MANAGEMENT DISCUSSION AND ANALYSIS REPORT[2010-11]
OVERVIEW
The financial statements have been prepared in compliance with the requirements of theCompanies Act, 1956, guidelines issued by the Securities and Exchange Board of India(SEBI) and the Generally Accepted Accounting Principles (GAAP) in India. Our Managementaccepts responsibility for the integrity and objectivity of these financial statements, aswell as for the various estimates and judgments used therein. The estimates and judgmentsrelating to the financial statements have been made on a prudent and reasonable basis, sothat the financial statements reflect in a true and fair manner the form and substance oftransactions, and reasonably present our state of affairs, profits and cash flows for theyear.
INDUSTRY STRUCTURE & DEVELOPMENT
India is today considered as a Sunrise Industry for the logistics players of the worldbecause of the size of the market and the untapped potential in the market. The countrytoday is only to the tune of 3% of the global logistics market. With increasedcompetition, every market player is keen to make their mark by aiming for the share of thelogistics pie. Influenced by the success of the global players in the Indian market, theIndian counterparts are also gearing up for the challenges, by providing a spectrum ofservices & offerings.
The global logistics market is valued at US $4 trillion with an 8% growth over theprevious year. The Indian logistics industry is estimated at 125 billion US$ of whichabout 90% belongs to the unorganized sector. For the remaining 10% of the organizedmarket, the growth rate is pegged at 20-25% per year.
Logistics in the Indian context would mean providing services such as transportation,warehousing, distribution, order & inventory management. Logistics costs in India areabout 13-14% of GDP, as against 8.7% in the US, 11% in Europe, 12% in Japan and 18% inChina. A further reduction of 1% in logistics cost could result in huge savings.Critically examining logistics cost drivers will enable Indian firms to gain competitiveedge in global market place.
The current market size for the trucking logistics is 50 billion dollars with around2.5-3 million trucks moving within the country per day. Transporters with a fleet lessthan or equal to five trucks constitute a share of around 80% of the total revenue in2009-10 with the scenario not being very different from 2008-09.
The overall logistics scenario looks quite encouraging with the road freight industrywitnessing a year on year growth rate of 20%. Similarly the rail & air freightindustry also growing every year by 15%. Meanwhile, the sea freight industry growth ratehas been 18% and the express logistics & supply chain logistics promising anenterprising growth of 35%.
OPPORTUNITIES
The Indian Economy is on the up-tick evident from factors such as healthy IIP growth.The annual GDP of the country is expected to witness an overall growth around 7% in2011-12. For the subsequent years, GDP growth has been projected at 7.5 to 8% which willresult in increased imports and exports.
The logistics industry contributed to around 13% of GDP in 2009-10 against 11% in2008-09 and 12% in 2007-08.
The Indian warehousing sector has enormous potential as it is poised to be valued at US$55 billion by 2011-12 with around 45 million Sq Ft. warehousing space to be developed.About 110 logistics parks shall come up over an area of 3500 acres in next two years.Also, the introduction of concessional import duty of 5% would help setting up mechanizedhandling systems & pallet racking systems/ cold storage for food grains.
Infrastructure development is another aspect fueling growth. Another dimension ofdevelopment are the FTWZ’s (Free trade warehousing zones), which would enable supplychain / logistics to function much more efficiently by removing the cargo bottleneckswitnessed at the Integrated Container Depots (ICD’s).
Moreover, projects such as the green fields project, national highways development,national maritime program, introduction of freight corridors in rails shall add fuel tothe growth.
A Bulk Logistics – Sical Standalone
Financial Performance
| | (in Rs Crores) |
| 2010-11 | 2009-10 |
| Turnover | 570.48 | 537.40 |
| EBIDTA | 27.56 | 44.27 |
On the operational performance, Sical has its presence in almost all the major andminor ports. Sical provides integrated solutions for multimodal logistics and is thesingle window for businesses that seek to create value – enabled supply-demand chainsseamlessly across road, rail, port and sea.
The total volume handled at various ports in 2010-11 was 27.256 million tones. Themajor commodities handled were:
| Commodity | Million MT | % |
| Coal | 23.055 | 84.59 |
| Dolomite | 1.723 | 6.32 |
| Iron Ore | 2.242 | 8.23 |
| Others | 0.236 | 0.86 |
| Total | 27.256 | 100 |
We are the partners for TNEB in handling coal both at Ennore and Tuticorin Ports.Further, the Company has an exclusive berth at Chennai Port – the Jawahar Dock –5. Apart from coal, the company handles various products viz. dolomite, iron ore, projectand miscellaneous cargoes.
The Company also provides Customs House Agency as well as Shipping agency services.
