Mahindra Logistics Limited (MAHLOG) Earnings Call Transcript & Summary

Good evening, everyone, and thank you for joining us on the Mahindra Logistics Limited Q3 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 now invite Ram, Managing Director and CEO of Mahindra Logistics Limited, to give his opening remarks. Thank you, and over to you, sir.

Thank you, Shogun, and good evening, everyone. I hope you and your loved ones and colleagues are doing well and safe. as we are in the midst of Wave 3. I do hope you all have had a chance to review our results and presentation, which are available on the stock exchanges and our own company's website. Today, I will provide a quick overview of the external environment in the quarter gone by in terms of our end markets and overall developments in logistics industry. We'll follow that as a commentary on our performance right in our financials, right? Given some of the margin challenges we had, we'll dwell a little bit more on that, and then we'll also cover a broad update on strategy and some key initiatives across the company, right? So let me begin just with the external environment. Overall demand for logistics services and solutions continues to see an improving environment and momentum as companies focus on responding to supply and demand volatility with a higher focus on resilience. We continue to see a strong shift towards multimode moment, especially for coastal shipping and green shipping in commodities in the automotive sector. The drive towards network expansion and omnichannel fulfillment is resulting in greater traction in fulfillment logistics, last mile delivery and an increased demand for integrated solutions. Our global supply chain remain pretty fragile with a bit shortages in containers, light shortages in sea movement, ocean movement and air movement as we all see some impact of geopolitical factors both in terms of demand and otherwise. These factors have created a lot of pressure on our customers' operations as they try to manage a globally disaggregated supply chain in most industries. In these conditions, technology remains a key lever for driving increased efficiency and customer experience across the value chain. Looking at our specific markets and how they are performing. Let me begin with automotive. As we saw in the quarter ending September '21, the semiconductor chip shortage continues to endure and a structural improvement is likely to take place only in a few quarters from now. Several factors like OEM price hikes, high fuel prices have added to the issues of chip shortages and demand has been subdued. During the quarter, while there was a strong growth in CV sales, these have, in some cases, been driven from inventory. Our demand for domestic two-wheelers also remain subdued. Our business in auto, both M&M and non-M&M, was impacted by the slowdown, given lower volumes compared to last year. The volatility in volumes also had some impact on gain sharing programs we have with our customers. From an outlook perspective, we expect to continue to see volatility here with improvements coming through will be in the latter half of the next financial year. Now moving on to Farm and Agro. The tractor and Ag market has seen a slowdown in the last quarter and there continues to be an overhang due to significant base effects and unseasonal rains, the domestic tractor sector has had a year-over-year decline. This was true for us also with the volume drop, more precipitated in outbound movement due to lower sales, while our customers continue to manufacture tractors given the upcoming season. Our E-commerce, which is -- the last quarter marked the most important seasonal peak for the quarter segment. Overall, festive demand was fairly moderate. I mean, in fact, it was more pronounced for specific categories like electronics and large appliances. While October showed positive traction, November was marginal and December was pretty muted owing to off-season sales for ACs, fans and air coolers. While some categories like dishwashers, laptops and microwaves continue to witness steady growth, the high base of last year is catching up in those categories as well. Metros and tier 1 cities saw good demand in the peak, while rural demand was more subdued compared to last year. Multiple factors seem to have contributed to kind of a moderation of demand, including the reopening of physical distribution systems and stores. Wave 2 impact on consumer sentiment and larger supply strain issues and large electronics due to the semiconductor problems and the whiplash, which that has caused across the world. Moving to consumer pharma, consumer pharma FMCG and electronic durables and so on. This is a -- we saw positive momentum here in addition to -- as I said earlier on, there was an opening up of markets, which I think has helped. That said, in addition to high base rural demand was affected by inflation in Q3 '22, rising price on farm inputs have been greater than those on output for having some effect on farmer earnings. We have seen growth in modern trade and e-commerce in these markets. Our discretionary categories also saw significant growth, aided by improved mobility, increased footfall on premises, a larger number of social events and of course, a seasonal uptick in bedding demand. Our own volumes showed moderate growth here driven by these factors with more volumes really coming in the first mile and the last -- a mid mile. This was also the first full quarter of the Bajaj project in steady state form. And despite external -- these external factors, we saw a strong revenue growth flow through coming on account of Bajaj, in addition to the rest of our accounts. Moving on to Enterprise Mobility. Due to the continuation of work from home policies and additional restrictions imposed by state governments, the Enterprise Mobility segment, especially the BFSI based customers, that they remain pretty subdued in terms of demand. We have been able to repivot demand towards other segments like e-commerce, right, and other managed services markets. We expect Enterprise Mobility to remain under pressure, but we made a conscious effort, as I said, to broaden the customer portfolio, and that has shown good traction in the quarter gone by. Lastly, let me comment a bit on international freight forwarding or our Freight Forwarding subsidiary. Global supply chains remained pretty overheated as I mentioned earlier, with shortages of containers and liner capacity issues. Due to these factors, there are shortage, there is shorter lead inflation in pricing across the board in air and ocean products. The recovery in exports is aiming a broader growth pattern with an uptick across all categories. Imports pressure remained due to the global supply chain issues, which we talked about earlier. Overall, the segment is benefiting from a positive pricing environment, though margins do remain under pressure. Now we had -- we continue to show strong growth here, and our focus here remains to diversify our offering base and balance the right trade loans and work with the right enterprise customers. Now moving on to the operational end of the business. Despite some of the challenges from a demand perspective, we continue to see positive traction from a revenue perspective in almost all our segments. The Auto business was, of course, impacted along with the Farm segment, right, given the broader macros there, there has been a resultant drop in revenue from customers, including M&M. In e-commerce, consumer Freight Forwarding, all these segments had strong revenue growth. We continue to obviously -- continue to demonstrate quarter-on-quarter traction in these segments. Overall revenue in these segments grew by 24% on the SCM side right across the board, and we did do have an unfavorable impact on the non-M&M auto piece, as I mentioned earlier. Our Warehousing and Solutions revenue grew by upwards of 37%, driven by a continued focus in this space despite some of the demand challenges we spoke about. We have won several new accounts during the quarter, including a [indiscernible] distribution fulfillment operation for a big FMCG company in Western India, distribution fulfillment in Eastern India for a leading government manufacturer, inbound to manufacturing and distribution for an EV 2 Wheeler OEM and we are expanding in the retail space with a multi-brand with one of India's largest multi-brand retail chains. These projects will go live in the coming months and continue to underline our strategic focus on solutions. Well, the