The Hindu Business Line : The trend is for customers to outsource more and more

Our idea is to continuously graduate our customers to the higher value-added businesses and to continuously keep developing new products of such nature.

MR VINEET AGARWAL, EXECUTIVE DIRECTOR, TRANSPORT CORPORATION OF INDIA

Srividhya Sivakumar

Companies are realising what their core business is and are beginning to outsource beyond basic transportation, says Mr Vineet Agarwal, Executive Director, Transport Corporation of India. In an intervie w with Business Line, he shares his views on the emerging trends in the logistics sector and how he thinks supply chain management is evolving in India.

Excerpts from the interview:

What are the trends you foresee for the logistics sector as a whole?

If you look at trends that affect the industry as a whole, predominantly it is infrastructure development. Second, of course, is how corporates are looking to change their supply chain model. And, third, is the demand from new industries such as telecom, retail — which were non-existent in the last five-seven years.

These are all new industries and new verticals that have come up. Now what we see as trend is that customers are looking to outsource more and more; outsource not in terms of just the basic transport but also more of other activities, such as warehousing.

For example, if it is an auto firm then it could be in collection of parts from various suppliers, bringing it to a warehouse, collecting it there and then supplying it to the company as and when required.

Then when the product is ready, it could be a car, a bike, and tractor — storing that as a finished product in the warehouse, transporting it to the dealers and may be even payment collection on behalf of the company and then, spare-parts management. You could have a warehouse thatwill do spare-parts storage and then delivery. This is a typical auto supply chain.

In telecom, you will have a different supply chain. The telephone (handset) supply chain will be different from that of the infrastructure side of the supply chain. For the handsets, you might be getting some parts from the US suppliers.

For example, in India, companies such as Nokia and Motorola not only make phones locally but they also import a lot of other phones. So, you have a domestic and an international component as well. Both of these need to be bunched together for delivery to the final party, who may be a wholesaler.

So, do you see more companies opening up to the idea of outsourcing their supply chain completely?

Yes, they have to, because they need very high precision, very high quality levels and this is something they cannot do themselves. This is not their core business. So, companies are realising what their core business is and are outsourcing beyond just basic transportation.

The growth of the logistics industry has a direct correlation to the growth of overall GDP. Logistics as a percentage of GDP is about 13 per cent. However, that is for the overall GDP. Services contribute to over 50 per cent of our GDP.

So, if you take only agriculture and manufacturing, which is about 45 per cent, the logistics cost is more than 25 per cent. Compared to the rest of the world, it is definitely very high. A lot of it is due to infrastructure bottlenecks.

Does that mean consolidation in the sector could be on the cards?

We are into four lines of businesses — trucking, express cargo, supply chain consultancy and shipping. If we take the trucking business, consolidation is not going to be that high because real consolidation of assets is not going to happen.

It runs on a much outsourced model. For instance, most of the trucks, , are owned by single users or by those with less than 20 trucks. The other assets, such as warehouses, are not large assets. The quality of people, that is, manpower, is still growing and one may not want to own that asset. Further, customers typically want to fragment their business. They do not want to give it to one company. So, the real consolidation in the basic transport industry is going to be slower.

In express cargo, there are already some barriers to entry because you need to make a certain amount of investment. So companies, such as ours, XPS and Safexpress, need to log certain amount of volumes and a certain amount of basic investment in infrastructure.

So, if you have a pan-India service, you need to run trucks whether they go empty or not as it is a scheduled service. Here, fewer players come in because of these barriers to entry. However, the courier business has more players since it is highly fragmented. So, consolidation in the courier space may be higher.

In the supply chain side of the business, there are not many players and the barriers to entry are even higher, because it a knowledge-based business. In the shipping business, consolidation could happen through acquisition of ships.

Trucking, typically, is a low-margin and volume-driven business. How has TCI managed to improve margins?

Although the overall logistics business works on volume play, we, as a company, are more into higher value-added services. We move almost 2.5 per cent of India’s GDP, in terms of value of goods, every year. That is more than $20 billion. But we do not have 2.5 per cent of the market share; ours is probably 1-1.5 per cent.

The additional business is because we move higher-value cargo and are into more value-added services. So, in some ways we are a volume play for value-added products. We are not into transport of commodities such as steel and cement.

The typical margins in trucking business are about 2-4 per cent at the EBIDT level (earnings before interest depreciation and tax) but a value-added service that we have, for example supply chain solutions, has 12-13 per cent EBIDT levels. So, our idea is to continuously graduate our customers to the higher value-added businesses and to continuously keep developing new products of such nature.

For instance, in the last few years, we have developed warehousing as a major product. We now have about 7.5 million sq.ft of warehouse space across the country that we own, lease or manage. Then we do cold chain, courier, air cargo services. We have also gone international with offices in Singapore, Hong Kong and so on. So, these are all the higher value-added products, which will be supported by the lower value-added products. We might in future move out of some of the low value-add businesses.

How has the ban on truck overloading impacted your business?

The impact was visible on the freight rates that have shot up substantially after that. Subsequently the rates did stabilise a bit. But our understanding is that at the local level, that is, inside the State, overloading is still happening. However, if you are moving between States, it is lesser or virtually non-existent.

What are your capital expenditure plans?

Our four-year capex plan was for Rs 400-450 crore. Of this, the first year we spent Rs 100 crore. This year, the plan is to spend about Rs 150 crore and another Rs 150 crore next year.

Of the Rs 450 crore, Rs 150 crore will go towards warehousing, about Rs 150 crore into ships and the rest for trucks. Capex funding will be through a mixture of internal accruals, debt and equity dilution (around first quarter of FY09).

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