Ladies and gentlemen, good day, and welcome to the Allcargo Logistics for Q1 FY2025 results conference call hosted by PhillipCapital India Private Limited. As a reminder, all the participants' lines will be in the listen only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touch tone phone.
Please note that this conference is being recorded. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions, and expectations of the company as on date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. I now hand the conference over to Mr. Vikram Suryavanshi from PhillipCapital India Private Limited. Thank you, and over to you, Mr. Vikram.
Thank you, Pia. Good morning and a very warm welcome to everyone. Thank you for being on the call of Allcargo Logistics. We are happy to have the management with us here today for question- and- answer session with investment community. Management is represented by Mr. Ravi Jakhar, Group Chief Strategy Officer, and Mr. Deepal Shah, Group Chief Financial Officer. Before we start with the question- and- answer session, we will have opening comments from the management. I hand over the call to Mr. Ravi Jakhar for opening comments. Over to you, sir.
Thank you, and welcome everyone. Good morning. I am happy to share updates about the company and the underlying operating businesses with you. Before we take on questions, I would like to summarize the business outlook and then hand over to my colleague, Deepal, to talk through some of the financial highlights. This has been a good quarter, and we have had sequential improvements across all the businesses. The flagship business, which is international supply chain, has seen a good momentum, which we have been expecting for some time and now in this quarter, we have seen improvement in volumes. We expect the improvements to be more substantial in the months to follow as we have seen the demand starting to pick up only towards the middle of June, something that we have highlighted in some of our monthly updates as well.
For the quarter gone by, we saw the LCL business increase by almost 6% compared to the previous quarter. We also witnessed the FCL business up 9% as compared to the last year. When these volumes have gone up, this has meant that our utilizations have improved on the LCL side. So we have on the utilization index, we have each ECU container utilized 4% better as compared to last year. We have also been able to increase the share of 40 ft containers by almost 9%, which are operationally more efficient. We have also been able to reduce the transshipment requirement.
All these things combined have allowed us to improve the margins in the business, and therefore, that has contributed to the positive growth in EBITDA, which on a consolidated basis is about 34% compared to the previous quarter on the back of 13% expansion in the consolidated revenue. On the international supply chain business, we have been noticing that for the month of July as well as August, the volumes have been stronger. We see a similar demand outlook for September and October. Therefore, our general belief is that market should see continued sustained recovery in trade volumes until the end of the year. Coming to the domestic business.
On the express business, we have seen that operational efficiencies, which have been achieved early part of this calendar year, have sustained, and that has allowed us to continually improve the operating margins in the express business. As an outcome of that, the EBITDA for the quarter is almost 33% higher than the previous quarter. We believe that on the back of these operational improvements, the commercial growth should also kick in. The industry itself is expected to grow at a robust pace, and that should help companies expand its commercial operations, increase the volumes and revenues, and on the back of these sustained operating efficiencies, we should see a continued improvement in margins and profit bottom line numbers in the express business as well. Contract logistics business, we have continued to maintain the expansion mode, which meant that the white spaces have been more or less consistent.
As far as revenue is concerned, we have increased almost 13% as compared to the previous quarter. We increased almost 22% compared to the previous year. This is primarily on the back of renewed contracts, and now we are expanding in other domains. If you see the distribution of our business, it is almost equal across the mainstay chemical domain, the e-commerce business, and now auto and other industries also contribute to almost one third of this business. So the business is now well diversified. We have multi clients working with us and a lot of new contracts being signed, and I see that a healthy pipeline, which is visible. So we believe that for the coming quarters, the contract logistics business should also see a sustained growth.
As a combination of these three businesses doing well, we have seen a positive sequential outcome, and we believe the trend should continue. In terms of the macroeconomic environment for the domestic business, we have been experiencing increase in the volumes, and we believe that with the festive season ahead, the volumes on the express business side should only go up. On the contract logistics business, the trend of companies wanting to outsource and move from unorganized to organized, that is something which the underlying current has remained, and therefore the industry growth continues to be healthy. On the international supply chain business, besides the revival of trade volumes, the company is also focused on two key categories of initiatives. One is revenue expanding initiatives, which include launching new products, launching new trade links, and also strengthening our presence in certain markets where there is an opportunity.
For an example, recently we appointed a new leadership team in Argentina, Uruguay and Paraguay, three markets where we felt we were underrepresented, and now we have very strong commercial team which has come on board together as one team. We expect that the volumes in these three countries could potentially double from the current levels in next 9- 12 months. We believe there are other such pockets of opportunity wherein the company's market share is relatively lower, and we continue to work towards such specific opportunities. The second key category of initiatives is on the cost side. There is a continued focus on standardizing our operations, which allows the operations to be outsourced. We have achieved a lot of cost savings, as discussed in the past calls, through standardization and then outsourcing of operations from United States into Mexico.
