TVS Supply Chain Solutions Limited (TVSSCS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to TVS Supply Chain Solutions Limited Q4 and FY '24 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. J. Sivakumar, Head Investor Relations at TVS Supply Chain Solutions. Thank you, and over to you, sir.

Thank you, moderator, and good afternoon to all. We welcome you to the TVS Supply Chain earnings call, Q4 and FY '24 full year ended 31 March '24. We have with us today Mr. Ravi Viswanathan, Managing Director of the company; and Mr. Ravi Prakash Bhagavathula, Global CFO. Our financial results and investment presentation have been posted in the stock exchange website and also on the company website. We'll now commence the call with opening remarks from our management team, followed by an open forum for question and answers. Before we begin, I would like to point out that some of the statements made or will be made during today's call may be forward-looking in nature and must be reviewed in conjunction with the risk that the company faces. A disclaimer to this effect has been included already in the earnings presentation that has been shared. Now I hand it over to Mr. Ravi Viswanathan, Managing Director of the company, to make opening remarks. Over to you, sir.

Thank you, J., and good evening to all of you. Welcome you once again, where we would like to discuss our quarter 4 and our full year FY '24 performance. I will share with you the highlights of our performance and my colleague, Ravi Prakash, the Global CFO, will then take you through the analysis of our numbers. We look forward to interacting with you as part of the Q&A. Before I begin, I think I will provide a brief background of our company for the benefit of those participants who might be joining our analyst call for the first time. TVS Supply Chain Solutions is a tech-led and asset-light supply chain solutions provider with capabilities across the value chain. We operate in two segments: the Integrated Supply Chain Solutions segment, which is called ISCS and the Network Solutions or the NS segment. Our presence spans four continents: Asia, Europe, North America and Oceania with a diversified customer base spread across multiple sectors. Our customer contracts are fairly long term in nature with the average relationship span of 12 years for ISCS segment and 11 years for the NS segment, reflecting the mutual trust and collaborative nature of the relationship. To summarize TVS Supply Chain Solutions is an Indian multinational with strong local and global presence in a competitive space with the best-in-class in the industry. The management focus is on capability-driven customer growth with profitability. We pride ourselves with the fact that we have over 78 of the Fortune 500 companies as our customers, which has increased significantly from 61 just 2 years ago. The steady growth of marquee customers positions us favorably in our stated goal to be among the top 50 logistics companies worldwide. With this short introduction, I shall now move to the performance highlights for Q4 and year ended 31st March 2024. We had a strong quarter and a strong year in the Integrated Supply Chain Solutions segment with good growth, both on revenue and margins. The ISCS segment delivered sequential growth of 8.4% and on a full year basis, it grew by 14.4%. ISCS segment revenues growth were broad-based across all our key geographies, namely India, Europe and North America through expansion of current customer engagements and new business wins. And this momentum will continue in FY '25. The ISCS segment's margins for the quarter were 9.6%, which was a 40 bps improvement year-on-year. And on a full year basis, ISCS segment margins were 10.2%, which is 130 bps higher compared to the year ended March 2023. The Network Solutions segment or the NS segment, within that, the integrated final mile revenues saw steady revenue growth on a quarter-on-quarter basis. The segment, however, faced margin pressure due to extraordinary inflation levels, mainly in the U.K. and Europe, which has started easing now. The Global Forwarding Solutions or the GFS business, which is the second segment within the NS saw revenues for quarter 4 increase, reflecting the uptick in the demand after the slowdown in freight observed in the last few quarters. Ocean freight rates for the quarter were nearly at the bottom end of the curve with near-term rate outlook being positive. On a full year basis, freight volumes, however, reflected the global industry trend and was weak across all our trade lanes. On a year-on-year basis, our NS segment revenues were 26.9% lower. Our margins for the NS segment were consistent on a quarter-on-quarter basis at 4.5%. In IFM, we are currently implementing pricing revisions with our customers and executing operational efficiency initiatives aimed at margin improvement. In GFS, our focus has been on procurement efficiency and operational efficiency, which has helped soften the impact of low rates. Additionally, we have also taken specific cost reduction measures across both these subsegments. Between both the ISCS and NS segments, business development contributed 9% of the quarterly revenue and has been consistent with previous quarter growth. On a consolidated basis, revenues for the quarter was 9.2% higher sequentially and 4.5% on a year-on-year basis with adjusted EBITDA margins for quarter 4 at 7.2%. On a full year basis, our consolidated revenues were down by INR 794 crores, a reflection of the rate decline in the global freight. We grew our EBITDA, however, by INR 25 crores in spite of the significant reduction in the revenues. On a full year basis, revenues were down by 7.9% year-on-year, while adjusted EBITDA improved by 80 bps. So with this background, I'll hand it over to Ravi Prakash, our Global CFO, who will take you through a detailed analysis of the numbers.

