MANAGEMENT DISCUSSION
(Within the limits set by the Company’s competitive position)
Economic Scenario
The fiscal year 2009-10 began as a difficult one. There was a significant 09, followingthe financial crisis that began in the industrialized nations and spread to the realeconomy across the world. Yet, over the span of the year, the Indian economy posted aremarkable recovery, not only in terms of overall growth figures but, more importantly, interms of certain fundamentals, which justify optimism for the Indian economy in the mediumto long term.
For the fiscal year 2009-10 India’s economy grew by 7.4 percent growth rate of GDPwhich is an upward revision from earlier estimates of 7.2 percent due tohigher-than-anticipated growth in agriculture, mining and manufacturing sectors. There arealso signs of a turnaround in the merchandise exports as the export figures for the year2009-10 are also encouraging.
This also helped India’s logistics sector, including ports and road transport,which shown the signs of recovery from a global recession that caused trade to shrink andcargo volumes to slump.
The major challenges before the Indian economy is to control the emergence of doubledigit food inflation, to improve education opportunities and provide health facilities atthe level of households, both in rural and urban areas, to strengthen government systems,structures and institutions at different levels of governance and the last but not theleast to show resistance against the terrorism which spread its poisonous shadow acrossall over the world.
Company’s Business in brief:
Your Company offers a complete range of Logistics Products, which include followingbusiness activities:
a) Transportation Services, Part as well as Full Truck Load Business.
b) On-Board Air Freight Services, known as Co-Loading, across the length and breadth ofthe Country.
c) Air Cargo Consolidation Services for Domestic and International Courier Companies.
d) Inbound Freight Services into the Country.
e) Express Cargo distribution through out the Country involving door-to-door deliveryof consignment in a time bound schedule.
f) Logistics involving the services like storage, packaging and inventory managementservices to customers.
Your Company is a single stop Logistics Services Provider, offering complete Logisticssolutions through the extensive infrastructure of Offices and Delivery Destinations acrossall over the country.
(A) PATEL ROADWAYS
This division of the Company undertakes the conventional transportation of goodsincluding part and full truck load. It involves point-to-point movement of cargo in asingle trip in truck loads of various capacities ranging from 5-25 tons. It also includesmovement of specially containerized goods.
Industry overview:
India has an extensive road network of 3.3 million kms - the second largest in theworld. The Highways/Expressways constitute 70,748 kms (2% of all roads). About 65% offreight and 80% passenger traffic is carried by these roads. The industry has been makingan increasingly important contribution to the economic growth of the country by providinglogistics of the cargo movement.
Opportunities & Threats:
Today the Indian customer’s standard and the level of expectation have gone updramatically. Hence, it is Customer Service which is going to give thecompetitive edge to any industry in the future.
The domestic express cargo industry is meeting the customer satisfaction needs byproviding speedy and safe delivery of cargo like documents, packages, samples, exhibitionmaterial etc. Domestic market for door-to door express cargo market is more than Rs 400Crore and current rate of growth is in a healthy region of 35% per annum.
Freight rates, in general, have increased in the recent past. Considering the GDPgrowth rate of 9%, it is expected that road freight Industry will be growing at CAGR of9.9% from 2007-08 to 2011-12. The Road freight volumes have been targeted at 1,231 billiontonne kilometers (BTK) by 2011-12.
Annual growth projected at 12-15% for passenger traffic, 3.6 trillion investments havebeen outlined which will be utilized to develop and re-develop road infrastructure acrossthe nation. The better road infrastructure will also lower the maintenance cost fortransporters. Thus it will lead to enhanced reach and improvement in efficiency in roadtransportation.
The long term profitability will be affected by factors like the necessity to pass onthe benefits of efficiencies to ultimate customers and strong inter modal competitionespecially with up coming of railway freight corridors.
