first half annualized basis.

So on a per square feet like I earlier explained, the fact that stockyard sale decrease also would give you an increase on per square feet becoming higher.

The next question is from the line of Mr. Mayur from Wealth Managers.

Am I audible?

Yes, Mayur, you are audible.

So actually, I don't know how much you'll be able to add more because I understand you've given some explanation on that. But honestly, let me be a little candid here. The satisfaction on the margins front remains far from understanding because -- I just a little longish comment over here from my side so that you can add more if possible. Over the last 2 years, you've been adding that integrated solutions, warehousing increasing mix, increasing mix of e-commerce, pharma, other sectors, further in terms of the non-Mahindra part. All of this, when we look at all those bricks, all those bricks have been moving in the right direction for us as far as the narrative is concerned, also as far as the numbers are concerned. If you look at the transportation growth in quarter, and if we remove the 75% year-on-year growth of the freight forwarding within that, the core transportation where the fuel actually hits you would be relatively lower. And yet the warehousing has increased by 27%, 28%. Still, when we look at -- as the point was rightly mentioned, the magnitude of margin erosion and not only for this 1 quarter, but over the last 2 years, which has been there from -- we are at a PAT margin of 1%. As an investor, this gives us a very vulnerable situation and kind of makes us very scary about the situation that why is that narrative not playing out in numbers quarter after quarter despite the top line growth being in place. So it will be great if you know -- and also the fact that is it that in reality, the auto or the M&M business has been more profitable to us compared to the others? Is there a -- is that the kind of situation because when we look at 5 years down the line, let me very honest, what I'm trying to ask is can we -- at INR 10,000 crores, I understand it's an aspiration and not a guidance. But at a INR 10,000 crore revenue, can we make a INR 300 crore PAT? That is a simple question, which we are looking for in terms of understanding because unless that happens, a lot of things become difficult for long-term investors.

Mayur, let me add a couple of more points.

Yogesh, sorry, go ahead.

So Mayur, if you look at what has played out, obviously, quarter-on-quarter, the scenario has been fast evolving. There are differences to be observed, which are a different line items. Just to draw your attention to our P&L. In first half of this financial year, if you look at it. On the other income line, which we have not spoken at all in any of our communication until now, we are lower by INR 7 crores, which was one-off, which we had got last year has got offset with business profits generated. In addition to that, if you also see the Ind AS method of accounting of leases, it's an increased leases what we have signed up for in first half of FY '22. That impact on PBT because of Ind AS method of accounting. If I would have accounted based on AS 17, my PBT would have been higher by INR 4.5 crores. So I mean, from that perspective, there are different reasons other than environmental, which obviously, Ram has detailed earlier, and you absolutely are aware since we all are in the same environment, plus you have tracked them. [indiscernible] is something which kind of fix which we are doing from a solutions or integrated logistics or more stickier businesses has a -- I mean you did mention 5-year plan, INR 10,000 crore aspiration. I mean, everything -- I mean, obviously, acts -- our activities are directed obviously, from our end more towards our vision per se. And those fixes which we the businesses, multiyear integrated logistics businesses are to contribute towards that. What you have seen right now is obviously -- I mean, we obviously are explaining our quarter numbers, and we have done that without even mentioning that in the quarter, there is a INR 4 crore reduction in other income itself, which was a onetime last year.

Yogesh, are we saying that because of lease accounting and because of hyper fast growth, which we are witnessing the upfronting, which happens because of the, obviously, accounting standard will continue to remain there and will also impact the margins even they may increase, but it may increase at a slower pace or that impact will remain there? Is that the point also which needs to be understood?

No.

Yogesh, go ahead then I'll comment.

So just one point. What you see here upfronting right now is a growth from a lower base. Now these new facilities, what we have added in last 1 year, I mean, start becoming -- I mean lower cost -- I mean, so it's reducing amount cases, right? So on a linear basis, I mean, if it's a 5-year thing, first 2 years, I account higher costs. The last 2 years, I account lower cost. So that gets offset with newer facilities get added in the whole older facilities of that volume being there. So you would not see ever impacting thing on P&L. But as we start this particular thing at one time, which is what's playing out right now. Ram?