We continue to evaluate other such opportunities on how we could standardize operations and then outsource to reduce costs. The second opportunity in that category is to continue to drive automation, because standardization also makes automation more feasible. The combination of these two things should allow us to maintain our costs against all the inflationary pressures. As an outcome of that, the business should do well. That we brought summary on the business performance and the market outlook. We will talk more about some of this in the questions that come across. On that note, I would request my colleague, Deepal, to take you through the financial highlights for the quarter gone by. Over to you, Deepal.
Yeah, thank you, Ravi. I will now discuss the performance for Q1 FY 2025. The consolidated revenue for Q1 FY 2025 stood at INR 3,813 crores as compared to INR 3,271 crores during the Q1 FY 2024 and INR 3,398 crores during Q4 FY 2024. The EBITDA for Q1 FY 2025 stood at INR 133 crores, down 5% as compared to Q1 FY 2024 and up by 34% as compared to the quarter ended March 2024. The company reported a consolidated PAT of INR 4 crores as against a loss of approximately INR 12 crores reported during quarter four FY 2024. Consolidated net debt for the quarter ended June 2024 stood at INR 434 crores. Moving on to the segmental performance, I will start by discussing the performance of the international supply chain business.
The trade environment has been buoyant. Demand has exceeded expectation on the back of strong global growth momentum as compared to 2023. LCL volume for the quarter ended June 2024 stood at 2.25 million TEUs. Similarly, on a YoY basis and representing a quarter-on-quarter growth of 6%. The FCL volume for the quarter stood at 156,000 TEUs, similar to last quarter and up 9% on a year-over-year basis. With Q1 FY 2025, the ISC business reported a revenue of INR 3,320 crores as against INR 2,823 crores in Q1 FY 2024 and INR 2,919 crores in Q4 FY 2024. The EBITDA for the same period stood at INR 81 crores as against INR 42 crores and INR 111 crores respectively.
Now moving on to the Express business operating under the GESCPL brand company. The volumes for Q1 FY 2025 stood at 300,000 tons as compared to 292,000 tons during the same period last year. The quarter reported revenue stood at INR 358 crores as compared to INR 367 crores in the same quarter last year. The EBITDA for the quarter ending June 2024 amounted to INR 20 crores as compared to INR 18 crores for Q1 FY 2024. Moving on to the contract logistics business, which sits under the Allcargo Supply Chain.
The contract logistics revenue stood at INR 91 crores for the current quarter as compared to INR 71 crores for the quarter last year. Similarly, EBITDA for the quarter ended June 2024 stood at INR 39 crores as compared to INR 32 crores for the same period last quarter. In line with the best disclosure practices, we have been consistently providing other key comparative financial and operational indicators in our investor presentation. One can refer that for more detail. With this, I would like to open the floor for question- and- answer session.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Rushabh from RBSA Investment Manager LLP. Please go ahead.
Hi, sir. With regards to the express business, we have seen a good churn at the senior level management team. I just want to understand what changes have been made or what changes we will be making at a broad strategy level so that there is good double-digit volume growth over the next two, three years.
Considering that Gati is a separately listed company, I would refrain from going into too much of detail on that and the Gati management team could answer better. Just to state the facts, as you are aware, Gati's express business has seen an operational turnaround, with the cost of operations now matching the best standards in industry, and that has been the primary driver of profitability. Sandeep joined us as a Chief Operating Officer last year in the Gati business, and there has clearly been a strong outcome.
We have had senior commercial leaders joining the company recently, and we remain confident that they would steer the company towards some future growth. Sharma joining as the Chief Commercial Officer. Of course, Phil has retired from the company and would continue to transition the management. There have been changes which have been made. New people have been brought in, and new people would bring in new energy and a renewed focus, which should continue to drive the growth momentum, which has been built on the back of a significant turnaround from extremely challenging situations. I think all the management changes should work well for the business.
Secondly, on the contract logistics side, what is the sustainable EBITDA margins? We have seen a slight dip here. Can you just share next two, three years, what is the outlook here?
The EBITDA margins, I would say the current quarter decline is not an indication of a trend. On a small base, sometimes the cost reallocations can also have a bearing impact. But fundamentally, the business profile should remain consistent. We do not see a significant upward or a downward revision in the margin profile. They should sustain from a two to three-year horizon. We could potentially build additional revenues from the transport part of the contract logistics, where we had certain restrictions which are now removed, which typically comes at a lower margin, but then that would be like an incremental business on top of whatever growth we see today.
If we continue to witness the current growth pattern, the margin profile should remain same. Should there be an accelerated growth on the back of the current contract logistics business with greater contributions from transport, the margin percentages could decline, but the absolute margin should grow even better. That is how I would put it.
Okay. Thank you, sir.
Thank you very much. Next question will be from the line of Ravi Singh from Cosmic Horizon Capital. Please go ahead.