demand side was fairly -- showed positive traction. Operationally, this was a challenging quarter in some other dimensions. Muted demand, especially in November and December in e-commerce affected our volume flow-through in many of our sites. This has impacted operational efficiency and the leverage we typically gain in earnings from the same. From a medium-term perspective, this additional capacity should see volume recovery. The peak was also characterized by challenges in terms of manpower availability and cost challenges in several markets and man power due to COVID and other factors. Combined with a sharp drop in volumes, there was a significant result additional manpower during the quarter. And while we did reduce the man power through the quarter, this did result in additional manpower costs. We have taken efforts to address this, but there was a period impact of the same. On the Bajaj account, we have now completed all of the transition of the account, and we now have deployed a technology-driven supply model across the entire customer base. As we had pointed out earlier that once we complete transition, there will be a period of optimization of the supply chain, the way the contract is structured. With the post transition, we have a significant optimization shared across the supply chain. And during this period, we typically have higher costs, which we saw obviously in the quarter just gone by. In addition, we also saw an impact as optimization was delayed due to multiple factors, including local disruptions and demand patterns, which our customers had. But we are now focused on accelerating the same, and we expect that the optimization has required the schedule to take 3 to 6 months will be done on time. In addition to lower volumes from Auto and Farm, we did see higher volatility. And as I mentioned earlier, this resulted in lower gain sharing on some contracts, though margin will be had some impact of these factors. The above factors did obviously put significant -- result in significant marketing pressure during the quarter due to cost escalations. We have remained focused on both short-term and medium-term actions around the same. And we do believe that from a broader term perspective, the capacity and the focus we are putting that will drive appropriate leverage for us, given that we are now seeing strong volume movement on a quarter-on-quarter basis. In addition to that, I also want to share some other operational highlights for the quarter. During the quarter, we announced, of course, the Luhari warehousing operation, which totally is 1.4 million square feet, and India is -- India's largest warehousing facility in a single location, among any 3 PLs. The first 0.5 million square feet is already operational, while the other 2 warehouses are now under construction, and we expect in Q4 F '22 and Q2 F '23 delivery for each of those blocks. The new facilities will play a pivotal role in our long-term vision of creating a pan-India network of multi-client facilities, which should manage the fulfillment distribution of our clients' operations. Over 2,500 employees and third-party sources will be employed at peak in the site. The facility, like all our newer facilities, are built to meet our broader sustainability standards, including regulations for liquid discharge management, renewable energy, base management and has significant investment in state-of-the-art construction technologies. We've been pleased to actually have the partnership with LOGOS to help us deliver the site. During the quarter, we were also recognized with our Great Place to Work certification. This affirmation continues to underline our investments in creating a diverse and inclusive culture at MLL, where employees can participate in creating a shared future. Our technology investments continued during the quarter. We went live in the quarter with a new platform for freight-forwarding, a new warehouse management system and upgrades to our mobility and transport management platforms. During the quarter, EDEL successfully completed 1 year of operations. During this period, we have operated now nearly 5 million clean kilometers across 14 cities in India. With the fleet, which is slowly progressing to several vehicles, an uptime of over 90%. We are well positioned to provide customers last-mile delivery solutions. We have, in the past, announced partnerships with Flipkart and Amazon to help work with them on expanding EV-based services, and we continue to expand those relationships. During -- in November, we also announced the acquisition of Meru by MLL, a collection of [ 4 ] companies. With this acquisition, we will add airport right handling and on-call services to our Enterprise Mobility services offerings. Meru and Allied's combined expertise will allow us to offer better B2B and B2C services, and gain better share of all enterprise customers while delivering on a broader promise of safety, customer satisfaction and long-term sustainability. As part of that transaction, we also will be adding 250 EVs to our fleet. We expect and we are continuing to obviously see a significant recovery in the airport business across the board. But we also expect synergies to come in as we integrate the enterprise end of both the businesses. which will drive better asset utilization, greater supplier cost leverage and improved cost management within our business. Our integration teams will launch those synergy initiatives post-closing of the transaction. Now let me share the financial performance of the quarter ended 31st December 2021, revenue for Q3 -- 2022, sorry. Revenue for Q3 F '22 increased by 7% to INR 1,118 crores as compared to the same quarter in the last year. Our gross margin for Q3 FY '22 stood at 8.9%, compared to 9.9% in the prior year's corresponding quarter. EBITDA for the quarter stood at INR 50 crores compared to INR 55 crores last year. And as a result of that, PBT was down 71% from INR 25 crores to INR 7 crores and PAT was down by 72% from INR 5 crore -- to INR 5 crores in the quarter. PAT margin stood at 0.5%. Proportion of revenue from the Mahindra Group now comprised 44% in Q3 FY '22 compared to 48% last year. If I look at segment performance, revenue from supply chain, the supply chain management segment increased by 6% to INR 1,075 crores. The Enterprise Mobility segment underlying uptick in revenues and growth there. Overall revenue there was up 16%, compared to last year to INR 43 crores. Revenue from supply chain management contributed 96% and the mobility business comprised 4% of our total revenues. Our non-M&M SCM business grew from INR 501 crores to INR 590 crores, an overall growth of 18%, right? Underlying that, of course, we did have a decline in the auto business, but offset by a 24% overall growth in e-commerce, consumer and other businesses. Our warehousing and value-added services for the non-M&M SCM business grew from INR 164 crores in Q3 FY '21 to INR 225 crores in the current quarter, registering a growth of 37%. Share of warehousing and value-added services in non-M&M SCM, has reached 38% compared to 33% in the same quarter last year. Obviously, we do recognize that while the revenue performance, as I said, has been -- we feel has been positive. We continue to see traction there. right? And the revenue profile also lines up to our broader strategy of driving integrated solutions. During the quarter, we obviously did see margin impacts due to the factors we outlined earlier. As we reposition the core 3PL business towards integrated solutions, we have seen lower volumes in this quarter than what we had set up the quarter for and lower flow-through impacted leverage and obviously compounded higher man power costs. In addition, the Bajaj account had an impact as we have a time lag between transition and optimization, which we have discussed earlier. These collectively are the primary reasons for the margin pressure which we saw this quarter in Warehousing and Solutions. Our Transportation margins have remained consistent, which includes the business from M&M. Overall, across all verticals, we continue to witness strong revenue traction, a continued story now for the last few quarters. We remain upbeat on the new opportunities that we have embarked on with some of the recent client acquisitions. And obviously, we are very focused on driving the efficiency in our operations to be able to drive earnings back to our historical trend line. With that, I thank you for your attention, and we'll open up the floor to questions.

