Mahindra Logistics Limited (MAHLOG) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Mahindra Logistics Limited Q2 and H1 FY '23 Earnings Conference Call. We have with us from the management, Mr. Rampraveen Swaminathan, Managing Director and CEO; Mr. Yogesh Patel, Chief Financial Officer; and Mr. Shogun Jain, Strategic Growth Advisors. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Shogun Jain. Thank you, and over to you, sir.

Good morning, everyone, and thank you for joining us on the Mahindra Logistics Limited Q2 FY '23 Earnings Conference Call. We have with us Mr. Rampraveen Swaminathan, MD and CEO; and Mr. Yogesh Patel, CFO of the company. I hope everyone has had a chance to view our financial results and investor presentation, which were recently posted on the company's website and stock exchanges. We will begin the call with opening remarks from management, followed by an open forum for Q&A. Before we begin, I'd like to point out that some of the statements made during today's call may be forward-looking in nature, and a disclaimer to that effect has been included in the earnings presentation that was shared with you earlier. I now invite Ram, MD and CEO of Mahindra Logistics Limited, to make preliminary remarks.

Thank you, Shogun, and good morning, everyone. I hope you and your loved ones are doing well and safe. I trust you all have had a chance to view our presentation and financial results, which is available on the stock exchange and our company's website. Pursuant to queries in past earnings calls, we have expanded the information provided around our 3 business segments, the 3PL business, network services and mobility, as well as details around MLL stand-alone and subsidiary company performance. Before I share any specific comments in our operations, order intake and key corporate developments during the quarter, just sharing a quick update on the external environment and trends in our end markets and businesses. We'll then discuss our financial performance in Q2 and H1 FY '23, and our focus areas for the remainder of the year. Let me just quickly begin with external environment in our end markets. Leading economic indicators, just transportation, warehousing and inventory ideally indicate potential performance of the overall economy. Q2 FY '23 marked a cool off in key commodity prices, including those of base metals and crude oil as against the Q1 FY '23 period, which had witnessed elevation in commodity prices. To curb prevailing inflation, the RBI has adopted a part of aggressive policy tightening. In addition, demand situation has broadly been stable compared to previous quarter, while rural demand remained muted due to inflation's impact on disposable income. Input costs, especially those connected to the price of crude oil and palm oil, have stabilized after a period of increase. Due to the stronger monsoon, going ahead renewal demand is being viewed with optimism. We entered Q2 of FY '23 with an optimistic outlook on demand with the advent of the festive season and some sector level sales, but demand has remained neutral across many categories, especially e-commerce. While the sector has seen higher value growth gaining momentum in terms of demand, underlying volume growth has been lower than anticipated or forecasted by our enterprise customers. The operating environment remains challenging in Q2 FY '23 for multiple factors. During the quarter, as auto demand went up, we did witness significant shortages in supply of car carriers in some parts of the country, which resulted in a tightening of purchase price and an inflationary trend there. Vehicle and driver shortages were also there in some other segments. During the quarter, we saw increase in costs related to our frontline workforce and outsourced manpower, which specifically impacted our 3PL contract logistics business. International cross-border movement continued to see downward pricing corrections, especially for ocean cargo on the Asia and European lanes. These factors have an impact on revenue and margin of our forwarding business. And key announcement of policy shift during the quarter was the announcement of the National Logistics Policy. The National Logistics Policy aims to promote seamless goods movement, but also increasing the competitiveness of Indian industries through a better logistics infrastructure. While Gati Shakti is focused on the creation of physical infrastructure, the NLP will concentrate on logistics across shipping, storage inventory and investments in digital systems and processes. The NLP is all encompassing from a strategic view across the problems of high cost and low efficiency and by focusing on building a broad interdisciplinary cross-sectoral and multi-jurisdictional framework for improving the logistics ecosystem. The policy's stated objectives are to increase the competitiveness of Indian manufacturing exports and export and accelerate the nation's economic growth by improving logistics infrastructure and reducing the overall cost of logistics. The goal then is to build a world-class infrastructure for logistics, which is on par with many other countries in the world. The NLP thus will need to cut logistics spending from approximately 14% to 16% of GDP today, gradually towards an worldwide average of around 8% of GDP by year 2030. In line with this, the value of the Indian logistics market is expected to [indiscernible] significantly from its current value during the next 2 years. The new ONDC initiative holds exciting prospects for providing open services and infrastructure, especially in the last mile, and we are looking forward to be part of the same. Let me now move on and talk briefly about our end markets and of course, beginning with the automotive industry. Since last year, the auto industry has been seeing an uptick in demand with most categories showing encouraging traction. Since demand drive was still functioning and channel filling was observed prior to the festival season, the longer-term outlook continues to remain optimistic. As chip shortages reduced, the ability to fulfill demand has increased across the board. And I think across -- broadly inventory has increased, leading up to the festive season. As a result of rising cost for raw materials, of course, many OEMs have reset prices. Also, there is a significant addition of new models, which are creating a greater pattern of demand right across the industry, both in terms of SUVs and other passenger vehicles and commercial vehicles. Demand for entry level two-wheelers continue and PVS continue to remain weak, which has been offset by strong urban demand for SUVs. Commercial vehicle retail fell due to seasonality, but we expect that to be revived, especially given the high infrastructure spending and revival in freight movement. I think they will [indiscernible] actually show a very positive trend in terms of broad freight carriage. The festive season and lower supply chain issues due to chips has resulted in broader availability and movement of products as OEMs increase their volumes to fulfill demand. The consumer durable industry, after robust summer, the consumer electronics industry traditionally experiences some slowing of activity in this quarter due to seasonal factors, as well as demand moderation because of higher prices and a subsequent reallocation spending towards other forms of recreation. Margin pressure has also been witnessed in the industry as a result of cost-related headwinds and increased competitive intensity. Our leading brands and distribution channels are still hopeful that the festive season will see a strong return to healthy demand. Sales of durables on Amazon's Great Indian Festival and Flipkart's Big Billion Days have seen an uptick. However, demand for entry-level products has remained weak as inflation has had an impact. The demand for lighting products have not been significantly impacted and the industry continues to see a robust offtake. The broad softness has persisted in the last few months, and we estimate this to continue. Moving on to the e-commerce industry. The e-commerce industry, the growth has been fueled by multiple factors, including better logistics, higher level of [ occurrence ] and greater technology-driven platforms, increased online shopping offers and a broader level of digital adoption post COVID. In contrast, the modern Indian logistics sector comprises domestic and international elements with respect to service supply chains and production. During the last few years, there has been a dramatic rise in online adoption and this trend is predicted to continue. Companies that specialize in providing logistics services are directly impacted by the expansion of the industry. Many of the e-commerce companies are turning towards increased outsourcing as a way to rapidly expand network and accelerate order fulfillment. While our broad long-term macros are positive, demand has been subdued during the festive peaks early in the quarter, and volume has only shown moderate growth with continued pricing pressures. The significant expansions in the past few years, right, have added a lot of network capacity and down -- and this has shifted more towards consolidation, especially among marketplaces. Moving on to mobility. The enterprise mobility segment is showing a pick in demand with the increased work-from-office policy. And therefore, we have seen a 20% to 30% uptick in trip levels. However, work from home remains the norm for night-shift operations, which are a significant use case for enterprise transportation. And that has impacted the scale and speed of the recovery. Still, we remain optimally committed to expanding the segment through a focus on service quality, safety and optimizing our journey towards electrification. The frequency of business travels and personal travels in India has increased dramatically in the recent past as we return to post COVID environment or post COVID level of activity there. Overall, we have seen this flow into a moderate growth in the enterprise part of our mobility business and a 40% to 45% growth in airport transportation-driven services, provided by Meru. If I sum this all up, I think across the quarter, we are in the midst of a strong auto recovery, right. The farm environment is stable, and demand pattern across other markets are varying, but the