Hi. Thank you for the opportunity. In the NVOCC business in the pre-COVID time, we used to do an EBIT per LCL container volume of about 0.44x, which had risen quite sharply during COVID time. Now it is close to about 0.15x. Now with container shortages and the huge increase that we have seen recently in the long-term freight rates, can the EBIT for LCL at least shoot up to the pre-COVID levels of 0.44x, if not higher?
A couple of comments here. The LCL and the FCL business composition, as well as the trade lane composition, have significantly changed over the years. Also it represents a mix. Therefore, we have always advised against comparing on an EBIT per TEU basis. We have shared the guidance in terms of what drives the operational profitability. Typically, 1/3 , 2/3 , or roughly 70-30 is the percentage of gross profit contribution from the LCL and the FCL business. That is what we have maintained. If one was to try and estimate the profitability scenarios, one could look at that split of GP. We have been sharing the volume details. On the FCL business, freight rates are going up or down have somewhat direct bearing, not exactly in the same proportion, but to some extent on the profitability.
On the LCL business, the key drivers are utilization and the 40-ft container usage, both of which are again shared on a monthly basis. From here on, what we see is that we have great confidence on the volume growth and utilization and 40-ft containerization remaining same, which means that the operating profile of the LCL business should improve from here. In this business, as you could see, the SG&A cost is a significant multiplier of bottom line. That is something which we are confident again of continuing with all the initiatives that I spoke about.
Effectively, there is a significant operating leverage that kicks in and therefore, if one is analyzing the EBIT per CBM in the LCL business or EBIT per TEU in the FCL business and some kind of a blended number on that, you would see that marginal improvements in gross profit can have much more significant positive impacts on the bottom line on a per unit basis. Business fundamentally tracks gross profit per CBM for LCL and gross profit per TEU for FCL. That is how all the country managements are driven.
I would say that from current levels, one could expect the SG&A costs to be largely contained, keeping them well below inflation rate, because inflation will have a natural impact. But we intend to offset that to some extent with the automation initiatives. Now on the back of that, we have shared some guidance on the volume expansion. One could play out the operating leverage and make some estimates, but Yeah, fundamentally, we should move towards levels broadly in the range or maybe perhaps higher as the business revives over the next two, three quarters.
Right. Makes sense. Also all the cost initiatives on the employee cost front, is that all done or is there some more positive impact that can flow through in the next quarter?
That is largely behind us. Like I said, there have been increases and there have been reductions. That is how we've been able to contain the costs. Otherwise, in a normal operating environment, the costs would have gone up. That's the reason why all the corporate cost reductions and automation initiatives and outsourcing initiatives have come in handy to maintain the costs. Now we have seen the revival in business. This quarter, we have seen some growth in volumes, and we are seeing even better trends in the recent months. We would have the monthly updates for the month of July, perhaps within next five, six days it should be out. One could see there should be a continued positive trend on the business that should translate into improved profitability as well.
Right. Lastly, just in the first five months of this financial year, we've seen a record 74 million TEUs of container movement yearly, which has beaten the previous 2021 record of about 73.9 million TEUs. Many analysts world over believe that this was majorly on account of front-loading of demand. The Christmas and the New Year stocking, which generally happens around Q3, had been preponed to Q2. Does this imply that somewhere down the line, demand could taper off and freight rates could cool off from here on?
One, typically, whenever we look at the container statistics which are usually shared, I'm not sure which numbers you are referring to, but there is also a mix of empty and the laden containers. Laden containers typically demonstrate movement of inventory, while there is a lot of empty containers, which basically are based on the repositioning required as per the trade lane. In terms of the demand, we had seen sharp pick-ups and which had led to a significant expansion in freight rates, say from April until June, July. Then there has been a marginal decline on some trade lanes and marginal increase. It has not been a constant increase. Now we believe the freight rates should remain stable or more or less range-bound until the end of the year.
Beyond that, there is no visibility at this point in time, but typically around the Chinese New Year, around February, there has been a little bit of a slackness. There could be some decline as well. But right now, the biggest challenge here is on the supply side, with the whole Red Sea crisis, the additional turnaround transit time. Also the U.S. ports have been congested. All these factors have been leading to a bit of a supply shortage as well. We cannot really comment upon the geopolitical situation, but at least the immediate future, we do not see things changing rapidly. By the time things improve on the supply side, we believe the demand should get better because the current demand uptick is largely from select markets in Asia, U.S., Mexico, and South America.
European economies have remained subdued, and we have not seen momentum or growth in those markets, which potentially could follow in 2025. It is more like a combination of all these factors should potentially create a sustained demand for the remaining three quarters of this financial year. That is what our broad estimate is based on all the geopolitical developments and the trade insights that we follow.
All right, sir. Thank you so much for your answers. I have two more questions, but I will get back in the queue.
Sure.
Thank you very much. The next question will be from the line of Rajesh Agarwal from Moneyworld. Please go ahead.
Sir, any one-off this quarter in terms of expenditure?