Introduction of the proposed Goods and Services Tax (GST) would change the rules of thegame for logistics sector in India. With introduction of GST and abolition of CST, tradeboundaries between states will not exist and companies can consolidate their supplychains. It would facilitate seamless supply across supply chain and across state. GSTwould increase the importance of logistics for the manufacturing sector. Presently, mostlarge manufacturing firms have regional warehouses of their own to avoid inter-statetaxes, but under GST they can streamline their operations and outsource their supply chainrequirements to logistic sector.
Outlook:
The outlook for Road Freight Transport Sector largely depends upon infrastructuralfacilities available in the country. Road development is recognized as essential tosustain India’s economic growth. The Government is planning to increase spends onroad development substantially with funding already in place based on a cess on fuel. Alarge component of highways is to be developed through public-private partnerships. Theinvestment opportunities exist in a range of projects being tendered by NHAI forimplementing the NHDP - contracts are for construction or BOT basis depending on thesection being tendered.
In view of the above development the Road Freight Transport sector has bright chance toperform to its potential in the current year.
Risks & Concerns:
The Road Transport Sector is marred by many inherent risks which are specific to itsfunctioning, like fragmented ownership of vehicles, poor infrastructure of roads,bureaucratic delays at the borders, poor vehicular maintenance, en-route levies etc. Thesemay be categorized as operational risks. It is also exposed to market risks and financialcorporations are exposed. These include risks like fluctuations in the economy and suddenchanges in the Governmental policies and laws at macro level and risks like increase inthe prices of component parts and fuel, increase in the hiring charges of vehicles etc. atmicro level. Besides these, the Road Transport Sector is also saddled by naturalcalamities and events like bandhs and riots in various parts of the country. The fuelhikes on petrol, diesel, CNG and LPG in the Nov’09, Feb’10 and very recent inthe month of Jun’10 has raised the Freight rates by 5-8% due to which all thecommodities and raw materials cost has risen by 20-30%.
(B) PATEL RETAIL
This is relatively new business activity undertaken by the Company during the year 2006and comprises of express delivery of consignment(s) on door-to-door basis. The businesshas increased from Rs.145 lacs average p.m. to Rs.180 lacs average p.m. in the currentyear and is expected to contribute approx. 20% of the Roadways Division by the year end.
Industry Overview:
Indian express industry, which along with China, is one of the fastest growing expressmarkets in the world. Though the size of the Indian express industry is miniscule whencompared to the global express industry. However, the Express
Cargo industry in India has been growing at a phenomenal rate of 20-25% and expected tomore than double by 2012. The business of Express Cargo is carried on by using all threemodes of cargo movement i.e. surface, air and rail. Surface cargo movement constitutes thebulk of the express cargo movement.
The Indian express industry can be broadly classified into semi-organized andunorganized players mainly operate at intra-city level and niche domestic market. Thestructure of the industry can be gauged from the fact that although there are more than2,000 players operating in the country, only 20-25 players operate on a national level.Major national players in the express cargo industry include Gati, Safex, AFL, Xps,Speedage / TNT.
Opportunities & threats:
The prospect of express industry is primarily dependent upon the growth in GDP andworld trade. With the Indian economy expected to grow at 9% annually, coupled with anaverage annual growth rate of 16% in India’s global merchandise trade (Source:Foreign Trade Policy), the Indian express industry is expected to grow at an impressiveannual rate of 20% to 25% over the next few years. Moreover, with India being recognizedas an outsourcing destination, manufacturing sectors like textiles, automobiles andpharmaceuticals are likely to witness increased activities in medium to long term. Inorder to maintain its competitiveness, companies operating in these industries areexpected to outsource their logistics requirements to third party logistics serviceprovider (3PL) and concentrate on their core-competency of manufacturing.
There are extra ordinary opportunities in this business. Using the formidable strengthof its existing infrastructure of nearly 350 branches / offices / hubs, VTS scheduledvehicles, Centralised Delivery System and manpower, our Company is in a position to expandits activities in this lucrative sector.
Challenges faced by the industry include matching upto the rising expectations of thecustomer, expanding the network to reach hitherto uncovered areas, containing rising fueland freight costs and retention of manpower.