short-term signs have been more muted. The operating environment on the supply or the cost side has been impacted by inflationary trends in parts of the transportation sector and rising front line and operating costs. If you look at our business, our 3PL and network services businesses continue to see growth in volume in the first half of the year and the quarter just gone by. During the quarter, the 3PL business grew by 32% on a year-on-year basis. And for the first half, it grew by 35%, driven by strong performance in auto and continued growth in our existing operating sites. We continue to see volume growth and demand for integrated solutions over the past few quarters. The farm sector continues to do well, positive atmosphere prevails. The kharif harvest approaches and commodity prices remain stable, and we are optimistic about growing performance there. Within the supply chain businesses or the 3PL business specifically, the M&M business grew by 47% with robust drivers especially in the auto side of the business. The non-M&M SCM business grew by 12% and by continued growth in e-commerce, consumer and other markets. In the second quarter compared to last year, last year was an exceptionally strong second quarter driven by a recovery from the second wave of the pandemic. And this year, it's been more muted. And therefore, if you look at H1 growth year-on-year, the non M&M businesses for the first half of the year grew by approximately 20%. The share of solutions and warehousing grew 14% year-on-year. Sequentially compared to Q1 of FY '23, we saw growth in 3PL volumes, as well as growth in our network services businesses. Freight forwarding, last-mile delivery and B2B express grew by 18% on consolidated revenues in the quarter. The freight forwarding business growth has slowed down because of pricing correction, but underlying volume growth remains robust and positive. Before I talk about consolidated financial performance, I'd like to spend a few thoughts to talk about recent corporate developments and as well as the performance of our subsidiaries. Let me just begin with the acquisition of the part truckload or Express Business of Rivigo. We recently entered into a Business Transfer Agreement with Rivigo Services Private Limited and its promoters as of September 26, 2022, to acquire the B2B Express Business of Rivigo, including all rights, titles, beneficial ownership and interest thereof on a slump sale basis. The scope of the transaction also includes the complete technology stacks and the IT usage of the Rivigo brand. Rivigo founded in 2014, pioneered the relay trucking model that relies heavily on strong technology and technological capabilities. The acquisition will strengthen our company's B2B Express business. By leveraging and utilizing Rivigo's large network of 250-plus processing centers and branches covering an area of more than 1.5 million square feet and, more importantly, actively leveraging its strong technology capability. We believe that there are strong synergies across networking and customer service. Rivigo's operations network covers more than 19,000 PIN codes across India and is providing significant opportunity for us to collectively grow the business. Over the last few years, Rivigo Off Truckload business has had challenges, right? And those especially got accelerated during the COVID period. However, despite the fluctuating revenue levels, we believe the quality of the services remain very strong and underlying network and technology architecture is top quartile. The revenues generated by the Rivigo Express business in FY '22 was INR 371 crores. The Express business EBITDA is currently negative, largely driven by the operating cost structure, but we have very defined plans to drive synergy in combination of the businesses and the focus around cost optimization and in several levers, we are confident the company is beginning to generate positive EBITDA in the next few quarters. And of course, we will share progress of that along the way. During the quarter, we also incorporated wholly owned subsidiaries. V-Link Freight Services Private Limited in Mumbai was established in September. The company has an authorized share capital of INR 5 crores and INR 1 crore in paid-up capital. VFSPL will engage in cross-border logistics, supply chain management, freight forwarding and air charter businesses, right, for our customers in India and across -- and outside. Let me also quickly talk about some of the other important subsidiaries. Meru, the mobility business of Meru, as you all know, has been focused on B2C and airport movement across 5 major cities in India, while the segment was impacted by COVID. And over the last few years by varying demand and supply patterns, since the acquisition, the operating rigor and the focus on cost control has started showing results, with increased levels of synergy at the operating level between the Meru and Alyte businesses. Consequent to that, in the first half of the year, revenue was INR 44.6 crores as compared to INR 23.9 crores in H1 FY'22, a significant growth level. Profit after taxes and losses at a PAT level have narrowed down to INR 4.2 crores in H1 FY '23 compared to a loss of INR 10.8 crores in the first half of FY '22, a significant reduction in our losses as we drive those synergies and cost optimizations. Whizzard, this is the last-mile delivery business, which we invested in earlier this year, has been scaling up its operations as well. Revenue for H1 FY '23 was INR 62.4 crores as compared to INR 52 crores in H1 of FY '22. We continue to make investments or support investments in that business to expand the offerings around micro fulfillment and B2C and also invest in expanding the network and the technology infrastructure of the company. As a result of those investments, the company continues to have an impact of that. PAT losses for H1 FY '23 were up marginally from INR 1.9 crores in H1 FY '22 to a loss of INR 2.8 crores in H1 FY '23. 2x2 Logistics, the assetized cars business, has obviously been seeing disruptions for some time now, right. Over the last year, we have, due to retro-fitment and rebuild reasons, had a high substantial amount of fleet off road. We have started -- completed retro-fitment for several parts of the fleet and operations are resumed. At the end of the quarter, more than 2/3 of the fleet had been redeployed, right, in operations. We continue the investment to complete the retro-fitment and redeployment of the assets. Overall, the car carrier industry is seeing broader positive outlook in terms of demand, and we believe on completion of the rebuild and retro-fitment, the business will be well positioned to show a strong recovery in revenue and earnings. For the quarter gone by, the business has made a loss of INR 1.1 crores in Q2 FY '23, which is marginally better than a loss of INR 1.2 crores in Q2 FY '22. Let me now share consolidated financial performance for the quarter. Revenue for Q2 FY '23 increased by 28% on a year-on-year basis to INR 1,326 crores. Sequentially, compared to the first quarter of FY '22, revenue increased by 11%. Revenue from supply chain management, including our 3PL and network services businesses, contributed 95% of overall revenue and the mobility business has contributed for 5% of overall revenue. Gross margin at a fully consolidated basis stood at 9.7% in Q2 FY '23 compared to 9.8% in Q2 FY '22. While gross margin was impacted favorably by volumes and underlying cost movements, it was impacted unfavorably due to 2x2 operations, as a drop in margins of the forwarding business and an increased shift in terms of product mix towards full truckload transportation in our 3PL business. EBITDA for the quarter stood at INR 70.9 crores, up INR 49.2 crores in Q2 of FY '22. PBT on a fully consolidated basis was up 118% from INR 7.7 crores in the prior year's Q2 to INR 16.7 crores in Q2 FY '23. PAT was up by 145% to INR 11.3 crores in the quarter. These are on a consolidated basis prior to consolidation of Meru and the share of Whizzard, PAT grew by 15% year-on-year from INR 9.3 crores to INR 14 crores. The proportion of revenue from the Mahindra Group comprised 53% in Q2 FY '23. Let me just also share a few more details around the segment level performance. Revenue from supply chain, it increased from INR 978 crores to INR 1,263 crores, up by 29%. The mobility segment grew by 15% to a quarterly revenue level of INR 62.8 crores. SCM revenue has seen an uptick in the growth across our 3PL business and continued growth in our network services businesses. Our revenue from the Mahindra group supply chain businesses grew from INR 483 crores to INR 708 crores in Q2 FY '23. Our non-M&M SCM businesses, which include the 3PL and network services businesses, grew from around INR 495 crores in Q2 FY '22 to INR 555 crores in Q2 FY '23. Our warehousing and value-added businesses for the non-M&M SCM business have grown from INR 201 crores to INR 223 crores, registering a growth of 11%. Share of warehousing and value-added services in non-M&M SCM businesses has reached 40.2%. As we move forward, we will -- we remain committed to our long-term focus on growth, right, to consistently lead out our vision for the business, which is a combination of strengthening and expanding our core 3PL business, diversifying service lines around freight forwarding, B2B Express and last mile, all right, and remaining focused on building a diversified market mix across automotive, e-commerce, consumer durables, pharma and other segments. We also remain focused on enhancing capital efficiency, with a focus on driving down operating costs and increasing the productivity of our business. As we keep investing in some of our newer businesses, right, we are seeing the impact of that from a margin perspective. But those businesses, we remain confident will turn around in the coming quarters. As we see increased scale and margin expansion, those should accelerate the earnings of the company. In the short term, we are anticipating increased demand from our existing accounts despite softer demand, right, and growth in our global forwarding business. And we remain focused on the cost reduction and continue to invest in technology to drive differentiation for our customers and value for our customers. With this, I will open the floor for questions and answers.