Thank you, Ravi. Good afternoon, everybody, and thank you for joining our earnings call. I'll take you through the highlights of our financial performance for Q4 and the year ended 31st March 2024. Q4 FY '24 marks an important step on our journey to establishing a consistent growth and margin trajectory. We have reported revenue growth on a consolidated basis after a couple of quarters. and that is on the back of the ISCS segment continuing to remain strong, the power of a strong portfolio coming through very well. And most importantly, we have delivered positive profit before tax. The company has demonstrated a consistent turnaround in profit quarter after quarter sequentially. I'd just like to remind the participants, Q1 PBT was a loss of actually minus INR 10.7 crores. Q2 was minus INR 4.5 crores. Q3, we broke even and Q4, we are a positive of INR 5 crores. In FY '25, we expect to further build on this momentum and deliver improving results quarter-on-quarter. Along with the release of our annual results, we have provided additional geography and segment-wise financial information. This is something we hope to do on a periodic and definitely on an annual basis. We hope that this detail will provide appropriate context to our performance. As you review this material, a couple of specific call-outs from our side. All parts of our ISCS business has been growing at a 17% to 18% CAGR over the past 3 years. As we grew, we have diversified our customer base while adding more Fortune 500 clients. And in terms of revenue drivers, as we have messaged in the past, in our case, it is our ability to penetrate more customers, increasing wallet share that matters and not strictly the GDP of the countries that we operate in. We expect to periodically update these and revisit the disclosures for any further information. With that, let me walk you through an analysis of the key line items in the financials. Q4 FY '24, revenue stood at INR 2,426.3 crores compared to INR 2,221.8 crores in the previous quarter and INR 2,321.6 crores in Q4 FY '23, resulting in a year-on-year growth of 4.5% and a quarter-on-quarter growth of 9%. Revenues from business development maintained their momentum with INR 218 crores being clocked in Q4 -- and Q4. For full year '24, revenue from operations was INR 9,200 crores compared to INR 9,94.4 crores last year. Despite an approximately INR 1,600 crores decline in the GFS business on account of pricing, annual business development revenues of INR 881 crores and momentum in the ISCS segment has enabled us to deliver a INR 9,200 crores revenue. Other income for the quarter was INR 6.8 crores compared to INR 21.6 crores in Q3 and INR 10.9 crores in Q4 last year. Other income comprises mostly of interest income from bank deposits and other deposits and a little bit of exchange gain. With this, the total income for the quarter was INR 2,433.1 crores, which was a growth of 8.5% sequentially and 4.3% year-on-year. For the full year, it was INR 9,245.8 crores, down 8.1% year-on-year. A brief explanation of how our major expense line items have evolved. Freight, clearing, forwarding and handling expenses reduced significantly, driven by the decline in freight rates and improved procurement efficiencies. This expense line item for the quarter was INR 637.9 crores, a reduction of 1.5% year-on-year and INR 2,327.8 crores for the full year, down 37.6% year-on-year. As you can notice, the number has reduced more than the revenue, and that is because of the procurement efficiencies and the operational discipline, which are reflected in the variable margin, which has improved by almost 300 basis points, both for Q4 and full year, and that has been called out in the earnings presentation. The other major line I'd like to talk about is employee benefit expenses. For the quarter, it was INR 568.3 crores versus INR 491 crores in the prior year and INR 552.3 crores in the previous quarter. On a full year basis, it was INR 2,243.2 crores versus INR 2,010.6 crores last year. As we have mentioned in our past calls, the year-on-year increase in employee benefit is on account of ramp-up in customer engagement in the ISCS segment requiring manpower deployment. And the quarter-on-quarter increase was because North America operations reverted to normal after the UAW strike in Q3. Most of these cost increases are absorbed in the gross margins of the respective business segments. We have provided the segmental results for ISCS and NS segments on Pages 21 to 26 of the investor presentation. Consolidated adjusted EBITDA for Q4 was INR 174.5 crores compared to INR 173.6 crores in the previous quarter growth and INR 170.8 crores in Q4 last year. Adjusted EBITDA for the full year was INR 710.2 crores compared to INR 685.1 crores previous year. Once again, I'd like to call out that despite a INR 794 crores decline in revenue, we have managed to grow EBITDA from INR 685 crores to INR 710 crores. Lastly, an important step, which we've been talking about through the year was completing the debt reduction exercise. We have completely used the IPO proceeds as well as funds from internal sources to prepay all our long-term debt and a substantial portion of our working capital borrowings. As a result, our interest expense, which was running at about INR 41 crores per quarter in Q1 has now come down to INR 16.6 crores and that is what we expect to -- that is the range in which we expect to see in the next few quarters. Finally, we achieved a profit before tax of INR 5 crores compared to a breakeven profit of INR 0.6 crores last time, as I said, demonstrating the turnaround. This is a -- this concludes the summary of the financials. I'll now hand it over back to Mr. Ravi Viswanathan.