Trucking division transports various cargoes ranging from dry bulk to liquid bulk toproject equipments through own trucks as well as hired trucks. The competition faced fromunorganized sectors and frivoling fuel prices impact the performance.
B Container handling
The performance of the Container handling subsidiary of the Company viz. SicalDistriparks Limited during the year under review is furnished below.
| Financial Performance | | (in Rs Crores) |
| 2010-11 | 2009-10 |
| Turnover | 81.70 | 65.53 |
| EBIDTA | 14.20 | 10.06 |
The total volume handled at the ports where the CFS of SDL has presence during the yearunder review are furnished below:
| Port | [TEU] |
| Chennai | 78,664 |
| Tuticorin | 23,696 |
| Vizag | 20,510 |
| Total | 1,22,870 |
There is an improvement in the performance of the company during the year 2010-11 dueto improvement in revenue and also increase in storage days.
C Rail Container Operations
The Rail Container operation is carried through Sical Multimodal and Rail TransportLimited the subsidiary of the Company. Currently, this Company operates 7 rakes in itsfold and has more than 1800 own as well as leased containers. The container trains are runon Pan-India basis across the country. Depending upon the traffic, new routes are beingintroduced as a strategic decision. A snap shot on the performance of this Company duringthe year 2010-11 is given below:
| | (in Rs Crores) |
| 2010-11 | 2009-10 |
| Income | 103.70 | 87.55 |
| EBIDTA | (4.27) | (1.49) |
The Company has been improving its performance. This project is capital intensive witha long gestation period. SMART has initiated project activities for developing its ownrail terminals near Chennai and Bangalore. Acquisition of land has been completed andcivil work has been commenced. The Company has tied up for term loans with the lenders forthe project. Once own terminals are made available, there will be an abundant scope forhandling larger volumes and diversified clientele base. Dependence on Common RailTerminals (CRTs) in various locations is considered to be a hindrance in the performance.Once own terminals are made ready, the Company will be in a position to handle EXIMcargoes also. This would provide rail connectivity between ports and various destinations.Even though, the Company faces competition from other private container train operators aswell as CONCOR, the Company has stabilized its operations and the terminals underconstruction will fuel the future growth.
Other Projects
The iron ore terminal project coming up at Ennore is already completed and commercialoperation could not be commenced at due to ban of the export of Iron Ore by the Govermentof Karnataka. We are exploring the alternative use for the terminal.
The Company has also been awarded the project of developing a mechanized iron orehandling facility at the deep draft berth No.14 of the New Mangalore Port on BOT basis.The Project activities have been initiated.
The Company has entered into a JV agreement with Mitsui OSK Lines Limited and ToyofujiShipping Co. Ltd., Japan for the car yard management at Ennore Port for handling theexport of Nissan cars. For this purpose an SPV viz. Ennore Automotive Logistics Limitedhas been formed. Since lot of automobile manufacturing units of foreign countries arelocated in and around Chennai, this entry would provide an opportunity to handle theautomotives of various manufacturers in the years to come.
Sical – Overall Consolidated Financial Performance
The Consolidated financial results for the FY 2010-11 as compared with FY 2009-10 isfurnished below:
| | (in Rs Crores) |
| 2010-11 | 2009-10 |
| Income | 803.48 | 726.73 |
| EBIDTA | 32.32 | 38.16 |
| PBT | (11.99) | (19.77) |
| PAT | (11.08) | (35.27) |
The Company was able to improve the overall performance by reducing the lossessubstantially over the period. The Company has turned around the operations in the firstsix months of the Financial Year 2011-12 and has turned itself into a profit zone aftertwo consecutive years of losses. Efforts are underway to improve the performance ofvarious divisions across the Company.
Our Strategy
We seek to further strengthen our position as a leading logistics company bysuccessfully differentiating our service offerings and increasing the scale of ouroperations. To achieve these goals, we seek to:
• Increase business from existing and new clients
• Expand geographically
• Continue to invest in infrastructure and employees
• Continue to develop deep industry knowledge
• Enhance brand visibility
Competition
We operate in a highly competitive and rapidly changing market and compete with variousorganized sector as well as unorganized sector logistic player. However, we recognize thatprice alone cannot constitute a sustainable competitive advantage. We believe that theprincipal competitive factors in our business include end to end multi modal executioncapabilities to deliver seamless, scalable, cost-effective services; increase scale andbreadth of service offerings to provide one-stop solutions; provide industry expertise toclients’ business solutions; attract and retain high-quality professionals. Webelieve we compete favorably with respect to these factors.
Outlook, Risks and Concerns
This section contains forward-looking statements that involve risks and uncertainties.Our actual results could differ materially from those anticipated in these statements as aresult of certain factors.