[Operator Instructions] First question is from the line of Mukesh Saraf from Spark Capital.

First question is on the Express business within in your network services. I mean, we see that Y-o-Y, obviously, the gross margins have declined significantly. It was 0.8% positive last year same time, and now it's negative while revenue growth is about 18%. Could you give some kind of a sense on what -- I mean, what has led to the margins declining? Because peers -- in your peers that we see the numbers, the B2B Express business, they're all around the mid-teens margins. While if our scale is still lower, could you give some kind of outlook there? Also, in relation to this, in terms of the fleet, in terms of the shopping centers, do we have dedicated fleet separately for this business and sorting centers as well? Are we able to kind of utilize the existing fleet and sorting centers for this business?

Yes, sure. Mr. Mukesh, yes, I think the Express business, telling from an operating model perspective, we will be obviously running a collection of hubs serving around 8,000 PIN codes directly and obviously a set of external PIN codes across the country. From a renewal perspective right now, those hubs are serviced through scheduled linehauls, right, which operate between them. These are vehicles dedicated to that business, right? We don't own the vehicles. We obviously [ post ] them, but these are -- this is a network which operates on a time to time basis, and therefore, they're dedicated to that end of the business. What has changed are, obviously, on margins year-on-year as you are seeing, you already pointed out right now already. We are in the process of expanding the network, right, and scaling that up. And therefore, right? And therefore, through the quarter, we have obviously added new locations, new geographies, to serve them. And as we scale up between the express business, we are investing in the network. We're investing in the network ahead of the demand because customers come up after you have an operating offering. And I think we, therefore, want -- because most of the express business is through the scale-up period, right, they obviously do have reinvestment cycle. At the same time, I think it's pertinent to note that if you look at the express business at a quarterly level, while we have seen a swing in terms of margins, if you compare H1 versus H2, we've actually seen that margins have improved. So that's just an additional data point. Of course, as we complete the Rivigo acquisition, we will drive the integration of our existing express business and that business together. As you know, that move has strategically been driven by the drive to build scale on the back of strong operating systems and expanding network and really create technology. And therefore, I think the combined -- the combination of these businesses will obviously, I think, allow us to change the slope of the network -- expansion of the network, but also the movement of margins. We do obviously expect that in the medium-term margins will [indiscernible]. They will be similar to comps, right, from the market.

And this continues, I mean, we are at a INR 200 crore annual kind of run rate here for the express business and Rivigo is about INR 370 crores business that we have acquired. So are we looking at, say, INR 600 crore kind of a number on an annual number sometime next year?