Nothing significant that needs to be highlighted.
Okay.
Deepal, do you have any comments on that?
Yeah, nothing. No one-offs.
Yeah, one from INR 32 crores we got for that COVID relief for employee. That was there in this quarter?
No, it was not there. It was there in the last quarter, June of 2023.
Okay. 2023 it was there. Okay. All the costs last year, okay. All the cost has been appropriated and everything, any increase in cost or anything in rationalization in the cost side?
We are working on-
Yeah. Okay. Let me go ahead. Yeah.
Okay.
Yeah. Thanks, Deepal, for confirming on the no one-offs.
Like I said, on the cost side, we have done a lot of cost reduction initiatives which have allowed us to maintain the cost despite inflationary increases. No significant additions or reductions expected there.
The cost will-
Focus is going to drive gross profits to drive the bottom line.
Any operating leverage from here will drive to the bottom line?
Yes, that is exactly the strategy and the expectation.
Sir, one question. What you have done, apart from the automation and digital, which we are talking about. If the business becomes more a sustainable model, it does not become a one-off, because of the freight rate or supply shortage of containers, we benefit. When that is over, we do not benefit. Is there any strategy we can do our 6% EBITDA or something like that, so the business can become more sustainable?
I think the best part and the most beautiful aspect of our business is that it is a very unique niche business which is not replicable. The business that is the flagship international supply chain is less than container load consolidation. In here we operate 2,500 direct trade lanes which means that it's like how you book an Uber, you could book an ECU container, you could book one CBM of cargo, which should make it simple for understanding. You could just book one CBM of cargo every week across 2,500 trade lanes. This is like a vast airline network. To give you an example, this is a bigger network than any shipping line in the world.
That's the kind of scale we have created globally, and that is the reason why some of the largest forwarders globally also are our customers, which means that even DHL, Panalpina, DSV, and the likes of these large forwarders, when they have requirements, even they end up being customers for ECU Worldwide. It's a very robust, strong network. Being a cross-border trade, it also requires operational engagement on both origin and destination. It's a very unique business. We have our own offices in almost every country that matters, barring Russia, in terms of scale and size. This network, this well-established direct services, are the fundamental ground which creates very high entry value. Now, on top of that, what we're trying to do constantly is our customers are mostly forwarders who are well-educated. Our vendors are shipping lines, which are also well-managed.
What we need to do is we need to create the phygital layer, which is the physical infrastructure on ground to manage consolidation and containers, and the digital network to bring all these stakeholders together and provide seamless visibility. That's where all the automation, the data analytics on route optimization, all of those come into play. We are the only company in the world which has almost 70% of its export bookings coming in through digital channel. All these differentiations on an already unique niche business model creates very high entry barriers and very high defensibility in the business.
Why didn't we benefit after the freight rates came down or container utilization came down? Why we didn't benefit if it would have been so?
No. That is exactly the counterproductive thing, because as you can imagine, the cost of operating the business is the cost of container, and the revenue comes in from every cubic meter that we carry. When the economic downturn happened, and on the back of that, it was a very unique dual event when the freight rates also rapidly collapsed and the utilizations also came down.
Okay.
We were in a situation where each container, the cost of carrying the container is, the freight rate is to a large extent when the LCL business starts on, right?
But if you are not carrying enough cargo, then you do not make money. It is like in any airline business, if you have vacant seats, you do not make money. If you have a full aircraft, then you make money. Exactly the same way.
Do we enter into the contract annually, contract with the shipping line, so much container we will upload for LCL and all?
There is a combination of rolling contracts, spot buying-
Okay
....minimum commitments, and sometimes it is more of the volume incentives, like when we cross certain thresholds, we get certain additional volume incentives, etc. These are initiatives which go back 30 years.
Okay.
It is not exactly that we have contractual obligations on the buying side, but we have strong comfort. To give you an example, in the worst crisis of container shortage in the history, in the big peak of COVID, as well as in the recent times, we are always able to find space for our customers across the world. That has been a strong testament to our operational capabilities.
If the scenario is normal, geopolitical and other things, utilization of container, then we will make money, we will make more bottom line?
Absolutely. The bottom line should grow as long as we are able to improve the utilization, which should be on the back of volumes. As the economic growth revives, which we are seeing right now, and it should continue. As the interest rates coming down, the consumption should go up. The whole macroeconomic environment is that last 12 months were tough, but things are looking better. Europe possibly will take some time longer. Overall, basically, we see enough contributions coming in from different quarters of the world to drive economic growth, up the trade volumes, and all of those directly contribute to us.
Okay. The container shortage or the shipping line routing from-
Could you do return to the question queue.
Okay. Thank you, ma'am.
Thank you very much. Next question will be from the line of Radha from B&K Securities. Please go ahead.