Thank you for the analysis, Ravi Prakash. Our business development continues to contribute 10% of incremental revenue across both the ISCS and NS segment. And for quarter 4, the business development contribution was INR 218 crores. For details, please refer to our investor presentation, Page #7. We had significant new customer wins in both the segments. In the ISCS segment, we won in India, a diversified equipment manufacturing company and a commercial vehicle OEM and an engine or a generator manufacturer in India. We won new deals with a defense contract in the U.K. and a water utilities company in the U.K. On the network side, we won a tech or a solutions integrator. We won a large engagement with a tech solutions integrator in the U.K., a communication equipment manufacturer in the U.K., an auto component or a battery manufacturer in India, an engineering and product manufacturer in the U.S. and a clothing and apparel manufacturer in the -- in APAC. Our pipeline of new opportunities is strong and currently presents a revenue opportunity in excess of INR 4,000 crores. In addition to business development initiatives, continuous customer engagements provide us newer opportunities as part of our encirclement strategy, where the objective is to enhance the share of revenue from the customer through effective cross-selling. Here, it is pertinent to mention that recently, we were awarded partner-level status by John Deere, which is a recognition of our dedication to providing products and service of outstanding quality as well as commitment to continuous improvement. It also provides us an excellent platform to explore more opportunities within the customer ecosystem. Also, we have a very long relationship with an American auto OEM. We've been working with them for over 30 years. During the year, we won a contract to provide a logistics solution in a second site in addition to the site that we've been engaged in. The reason I say this is it's coming on the back of a very strong, what I would call, a global account management initiative wherein we are trying to significantly grow our revenues in our large customers through active account mining. As we exit FY '24, we are strategically placed to participate in large opportunities. When we won the Centrica contract, it was worth over INR 2,000 crores. I had mentioned that it is an inflection point where we would be invited to participate in opportunities of that size. I am glad to announce that we have quite a few such large deals now in the pipeline, and the teams are confident that we will convert a couple of them through the course of this year. We are actively engaged in AI solutions. And today, we have AI deployed or AI as an artificial intelligence deployed at scale in U.S., U.K. and in India, and we continue to drive our solutions through active technology intervention. In summary, we moved from position of reporting losses after taxation at the end of Q1 and Q2. We then turned into breakeven profit in Q3 FY '24 and finally, to single-digit profit in Q4 FY '24, thanks to multiple on-ground operational and strategic initiatives. Going forward, we are confident of delivering double-digit PBT numbers in the quarters ahead. With that, I would like to open the floor for questions.