No. So Mukesh, we are actually at -- around last 12 months, we had INR 170 crores to INR 180 crores revenue. H1 is actually INR 97 crores.

Yes. So annual is INR 200 crores is what I was looking at.

So roughly INR 200 crores. But if you take -- so then we'll deal with LTL last year numbers, INR 180 crores plus INR 370 crores, adding up to INR 550 crores, right, is number for the last financial year. And we obviously are looking at a fairly strong growth there. But the immediate and the short-term focus is to actually drive very strong service quality, ensure that we protect yield and we are optimizing cost, right? Because I think if you look at -- to do -- this is -- I mean, if you get an integration wrong, you can actually lose customers in this industry as well.

Right. Right. Absolutely right. And just my second question, again on the network services. We've also kind of highlighted the last-mile number there. And so just wondering, this last mile is a dedicated service that we provide, aside of the last mile we might be doing as a part of our SCM or our integrated service? So this is just a dedicated last-mile service that we provide.

Yes, so this is just -- this is just -- this part of the business, the last mile gets sold as a service, right? So this is not anything which we do on integrated solution level. That normally will get rolled up under the 3PL part of the business. Delivery stations, delivery associates, electric EV cargo based long delivery services, and the network, which is around -- across over 120 cities in the country, right, [indiscernible] services. This also, if I may add, excludes revenues of Whizzard, right, as Whizzard revenues are not consolidated, combining -- and you have seen the result was around INR 62 crores in the first half of year. And so the combined, both of those, that include last-mile delivery business would probably be -- the total magnitude of that would be around INR 160 crores on an H1 basis, right, growing at roughly that 20%, 25% level. Our own last-mile delivery business actually grew 55% last quarter as we penetrated some newer segments like groceries and so on.

Got that. And my last one is, I mean, we have given indicators -- I mean, the gross margins for various segments. Could you kind of give an indicator of gross margin between say Mahindra and non-Mahindra and say, transportation warehousing as well? And it would just be helpful in understanding how the mix changes because we're seeing a strong growth in automobile and hence Mahindra is doing very well. And I think transportation also is linked to that. So something there will help.

Sure. So I'd say if I just -- I think as we mentioned before in prior earnings calls as well, Mukesh, mostly we don't differentiate from a Mahindra versus non-Mahindra account, the margin profiles are driven more by the kind of service [ lines distributed ], right. The Mahindra business is largely full truckload transportation, right, and in terms of network, it's [ cross-box ] and [indiscernible] levels of postponement in the supply chain, right, as opposed to non-Mahindra businesses, which, of course, actually have a larger share of warehousing solutions, up around 40% of the business, right. So it's a bit unfair to actually do them from a competitive perspective. What I can say, as we have said earlier on, is there are transportation businesses generally have a gross margin is around the high single-digit level. And our warehousing and solutions businesses generally have something in the mid-teens. And therefore, that's roughly -- that gives roughly what carries the weightage of the margins. Now a couple of things I do want to add here, which I think would be relevant is one, obviously, we've seen, as I mentioned in my opening comments, a fairly significant inflationary impact from a car carrier perspective. Our car carrier shortages have been significant. That has obviously had a trailing impact on margins in the second quarter, right? And will probably flow through a little bit in the third quarter. But we expect that to get rebalanced as our partners add more capacity in the coming months, right? And so that's one thing. And of course, we do with the Mahindra business actually operate through a fair amount of -- through a combination of management fees or service fees plus a fresh pair of savings. And we try to beat the level of volatility in the network. That's the level of savings in the second quarter has been impacted, but that's something, again, which we believe will catch up to the rest of the year.

[Operator Instructions] The next question is from the line of Damodaran from Acuitas Capital.

Firstly, thanks for the better disclosures that you have come out with this time. So a few questions around that. I mean, firstly, among the -- between the network services business and the 3PL business. So what is the customer overlap between all the businesses, 3PL, freight forwarding, express and last mile? And a related question to that is what is the internal management structure to sort of ensure that there is sufficient management bandwidth that can be given to all these different businesses, given that you have dedicated competitors in each segment and there will be different metrics, and you are a challenger? So I just wanted to hear your thoughts on that.

So it's a great question, Damodaran, thank you for that. Let me -- I will take them in sequence and if I don't follow your order, please bear with that. So I think this is from a customer overlap perspective, I think on the customer count perspective, there's probably a 25% to 30% overlap of those customers, right? So obviously, we do cross-sell, up-sell to our clients across the board, right? What I think differentiates these businesses is the way our customers buy these services and what drives value creation in the business. So in the network services businesses, a lot of times, the customers just buy the plain, the basic service itself. There is not -- it's not a multiservice integrated solution. It's normally a customer who wants to move more across countries, right, wants to actually move packages across geographies by surface, or wants to do last-mile deliveries in a specific part of the city itself [ and even on ] a specific state. So they tend to buy services on a service level basis and don't buy a bouquet of integrated offerings, right? So the same customer, therefore, buys it very differently at times, and that's why we actually keep them the way they are. The second part of it is the way we create value in the 3PL business through the integration and solution design and domain-level capability, right? In the network services business, it's really around having the infrastructure and driving utilization and service quality, right? And therefore, these businesses are kept differently and measured differently because of that. Your other question was around management structure. And obviously, the 3PL B2B businesses essentially has an independent or a clear P&L owner, right? And each of those P&L owners essentially are partners and are -- the P&L owners are part of our company leadership team, right? And we have individual P&Ls, which we have kind of end-to-end accountability to drive. We have, obviously, programs inside the country which are enabled on driving synergy, both in terms of demand and supply. So for example, weekly procurement essentially often -- it happens through a central group which supports all parts of the business. We do obviously work on customer account management across multiple service lines. But individual businesses actually have specific P&L managers or leaders and they manage the operations, the demand generation operations and service quality of their respective businesses. I hope that answered the question.

Yes. Yes. That's fairly elaborate. The other question that I had was your, I mean, disclosures on Rivigo. So can you just give some more color on the profitability metrics? I mean, what sort of EBITDA loss is it making right now? And what's the plan to sort of turn it profitable? I mean, where will you generate the cost savings from, I mean, basically [indiscernible]?

