The Hindu Business Line : `We are betting on growing trade with neighbours' — Mr Cyrus J. Guzder, Chairman and Managing Director, AFL

AFL, a leading Indian logistics company, is going for a major expansion of its global and domestic network. The company is betting on the growing trade between India and its neighbours, especially China. Recently the company has appointed a German to head its global operations. Mr Cyrus J. Guzder, Chairman and Managing Director, AFL, who has recently been elected as head of the CII's national committee on transport and logistics, spoke to Business Line on his company's growth plans as well as on emerging opportunities in the Indian logistics sector.

Excerpts from the interview:

AFL has recently set up a centre in Singapore and appointed a foreigner in India to head its global operations. So are you focussing more on your international business now?

In the cargo division, we are heavily focussed on the international business because there are great opportunities, which will keep growing. India has recently signed an FTA with Thailand. So companies are likely to set up base in Thailand to export to India. The same would be true of SAARC.

But, the big surprise in the past three years, has been Indo-Chinese trade, which leapt up from around $20-30 million in the 1990s to $250 million in 2000. Today, we are at $4 billion and the forecast is for trade to touch $14billion by 2014.

Interestingly, this is a two-way trade so we felt the need to set up our own offices abroad. Because there are not enough direct sea or air links between China and India, much of the cargo is trans-shipped through Singapore. So, AFL has incorporated a company in Singapore. This will be followed up with an office in Thailand in a couple of weeks, followed by a venture in China.

It is difficult to get freight licences in China. So we are entering into a strategic alliance with a local partner and our recently appointed global logistics manager is tying up these arrangements. The Chinese office will be engaged in operating traffic between China and India as well as intra-Asia trade. After that, we will turn our eyes to US and Europe.

Currently a small fraction of the India-China trade is moved by air. It is substantially by ocean freight and is routed through Hong Kong, Singapore or Kuala Lumpur.

But the China-India air cargo traffic is going to explode and, if I had a 747 freighter, I would deploy it on this route. It would be uni-directional, a little seasonal, but it is one lane where, if we create capacity, we will succeed. Because Chinese goods are very cheap and the retail boom is going to trigger a lot of air cargo movement.

Do you plan to acquire your own aircraft?

I would not at any stage think of buying aircraft for international operations because of the amount of capacity available. All the long-distance aircraft being ordered — B747, B777, A340 — have a large under-floor capacity. As more come on, there will be a lot of belly-space available.

Second, with India following an open sky policy for freighters, a number of freighters are flying to India. So I would not want to compete with these companies for whom aviation is the core business and they are profitable.

But it is a different story in the domestic market, where I do not think foreign freighters will be allowed to enter. I don't see a Korean Airways, Polar or Evergreen flying domestically. So, in future, there will be more opportunities for more players to fly aircraft and compete in the domestic market. We have always studied the mater. We will enter the market only when the market is ready to justify the viability of the huge investment. You need to have enough high-margin traffic to justify investment in aircraft.

How is AFL placed in the logistics industry currently?

AFL has always held a strong and stable position in the industry. We were the pioneers when the air-freight business took off in the 1940s in India as a tiny by-product of the passenger services. The conversion of its fleet of Constellation aircraft into freighters by Air India in the 1950s was an event that stimulated AFL.

Our domestic network is expected to grow significantly in ground transportation and warehouses. We currently have 45 warehouses in 29 States with over 6 lakh sq ft, Currently, we are building a warehouse in Bhiwandi, and this facility should be ready by March 2006, when we will have 10 lakh sq ft of space. Our plan is to have 20 lakh sq ft in the next 18-20 months. And to feed that we will be adding a large number of trucks, under an integrated plan that covers contract logistics in India. This will be closely linked with our foreign import-export business.

If you do ocean freight business, then you are expected to buy containers, which have to be fed. So it is a good idea to open locations across the country. The warehouses and trucking business will service both the domestic and international business. And, if you have strong partners abroad, they will be able to feed your domestic network, which is where we are very strong.

Is the air-freight sector back on the sustained growth path?

The air-freight industry has been growing at more than 20 per cent per annum since 2002. Before that, we went through a lean period between 2000 and 2002. It was a difficult time due partly to global factors. But, since 2002, we have sustained a rising trend in exports.

Earlier, the problem was not just external. The reform process kicked off in the early years of the NDA, when the Government made several commitments under GATT and Customs tariffs came down. However, Indian products were not price-competitive. There was a real terror about Chinese exports. But remarkably, the Indian manufacturing industry has pulled itself together, and became more efficient during 2000-04. One actually began to see the results by 2002. In 2003, we saw a year-on-year growth of 18 per cent. Similarly, during 2003-04, we saw a 20 per cent growth; and a further 20 per cent in 2004-05. Even this year, we expect 20 per cent growth. So we are seeing a sustained CAGR of 20 per cent in air freight.

Is AFL growing along with the industry?

We are well embedded in all industry segments, we have maintained a growth of 5-10 per cent above the industry average. We see ourselves at the beginning of a period of sustained growth in air exports. In the last five-seven years, a range of products have begun to be moved by air, such as pharma, IT, auto components, and light engineering. In a motorcar you have several micro-motors, which are sourced from India. We had little to do with the auto component and hi-tech industry three-four years ago when we were substantially focused on garments. But now we look at hi-tech, auto. And the other area that supplements garments is textiles, moved by both sea and air. There are some other interesting areas like the movement of granite from Andhra Pradesh by ocean freight.

Last year, granite shipments pushed up our ocean freight business 60 per cent. In 2001-02, we moved from being a substantially air cargo company to a comfortably multi-modal company.

So would you call yourself a multi-modal transport operator now?

Yes, we are effectively a multi-modal operator offering our customers a choice of transportation modes. Customers today use different modes of transport in an interchangeable manner to meet their commitments.

How will you fund your expansion plans? Do you plan to enter the capital market?

So far we have managed comfortably with internal accruals. This is because we have not been investing in brick and mortar warehousing and have entered into long-term leases.

We have also been making use of the available auto finance to expand our fleet. But the investment on IT infrastructure is very heavy and, over a period of time, we would want to build intelligent warehouses in the top eight-nine cities. This would basically be for IT, pharma, and temperature-controlled goods such as medicines and food. As and when our expansion requires us to inject capital, we would not hesitate to enter the market, but in the first instance we would go in for private equity.

We are no strangers to raising private equity. We have been through one round of raising private equity in the late 1990s, which led to an expansion of our DHL business. On entering the capital market, the decision would be based on whether you want to remain listed. If it is a one-shot investment, it is advisable to tap private equity.

What kind of capital expenditure you estimate for the expansion?

Our capital expenditure budgets for the past five years have been around Rs 10-15 crore annually. We would look to double this budget each year for the next three years to fund our expansion. So we would be looking at a budget of Rs 20-25 crore for the next three years to achieve the expansion planned.

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