[Operator Instructions] The first question is from the line of Krupashankar NJ from Avendus Sparks.

Congratulations on steady improvement in the profitability witnessed during the quarter. My first question was on the ISCS business, while you have stated that there have been multiple business wins, what would be the time frame when it will start contributing materially to our revenues? And the robust order pipeline, which we have stated as INR 4,000 crores, what proportion of it is from the ISCS business, if you can share some light on that?

This is Ravi Prakash here. I just want to make sure I've heard the question correctly. I think your question was what ISCS business, what proportion is going to contribute. Today, the Integrated Supply Chain business or ISCS is 55% of the company, and it's about INR 5,500 crores in revenue. That is actually the major part of the company. And that is the reason it's important that it keeps growing at the 14% that it has been growing. So I hope that clarifies it. And in terms of...

Sorry, Ravi. My question was actually you have started -- you talked about the business development efforts and the business wins in the ISCS segment. I was wondering when it will ramp up and contribute substantially to our top line, on the one which has been displayed on Page #11 of the presentation.

So this is Ravi Viswanathan here. So what Ravi Prakash is saying is that it's a continuous process. So it is a deal pipeline which gets converted, which has delivered the 14% growth year-on-year in the ISCS segment. And when I said that we are very confident of growth in ISCS, and I will stick my neck out and say we are very confident of a double-digit growth in ISCS on the back of these pipeline deals that are getting converted. Typically, ISCS pipeline takes about 6 to 9 months to fructify. So today, the INR 4,000 crore pipeline is in various stages of conversion. So some of them in our parlance, this could be in stage 5, stage 6 or stage 7. Stage 7 being the stage when it get converted to a contract and gets executed. And we typically have lead times of anywhere between 4 weeks to 10 weeks depending on the complexity of the engagement for them to start. I don't know if that answers your question, I hope so.

And I just want to also add a little bit. See, it's not like a point in time. It's not like a stop-start engine. At any given point in time, if you look at our deal pipeline, you'll probably be the same thing, and you'll have deals coming through all the time. And that is what we are messaging when the -- if you see the investor presentation, we have said that this year, we were able to add INR 881 crores of incremental revenue because of business development. That is actually a portion of the deal pipeline, which would have existed in the prior year. And that's how it goes all the time.

Understood. Understood. That's very clear. And second question also on that INR 4,000 crores of order pipeline. Now given that we are in the services sector, how do we arrive at this particular order pipeline number? Is it based on the pre-agreed customer contracts which we have signed and that should translate over the next -- how many years does this translate into our top line growth?

So this is visibility of INR 4,000 crores of revenue. So let's say, I convert all of them today, that's the visibility I have for the revenue. But this could be potentially from a total contract value, a much higher number, okay? So INR 4,000 crores is not the contract value, but it's the opportunity to convert them as revenue for this current year. So we are not yet declaring the TCV, but hopefully, we'll get there in a few quarters' time. How do we arrive at this number is based on what the customer has told us in terms of volumes, in terms of movements, in terms of number of parcels packages, which is based on which we have given the estimates or proposals. And that's how we arrive at the numbers.

Understood. Understood. So were there any capacities which were already set up based on this order book and then the ramp-up would also drive a fair bit of margin expansion in the ISCS business. Is that a fair assumption?