I think from the past perspective, obviously, Rivigo has always reported numbers on an integrated basis between FTL and PTL. And therefore, the blended numbers are not fully reflective, Damodaran, of the carve-out of the business. The way we have done the BTAs, we have specifically carved out sections of the business, parts of business which constitute what we would like to cover in the transaction. And therefore, the blended earnings are not very reflective, right? That said, obviously, today the business is probably at a minus 7% to 8% EBITDA level on point-of-time basis. Now what's going to drive that value creation in the business, right, on the combined business? So first of all, I think Mukesh asked earlier, our combined business is around INR 500 -- the combined express business is around INR 550 crores, INR 560 crores and instead of operating 2 networks, we obviously synergize that network. So increasing higher volume throughput through a combined network is one thing which is actually going to drive obviously, lower operating cost, right, at a network operating level. The second thing, obviously, is that route optimization and lean optimization across geographies and customer bands are focus areas to drive asset utilization or trip utilization across vehicles, and we express that utilization of all the vehicles will improve, and that will drive down cost. The third thing, of course, is that we are looking obviously at higher purchasing leverage. At MLL, we acquired and buy significantly higher level of FTL transport capacity. And that synergy is something which we'll bring to bear, right, in the combined business, and that should give us significant -- it should give us leverage. And lastly, the management or the operating structure model, I think just building on what I already commented to Mukesh, Damodaran, is that the operator shared services model, individual businesses are responsible for demand generation, operation service quality. But we don't really have -- but overheads are shared across multiple segments, that offers a much larger revenue base. And that should allow us to optimize the overhead structures for the business. So combined to these 3 or 4 broad levers, Damodaran, is what -- along with volume growth, right, as we combine go-to-markets, we expect to be able to get the combined business and turn positive EBITDA zone in the coming quarters.

Just one last question from my side. We saw some working capital deterioration this time around. So I mean, could you comment on the level of sustainability of working capital and what's the reason for the deterioration?

Sure, Damodaran. Yogesh will take that.

Damodaran, our working capital days as of end of September stood at 13 days, which is, in fact, a change of 2 days from what we were earlier when we started this financial year. The main reason, I mean, this is the period of time, usually middle of the year, it kind of balloons up a bit given the customers usually -- I mean, during the festival season, the payouts towards bonuses, et cetera, are higher. And there is a little bit of stretch on the days sales outstanding or the receivables per se. So that's the primary reason for this 2-day delta, what you see in working capital deployed in the company, which by -- as we come towards the end of Q3 and then Q4 is always an improving trend from that perspective. But usually, this is kind of, I would say, a little bit of cyclicity and a middle of the year phenomenon.

Yes. But even if I look at September to September, it deteriorated fairly -- I mean it's almost half. So even -- I mean these seasonal issues would have impacted last H1 result as well?

No, Damodaran, I think if you're looking at an absolute value perspective, absolute value would have gone up because of the size of business, which has gone up itself. What I was trying to do is trying to explain to you saying that one is the absolute working capital deployed because we are an asset-light company. From that perspective, as predominant deployment, I mean, in terms of investment in the business to be from a working capital perspective. And as your business volume grows, your commensurate deployment of working capital would be higher.

Yes, Yogesh, I'm just looking at the cash flow generated. I mean that's like INR 30 crores for this half year versus INR 97 crores for the last half, I mean, H1 FY '22.

Right.

So I mean, there's a sharp jump in trade receivables around [ INR 35 crores ], right? So I mean if you're saying that's just seasonal, then that bad impact should have been there in the last -- I mean, last September results as well, September FY '22. So that's where the question was coming from.

Right, Damodaran. So that last September -- with last September's quantum of business which we are doing, this September's, I'm saying some -- if you convert that back to days, right? So I mean, I did come back in the beginning itself to say that how does this work with receivables, and that's the real reason here. So I confirm to you that, yes, that has been the theme. And the reason why this is, is cyclicity and we're sure of that that this would rationalize. I mean this is the peak season as well as festival season. Both leads to this particular data.

Sure. So you're saying that, I mean, working capital, you should not expect any sizable movement in terms of number of days on an annual basis, that this is just season?

That's correct.

[Operator Instructions] We have the next question from the line of Pranay Roop Chatterjee from BCMPL.

Just one question on the same working capital and cash generation. So if I look at the free cash generation in H1 2023, it has been negative and largely because of working capital outflow, which Yogesh mentioned is because of elevated DSOs in the H1 of the year, right? So if I compare versus last year, it's correct that the DSOs will include accrued sales, is elevated, and then it sort of comes down as the year goes by. But what I also see is that your DPOs have worsened. Well, you were able to leverage your DPOs to a large extent in the last 2, 3 halves, but that has sort of normalized right now. Any comment on whether any vendor relationships have changed in terms of contractual DPO numbers? Anything that has happened on that front? And number two, any comment on free cash generation going ahead? Like should we able to see a positive outflow or due to the new businesses normalizing, we should expect a negative flow for a few quarters?

Pranay, you're right. So from a number perspective itself, cash generating from operating activities for first half has been negative close to say INR 25 crore number. And on that, the payables piece, I mean, I think what I mentioned probably from a -- there are 2, 3 things happened from macroeconomic factors. So what Ram detailed in terms of our operational metrics itself, right. One is the whole inflationary effect, which has gone through, which has kind of from a vendor ecosystem perspective. Obviously, there is a little bit more burn in cash from their perspective as we operate. While there is no change in terms from our perspective, our -- again, there's a seasonality, so during this time, even as vendor would expect us to clear this off per se. Second is our share of business towards warehousing and value-added services has a larger deployment of manpower and rental fees, which again is -- goes in ahead of the cycle. Some manpower cost does get paid out every month from a calendarized perspective. So these couple of things. But from -- again, as I mentioned in earlier question from Damodaran as well, that if you were to look at asset-light business, obviously, is -- or other terms what we engage with our customers and vendors, both combined, these factors towards a particular number of days of working capital, which we steer our business with, and we should get back there. But the reason I think is common here from the inflationary or availability aspect of supply, be it on the auto carrier side, which Ram mentioned earlier, where -- and the seasonality now linked to the festival season, where the payables also does get paid out from that perspective. So these couple of things on the payables side.