Hi, sir. Thanks. Sir, sequentially, despite the rise in volume, we are seeing that our operating costs have remained elevated. Could you please highlight what are the reasons for this? Because last two years, we have taken a lot of initiatives on the cost front. When can we see the benefits of that come into our books?
A significant part of operating cost is ocean freight. Naturally, in a rising ocean freight environment, operating costs will also go up. But like I mentioned, we've planned, which is why if you look at on the consolidated basis, a 12% increase in revenue sequentially has led to a 34% increase in EBITDA. The operating costs would not come down. They would come down or go up with the freight rates. But what we're expecting is that the volume should go up. Gross profit per unit volume, which is what we call as yield in this business, should remain consistent or we endeavor to improve. An increased volume and an improved yield should lead to a higher gross profit, and all of that by containing SG&A should come down to the bottom. That's how the business strategy is being worked upon.
Okay, sir. Secondly, what kind of volume growth that you are targeting for FY 2024 for the international supply chain business?
At this point in time, we are not sharing any specific guidance, but we would like to reiterate that we would continue to expand market share, which means that we would grow faster than the market in both LCL and FCL business for FY 2025.
Okay. And sir, in contract logistics business, we have gained market share from customers in this quarter. But despite that, we are seeing that EBITDA has dropped. What are the reasons for this, and what is the path for the contract logistics business in this quarter, and how much do you expect for full year?
The contract logistics business is typically driven by contracts varying from one year to three years in contract life, and therefore, quarterly trends could have a little bit of deviation based on how the white space is moving. Because we are constantly investing in acquiring additional capacity, which naturally remains vacant for some time and then customers fill in. There could be some sequential variances, but typically, revenue growth and the revenue mix is an indicator of profitability. In this case, revenue growth looks strong, revenue mix has remained consistent. So profitability should remain consistent in terms of margin profile and should improve in terms of absolute amounts.
Okay. And what are the current volumes from the three regions that you mentioned, Argentina, Uruguay, and Paraguay? Also, in which subsidiary are these regions being recorded?
The international supply chain business outside of India is all under subsidiaries below ECU Worldwide NV, which is the Belgian entity. That is where we record. We do not share country-specific volumes.
Great. Okay.
Thank you very much.
Lastly,
Okay, go ahead.
Last question, you mentioned about the net debt. Could you mention the net debt from each business segment and what is the target net debt for this year and next year?
I would request my colleague, Deepal, to comment on that.
Yeah. Target net debt, it depends upon each business. In some businesses, we may want to just have some leverage for working capital requirements. If you want the breakup, we can share the breakup. As far as ECU is concerned, which is the largest business outside of India, the net debt is INR 133 crores. Allcargo Logistics, which is the standalone, but also may hold core, holds a net debt of INR 524 crores. Gati typically is at INR 195 crores net cash available because we had the QIP money being raked in. AACPN is at around INR 24 crores of net debt, which is used for CapEx requirements and for long-term borrowing. There are a cash shop around close to INR 52 crores in other subsidiaries, adding up to INR 424 crores of net debt.
Sir, any substantial or any CapEx plans for this year and next year?
No. Gati, you already have the QIP proceeds, where we are going to be investing in some hubs and also into the technology piece. Apart from that, in Allcargo ECU, we do not have any large CapEx requirements. Only maintenance CapEx, et c, which is expected.
Okay. Thank you very much.
Summary is we expect the debt to go down from here, not go up, only subject to working capital debt, which if the freight rates go up, and that of course, will increase our business on the earnings as well. But if that's the case, only the working capital debt may kind of go up a little bit, depending upon how freight rates perform. But just to confirm to you, in spite of the working capital debt going up, our DSOs and all have been reinsured and been controlled. There isn't any additional exposure. It's only the additional business that we are raising in terms of revenue, which will be followed by profits as they come along. Yeah. Thank you.
Thank you.
Thank you very much. The next question will be from the line of Dheeresh K. Pathak from White Oak. Please go ahead.
Yeah, thank you. Basic question, just to improve my understanding. LCL volumes you measure in CBM and FCL in TEU. Why is that?
The FCL is measured in TEUs, which is a 20-ft equivalent unit, because we typically carry the full container load, which means that the customer either books one, two, five, or 10 containers with us. This container could be a 40-ft container or a 20-ft container, and that is why globally, the container business is measured in TEUs. The reason why we measure LCL in CBM is because customer does not bring in the entire cargo. Customer brings in a part of the cargo. So cargo brought in is like 1 cu m or 2 cu m or 0.5 cu m , and therefore, the bookings are always in cubic meters. All these shipments together fill up the container. That is how the less-than-container load consolidation business works, and hence, the unit of measure is always cubic meters in LCL and TEUs in FCL.
Is it a fair understanding that in FCL, the revenue and cost are both on TEU basis, but in LCL, the revenue is on cubic meter, but cost is in TEU?
Yes, that is correct.
Okay.
Which is why the utilization, which is cubic meters per TEU, plays an impact on profitability.