We will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Kishore from Axis Capital.

This is Sumit Kishore from Axis. My first question is Warehousing and Solutions business grew almost 35% year-on-year, even the non-auto business saw a 24% growth. Just want to understand -- how should we look at the scope for operating leverage led margin improvement in your business model? And on a relative basis, would be margin pressures have been higher in, say, Transportation, which saw slight dip and in the Auto business, which saw a 6% decline?

Yes. Sumit, do you have -- is that -- do you just have one question? If you have another one, you can [indiscernible] .

Yes, the second question is while you have touched upon it, but we've seen the COVID impact spill over into this quarter. In fact, it was more severe. So would the seasonal man power cost that you talked about is something to be worried about in the fourth quarter as well. Could you also elaborate on the start-up costs for new projects that have driven margin pressure? And basically, one tries to disaggregate this 110 basis point of gross margin dip in SCM. How much is really the more prominent one. Is it freight cost? Is it the start-up cost or the seasonal man power cost? Or is it just spread over all these factors?

So let me kind of answer that. And I think in some ways all those questions are related. So I'll give you one answer which covers at all, right? So first of all, I think if you look at the concept of operating leverage. Typically, what happens, I think we mentioned earlier, we signed most of our solutions and warehousing [indiscernible] services contracts with a minimum guaranteed volume and there is a volume flow-through, which typically works, which has worked still, right? And as we gain more volume, we obviously see greater leverage on earnings because that volume essentially absorbs all the operating costs, right, in terms of -- or most of the costs in terms of facilities, that something which is more fixed in nature. So obviously, this quarter, we have been building larger facilities as we look at further growth and further volume flow-through, through our facilities. But this quarter, obviously, volume turned out to be lesser than what we expected and it was at the bottom end of that band. Because it was the bottom end of that band, Sumit, we obviously were not able to get the kind of returns we would typically generate, right? While revenue was overall incrementally, I think, favorable and showed traction. It was clearly lower than what we're expecting, right? We had set up our operations for higher levels. So revenue did come at a lower level of the band, and we have designed and put up many of these fulfillment centers and distribution centers is obviously -- was obviously to take more volume throughput. And therefore, we saw that impact coming in, right? Is [indiscernible] major. In terms of man power cost, I think man power costs were really -- 2 parts to the manpower cost situation. And I think that will answer partially your other question as well. So part of it was the inflation in man power cost, which we largely saw in some regions in the south, right? As post wave 2, we didn't see migrant workforce coming back and therefore, we had to have significant shortages, right? And that created inflation in costs. The second thing obviously was the volume tailed off pretty quickly. We don't -- we typically in line with our corporate philosophy your time stamp temporary workforce contracts for minimum duration of time. But volumes tailed off much faster, and therefore, we had standard man power capacity for periods of time. Now we obviously hired a large number of people during the peak, right? I mean this year, we went up to clearly 13,000, 14,000 people, Sumit. So that actually ends up being fairly material even if you end up having a 1-month lag or you're going to have several weeks of standard capacity actually becomes quite impactful to us. So as you look forward, I think the -- we have obviously your mark, your cut down and retune some of those man power assumptions in our business and also [ could ] work harder on productivity. So I think we will not see the excess capacity issue which we saw last quarter, but we will obviously see inflation patterns based on how COVID pans out. I don't have a -- I don't -- I can't clearly say that we will or we won't see it completely, Sumit, given that these are [indiscernible] manpower. But what I can say is as we stand towards the end of Jan, we have shown strong -- shown positive traction there during the [ Republic Day ], both in terms of cost per person and the way capacity utilization has worked itself, right? From an overall margin perspective, I think at your question, I think our Transportation business was largely stable. I think last quarter, we had mentioned that we had some flow-through from a timing perspective on fuel cost increases, all that, as we mentioned in the last earnings call, has actually sorted itself out. I think transportation business is fairly stable from a margin profile perspective. Because the Warehousing and Solutions business, which is what is supposed to obviously is a richer part of our business. right? And what we expect to obviously drive margins was impacted by these factors. I think you also remarked on the start-up costs, I think most we had -- we do have some level of start-up costs every quarter. I think a large part of the start-up cost this year -- this quarter was really -- it was really the cost around the optimization of the Bajaj contract, right? So that's a large pan-India contract. We are doing millions of packages on an annualized basis, right? And we transitioned the entire network over the last couple of quarters. And then we have more than a quarter, may be 1 and 2 quarters have we optimized the entire network as it deployed our technology to optimize transportation lanes, optimization, transportation systems. And we also drive productivity in showing a large number of warehouses and FCs across the country, right? So we had always planned to have a quarter to 2 of optimization there and that's something which is showing up in the numbers this quarter, right? As we stand, we don't expect that window to overspill, right? It will probably go on 2 parts of the fourth quarter, but we expect to basically be able to [ of finish ] that optimization on plan or a little bit ahead of time. If I had to break this all up into how -- what is the contribution of those in terms of overall kind of margins, I would say that we've had probably a 60-40, 60% of it was really around the peak-related issues, both in terms of operating leverage and higher man power costs and 35% to 40% was because of new project start-up costs, primarily being Bajaj. I hope Sumit that answered your question.

Yes, sure. That was very comprehensive. And just to understand your P&L better. The depreciation increased quarter-on-quarter and year-on-year as well. So what was the CapEx in the 9 month FY '22 period? And what are you spending this fiscal and next fiscal probably?

I think Sumit -- I think I'll ask Yogesh to answer the details, but I think what we have said earlier on as well, obviously, that debt line increase includes the right-to-use assets. And as we kind of expand our warehousing facilities that obviously grows in line with that. And that's why the margin enhancement on our Warehousing & Solutions business, which have generally delivered is critical for us. But Yogesh, can you please chip in with the specific numbers? And then we can -- then Sumit move on to the next person in the queue.

Sure. Sumit, specifically to CapEx per se and our spend up to December would have been around INR 70 crores. I mean if you would recall, for the year, we had kind of indicated our spend to be between INR 80 crores to INR 85 crores range. So that kind of holds good. I mean up to December, we would have incurred CapEx of INR 70 crores this year. Last year as well, we had incurred a CapEx close to, I mean, INR 85 crores full year CapEx, it was and the increased depreciation, obviously, is a factor of last year's CapEx [indiscernible] over the year getting amortized as well as what we would have done [indiscernible] . In addition to it, the depletion amortization, as Ram explained also covers the lease cost, which gets routed through that account in the accounting structure.

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

Sir, your non-Mahindra warehousing revenues have increased 34% quarter-on-quarter, while the underlying space has not increased. So just wanted to understand how much of this growth is driven by the Bajaj Electricals contract? And how much is driven by the Flex warehousing solution that you generally do right in this festive season? So -- and also if you can highlight like what are the typical margins you will see in the Bajaj Electricals contract, given that integrated contract the margins should be generally higher than the typical prefill contract. Is my understanding correct, sir?

Okay. No, let me just obviously comment on both of those, right? So first of all, I think when you look at the -- so our warehousing has not exactly been flat quarter-on-quarter. Typically, what happens, as you know, is we take the end of quarter warehousing stamp -- date stamp [indiscernible] end of the quarter. And therefore, obviously, all the warehousing came through by September 30, but it was not actually operational fully during July to September. Okay? So obviously, that's something -- it isn't all kind of [indiscernible]. So effective warehousing -- use to utilize warehousing space did go up during the quarter because of the time stamping of that. Now to your broader question, in that INR 225 crores jump, which was a 37% jump. How much of that was because of other normal BAU business, not just Bajaj, business as usual volume versus what was it because of -- specifically because of the Flex accounts, I would say probably right, 70%-30%. 70% of that growth is probably has been our underlying volume growth from a BAU perspective and 30% of it would have probably 25-odd percent of it would have been because of Flex, right? And obviously, we were hoping it could be even higher, to be honest, because the commentary, I mean, as you have seen the commentary I made earlier, volumes did come in short of what we had planned for. So I hope that answers the question. I think the -- Yogesh anything you would like to add there?