Got it. Got it. Okay. And my second and last question is more strategic in nature. So over the last couple of years, Mahindra Logistics as a business has shown a really increased focus on the network services side of things, which obviously, all of them are in investment phase and have limited scale. So right now, we have the express business, which is at about 0% GM. Last mile is also at a 0% GM. Rivigo is going to get integrated and your Meru Cabs is also scaling up at this point of time. My question is, internally, when you discuss at a consolidated level, do you have a broad firstly revenue target and a broad PBT target in mind? So I understand it's going to be very difficult to predict bottom line profitability for the next, let's say, 3, 4 quarters. But at a management level, do you have targets in mind in terms of, look, this is what we would like to achieve out of all entities once say, they've been sort of normalized? And especially in terms of cash generation, do you have any internal targets of turning cash profitable, let's say, next year or in 2 years' time? So if you could just discuss these high-level management targets.

Pranay, I mean, cash, I wouldn't -- basically, the cash metrics you have seen in the first half are a continuing metric, right. I mean you can just go and look at -- back at the recent and past. I think as Yogesh has already said, we don't expect the working capital metrics, right, to fundamentally change through this year. There are a few -- some parameters that sharpen especially as demand patterns move across asset classes, right? But broadly, those should be in play. That said, I think that's a working capital factor. I think there is a broader portfolio element here, of course, right? So as you know, we have been adding more detail around for all your benefit. The core 3PL business has also grown quite significantly over the last 3 years, especially in non-M&M share and in nonautomotive share as we have built strong positions in consumer and e-commerce, right? And that business on a margin level is also -- is at a pre-investment level in terms of margin, right, as we expanded the warehousing business and try to build a much stronger differentiation with technology. So that -- it's not like that business has not been a significant focus. Clearly, the network services business is a very important focus for us. We are investing in it. And there is a scale point at which these businesses have an inflection point in terms of earnings. And if you actually look at our 3 network services business, the freight forwarding business has kind of pretty much already been there, right? It's at the 9 and 10 percentage gross margin level, right? It's spread across quarters. It is -- it's kind of been growing and now has achieved scale, right? And therefore, that's kind of what our businesses should look like at scale in the network services piece. Clearly, the express business is an investment curve, right? And the last-mile delivery business also investment curves, both organically and inorganically right? Scale is important in this business demand. So we do obviously focus on driving that scale up, right? And add it all up, I think we've always said that our -- we believe that what is critical for us as a company and what we think makes us unique is our focus on being multiservice businesses and business and the multi-market business, right? So in the last 2 years when automotive was softer, our nonautomotive businesses actually grew at a much faster pace. Today, as you have seen, some impact of softness in some of our nonautomotive markets. It's automotive, which is driving growth, right? And it is balanced across sectors, which we have continued to invest in, which we think is very important. Similarly, balance across service lines is very important. So while we focus on 3PL, sometimes 3PL will grow faster, but at a mature level. As we get the right scale across these businesses, we think the combination of those businesses is what makes more us create value for our shareholders, as well as our customers because we can provide integrated solutions. Now in terms of targets, I think each business actually has targets. Obviously, the 3PL business is a more mature business. It has separate cash and profitable targets compared from a network service business. But the overall portfolio is headed towards a broader direction, which we have said before as well, that we can hope to become a INR 10,000 crore company. That's the aspiration. We put it out there clearly in the public world, right. And we expect that secularly, across segments, we should be able to continue to grow profit to pre-COVID levels, right? I think our pre-COVID level margins have been on 2% at a PAT level, and we expect to be -- our aspirations are to be better than that as the portfolio matures over the next 2, 3 years, right? And most of the network services businesses should actually look like the freight-forwarding business, right, right at maturity and scale. So that's kind of -- as you know, we don't give guidance, Pranay, but that's the closest level of detail I could probably share with you.

[Operator Instructions] The next question is from the line of Sachin Trivedi from UTI AMC.

Sir, yes, so just from 1- to 3-year perspective, again, not looking for margin guidance per se, but the warehousing business or the supply chain business that we operate in, how should we think about, let's say, if I were to -- if I don't want to go into a specific margin number, but what kind of potential that this business will have in terms of profitability just because we have scaled our non-Mahindra warehousing business substantially? But yet to see the results of that number in the numbers. And so just maybe if you can help us understand that side of it because that's our core of the business and if you can help us with that.

Sure. So I think if you actually look at the business, again, you just need to divide this, I think, Sachin, into 3 parts. So if you look at -- because the margin when you see them is a consolidation of all 3, the drivers of the margins are quite different. So if you look at our core 3PL business, right, and you see the results, I think you will see that we are of a gross margin of around 11% in the second quarter, right. And that business historically -- so that's actually been into the 10% to 11%; now, it's probably in the high 10s. We expect to continue to focus on driving margin improvement at the 30 to 50 basis points at an annual level, right? Now we're not -- that business because of the AS 116, we have obviously invested on expanding the warehousing network. And there has been a flow-through impact because of the AS 116 gets accounted. Most of warehousing network actually services that business. Okay? If you look at the 3 -- the network services businesses, we are roughly now around 20% of our revenue. But those businesses at a segment level are around 5% gross margin because they are in investment curve, right? As I said earlier on, at peak, at scale, those businesses should also be at 10-plus percent in terms of gross margin with a lower capital intensity because we are not investing in the same level of warehouses, et cetera, which we would do in the warehousing part of our business, right? And therefore, that business should be at that level, right? And so as you look at this -- as you look at the going-forward margin profile, I think the ramp-ups in different segments are different. The 3PL business is a business which is more core to us. It's a more established business model. And there, we expect to continue driven -- to drive improvement with margin acceleration. The network businesses are where we are building scale. The growth will also be faster there. So there'll be 2 factors, revenue growth will be faster and the higher revenue growth will also be driven -- will also drive better margin performance, right? But that's kind of the way we drive our 2- to 3-year view of these businesses, Sachin. And obviously, we break those 2 to 3 years views into more specific targets, which are there for the individual businesses on a short-term perspective.

The next question is from the line of Vikram Suryavanshi from PhillipCapital (India) Pvt. Ltd.

Sir, you talked about, I think, network services and growth and our focus of being a multiservice business. Just trying to understand, we did that framework updating outlook on particularly non-Mahindra 3PL side of the business in terms of our focus on client addition and traction with the existing customers in terms of slightly better growth outlook for that kind of a business. How are we looking at there?