Understood. On slide 14, the chart on the right-hand side, which shows container utilization index and 40-ft container usage index, what is the difference between the two charts?
Yeah. Container utilization is how many cubic meters are we putting inside the container. The 40-ft container usage index is of all the containers that we are using, how many of them are 40 ft and how many of them are 20 ft. What happens is a 40-ft container, as the name suggests, typically has twice the volume of a 20-ft container. However, the costs are not double. They are typically 1.6x- 1.7x, and therefore the objective is to always carry the LCL cargo in 40-ft containers. If you do not have enough cargo, like typically to give you a ballpark idea, 25 cu m to 27 cu m of a cargo is typically carried in a 20-ft container. If you have 45 cu m, 50 cu m, 55 cu m, you tend to carry them in a 40-ft container. That is how largely the business operates.
Sometimes if you say you only have 20 cu m or 22 cu m or 18 cu m of cargo, then you would carry that in a 20-ft container. From a business standpoint, 40-ft container means lower cost per cubic meter because the cost is not double, but the volume is double. Therefore, as the business is performing well, the volumes are high, we are able to use more and more 40-ft containers. The graph at the bottom suggests how is our 40-ft container mix improving or deteriorating. That is the difference. One is how many cubic meters are we putting inside each container, and the second one represents what percentage of containers are 40 ft in the overall mix.
This is only from an LCL business point of view, not FCL. Both the charts on the right-hand side do not represent FCL.
Both the charts are relevant. Yes, both the charts are relevant from LCL point of view only. That side.
LCL point of view. From a gross profit, let's say Q1 FY 2025 is INR 647, and then the EBITDA, the chart below is INR 81. The difference between that is all overhead costs, fixed overhead costs?
Yes. Between the gross profit and the EBITDA would be the overhead cost, the admin cost, staff cost.
That is a lot of overhead costs. Where does it, is it semi-fixed or it is totally fixed? What is the nature of this fixed cost?
I would say there is some degree of variability based on the performance. To a large extent, these are staff costs, your warehouse lease, office rentals, etc, and kind of fixed. Which is why I was mentioning earlier that the SG&A component is significantly high compared to the bottom line, and therefore improvements in gross profit have a far more profound impact on the bottom line. Therefore there is a huge operating leverage at play, and hence the endeavor is to always continue to outperform market. As soon as whenever we see the macroeconomic environment supporting the business, we see a good revival in the performance. Naturally-
Just to get a good understanding, this fixed cost is, let's say, INR 200 crore annualized run rate, if I did the math right. Of this 2,200-
I lost you. I am not sure if it is connection at my end or yours.
We cannot hear you at all.
Yeah. Okay. Yeah.
The line for the current participant seems to have disconnected. We will move to the next question. Next question is from the line of Sukant Garg from Equible Research Private Limited. Please go ahead.
Hello.
Yes, you are audible. You can go ahead.
Thank you for giving me a chance. I just wanted to know about the cash flow situation. The cash flow situation deteriorated as we compare it from June, because in June, the profit, the operating margin, and the cash flow is much better off compared to the financials we have now.
Deepal, you want to respond on that?
I couldn't actually hear you very clearly. It's regarding cash flow. What is the specific question? Can you please repeat that? Your voice was echoing in a way. I couldn't hear it very clearly.
Am I audible?
This is far better. Yeah.
Yeah. I just wanted to know that if our cash flow situation has been a little less better than what we have in Q1 FY 2024, because if I see the operating margins, the operating margins came down a little bit from June 2023 to June 2024, from Q1 last year to Q1 this year.
Yes. If you look at the results for Q1 FY 2024 versus the results for Q1 FY 2024, there is a change in the results as far as the EBITDA amount is concerned. Keeping that in mind, the cash flow has to some extent, the EBIT margins, to that extent, the cash is marginally impacted. Also, what has happened is that if you compare the freight rates in Q1 of 2023 versus Q1 of 2024, which is now, you will see that the freight rates have also gone up a little bit. So there has been some additional investment in working capital, but we have sufficient cash and lines available for us to cater to these requirements. There is no other issue.
But do we recover that in Q2 or Q3 onwards? We have sufficient planning for that.
The operating cash, if you go back and look at the cycle two to three years back, what has typically happened is that whenever the freight rates have gone up, many a times it came with a better margin over a period of time. If that happens, the cash is obviously the freight rates pass through. So we will definitely recover all the cash back. The working capital expands when the freight rates go up and they contract when the freight rates come down and that cash is then replenished back to the lines that we have with the institutions. That is how the whole cycle works. But what it leaves behind is better business opportunity to cater to and better margins and profits in times of higher freight rates.
Yeah. Primarily to add to that, basically the fundamental driver here is that the ocean freight rates have gone up in the last three, four months, and that has meant a much higher working capital which is being deployed and therefore the cash flow has been utilized towards that.
Okay. Thank you.