No, no. That's correct. It's about that 30-70.

Got it. And sir, a typical margin profile for this Flex solution that you provide and also about the Bajaj Electrical contracts?

Sure, sure. Sure. I'm sorry, I missed that question. So I think Flex is a function of multiple factors. But obviously, our margins, if the volumes do come in as we planned, the margins tend to be in line with our general warehousing contracts, right? What we generally do is -- on the back of that flex, we normally also end up picking up your Transportation business, which -- and so it kind of be integrated the benefit that's coming. On the Bajaj account, I think what we have -- Bajaj accounts like all our integrated solutions businesses is a blend of warehousing and transportation, right? At peak, we expect to earn margins which are in line or slightly north of our average provides, right? Obviously, that is curve, right? So the way that kind of an account or is it for really larger projects happen as you start off and then you have a dip, right, and you carry a certainly -- you have a carrying costly optimize the supply chain and then you actually start margins ticking in. peak margins obviously tend to be higher than the average, right? And therefore, at that point, we should see higher than typical warehousing and solutions margins. right?

Got it. Got it. Yes. Sir, second question is, I just wanted to understand your thought process on the acquisition strategy. Recently, you acquired Meru Cabs from your group company, right? So now going forward, like will we wait for 1 year or so? Or we are still looking at acquisitions? And what are the capabilities you want to add going forward when you look at the acquisition pipeline, if you can discuss that?

Great question. So first thing I would say is that our acquisition strategy has 2 parts. First of all, I think we are not -- we don't really look at acquiring order bonds or revenue books, right? I think what's really important for us is to acquire capability. And for us, the capability part of it largely is around technology capital and people capital, right? So that's also one overarching thing, which I've said this before as well, but I'll just reiterate it for purposes of reaffirmation. The second part is our inorganic strategy from a capable perspective is not tuned towards any specific -- it's not biased towards mobility or towards supply chain. We continue to look at opportunities in both of them, right, actively given the strategy of each of those segments, right? On the supply chain side, I think where we are looking at, how we accelerating through inorganics is on, I think, really 3 parts. Obviously, we have talked about freight-forwarding earlier. It's a business which -- and the services and it's a business which we feel positive about. And it's something which we are looking at, we continue to look at the right opportunity there. The second one is around last mile delivery expansion. That's an area where as we see more traction from our clients around integrated fulfillment we have largely been a first mile and mid-mile company on fulfillment logistics. Now we continue to look at opportunities in last mile if we believe that they bring the right combination of people capital, tech capital and financial prudence, right and financial management, which from an earnings quality perspective. The third area, of course, is technology, right? We have continued to make investments in technology. A lot of that has been -- as I've said earlier, a cloud-based suite of integrated solutions for different service lines. But we currently to look at possibilities there either for partnerships right, or acquisitions, we have largely been using a partnership model till now, right? And as far as the mobility side is concerned, as I think we are keen on primarily focusing on the enterprise segment. And the core strategy for the Mobility business remains about doing 2 things: expanding services to enterprise customers, so we can gain more share of wallet and leveraging that share of wallet to drive supply optimization on the back end, both in terms of ICE and EVs, right? So the Meru acquisition was really fit in that sense, 35% to 40% of the business is purely enterprise transport management services, which is what Allied does. So that's a straight synergy fit. And then it also provides other services like on-call, et cetera, which allows us to get a higher share of wallet with our enterprise customers. We believe there are some strong opportunities from a supply synergy perspective. Those will probably take -- those will probably be more visible once the market recovers fully. But intrinsically, we believe there are strong opportunities to drive tech driven supply chain optimization, where we can use the same vehicles, let's say, for multiple services, and therefore, utilize it for more kilometers in a month. and therefore, drive better margin utilization.

The next question is from the line of Mukesh Saraf from Spark Capital.

Just wanted to -- I mean, one of the comments you just made that on the integrated business, the margins would probably be similar to the company average or probably slightly north of that. So just trying to understand that with your targets of maybe INR 10,000 crores revenue in say FY'26 and probably a good portion of the business coming from new integrated solution contracts, what kind of margins, I mean, is that average? I mean, is the company level margins that we are looking at? Are we looking at a similar 4.5%, 5% kind of margins? Because if these new contracts come in only at these margins, then what are the margin levers that we have?

I think -- so Mukesh, I'm trying to [indiscernible] specific answer. But I think if you look at it, I mean, we look at the broader growth plan for the company. I think all 3 broad parts. I will skip the mobility piece. That's part A -- part C actually. Part A has been the core 3PL business to reposition ourselves more as an integrated solutions player, right? And part B has been to grow some of these service lines where we historically had low share of business, freight-forwarding, the B2B Express, last-mile delivery and probably kind of create this electric vehicle category in some ways, right? So these are the A, B and C parts of that kind of road map to INR 10,000 crores, right? Now if you look at -- I won't talk much about mobility, getting your questions driven by supply chain, right? On the services side, I think on the Express side and the freight-forwarding side, I think we expect to basically maintain or sustain the margin levels which we are at right now, right? And I think we've certainly been able to moderate, right, and ensure that we are having reasonably good gross margins in forwarding as well, right? And the express business, while we are funding it will mature to a moderate industry-level margin profile, right? The last-mile delivery business, as you know, Mukesh said earlier, we are cautious about growing there because of -- because we have specific margin targets and capability expectations there, right? Now on the integrated solutions piece, which is where I think -- which is probably going to be 2/3 of that old pie, right, over a period of time. I think what we've said historically is 2 things. We were -- one is that we -- and I think we're still on the same page. One, I think, is at the gross margin level, net of the AS 116 impact, we expect the marginal solutions to be accretive to the gross margin. right? And today, I can say that on the smaller and midsized solutions we have done over the last couple of -- over the last 18 months, whether it's been pharma, whether it's been durables, whether it's been appliances. I think post the correction period which we have is the optimization period, several of those projects are [ not ] delivering that, okay? Now -- so that's one lever of benefit just purely at a gross margin level. The other benefit, which we obviously believe integrated solutions will bring is around stickiness and size, right? And that should actually give us leverage from an overhead perspective, right? So the way we look at the business is we have gross margins, which are -- I mean I would leave this quarter aside, right? I mean just leaving this quarter aside. But broadly, we'd expect that the margin profile would be slightly -- bond solutions will be slightly better than what we have done in the past and the volume growth, which we get through that should be able to actually start leveling off on our overheads. I think even this quarter, and Yogesh can say specifically, but even this quarter, I think our overheads -- you've seen our overhead only grown by 3%, right, on the revenue and volume growth, right? And we can -- and it's now probably at 4.6% or so of sales. So as the volume growth comes in, we'll actually get -- we'll be able to accelerate the leverage on that line as well.

Right, right. And...

From a modeling perspective, Mukesh, probably you and -- probably Yogesh can get back to you and have a specific conversation around.