It's a fair assumption. We have some amount of contracts, which we will utilize existing infrastructure and network, especially the network business, that's how it will be. But in the Integrated Supply Chain Solutions, where we are designing complex solutions for the customers, most of the time, it would -- that's why I said the lead times would change anywhere between a few weeks to 10 weeks, depending on our -- the kind of contracts. So for example, the large deal that we announced in the U.K., it took almost 8 weeks to bootstrap because we need to make sure that we bring in the people, the facilities, all of that. So every contract has that complexity built in. But I would say the Network Solutions side, typically, the ramp-up is much faster. And the ISCS segment, it takes anywhere between 4 to 10 weeks for the ramp-up to start.

Understood. Last question from my side would be on the Network Solutions business. We have seen suddenly a spurt in container freight rates on key routes. Now how does it place us over the near term with respect to, because last time there was such a large gap in demand supply, we could see that our margins in the business had jumped up to close to about 7%. Is there a possibility of a margin reversal because if this sustains?

So this time, what we have done is in the investor presentation since you asked this question, we have actually given 3 years -- 4 years revenue, '21 to '24. And we have specifically called out the "incremental pricing impact" because of the COVID pricing, right? And if you look at that, and at the bottom, we've also given our volume data. What I can now say is in terms of rates per container or rates per tonne of air freight, more or less, we are back to what I call '21 levels, which were probably pre-COVID levels, just before the COVID hit kind of levels. In a way, this represents a normalization of the trade lane economics in the network segment. The only aberration now is the Red Sea, the incremental cost as well as price because of the Red Sea, but it is not on the same scale that we saw during COVID. Having said that, if you look at our EBITDA margins in the GFS business, we've actually been able to hold the margin percentages because we -- and that's where I talked about the variable margins doing much better because we've been able -- we've been very good with our procurement efficiencies. So going forward, in the next 3, 4 quarters, the outlook would be that we are focusing on volume improvement. We don't -- we expect prices to move in a narrow band. And with the help of volume, and we have taken some very stringent cost containment measures, we expect to see improving profitability.

[Operator Instructions] The next question is from the line of Achal Lohade from JM Financial.

Excellent presentation, I would say, a fairly detailed one. Just a few clarifications. First on the guidance what you have given. I presume that this is FY '27, the margin guidance what we have given, 4% PBT margin is basis $2.5 billion revenue. Have I understood it right?

So Achal, it's -- we are talking about a mid-teens growth rate of volume year-on-year, Achal, right? So we have not called out a number in terms of revenue. Yes, $2.5 billion is our vision. But the guidance that you see in Page 18 of our investor presentation is that by FY '27, if we keep growing revenue at about, say, 15% year-on-year, this is where we expect to hit by FY '27.

Understood. What is the mix here we have assumed because [indiscernible] difference would be -- there would be difference between the NS and the ISCS PBT margin. So what is the revenue mix we should assume here, it will remain same. Is that, sir?

So you should, at the minimum, assume ISCS at 55% and a little bit probably -- maybe a few percentage points better. The IFM business would probably be between 18% to 20% and the balance would be the GFS business.

Understood. On the IFM piece, if you could help us understand the challenges what we went through, what the solutions and the outlook, if you could specifically talk about this particular subsegment, sir?

