GST, infrastructure status to spur investment in logistics sector

Two recent changes have raised the hopes of logistics companies after years of neglect and subdued growth. Together, the implementation of the goods and services tax (GST) and the grant of infrastructure status to the sector are expected to spur investments and bring much-needed efficiencies to logistics companies that have remained shackled by high costs of operations.

 

The industry believes the twin measures will reduce the overall cost of logistics for manufacturers to the internationally acceptable level of 7-10 per cent of the gross domestic product (GDP), from the current 13-14 per cent, and boost exports by making Indian products more competitive globally.

Logistics costs have been one of the biggest stumbling blocks in the way of Indian manufacturers wanting to target global markets. At 16-18 per cent of production costs, logistics expenses weigh on exporters, making their products uncompetitive vis-à-vis those of China, where logistics make up 8-10 per cent of the costs.

 

The recent changes are going to affect the industry in many other ways as well. In 2014, the World Bank’s Logistics Performance Index estimated that the country loses $6.6 billion every year due to transportation delays, which in turn are the consequence of the prevailing inefficiencies in the transportation and distribution network of manufacturers as well as logistics companies.

 

GST is expected to address this problem to a large extent.  Up until July, when GST was implemented, tax efficiency was a company’s primary concern when making decisions about setting up warehouses, instead of logistics costs or customer service, resulting in the creation of multiple inefficient stocking and distribution locations in each state.

 

Raaja Kanwar, Founder & Managing director, Apollo LogiSolutions

Now, with GST in place, companies can aggregate state-wise warehouses into one large regional warehouse and benefit from the resultant cost and operational efficiency that such a model brings. This so-called hub-and-spoke model is known to provide improved services for everyone involved in the market — customers, distributors and manufacturers. This in turn, say experts, may lead to an increase in business opportunities for organised service providers operating large warehouses in key geographies.

 

Crisil expects the future to belong to end-to-end logistics solutions provider with a pan-India presence and those that are oriented towards providing efficient service at lower costs. In a way, the changes have paved the way for consolidation in the industry by tilting the scales in favour of large companies.

 

“Many of the unorganised players will not be able to continue (as they have now been brought under the tax net) which will lead to consolidation. In fact, consolidation has actually started,” says Raaja Kanwar, founder & managing director of Apollo LogiSolutions. Over the past month, he says, he has received at least 10 proposals from companies wanting to sell out.

 

There is an air of optimism around large players in the sector across the country. R Dinesh, managing director, TVS Logistics Services, says, “Logistics is a sunrise sector that is expected to grow multifold in India. Infrastructure status will help the sector to become more competitive and bring in a lot more players with integrated service approach, which would help Indian manufacturers.”

 

Logistics companies, he says, have a much bigger role than just transporting goods, and the value addition that integrated service providers can bring to manufacturers is being recognised by the government for the first time.

 

One of the major problems that the sector was grappling with so far, says Kanwar, was finances. Banks were not willing to lend because the industry was largely unorganised and fragmented. Infrastructure status will now enable the sector to borrow funds at competitive interests with enhanced limits, as well as access funding via external commercial borrowings.

 

If interest from private equity (PE) funds is anything to go by, the sector is already witnessing a rush of activities. After a sharp 41 per cent drop in investments in 2016, the sector has seen a four-fold growth in PE/VC (venture capital) investment inflows in 2017 at $1.2 billion against $414 million the year before.

 

Interestingly, long-term investors such as pension funds are also more willing to back big logistics players. In May, the Canada Pension Plan Investment Board committed to spend $500 million in a joint venture with India’s IndoSpace and Singapore-based Ascendas Singhbridge inked a $600-million deal with Firstspace Realty to develop industrial warehousing space in India in June. Others such as Carlyle Group, Warbug Pincus, FairFax India are in the process of firming up their investment plans. Besides, home-grown Milestone Capital is set to launch a warehousing fund with a target to raise $156 million.

 

Piramal Finance Ltd, a unit of Piramal Enterprises, which early this year marked its entry into the logistics sector by investing  Rs 485 crore in Apollo LogiSolutions, expects investments in the sector to record a compounded annual growth rate of at least 15 per cent.

 

“The time has come for the industry to grow. There is an opportunity to bring down the logistics costs to 7-10 per cent, which is the international standard. Both GST and infrastructure status would help in achieving this,” says Piramal Finance Managing Director Khushru Jijina.

 

The massive investments coming into the sector is good news for job creation as well in the sector that mainly employs blue collared workers. The only downside, say experts, could be the lack of sufficient skilled people to join the workforce.