Sure, sure, sure. I will get in touch with separately. I mean, again, just looking at say, the last quarter and this quarter, last quarter, we had seen an impact of fuel prices and that's what impacted our [indiscernible] . And I'm assuming this quarter, we would have got the pass-throughs for that, and hence, the transportation margins would have gone up because diesel prices actually came off in November. So in a sense, the warehousing margins are actually much lower because the transportation margins would have been up Q-o-Q. And probably, this should correct is what you are saying after the optimization phase, and you should see a significant increase in warehousing margins.

So I can't -- I mean, what I would say is, Mukesh, I think I said in the last earnings call as well that we have finished passing through all the fuel increases, right? So that is not the problem. Obviously, transportation volume is kind of flattish and the Mahindra business is down compared to last year, right? And that's a large part of our transportation volumes as well. So at a gross level, I don't know exactly how it -- I will have to get back to the exact dollar values for that. But broadly, as I said earlier in the call as well, the transportation profile margin -- profile was pretty stable, in line with the past. And that's why we called out specifically that most of the challenges or the erosion or the pressure we have seen in this quarter has actually been on our Warehousing and Solutions business.

[Operator Instructions] The next question is from the line of Shyam Sundar Sriram from Sundaram Mutual.

You just mentioned that the higher capacity buildup in warehousing, expecting volumes to come through was one major factor for the margin growth. What steps can we take internally to plan better so that this -- these [indiscernible] don't reoccur. That's my first point. Secondly, you did mention the Flex solutions are on similar margins as the standard integrated solution -- standard warehousing solution contract -- now I'm very surprised, given the short-term nature and the enormous stress that it puts on your system, shouldn't this business be a higher-margin business -- or is it -- I mean, just if you have to think about that is it even worth doing this business with so much of variability and the strength that it brings upon the system per se. This is my first question. Secondly, are there any further start-up costs in this first half calendar '22 because this was a 45 bps kind of an impact per share at the gross margin level. Are there any further similar start-up costs expected in the first half of the calendar '22?

So I see, let me answer the second part first. I think, as I said, Shyam, earlier on, so we carry a little bit of start-up costs every quarter. That's kind of normal to our business. This quarter, we've seen the higher impact of the Bajaj cost and that network optimization should -- will have an overhang to the fourth quarter. But as we planned right now, we don't expect it to carry into the next FY. Okay, right. And that's -- given the scale of the contract, 3 to 4-month pan-India network, we are doing 800 to 1,000 trips every day across 11 facilities across the -- 13 facilities actually across the country and delivering to more than 700 delivery points. It's a large optimization. But that should get done through, as I said, the fourth quarter of this year. Apart from that, I don't expect anything really to come out. There is a learning curve, obviously, on scale as well. So I think next time as we have to do larger end projects -- more projects of the scale of these, I think we obviously have a learning curve and getting better as optimization as well, right, as more volume comes through. In terms of the Flex contracts and the other question you had around optimization, obviously, I think, as you know, we've been expanding -- you have to take a call on how you build warehousing infrastructure and the housing capacity, right? And so it is a shift function. It's a step-up function. It's not a linear function, right? So that's kind of a bit of the broader -- and therefore, the horizon of planning has to be a little bit longer, right? We can't add -- Shyam, we can't add 20,000 square feet every month, right? That's also suboptimal in a different way. Probably -- it's probably low risk, but probably also creates low return from a long-term perspective. What we have been doing to optimize it, obviously, is though, if you look at our facilities, which are -- and our capacity, which is more flow storage based, we have been trying to divert that across some of the newer clients. And that's why -- and we're trying to kind of get better square feet utilization in terms of revenue yield. And we are hoping to consolidate -- we started that work actually already. And I think hopefully, through this quarter, we will see more acceleration of that with some of the newer businesses which are being picked up. The second part there obviously has been to retune our man power productivity and recruitment assumptions. And that's something which -- there will be some volatility, which probably will continue basically the individual geographies, but we broadly think that at least we are getting that under control and the Jan peak thus far has been a good -- has kind of shown results of the work we have done, right? So I think the capacity issue very honestly -- I think we feel confident about the fat it will kind of play itself out, Shyam, because -- as I said earlier on, we have to take positions. We can't just build facilities every month, right? And as we build larger facilities, there are long-term productivity and OpEx benefits there, which will start showing up in our margins as well. right? As far as the Flex question you had, Shyam, I think Flex is a combination of different things, right? There are pure flexes that are going to the middle of nowhere and actually building a short-term flex solution. And those generally do carry a higher margin profile. And then there are large flexes which actually often are -- which are kind of attached to an existing node, which we operate ourselves, right? So for example, in Kolkata this year, we did a 3 lakh square feet flex for one of our clients, right? Now that kind of that's next to another facility which you operate for the same customer, right? And therefore, the stress which you spoke about is a little bit different, right? The pricing is a function of multiple factors. And I would say the flex model is also becoming more mature, Shyam, I think both in terms of cost management and of course, in terms of the competitive functionality there also is increasing, right? So we do get -- I think margins typically -- if we don't have any disruptive factors. We do get margins slightly higher than our technical warehousing business, but it's not a gold rush anymore. I hope -- I don't if that kind of answered your question, but...

Yes. Yes. Yes. I got your point, Ram, but the only question I'm still wondering maybe -- so see our revenues has grown -- has grown 10% sequentially. We have done very well on that. Nevertheless, our earnings on this higher revenue has been lower than what we did last quarter, right, which means we are losing money by putting up these flex solutions that have lots of variability. Of course, there is a start-up cost element also, which is there, but that will ease out. I'm just wondering whether is it worth at the end of the day to have the variable businesses -- that is my -- that was my limited point?

Sure. Shyam, the capacity issues, I think, exclude the flex point. I would say that your flex is not counted as a capacity expense I talk about. The manpower problem was reasonably secular. I mean, typically, I mean you are hiring many of these facilities, they are man power intensive to some extent. So you normally have 35%, 40% cost of man power. Even on a business as usual basis, Shyam, if not in some products even offerings even higher. So when you see a sharp escalation there, it does have an [indiscernible] through impact. So I would say this quarter, for sure, Flex was not the problem for us Shyam. If that probably is a good -- that's what [indiscernible] I would summarize, I don't think Flex basically had an overhang on our earnings.

Sure, sure. Sorry, just one last question, if I may please. Given that there is a sharp inflation in man power, I mean, not only for us across all industries, we are seeing much higher inflation in terms of the manpower cost. Are there any elements in our contracts with customers that allow the some kind of a pass-through for this slightly higher-than-expected man power cost?