Outlook:
The express sector in India has a bright outlook. As a fast-growing, market-driveneconomy, we believe India is poised to take a leading role on the world’s stage. Theoutlook for this product is progressive. Though it is a part of the Transport Sector ingeneral, the Express Cargo Industry, in a short span of time, has been able to carve aseparate status and identity for itself. With the steady growth in all the sectorsincluding the Manufacturing and the Retail Trade, the Express cargo industry is poised forhealthy growth. The improvement in the road infrastructure is becoming evident and alarger segment of corporates have started preferring express deliveries made in time.
This mode of transport has an ability to grow at a very brisk pace. The net margins inthis business are much higher as compared to those in the conventional freight transportbusiness as the customer is prepared to pay a higher price for professional handling ofcargo and door-to-door delivery, and Just in Time delivery of cargo.
Risk & concerns:
The complexities of this business are very high because the service levels are based ona number of constituents like reach (depth and width), government regulations,infrastructure etc which are not in the control of service providers in this industry. Toa certain extent the risks are akin to the transport industry as a whole. Besides, theinvestment and commitment levels required are also quite steep.
(C) POBC DOMESTIC
This division of the Company undertakes the business of Co-Loading of various couriersin the domestic market.
Industry overview:
The Co-loading & Cargo Industry depends on the Airlines, Government Policies andStatutory Compliances which directly or indirectly define the pricing policy of Airlines
The Industry is poised to regain its lost Vigour in the year 2010, It’s a factthat that like all other Industries, Air Cargo
Industry also suffered some reversals in the year 2009 due to Global Market Conditions.However the financial year 2010-11 has begun on a positive note, and there are marketindicators to believe that Cargo Industry could register a double digit growth once againthis year.
The Courier and Cargo Market are seeing tremendous demand and increase in businessesfrom Tier II and Tier III cities. The opening up of India’s Banking , Insurance,Finance, Retail, Aviation and telecom sectors to the globe and ongoing penetration ofIndian and Foreign companies to smaller cities in India would drive the Sector’sgrowth to the significant level.
The Outlook for this division in 2010 – 2011 can be best described as Backto Business
Opportunities & Threats:
After a significant slump in the year 2009, the air freight and courier business seemsto be once again getting back in a robust mode . The recovery which has commenced aroundFebruary 2010 is showing signs of Getting more formidable with each passing month. TheCourier Industry might suffer some setback due to the Proposed changes to the Postal billregulations which confer the exclusive privilege to the Postal Department to handle alldocuments weighing less than 300 gms .
The decontrolling of the Fuel Prices can lead to a substantial increase of freightcharges there by posing a threat to the growth of the industry .
Outlook:
India’s macro economic environment looks steady. It is expected that Indianeconomy will bounce back and the growth path will continue on projected lines of 15 to 20per cent YOY for the next two to three years.
The Tier II and Tier III cities will play a major role in the infrastructural growth.The growth potential is more in the smaller towns which needs to be tapped.
Risks & Concerns:
Market driven fuel price will lead to a cascading effect as the Air Turbine Fuel (ATF)Prices will go up as the International Prices Goes up . This will directly or indirectlylead to increase in freight charges , there by forcing companies to look out for cheapermode of transportation which will affect your company adversely.
(D) PATEL AIRFREIGHT DOMESTIC
This division of the Company carries on the business of air cargo movement in thedomestic markets.
Industry overview:
The industry is gradually coming out of the grip of global economic crisis. As the yearunfolded, global markets were subject to developments such as volatility in the price ofcrude oil, inflationary in the United States. Over the last six months, an economicrevival has enveloped the whole world. India has also been impacted and consequently themarkets have witnessed a robust uptrend in growth.
The Government’s initiative to develop and improve major Airports in the countrywith modern infrastructural facilities will boost Cargo volumes substantially.
Opportunities & Threats:
With the fuel prices stabilising the Airlines are in a position to make viableexpansion plans.
However, with the advent of the Private Players, the cost of the infrastructure andfacilities have increase at the terminals and airports thereby increasing the per unitcost.