I think our growth outlook is, as I think we've said earlier on, I think the goal is to grow the non-Mahindra businesses, especially our 3PL part of it, by 15% to 20% every year, right? And to grow the overall non-Mahindra business, including network services, by north of 35%. If you look at this quarter, obviously, it's been a bit lower, but if you look at H1 this year, I think combined -- we've kind of combined roughly a 20% year-on-year growth despite some of the kind of slightly softer trends from -- in the recent months around some of our markets. Why I say H1 is important because last year, Q1 was COVID impacted, Q2 was COVID recovery, right? And therefore, because quarter-to-quarter is not as accurate as H1 into H2, right. So that growth is something which we are focused on sustaining. During the quarter, we have continued to add our clients this time because we added a little bit more detail around our segment performance. I do not cover acquisition of accounts in my opening comments. But I can share with you that we have continued to expand, right, in -- of course, we've had -- we continue to have strong retention rate at a client number level across our business. And during the quarter, we have actually added more accounts. I think given the nature of the economy right now and the macros, I think obviously, this quarter, we saw more additions in the consumer and manufacturing business, right, where we have added work with both -- with different manufacturing clients. But we've added some contracts in the e-commerce space. I think the space of that has come down, has been lower than the past there. Overall, for the quarter, I think we had quarterly order intake on the non-Mahindra side, mostly 3PL of around INR 90 crores to INR 100 crores of newer contract -- on annual contract value basis. So that's kind of roughly the run rate we were on in the quarter in terms of order intake.

Okay. Got it. And just to get a feedback, like the customers when you talk to the new segments, because we are seeing good response from consumer e-commerce or manufacturing, but customers' ability to go to 3PL partners, is it becoming more and more aggressive? Or it is still a slow process and people are taking their own time to migrate? How is that response in terms of different verticals? And to what kind of -- the basically speed which -- is it like as anticipated, or still, we need to do a lot of work to really bring them on the table? So I just wanted to get that sense and how fast we can see that migration in India, the broader opportunity for 3PL players.

The auto industry, I think, has always been a higher outsourcing industrial in terms of 3PL. I think since GST -- so I think that's definitely [indiscernible]. I think e-commerce has also been as it was scaling up networks and volumes actually has obviously used a partner model quite aggressively, right, to drive growth. And I think adoption in both those markets is very, very good. I think consumer durables FMCG, FMCD, pharma and other categories there, I think there, historically, obviously, those markets have been served through CFA models. Post GST, I think there has been a growth in traction quite significantly, right, in that space. But it's a very distributed network, so companies continue to move that. They don't -- very few companies are doing a lift and shift of an entire network, right? In fact, over the last 2 years, with all the variabilities of COVID, I think that has actually placed a challenge on companies in terms of redesigning their supply chain network because there are new considerations are there. But I think the trend is fairly -- is overall healthy. I mean our own estimates are in India right now, the 3PL is around 6% of the industry is our estimate. And we think that given the work and -- the trend around formalization, given customers will drive towards more integrated solutions, and recent policy shifts like NLP, we think 3PL will probably come on 10% over the next 4, 5 years.

Got it.

I hope that answered your question.

Yes, sir. That's all very helpful.

Thank you.

The next question is from the line of Alok Deora from Motilal Oswal.

Sir, my question was more towards Rivigo. I just wanted to understand, you had recently put up a press release on the delay in the closure of that, of your transaction. So how are we -- by when can we expect that coming in? And also some color on what's the -- how much losses are there in that business? And by when we can see a turnaround there?

Yes, so I think the -- Alok, I think the delay in terms of what you've listed out was mostly on account of procedural delays and procedural factors. Obviously, from a governance, we listed them out clearly. We have planned a certain schedule around it, but given there has also been a festive season and with Diwali and other occasions have come in, there's just been procedural delays in that. I think as we stand right now, we probably expect the next -- in the next couple of weeks, we will be able to close the transaction subject to all conditions being met from all parties and in obvious terms have been adequately met. Now I think from a profitability perspective, I think I indicated earlier on that the numbers have always been blended. So we don't actually -- are not really reflective of what we think. What we have estimated right now is that probably on a running rate -- run rate level, the business is probably at minus -- is at a negative 7% to 8% EBITDA, right? And that's what we are hoping. And I think I already talked about the 4 levers which we are focused on to drive and get to a positive EBITDA level, combined in both our export business which exists today and the business which we buy from Rivigo Services Private Limited.

Sure. So overall, when we see Rivigo financials, it's at around 45% to 50% loss. So express business, you are saying it's around 7% to 8%?

No, I think that's not -- unfortunately, Alok, that's actually not what I'm saying. What I'm actually saying is that Rivigo -- RSPL operator on a certain blended model in terms of revenue market and cost structures, right? What we have done is we are essentially buying parts of that business. And the parts of the business which we are buying right now, right, are at that kind of EBITDA level. As we buy the business, right, obviously, we have plans on trying to kind of turn that around and restructure it. I hope that was clearer.

Yes. Yes. Yes. So actually, I was just trying to understand how much losses their extra business has out of the total because I think they have 2 businesses. One is the FTL and one is the express.

I think it's hard for me to comment on how their reported numbers were. I think that's probably best for the RSPL management to respond to. And I kind of avoid -- I'd just not like to answer that. But as I said, we have given you clarity about what we are buying and roughly the run rate which is it at.

Sure. And also, sir, so we are going to pay around INR 225 crores for that business. So how do we see the debt moving? Because I think some bit of debt will also come up for this, right, because the operating cash flow might not be entirely sufficient to pay for this.

Yes. So I think at this point, obviously, the business will be funded through internal accruals and debt. There will be a component of debt, clearly, which is there in the short term, Alok, right? At the same time, I think exactly how the overall debt table will work out, we are in the second -- third quarter of the year. And we have sustained strong growth this year, right? So obviously, we have to look at our forward view over the next 12 to 15 months in terms of working capital requirements, organic capital investments and investments in Rivigo. And we'll build a consolidated view of that. Right now, we don't have a specific sort of numbers to share, right? But what I would say, Alok, is directionally yes, there will be debt on the table.