Yes. I think -- I mean, there are -- the contracts are generally done in multiple ways, Shyam. I think generally, your contracts, which are like -- which are more long term like Bajaj or some of the other accounts, which we do, they normally either carry an index based on minimum wages and so on. Then there are contracts where the volumes are given every year, right, which are man power driven. And there it's really been -- it's where we do discuss what the cost impact is. There are some thresholds you say across and obviously, we have a chance to go back to the customer. But there are times within which we have to manage the performance ourselves, right? And this year, I think -- and this year was not -- that's why it didn't affect us on Flex so much, Shyam, because on Flex, we actually have a much more near-term window to that cost structure, right. But on our long-term contracts, our longer-term operations, when the pieces come in, and let's say, it's suddenly resulted a spike in cost. It just is an effect of Flex. Actually, Flex probably is better because you're contracted in the short term. It's your base business where actually you see the tail through effect. I mean you take Bangalore as a location and suddenly -- I mean you've got 3,000, 4,000 people in existing sites in the peak, actually, the small flex side doesn't cause the problem, the inflation across the board causes them.

The next question is from the line of Aditya Mongia from Kotak Securities.

I had a few questions from my side, which I want to take your perspective on. The first one relates to the warehousing business of yours. Now I'm just trying to kind of get a sense that when you say that the volumes were not up to the mark, was it more of an issue of demand being weaker at an overall level? Or was it an issue of competition getting in more and more?

Okay. [indiscernible] If you want to give all the questions and I will try and answer them together. Does that work for you?

Sure, that will work. The basis of this question, the other related question was that, see somewhere, you mentioned that your new contracted capacities are all doing fine fairly well utilized. And still we are saying that our utilization levels has a dip because we had plan for higher volumes and we didn't get those volumes. Does that suggest that the older warehouses for the customers not turning up? And just kind of relating it to the competition [indiscernible].

Let me just explain this, right? So typically, in with [indiscernible] conceptually answer, just when we kind of contract out the facility, let's say, which is x square feet, 1 lakh square feet, for example, we contact other capacity. That capacity is contracted out through the year for a certain volume and for some parts of the year for much higher volume. Okay? Right? Now we don't have any white space or we have very marginal white space in terms of contracting itself, right? Our facility is all contracted out. However, what happens is that the contracts basically are built around a certain volume. Now in that volume band, there is a minimum guaranteed volume, Aditya, which happens, right? And then above, that's a minimum guaranteed volume which the customer gives. And then, of course, you have a higher band in terms of what is the capacity -- what is your peak capacity, where ideally you make really great margins that. So this year, the problem was not that we lost sites, right? I mean all our sites are contracted out. The problem was that if we expected, let's say, 100 units to come in, it is actually at [ 85 ] So if you expect it to -- I mean if you compare it to a plant, for example, it's not like a plant was not utilized. But the thing was you start making 100 big units of a product, it actually made 85, right? And the challenge for us was that we did -- our PTS days were still 100, right? But then typically, the PTS days tend to last for a longer period of time, this time there's a sharp tail off in terms of volume. In fact, in December, some of our sites are actually below minimum guaranteed volume, which of course our clients paid for the minimum guaranteed volume. But -- so that was the factor which was playing, Aditya. It's not like any of our sites basically we have a competitive situation, let's say, our volume went off to somebody else or we lost a site. Our sites are not actually contracted. What we have stated in terms of -- what I said in the past is all that when we have talked about the warehouse contracting, we [indiscernible] all of the facilities are contracted out. They don't have white space in terms of uncontracted warehousing. But obviously, you expect the warehouses to have a certain flow through in terms of volume. And this year -- and we are obviously -- we've added capacity in the assumption that these volumes -- is the volume buildup will happen, right? And I think I mean clearly -- this is a time of day or time of kind of season factor. Secular growth will bring in the volume to our facilities, right? At the higher end of that contract in time, but this year, unfortunately, we are much closer to the lower end of the contracted band in many sites. And the higher man power cost, obviously, didn't change the cost bases of those facilities.

We got that. The second question that I want to kind of ask was that it's related to the question asked earlier. There is an element of inflation in man power cost on additional man power and maybe on existing man power as well, and our contracts are structured in a manner where we cannot pass them through fully. Should this be treated as an overhang on margins in incremental quarters or let's even incremental years because these are long-term contracts that we have signed from a warehousing perspective?

No. I think -- see, I mean what I would say, Aditya, we have multiple factors here. We have -- we controlled productivity and total man power cost is a function of volume of man power and cost per person, right? So one of our competencies, Aditya, is actually driving better productivity, like that's kind of what our solution design on our [ dexterity ] work and our process capabilities already are, always are. And that's what we do in most of our sites. Even this year, I think the man power inflation was specific to some locations, right? I mean I think I mentioned earlier in my comments, we did see a specifically larger problem in the South, for example, which is where we do have thresholds are contracted out as well. But in the South, we saw -- in a couple of locations where we saw a large spike. Those are big geographical locations for us. And that was very topical to those areas. We didn't necessarily see it in Delhi, we didn't see it in Ahmedabad. We didn't see it in Govandi or Pune. So -- but we obviously have a fair amount of capacity in the south. So that obviously didn't impact us. But we still believe that, as I said, we have -- even coming into the, right now, we have retuned our work on capacity improvements. And obviously, you probably planned for a larger volume, and we could have -- and you can plan differently as well. We plan for a higher flow-through this year because by most expectations, I think the peak was expected to be higher than what we thought it would.

Last question from my side. You've been talking about adding capabilities to the bouquet of what Mahindra Logistics have to offer [indiscernible] the time that you came at the help. Would you think that, that expense is largely complete? And maybe last-mile is the only part that the company would take through adding to the capability side? Or do you think a lot more work still needs to be done in terms of becoming more likable to your customer?

Sure. Sir, I'll answer that, simple answer is I obviously have to talk about this a lot often to other stakeholders as well. So I think 2 years ago, what we said is as we reposition the business towards to the future, we have to add capabilities in 3 things: expanding service lines, driving more [ repertoire ] to create your custom industry solutions, which are more integrated. And the third one is technology capabilities, right? I think from a service line perspective, I think we have established baselines now we were doing 7 or 8 services for 2 years [indiscernible], we have now expanded the offering, inside warehousing we offered several new service types and on transportation, several others on distribution, on freight-forwarding, et cetera, have made progress. So I would say there probably the larger challenge right now is what you pointed out, Aditya, which is last point [indiscernible], okay? On the technology piece, I think it's a continuous journey. I've said this earlier, we have never done with technology, but we did put out an 18-month road map to get a fundamental architecture on all these service lines together, which you could integrate efficiently. I think that one is probably 85% to 90% then, Aditya, okay? So we should really not see a significant bump up going forward from a tech investment. There will be probably a linear expansion on tech definitely. But is a bit beyond where we have. I don't see a significant bump up on tech. We may make some investments in block chain, a bit more in AI, some on automation. But I think those will be part of the core [indiscernible] stuff. On the solution design work, I think we are -- we have done -- we are doing some transformation work internally with the help of external consulting, and we probably have another 6 to 7 -- 6 to 8 -- 9 months of that work. right, to go there because that's changing process, people investing in domain knowledge and then integrating, obviously, operations and tech into the offering into those solutions as well. So Aditya, just to recap services almost there, tech 80% to 90% to 75% to 80% there and solutions probably halfway there, Aditya.

The next question is from the line of Pranay Roop Chatterjee from Burman Capital.