With an estimated Economic growth of 8.5 % the signs of recovery are evident and thevolumes of Air Cargo movements are expected to further increase. At the same time due toheavy competition in the Industry, the profit margins might not increase in the sameproportion.
Outlook:
Backed by the growing Indian economy this sector seems to be on an upswing with anexpected YOY growth of 10-15 per cent.
The competition within the airlines has resulted in very attractive prices for thecarriers of bulk loads. The active participation of new players will be favorable to theindustry and will push the operators to provide services with better speed and at cheapercost.
Your Company’s efforts in providing a one stop solution for all logistics needs ofthe customers will attract more business as compared to traditional cargo movers.
Risks & Concerns:
The service efficiency levels have increased tremendously due to increased competition.Customers are willing to pay a price and expect a premium service in terms of timelydelivery of consignments and transparency in cargo processing information. The serviceproviders have to invest manifold in manpower and capital to meet these rising standardsand use upgraded technology like on-line as well as wireless tracking of consignments andother support systems.
The Cargo industry is hinting at a robust growth. Airlines are now focusing more onCargo Space Management as it is an additional source of revenue for the airlines.
The recent initiatives by the government which include building of additional airportswith state of the art facilities, automation of cargo handling at existing airports,widening and concretization of roads leading to airports etc. will help the industry incatering its services more effectively and efficiently.
The sector struggles for proper cargo warehousing facilities and multi-modal links forlocal distribution, even with increasing number of airline companies making attempts toleverage the potential of the air cargo segment which we see as a big businessopportunity.
(E) POBC INTERNATIONAL
This Division is in the business of Wholesale Courier Consolidation for InternationalSectors and operates line-hauls ex Mumbai & Delhi.
Industry Overview
The Industry Overview is more or less the same as that of POBC Domestic, as it is partof the same Industry. The only variation is that, POBC International operatesInternational Sectors and hence there are some sectoral differences.
Opportunities and Threats
The major threat is that the scope of this business is declining and it could possiblybe reaching the end of its life cycle. This is because, post liberalization of the OBCEra, the scope for providing value addition in this business is diminishing. Excesscapacity and the resultant underutilization by the Aviation Industry resulted in Carriersgetting desperate and seeking out all sorts of additional avenues of business. Customerloyalty is a thing of the past now and many Airlines are offering direct deals toeveryone, even to our own Customers and weaning them away. IATA Agents have now alsoentered this business and this has created unhealthy competition, further eroding thealready slim margins that we were operating on.
Outlook
The overall Courier volumes are increasing and this appears to be good news. Withseveral Airlines drastically reducing capacity and / or withdrawing services, a balancehas finally been achieved now between capacity and demand. This has already led to a steepincrease in rates by the Airlines. If this situation continues, this should hopefully alsolead to Airlines focusing on their core area of General Cargo Business and leave Courierto Wholesale Consolidators like us. If this happens, it will provide us with theopportunity of effectively increasing our business and improving our profitability aswell.
Risks and Concerns
The Major Risks are : Airlines competing directly with us by offering the same rates toour Customers as well, Customers Co-loading with each other to increase their volumes anddeal directly with the Airlines thereby depriving us of their business as well ascompeting with us, Freight Forwarders poaching our business, Customers taking advantage ofthe situation by forcing us to reduce our rates / margins demanding extended credit anddelaying / defaulting in payments as well. Retaining Customers is becoming increasinglychallenging and a daily struggle. Unfortunately, the higher end of the market which isservice conscious is shrinking and the lower end which is only price conscious isincreasing. This makes a bad situation worse for us, since price is the only determiningfactor here. We are therefore constantly alert to take full advantage of all opportunitiesthat may arise from time to time and are continuously taking steps to ensure that ourinterests are protected to the best extent possible. At the same time, we are carefullymonitoring our payments and receivables to make sure that our Cash Flows are not adverselyaffected and that we do not face the risk of bad debts.