I also mentioned that our DSOs, I did mention earlier also, to Robert and Nimesh, our DSOs have been range bound. They haven't gone up. So the cycle in terms of recovery is fairly consistent. That is not the issue. It's only a factor of the increasing ocean freight rate.
Okay. Thank you. Thank you very much. That's all from my side.
Thank you very much. The next question will be from the line of Dheeresh K. Pathak from White Oak. Please go ahead.
Yeah. I hope I am audible now, sir.
Yes.
Okay. Sir, what I was asking earlier when I was not audible, that if I did the math right, there is a fixed cost of about INR 20 odd hundred crores based on last quarter financials. Just to get a better understanding of the business, what would be the broad buckets of where this INR 2,200 crore of fixed cost is incurred? How much is rental, how much is employee, and what might be the other big buckets of cost?
We do not share a detailed breakup of the SG&A costs, but I would say the staff cost is the single biggest contributor towards that cost. Second cost would be warehouse and office rentals and lease rental costs that we pay. Then third would be the general administrative costs corresponding to utilities, travel, etc. A part of that would be variable pay, bonus, etc, which is linked to the performance. In terms of forecasting what the P&L could look like, if you look at slide 14, which I think you only were referring to on the graphs, you also would notice that we share the yield, the LCL and the FCL yield index. This yield basically means gross profit per unit. So LCL yield is gross profit per cubic meter, and the FCL yield is gross profit per TEU.
Now, of course, this is on an index that we share, but one could clearly see, for instance, the LCL yield is more range bound. Now on the back of improved utilization, we believe we should get back to where we were 12 months ago and then possibly improve from there on. So this number should start looking at beyond 100. As the volumes grow, the gross profit is nothing but a multiplier of volume and the yield. So that is the way in which one could forecast the future performance. Like I said, to reiterate, we have done enough by way of cost reductions, outsourcing and automation to keep a check on this SG&A cost, and that is why there is a huge operating leverage at play in this business.
Understood. The way you are explaining and the way I understood, I would have expected LCL yield to be more volatile because you are booking revenue on CBM and you are incurring costs on TEU, but it seems your FCL yield is more volatile. Are you taking some sort of a market price risk in FCL business versus in the LCL business? Why is that?
I will tell you why is that. When it comes to an LCL business, the business is about we receive one cubic meter of cargo in our warehouse, wherein we consolidate that cargo. Sometimes we do the door pickup as well. Then that cargo is moved on the ocean leg. Subsequently, we have deconsolidation activity in the warehouse. Then there is a door delivery for some part of the cargo. There are multiple activities involved, and ocean freight is one component of that. All the other costs are more consistent and somewhat linked to cubic meter. The ocean freight component is the one which is linked to TEU. In this business, the other rates do not vary that much as much as the ocean freight.
Therefore, this is more driven by, as we are able to utilize, we are able to save on ocean freight cost because that is like, let us say, if you are able to improve the utilization index by like we have seen 4% here, let us say if we improve by 10%, that means that we are carrying the 10% additional cargo on the same ocean freight cost. Now, if the ocean freight cost is, say, 30% of the total cost, we are still saving 3% cost. Now, 3% cost in the kind of margin profile that you see impact on the bottom line, and that is how it kind of plays out. On the FCL business, the freight rates are very volatile.
That freight rate volatility plays directly into it because in a certain sense, large part of our revenue and costs both are only linked to ocean freight. There is not much of warehouse or origin or destination door activities in the FCL business, and therefore the volatility of the ocean freight rates is fully reflected in the FCL business. While in LCL business, it is just one contributor, and also it is kind of passed on. Typically, as the freight rates go up or down, we do not really end up making more or higher margins based on the freight rates. Naturally, of course, what happens is when the freight rates are high, people tend to consolidate more and do less of FCL. There is an indirect impact on how utilization goes up.
But fundamentally, from a pricing standpoint, it is not that we try to price higher when the freight rates are higher. Typically, the office operates on gross profit per CBM. So when the freight rate goes up or down, they typically revise the tariff accordingly. But what happens in FCL is, when the freight rate moves from say $1,000 to $5,000, we do not maintain the same $200 margin. It may not become exactly that much proportion, but it goes up and down, and it varies. So that is the reason why FCL has a greater dependence on the ocean freight. It has lesser complications, and outcome of that, the volatility is much higher in the FCL business as compared to LCL.
That is a very good insight you have said. So just to my understanding, in the LCL invoice for the client, the ocean freight is only 30%-40% of the total invoice. In FCL, it might be 90% of the total invoice or 100%. Is that a fair understanding?
On the cost side. On the revenue side, typically it is in an all-in integrated quotation, where if you log into ECU360, which is a unique platform that we have where you can get an instant quote for moving cargo from anywhere in the world to anywhere in the world. Typically, it is the line cost, and it would typically show charges for transport, handling, terminal handling. There are multiple line items in there. But what I am trying to explain you is, broadly, the component of ocean freight would be lesser in the LCL, and it is kind of a pass-through. So the volatility is kind of pass-through and the gross profit largely remains intact or in line. Volume is more dependent upon the utilization and operational efficiency.