I had 3 quick questions. Firstly, you mentioned that about 60% of the margin drop this quarter could be attributable to your excess capacity related to your man power and volume? Now the question pertains to Q4, more on Q4. Given the impact of Omicron, right? And how do you see volumes? And is this overcapacity issue behind us? Or should we expect some impact of this in Q4 as well? Secondly, on Meru Cabs ride, when do we expect consolidation to complete in terms of your financials? And given that Meru had INR 18 crore loss in FY '20 and about INR 30 crores loss in FY '21, I understand there would be certain rationalizations and the loss would minimize, but could we still expect like a INR 5 crore to INR 10 crore pressure on your bottom line post consolidation? And lastly, a quick question for Yogesh. There is this item called cost of materials consumed in your P&L, which came at about INR 5 crores this quarter. Just wanted to get a sense on what this item entails?

Yogesh, do you want to go first? And then I'll just tap it up on Q4 and [indiscernible].

I'm just pulling out the financials to what Pranay is referring to, so just I'll take at end.

[indiscernible] So, let me go first. I would say that most of -- on the additional capacity and the man power cost piece, I think, Pranay, Omicron obviously is resulting in fluctuating volumes. So we are not seeing volume pick up. And there will be some impact of the flow-through, I think, in our facilities through this quarter. But what we have done, I think on the people side is we've got that under control, right? So that's been something which we move quickly on. We do have productivity in process standards internally. So I remarked earlier on as well, we just kind of going to the Jan peak as you've seen, as you generally know, most E-com customers and others actually have a peak in Jan and obviously, things like fans and coolers also start moving around this period and that's something which, obviously, we are -- we have been able to mitigate the impact we saw in last quarter on that, okay? So I know that -- so the man power side that is taken care of. The flow-through on volume might still be -- might still carry some softness. On the Meru [ piece ], yes, I think you raised a great question, right? And I think you've seen the historical -- all of you have seen the historical results of Meru. Now what we know the Meru's existing management has already done has been obviously been trying to kind of manage and optimize costs further, right? And what we believe is that as we go in, we expect the 3 big waves of synergy [ premier ]. The first one is a substantial synergies from an overhead management perspective, right? As the volumes have shrunk, we think there's a lot of -- all of us have taken cost out, but still overhead typically in the mobility business, in terms of tech, sales, marketing, site management, et cetera, remains of reasonable volume. Now we think that's a state just do it kind of synergy, which we expect to come through, right? The second piece really is around the fleet optimization. As we -- typically, both companies are largely asset-light, right, but both are businesses. But clearly, we expect that our supplier leverage will go up significantly, right? We will be able to use the same cars for higher [ hours ] and higher miles and therefore, the marginal pricing is obviously the price of your last lab with your vendor is always lower than the price of your first lab, right? And that's in synergy, which we have evaluated and assessed and we have fairly good line of sight to that. The third synergy is actually around demand optimization. So there, I think -- and what we mean by that it is 2 things. One is having a wider bouquet of services allows us to go and get better share of wallet, right? So if you are -- if you are general electric [indiscernible], for example, we are doing in eTMS for you. We know that you're also doing an on-call, you also have airport kind of pickups and drops, right? So our ability to cross-sell actually is something which should pull in better revenue for -- especially for the Meru business. The second part is going to be that better supply obviously means that we will have better availability, right? So we believe that, especially for the airport and the on-call business, one big lever will be that our -- we think our supply capability will help Meru have lesser income [ pre-trips ] right, which is, for example, when you walk out of the Bombay Airport, you order a Meru cab and it's not available, right? So that kind of scenario might not happen because we'll bring our supply capability. Now put those 3 together, I think we expect to significantly have better earnings in the business than probably what Meru has had in the past, right? But that said, I think there will be some negative impact, margin impact right, in the first financial year, given the current demand environment, Pranay, I'm not in the position right now to fully quantify that. But it should be, of course, of a much more managed order than what you might be able to -- you may deduce from historical financial statements.

Got it. And when can we expect this consolidation to complete? Is it Q4? Or is it going to flow into next year?

Yes, we are working through the timing of it, Pranay. So I think hopefully, somewhere between the latter half of this quarter or early part of next quarter, we should expect it to get through. I think from a governance perspective, I do believe, and Yogesh, you should add, but -- you can add, but we have already informed updated the stock exchanges also by the deferral in growth.

That's correct. So at present, we are looking at to wrap it up. I mean the last -- we had looked at [indiscernible] within end of February. If there's any change, we will again obviously intimate. But right now, that's a time line we are expecting.

Got it. Ram, quick follow-up regarding your margins, I get your point. Still, if you'll try to look in terms of numbers, would it -- can we expect it to go back somewhere near Q2 levels? Or would say Omicron impact keep it somewhere in between?

Our aspiration, of course, is to try and take it back there. We're working obviously pretty hard on that right now, right? As I said, there are 2, 3 big impacts. I think the Bajaj optimization costs and a new product, which is the largest part of the start-up cost, I think that will have an overhang, Pranay, through Q4. I think from a demand perspective, we do believe that we will optimize while volume flow through in our facilities might be a bit lesser, we will optimize other cost levers to basically offset that, right? And I think the man power cost piece is already under control. So we don't think that the Q4 -- the Q3 issues we add in our BAU business will continue to [indiscernible] , Pranay, for most of this quarter, and we don't think Omicron will have an impact on that, right? Because we run a lot of standard -- a lot of high-volume nodes, right, for our customers in their network. And we also see seasonal upticks in some areas, right, for example on things like fans. Independent of Omicron, we will see some seasonal patterns of strength in Q4 as well.

Got it. And the last one? I think, Yogesh, if you could...

So on that piece, I mean, we have -- as part of the value-added services, which we offer in our supply chain, Pranay, there is things which we do in terms of component assemblies at our sites, things like what we used to do in terms of tire and wheel, in terms of completing a product or in farm equipment, certain components also we do. So this is the cost of material consumed in delivering those services. Now from a breakup of accounting line items, I mean, since the service is now a defined service within that? I mean that's kind of culled-out separately. But this is a cost of material consumed in delivering the value-added services within supply chain.

The next question is from the line of Alok Deshpande from Edelweiss Financial Services.

Two questions from my side. First question is on margins. I just wanted to sort of understand the margin mix better across transportation and warehousing because if I were to compare the margin profile for the company, which was roughly 8, 10 quarters back, and I'm talking about somewhere around mid-FY '20 when -- this was before COVID. We were at about 4.5%, 4.7%. Now given the fact that warehousing has become nearly 25% of the overall revenue from 15%, 2 years back. Despite the start-up cost of these new projects, I'm just not able to sort of put this together that why should the margins be lower than the levels that we were at nearly 8, 10 quarters back when warehousing piece was only 15% of the total. That is question #1. And my question #2 is, Ram, you spoke also about the volume shortfall this quarter where the volumes were at the lower end. Now in these kind of contracts, wouldn't the fact that these are variable volume contract or variable price contracts, wouldn't that sort of better pricing make up for the fact that if in the quarter, there is lower volumes, still the margins are quite decent. I just wanted to understand this conceptually better.