(F) PATEL AIRFREIGHT INTERNATIONAL
This Division is in the business of handling Airfreight of Export Cargo ex Mumbai
Industry Overview
This is part of the International Freight Forwarders Community and is focused onExports by Air ex Mumbai. It is a business where we deal with Exporters and Sub Agents togenerate International Air Cargo volumes on various Airlines ex Mumbai to destinations allover the world.
Opportunities and Threats
Being part of the International Freight Forwarding Trade, the repercussions of theproblems faced by the Aviation Industry are also faced by us. During the period ofAviation overcapacity, the diminishing yields of the Airlines resulted in reduced yieldsfor us as well and the global slowdown resulted in lower volumes too. Now that a capacitycorrection has taken place, Airlines have substantially increased their rates andobtaining space is often a challenge. Some Airlines take undue advantage of the situationby insisting on charging Express Cargo Rates for General Cargo service. Satisfying andretaining customers in such a scenario is therefore difficult, as it is not alwayspossible for us to obtain firm confirmed space at competitive rates for every shipment.
Outlook
With the improving health of the Global Aviation Industry, the outlook appears to bebrighter now. The Indian economy is robust and Exports are growing. Business volumesshould therefore be good. With increased yields by the Airlines, we are hopeful of someincrease in yields for us as well, which should translate into better profits too.
Risks and Concerns
The major risks are intense competition from several Global and Local FreightForwarders leading to wafer thin margins, customers insisting on and obtaining extendedcredit and delayed payments and defaults, which adversely affect cash flows.
To insulate ourselves from this and minimize our risks, we are very careful abouttaking on new customers and always check to find out if they have defaulted in paymentwith their previous supplier, which could be a reason for them wanting to shift over tous. We also carefully monitor the credit provided and payment position of all ourcustomers, so as to ensure that we collect our money in time and there are no defaults ordelays in payment to the Airlines or bad debts to us.
Human Resource Management:
The House of Patel is a people oriented organisation. The Management firmlybelieves that dedicated and motivated people is it’s most productive asset. Thisphilosophy is articulated in Company’s Mission which states:
Growth through total customer satisfaction, spurred by a motivated and pro-activefamily of employees committed towards innovation and continuous improvement in qualitystandards.
Enhancement in the quality of Services rendered by the Organization depends on thequality of people in the organization. The Company embraces an entire life cycle ofemployees’ engagement with the organization. Company’s vision ‘to be aglobally competitive company’ is propelled by a zealous and dedicated work forcestriving continuously on improving aspects of efficiency and prompt services to customers.Company’s focus remains on imparting training to employees at various levels,conducted by both internal and external faculty thereby building leadership.
The Company believes that intrinsic abilities of employees can be developed byrecognizing performance and suitably rewarding it.
The Company enjoys a cordial and peaceful relationship with all its employees duringthe year. The number of people employed were 1013 as on 31st March, 2010.
Internal Control System:
The Company has a satisfactory Internal Control System, the adequacy of which has beenreported by the Auditors in their Report as required by the Companies (Auditor’sReport) Order, 2003.
The Company is committed to further improve Internal Controls and strengthen theInternal Audit function. Further stress on Corporate Governance is being given in thecurrent year. We firmly believe that the business can grow and develop on the requiredlines and profitability can be sustained only through Strong and Transparent CorporateGovernance.
Financial performance and segment-wise performance:
The discussion on the financial performance of the Company is covered in theDirectors’ Report. The segment-wise performance is available in note 13 of the notesforming part of the Accounts for the year under consideration.
Cautionary Statement:
Statements in the Management Discussion and Analysis Report describing Projections,Estimates, Expectations, Future Outlook etc. in connection with the business may be‘forward looking statements’ within the meaning of applicable securities lawsand regulations. However, the actual results could materially differ from those expressedor implied in the statements made by the Management. Various factors which are outside thepurview of the Management Control can cause these deviations. These factors includeeconomic developments in the country, changes in governmental policies and fiscal laws,sudden and unexpected rise in input costs, change in the demand supply pattern in theindustry, etc.