Yes. What I'll do is I'll talk a little bit, and then I'll probably request Viswanathan to talk about the business outlook. Look, this time, we have specifically disclosed the IFM business revenue separately. And the reason we've done that. is to actually put out that the IFM business has been growing revenue consistently. It's an INR 1,800 crore business today as we speak. So the challenge we've had is actually on the cost side in IFM. And that is because in the last 2 years, the IFM business, a significant portion of its revenue is from the U.K. U.K. went through an extraordinary set of circumstances. Inflation, which was never seen before between 11% and 12%. Energy prices, which sometimes went up almost 20%, 25%. Then on the third, minimum wage increases, which almost over the last couple of years have gone up 20%, 25%. All of them hit at the same time. And then the government also withdrew some of the rate benefits that they had given to properties, which they had given during the COVID. So in a way, it was almost like an event which we had never seen that before. It took us time to transmit a lot of these prices to our customers, this huge cost inflation. It coincided like we talked earlier, with the ramp down of the very profitable contracts that we had in -- on the health sector in the U.K., delivering COVID vaccines. So we kind of -- this combination is what put pressure on the cost. So it's actually a cost side problem that we have. We've been working on it for the last couple of quarters. We have taken significant steps to reduce our fixed costs. We are looking at all elements of our infrastructure, whether it's property, whether it is routes, et cetera, to kind of bring it to a more optimal level while also working on pricing. We have seen improving results in Q3 and Q4 of this year. We expect to see continued improvement in Q1. And by the time we close Q2 of FY '25, it is our expectation that we will hit the run rate profitability that we would like to get to in IFM.

Achal, just to add that IFM continues to win significant deals. So from a business development and a pipeline perspective, I would say it's very healthy. Like Ravi Prakash said, our focus really is now to pass on some of these cost inflations back to the customer. We have succeeded in quite a few, and we're still in the process, like I said earlier. And of course, ensuring that we are consolidating a lot of our assets to see how we can spread it better. So I think there is -- like Ravi Prakash said, by Q2, we should hit the target run rate for IFM, but it is work in progress.

Understood. And just a quick clarification on that. In terms of the customers in terms of revenue, how much of the customers we have already passed on these cost inflation ideally in terms of the revenue sizes or if not in terms of number of customers, percentage where how much is already passed on or the customers accepting those cost inflation?

Achal, actually, a significant number of customers have taken at least one round of price increase. And we are working with a few large ones for a second round because -- see, as you can imagine, right, typically, in an economy like the U.K., you would normally say about 1% or 2% price increases because these are linked to inflation, whereas this is almost like a reset of the contract, right, because of the property and the other price increases. So we have done one round, which has been passed through, and we are in the process of doing a second round. And that's why we gave out Q2 as the target because by then, we hope to complete most of the pricing actions.

And if I were to ask you, sir, what is the blended cost inflation and in the first round, how much is already passed on? I'm just trying to figure out in terms of the margins have -- what kind of delta we could see from IFM in IFM and also at the total level?

So maybe let me put it this way, we are -- we don't give margin breakup by probably at this level, Achal. But like if you think about -- if you can talk -- if you can go back to some of the numbers that I quoted, costs have gone up by almost 10% to 11% in most part of the, what you call, business, right? And we are kind of trying to recover that in a couple of price increases.

The another question I had was in terms of India growth, if we look at the growth, particularly for the fourth quarter, the supply chain business seems to be a little weak. Can you help us understand what is happening here, specifically for India business, I'm saying, for both the Supply Chain and the Network Solutions, if you could talk in both fashion? And what is the outlook here?

Right. So if you look at the Supply Chain segment, it's been flattish, Achal, Q3 to Q4, while on a year-on-year basis, I guess, there's been a slight decline. Actually, if you look at the market itself, I would say it's been fairly sluggish this fiscal year. And it probably -- if you do a benchmark comparison, you will find from a supply chain perspective, we are probably better than the median number in terms of growth. So many of our large customers are probably waiting for June, I hope, but we expect those things to change post elections. But FY '24 marked a definite sluggishness in the India supply chain business, not just for us, but also for our peers. On the Network Solutions side, I would say that the decline was sharper and that came on the back of, of course, a very significant decrease in the freight rates. However, I would say that network side in Q4, we saw a significant increase linearly. That is from Q3 to Q4, we saw a significant growth. And also on a year-on-year basis, we saw a significant growth as we saw a couple of customers' export volumes go up significantly. So I would say India geography, ISCS flattish and GS -- and the Network Solutions, predominantly driven by freight showing very, very good recovery in Q4.