Sure. So let me then answer the second one first, and then I think we will dial back and I'll let Yogesh pull out some of the data, which I'm sure you may need to pull out as well to answer the first part. But sir, the second part, if one look at the way the contract is done, we do -- let's assume a site is contracted for 100 units a month. We will only carry a minimum guaranteed volume of, 75%, right? Now typically, what happens is that while we have a minimum guaranteed volume of 75%, what will happen is that we will actually, based on the customer forecast, be sizing -- 2 things happen, you size the facility for overflow, right? And the second thing which is there is we will also actually recruit man power, right, and plan shifts, et cetera, basis a certain volume. So when I said that the volume flow-through has been lesser this month, I mean, think about it, our more [indiscernible] manufacturing, think about it in that sense, saying that we essentially planned, let's say, 90, 95 a volume and we essentially lined up all our resources for that 90, 95. The volume came in at 75 or 80, right? Now probably we had -- we obviously have -- we've been aggressively trying to grow the business, and we've kind of gone after volume growth, right, and putting infrastructure and resources to do that, right? So what has therefore happened is that you have a certain more resources, which are standard, right? Some of it like some of it like scheduled hours, et cetera, or operating electricity, et cetera, you can turn off quickly. Some like our manpower, you actually do time stamp the contract with your vendors for some period of time, right? So if you have contracted them on a monthly basis, the volume doesn't end up for the month then you obviously end up with standard man power, which is a point I've made earlier, right? So that's what played out, right? So now obviously, if you are -- based on your relationship and your confidence in the planning work which we do for our customers, you size the business for a certain level, right, which is kind of what we did this year, and that's what was the capacity flow-through problem we had. If the volume had come at 90, 95, we have seen all those resources being used fully, right? Now the second part, which is what I already said earlier, then that 85, 90 people, let's say, the cost was INR 30 an hour for them. Because of some of the inflation, it might probably have become INR 32 to INR 35 in specific geographies. So your cost basis increased in some geographies and then you obviously saw lesser utilization of these resources than what you are planning for -- the good thing is that we -- as I said, because these are all manageable in some windows of time. We have obviously taken actions and most of that already.

Sure, sure. And the first question on the margins.

Yogesh, do you want to throw some color on that? I don't have my files with me right now, Yogesh, so you may just need to pull out some of it. If you can?

Sure, Ram. So look, from margin perspective? I mean, is it okay if I just walk it through separately. I mean I'm just [indiscernible] of, Ram, your calendar time as well right now at [ FY '17 ].

Sure, sure. No worries. Yogesh, I'll connect with you later, no problem.

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

My first question is, would you have FY '21 numbers for Meru top line PAT? And how has they panned out like in terms in FY '22?

So, Prateek, I don't have the exact number. I think there will be filings, et cetera, which will cover that. And obviously, I think if you reach out to us separately, we can answer that question more specifically. And unless, Yogesh, you have the numbers handy. But I would say that compared to F '22 -- F '21, F '22 dexterity, obviously, has seen growth for them, Prateek, right? That Meru has largely 3 parts of the business. The first part is the eTMS business, which is 30% or 35% of revenue, which is similar to what we do in [ Allied ]. So that business has not seen a lot of growth. It's kind of, I think, being fairly neutral. But the airport business, which has come down a lot because of the pandemic has -- before Omicron at least the volume has started coming back, they have actually started showing some positive momentum on the airport side. So overall, I think revenue was standing positively -- over directionally for the business. right? In terms of cost, I think there are multiple factors, but we know that they have also been working on cost optimization. I don't have the exact numbers that you proceed, unfortunately, for F '21, but I can -- I think if you reach out to us separately, we can definitely cover that.

Sure, sir. So the second question on -- like over the past 2 quarters, like when we compare Q1 to Q3, our warehousing space has sort of remained stable -- in fact, last 4 quarters, warehousing space has remained stable or I mean, not on decline because of, I think, some reasons which you highlighted last quarter. But like when we add depreciation plus interest, which has a component of ROU assets that number has grown INR 8 crores over the past 2 quarters. I'm just adding depreciation and other expenses simply. So why has that happened? If we have not added any space because that has actually weighing significantly because your PBT in third quarter is INR 7 crore and that incremental INR 8 crore is like sort of having a significant impact on your PAT?

So Prateek, what I say, first of all, is I think, I mean, that is actually just in our view, [indiscernible] said before. So your first point around warehousing space. I think you will see Slide 12, and we added this last quarter, Prateek. I think in response to questions you had only asked in the first quarter, say, as we started breaking down between warehousing and stockyards. Stockyards at very, very low value, they're high space, but they're actually low value and low cost as well. So what you would see [indiscernible] in, I think if you look at FY '21, we ended with [ $17.5 million ]. And you could say the end [ $18.8 million ] in Q3 FY '22. So you -- I mean, you're probably vis-a-vis logical basis only gone from [ $17.5 million to $18.8 million ]. But if you actually break that down pure warehousing and stores and light has gone from $11 million to $15 million. right? So that's in your 35% to 30%, 40% growth in terms of the space, right, in terms of pure warehousing, which is where the depreciation actually adds up, Prateek, right? So I think that's just a -- and I think you had raised this question, so we started giving this breakup last quarter, right, Yogesh? To help you people -- so we can respond to your questions to help you understand the underlying factors okay? Now -- so that's one. The second thing I would say is that [ dep ] itself carries 2 parts. It carries [ state forward ] rental cost, which is really is a restatement, right? Our gross margin should actually be -- should basically compensate for that, right? And the second thing is there is an AS 116 timing impact because that timing impact was -- [ 116 front in the charge ]. I think Yogesh had explained last quarter also that we saw a INR 3 crore to INR 4 crore impact in the quarter because of that. And this quarter also, we have seen something similar, I think, right? Yogesh will probably elaborate on that a bit more. But it is not, I think, accurate to -- while the overall number might have not increased. I think at the category level and specific to what drives [ dep ], Prateek there's been a fairly significant increase in capacity.

In our presentation this time, we have split those 2 line items also. So you would see that the split, which is coming in because of this warehouse space rental cost, which is 116 and the normal depreciation as well. So that will kind of do that. And another thing is obviously the more costlier space in terms of value-added or more standard warehousing, which has got added in. There is another element, the third element, I think I'll just one more thing I'll add on what Ram said, which is a certain space, which was towards end of quarter 4 of last year, which was customer owned space used to work out of which kind of translated to our own space. So which also meant that we will not -- I mean, from a cost perspective, the space count remain same, but the rentals would have coming down.

In interest of time, this was the last question. I would now like to hand the conference over to management for closing comments.

Okay. Thank you all for joining us today. I hope we've been able to answer all your questions satisfactorily. If there are any other queries or questions, you may reach out to us, right? And our Investor Relations team, right, as MLL and [ SGR ], Investor Relations [indiscernible]. Thank you once again for your interest in the company, and thank you for taking the time to join the call today.

Thank you.