Challenges
• Prohibition on handling of coal at Chennai Port
• Unorganized and fragmented nature of logistics industry
• Poor logistics infrastructure pushes up logistics costs
• Rural areas have poor access
• The railways are facing severe capacity constraints along with unfavourablepolicies
• Ports are congested and inefficient
The Way Forward
The Indian logistics industry is being heralded as the next big service segment with ahigh growth potential. The areas of investment for growth include Port Terminals, CFS /ICD expansion, setting up of warehousing zones and development of 3rd Party logistics(3PL).
The demand for 3PL business has been gaining ground in India with companies increasingtheir focus on better management of their supply chain processes in the wake ofglobalization. The companies are also adopting 3PL systems to increase their penetrationlevels in the market.
Issues and Concerns
The main problem for the logistics industry is that it is not governed by a singleministry. Logistics is governed by several ministries leading to lack of coordinationamong various governmental agencies.
Further, legal procedures are often fragmented and government clearances take a longtime. Moreover, customs procedures for transporting goods are long and cumbersome, leadingto delays in reaching the destination. Multiple check posts and documentation requirementsfurther delay the delivery of cargo.
Railways no doubt account for a significant portion of the national freight traffic.Certain issues, however, continue to impede the growth of freight traffic. Capacityconstraint is a major bottleneck for Indian Railways.
The lack of adequate rail connectivity to ports and long time lines for rail projectsforces the use of roads for transportation.
For Private Container Operators, challenges continue to persist. Compared to roadtransport, rail haulage charges are higher. About 70 – 75 per cent of the revenuesearned through the bookings of the containers are paid to Indian Railways as haulagecharges. Customer orientation also needs to be strengthened.
Movement of freight through roads is mired in several problems related toinfrastructure, inter state operability, taxation, over loading etc. These bottlenecksincrease the turnaround time of freight carriers, which increases operational costs.
The government should introduce access controlled highways with proper barricades andcrossings to facilitate uninterrupted traffic flow.
Over dependence on the foreign ships for carrying cargo is a major concern for theIndian shipping industry resulting in higher freight cost movements in the carriage offreight trade. In India over 80 per cent of the total freight bill is paid out of thecountry because of carriage of most of India’s overseas trade in foreign flag ships.
Container traffic at the major ports is heavily skewed towards the western coast. Ofthe total container traffic handled at major ports, only around 18 per cent is handled onthe east coast and 82 per cent is handled on the west coast. Moreover on the west coast,container traffic is handled mostly by JNPT and the Mumbai Port. This is due to thehistorically better connectivity enjoyed by these two ports. It is imperative for theoverall growth of the sector that all other ports provide similar connectivity at the samelevels of competitiveness and with the same intermediate storage facilities.
To sum up High logistics cost, fragmented and unorganized market, inadequateinfrastructure, lack of capacity, high transit time, inefficiency in operations, lack ofIT penetration, low outsourcing logistics, complex tax laws and over regulation, policylevel issues, lack of skilled manpower, lack of proper storage facilities are affectingthe logistics industry as a whole.
Going forward the growth of the logistics industry depends not only on the developmentof infrastructure but also on the ability of service providers to adapt to situations andoptimization of technology.
The logistics business is no longer limited to basic transportation but encompasses agamut of services.
The effective logistics management helps companies gain competitive advantage throughboth value enhancement and cost reduction.
INTERNAL CONTROL SYSTEM AND ADEQUACY
The Company has proper and adequate internal control systems and has complied with thevarious statutes of the Government and statutory authorities. Internal Audit has beenentrusted to an external auditor and periodical review is being carried out. The AuditCommittee meets regularly to review the adequacy of internal controls.
HUMAN RESOURCE DEVELOPMENT
Employees are considered as an invaluable asset and they are key to drive competitiveadvantages. Recognizing the importance of human resources all efforts have been put byyour company to ensure that best talent is recruited continuously developed and retained.
There has been a lot of emphasis on training and development including self learning,manager inspired learning through coaching and career development opportunities. Employeeswere also sponsored for various seminars, symposiums and workshops conducted by theexternal agencies from time to time to enrich their knowledge.
CAUTIONARY STATEMENT
Forward-looking statement in this management discussion and analysis involve a numberof risks, uncertainties and other factors that could cause actual results to differmaterially from those suggested by the forward-looking statements. These risks anduncertainties include, but are not limited to our ability to successfully implement ourstrategy, our growth and expansion plans, obtain regulatory approvals, our provisioningpolicies, technological changes, investment and business income, cash flow projections,our exposure to market risks as well as other risks.