Just last question. So you know we are having these new businesses which are coming, which are at losses or at lower profitability. So for the next year or next couple of years, do we see the margins being at near above current levels or slightly lower than these numbers? Any ballpark range we can work with because once…

Alok, so what I would say is I think it's -- I think every business is a slightly different frequency. So first, I think it's 3PL business. I think we kind of shared the margins with you on that, and we expect kind of it's on a stable basis and it'll have organic kind of margin improvement focus. If you look at within the network services businesses, there are actually 3 different businesses in 3 different stages. The freight-forwarding business, Alok, is actually at the 10% gross margin level, right, and they're scaling their business up. The express business has obviously been where we are scaling it up now faster through the Rivigo -- acquisition of the business from Rivigo, right? And the last-mile delivery business is a business which is kind of breakeven. And I think these businesses each -- but they also have very different growth drivers to our portfolio, and they compete with different businesses. We compete in last mile delivery with last-mile delivery businesses, in express with express companies. So I think it's not -- so we -- I won't call a specific number in terms of margin on a blended basis. I do believe that we will hold or improve at this stage, our 3PL freight-forwarding margins. And the other businesses, obviously, as we build scale will have a multiplier effect from a margin perspective.

The next question is from the line of Abhishek Ghosh from DSP.

A few questions. For the SCM part of the business, non-M&M, what will be the average tenure for a typical contract?

For the SCM part of the business, non-M&M, I think -- it's hard to tell some bellwether numbers like this, Abhishek. I'll just say that I think that the warehousing and integrated solutions contracts would probably be between -- would be 3 years on average plus on average, f I had to take an average representative number. And I think the transportation contracts depends on how much of network design we have on the FTL side and how we integrate with it. But those contracts also range between up around 3 years, between 2 to 3 years. This is a stand-alone transportation contract, if it's integrated across the board, across transportation, warehousing solutions, it will probably be around 3 years as an average.

Okay. Why I ask this question, Ram, is because a lot of those contracts which are signed in that FY '19 levels or 2019 levels must be coming up for repricing now. So how do you look at the margin profile of those contracts, what you were getting in 2019? Are you able to kind of get the same kind of margins? Or has it improved, deteriorated because of the competitive scenario? I wanted to kind of get some understanding around that.

Good question. I think if you look at our past, at least from the warehousing and the solutions part, I think you would see that as the business has grown significantly actually in the last 3 years. So a substantial part of is actually not coming up for re-contracting officially right now. But that said, I think the net numbers we obviously show are net of any churn which might be there. From where I stand right now, I think on an apple-to-apple basis, we are able to, by and large, hold or even improve margins, right? And what I mean by apple-to-apple is that if your customers do sometimes change the scope of the contract, they do change the number of plants covered, number of locations involved, right, so those kind of changes do happen. So it's a very hard thing to perfectly predict. But I would say that if I had to do an apple-to-apple comparison, we are definitely able to hold margins on renewals.

And would it be fair to assume that you have productivity gains in these and there's a learning curve [ between mix ]...

Yes, that's why I said we're able to hold or expand margins. I didn't -- some part of how I get shared, based on productivity benefits, how much we share, there's the outsource benefit to our clients, et cetera, is a very case-to-case kind of profit stream, right? But by and large, I think directionally, we do -- we are focused on maintaining or expanding those margins. In fact, I would say the margin discipline is something which, on the 3PL part of the business, we are actively holding especially in the current environment. And therefore, we do not -- if we don't meet margin hurdles, we will not probably -- sometimes we'll probably not do contracts if they're not able to meet margin hurdles, whether they're renewals or new contracts.

Okay. The other thing is you've spoken about this aspiration of this INR 10,000 crores of top line. Is there an aspirational margin, cash flow, ROEs as well, or is it just a top line aspiration?

I think at this stage, we do obviously have aspirations. As you know, Abhishek, we don't have an aspirational top line. We've got an aspirational bottom line. But as a matter of policy, we don't essentially give guidance on that, right? I think we've obviously shared the top line aspiration I think to help obviously share with everyone how -- not just a number but also a staircase to that aspiration and the shape of the revenue in terms of our vision of being not just a multiservice business and a multi-market business, which I think is very important to give long-term diversification.

No, Ram, reason I ask this question is if I just look at your current quarter's top line and broadly first half top line. And if I just compound with -- by about 20%, 25% even without Rivigo, you will be there at that revenue target. So that is fairly achievable, and that is fairly visible when we kind of model it. But if I look at your profit from the last peak cycle, what you had seen in FY '19 of about INR 86 crores of PAT, the trajectory is still a lot weaker. So I was just trying to understand from that perspective because if I could just compound the earnings at the current level, you're there at that INR 10,000 crores of revenue. And with Rivigo, I think that should be quite easy. But how should we look at the on the PAT basis? So that was the whole question.

Abhishek, I think what -- why we are -- as you can see in our more detailed disclosure now, all our businesses are not exactly at the same level, because we're investing in growth, the growth will come with the investment, right? So if you go back to the prior peak number, at that time, we were almost completely purely at 3PL and enterprise mobility business. There is no network service at that time, right? And therefore, today, the 3PL business is still in a pretty stable place, right? The network businesses within them, it's a mix of businesses, some which are getting to the right level of margin like freight forwarding and others which we're investing in, right. So as an asset-light company, I mean most of our investments are actually on through the P&L, because we're expanding networks and are building networks and we're putting capacity ahead of demand. But -- and therefore, one has to, I think, look at the business in terms of peak levels across the portfolio, right? And prior comparisons, I mean, are probably more relevant from the portfolio at that time versus the portfolio, right. I think 2, 3 years ago, when we set INR 10,000 crores in aspiration, I think everybody was asking how we're going to get to a revenue level. And actually I'm appreciative of the fact that you have greater confidence today given where we stand in terms of run rate in the next 3, 4 years. I think we have similar aspirations from a margin perspective and we believe we are confident in our view that we can deliver that as we build the scale.

Thank you. Ladies and gentlemen, that would be our last question for today. I now hand the conference back to the management for their closing remarks. Thank you, and over to you.

Thank you, everyone. I hope we have been able to answer all your questions satisfactorily. However, if you need any further clarifications or would want to know more about the company, please contact our team or SGA Investor Relations Advisors. Thank you. Thank you once again for taking the time to join us for the call, and wish you and your family and colleagues the very best. Thank you.

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