First of all, I'm glad you asked the question because I'm sure in the minds of several people. And it is good to actually have a direct articulation. Let me responded as Yogesh has already spoken about it. But just 2 points. First, I think until the fourth quarter of '20, we did actually show quarter-on-quarter comparable margin improvements in general in terms of gross margin is the trend line. So that's one thing which I would just first call out. The second thing I think is that in the last 2 years, there has been a lot of resizing of the business. And as we kind of resize the business, and you're right that many of our building blocks we're putting in are directionally the ones we think will take us to an end state which we're optimistic about and confident about. I think there is a transition period -- transition element there. And that transition element is in 2 things, right? First of all, we've obviously seen a lot of things moving up and down in terms of external environment. The volumes came down quite dramatically, which obviously has a significant impact on margins. We are now recovering right now, and we are putting investment in technology, which are a bit ahead of the curve. And therefore, we are probably a bit nonlinear to the long term to the underlying earnings potential. A good example of that putting capacity as demand is the warehouse additions which we are doing. We are putting a significant amount of addition right now because we are confident about the earnings potential as not just in terms of stickiness from a long-term perspective, but more importantly in terms of strategic value proposition to our customers. And in terms of the fact that it is a creditor financial. Now the third thing, which I would call out, right now more short-term thing, right, which is a question you add around fuel. So if you look at the quarter we just went by, right, our transportation income, which is excluding the freight forwarding business was around INR 510 crores. right? And in that, let's say, or directly to export to your point, right? So we see roughly a 5% to 6% increase in fuel costs between June and September in almost all our operating markets. And of course, index differently on average of 5% to 6% kind of growth number over 4 months which if you take it is actually almost INR 30 crores, right, a substantial and large amount of that has be passed through, but it is still very relevant and impactful okay? There is a timing issue, which is listed there. But that impact will start coming down only we balance it with more and more with warehousing based services. That's the direction we're already on precisely for this, right? But in the short term, given that we are still 70%-ish warehousing and transportation business on a non-Mahindra side alone. On the Mahindra side, like is even higher, right? There is a larger enduring impact in terms of the transportation, the fuel increases. So they are material. The other thing, which is the period, in fact, is the accounting standard change. We don't see it -- I don't like to explain that because I think beyond it is we'll be adding capacity from an enduring benefit perspective. We are putting -- somebody asked this question earlier on saying that we're looking at 20 million square feet over 5 years. So we are putting a substantial of that, obviously, upfront adding 5 million, 5 million square feet of capacity now, right? And therefore going forward, we think depreciation will be between the current curve even get more benefit at a basket level, right? And therefore -- and so what we see going forward is that deadline will start maturing, but the revenue benefits will start coming in today because of the large sudden spike right, it is actually impacting us because a sudden onetime spike. As we're coming down to future years, we'll be adding eventually add 3, 3.5 million square feet a year, it will still be less than what we're adding right now. So the AS 116 crores starts maturing, as Yogesh said, we expect the that line to actually move right at a much flatter level compared to the revenue line, right? Now from a going forward perspective, I close my commitments to both direct questions. I think you could get to INR 10,000 crores, how will we get -- would we be able to get to INR 300 crores? I think there are 2 ways to do that and to the view. And if you look at it saying that from INR 3,500 to INR 4,000 crores, we add INR 6,000 crores more of revenue even at 9.5%, 9.3% less the gross margin, right? So you are going to expect to get a substantial amount of gross margin increase. And we don't expect our expenses to actually be going up in line with that. And as I said earlier on, the debt curve should start flattening out. So if the mathematically works out, I said, yes. I will say INR 300 crores is definitely in the ballpark. We still have some margin in the in terms of gross margin, probably 30, 40 basis points. But with the cost management efforts we have, the volume has to play itself out. That's why I think the volume momentum is so important. In an asset-light business, and this is something that all of you have pointed out over the last 2 years here, that slightly over 2 years here, get back with a new momentum. And that's what we are trying to consolidate on right now.

That was quite detailed. One is that -- so now, as analysts and as investors also, we would continue to see PBT margins as the key part. I understand company look at gross margins and other levers of margin because are unable to -- from outside, we are unable to gauge the impact of Ind As separately, depreciation separately, interest separately. So we would appreciate if the focus remains on PBT because at the end of the day, it's also important. So because we don't understand what goes into gross margins, clearly, because if rent is categorized they're not at because there's a substantial increase there and yet the gross margin show increases. So we will remain focused on PBT. I understand the explanation which you gave.

I do appreciate the question. I'm glad that you asked.

Just one thing. Ram, one thing. We are seeing a lot of competition increasing actually focus on multimodel in real sense in terms of rail and other things. Where are we on that side in terms of multimodel? And where are we in terms of composition today outside the road transport, if you can have any color on that? And how does that shape up for us? That will be my last.

Yes. So I think -- so multimodal, I think we addressed this. I think [indiscernible] as well. But multimode is not to all problems, right? So multimodal is important at a national logistics mix level, but it really starts breaking even at about 1,000 kilometers, right? So below 1,000 kilometers, multimodal is not actually a very viable option. So if you look at the parts of our businesses, like last mile delivery, look at distribution, for example, those are places the multimodal actually doesn't play out. Multimodal plays out best in long-distance line haul, right, which is at least 800 kilometer, 1,000 kilometers or more if we have the right loading patterns right? Now on that space, which is where a lot of our car carrier movement actually -- car movements -- outbound car movements happen, right, as well as we used to do some commodities there, but we have been exiting in on our commodity focus. If you look at the larger volume traffic, which is about 1,000 kilometers, we today have some 13% of our volume in that part of our business, which grows by, right? A lot of that goes with NMG, which is a government-provided system as opposed to the FTU, which is more privately owned carriers, rigs. But 13% to 17% wobbles around every quarter based on how the automotive industry is moving, how their demand patterns are, but between 13% to 17%,like 15% on average is what we are in the 1,000 plus kilometer market, right, with consolidated load. So in the pace that it works, we are actually reasonable in terms of our multi-modal.

The next question from the line of [indiscernible] from Financial Limited.

In the interest of time, we'll move to the next question and then come back.

Sir, that was the last question. We would like to hand the conference over to the management for any closing comments now.

All right. So thank you all for a very engaging discussion, right? And I hope we were able to answer all your questions satisfactorily. However, should you need any further classification or you know more about the company, please feel free to contact our team or our investor relations advisers. Thank you all, once again for taking the time to join us on the call. On behalf of Mahindra Logistics and all our extended family, I wish you and your family and colleagues a very happy festive season. I wish you a very Happy Diwali, and thank you all for joining us today. Thank you.

Thank you. 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. Thank you.