Okay. And in FCL, the volatility is somewhat absorbed by you, so you are short volatility in a way of the container freight rates that we broadly see, right? You are short volatility. If there is a very sharp upswing or downswing, your yield index will be hurt in that period, right?
No, it typically plays in sync. Typically, the yield improves with the higher freight rates, and it reduces with the lower freight rates. It's not-
Why has it reduced this period? Because rates have gone up meaningfully, right? If I understand correctly, your yield index is down.
No, we are comparing it with the last year similar quarter, wherein there's a bit of a lag effect as well. If you look at sequentially, you would see a different picture, and which is why maybe, perhaps, I think we'll not share the FCL yield. We'll try to see if we can share more further data on this on a more sequential basis as well.
Mm-hmm. Great. Understood, sir. Thank you.
Thank you very much. The next question will be from the line of Radha from B&K Securities. Please go ahead.
Sir, hi. Thanks again. Sir, wanted to understand that in the international supply chain business, what percentage of customers are recurring in nature?
I would say, roughly about 40% of our business comes from large customers, which are almost all recurring in nature. 60% of the business comes from small customers, and I wouldn't put an exact number, but a large majority of those customers are also recurring customers, with many having year-long or decade-long relationships with us. Because most of this business is coming in through small and medium forwarders, I talk about the small customers, and they've been working with us for a long period of time. Typically, the share sometimes comes in from the new trade lanes, new services that are launched, and new products that we launch. Naturally, we continue to acquire the new customers as well in some key markets. But a significant proportion, I would say more than almost like 80%-90% of this would be recurring business from the same set of customers.
Secondly, sir, while you were explaining to the last participant that there is some lag effect in the gross margins this quarter, and maybe sequentially it could be better. Is my understanding correct, if the revenues for this quarter is on the basis of bookings that you might have received last quarter, and hence we can see the lag effect?
Sea quarter is typically an average 40 days of sailing from, if you make an average of Asia, Europe, Asia, Americas, and trans-Pacific and trans-Atlantic, there could be typically about four to six weeks of lag effect in some sense, which is why, like I mentioned, we look at the month gone by and the current month. We believe that trend should only improve on both the volume side and the overall parameters.
Okay. Also, despite majority of our customers being recurring, there is no contractual agreement with them. Is this a fair understanding?
That is right. There are no contractual obligations on either side. But I would say there is a reasonable understanding, and many customers handle many vendors. We would typically have volume incentives at play with some of the largest customers and some of the largest vendors that we work with.
Understood. Okay, sir. Thank you very much.
Thank you very much. Ladies and gentlemen, in order to ensure that the management is able to address questions from all the participants, please limit your questions to one per participant. The next question is from the line of Dhruv Shah from Ambika Fincap. Please go ahead.
Hi, sir, and congratulations on a good set of numbers, and thanks for the opportunity. I just have one question. With the freight rates going up and you seeing increasing in volumes, can we envisage that in a few quarter's time we should touch the run rate of what we touched in 2021, 2022? Or that will be too much to ask for?
We would refrain from the guidance, but like I said, at least for the four quarters of this year, starting with the first quarter, we've seen sequential improvement, and we expect the same sequential improvements to continue for the remainder of the year on a quarterly basis. That's the kind of broad outlook that we have at this point in time.
I don't want a guidance, sir. But are the price almost at the rates at which it was in 2021?
On different trade lanes. Like I said, the European economies have still remained subdued. If you look at the rates for export out of Europe into Asia are extremely weak, while at the same time, rates from Asia to Europe are much higher. Rates from Asia into Latin America, for example, for some of the trade lanes had touched as high as they was during some of the COVID phase as well. It's not like a secular trend across all trade lanes. There are a combination of trends.
How much would the revenue be from exports from Europe?
Our business is largely a representation of the global trade. We have a strong business almost in all parts of the world. It's pretty distributed.
Fair enough, sir. Thank you so much, and all the best for the future quarters.
Thank you.
Thank you very much. Ladies and gentlemen, that was the last question for today. I now hand the conference over to the management for closing comments.
Thank you everyone for joining us in, and we hope we were able to provide insights on the business and respond to your questions. One of the ways to improve disclosures and information from our side is to receive inputs and questions from your side. Please feel free to reach out to our investor relations team. Come back with your suggestions on what kind of information you would like to see, and we would be more than happy to continue to improve our disclosures and see how we can help the analyst community as well as our shareholders understand the company and the business better. Thank you very much for joining us today.
Thank you, and thank you very much.
Thank you. On behalf of PhillipCapital India Private Limited, that concludes the conference call. Thank you for joining us, and you may now disconnect your lines.