Ladies and gentlemen, good day and welcome to the Mahindra Logistics Limited Q2 FY 2022 earnings conference call. I now hand the conference over to Mr. Shogun Jain from SGA. Thank you, and over to you, sir.
Thank you. Good evening, everyone, and thank you for joining us on the Mahindra Logistics Limited Q2 FY 2022 earnings conference call. We have with us Mr. Rampraveen Swaminathan, Managing Director and Chief Executive Officer, and Mr. Yogesh Patel, Chief Financial Officer of the company. I hope everyone got an opportunity to go through our financial results and investor presentation uploaded on company's website and stock exchange. We will begin the call with opening remarks from the management, following which we will have the forum open for a Q&A session. Before we start, I would like to point out that some statements made in today's call may be forward-looking in nature. A disclaimer to this effect has been included in the earnings presentation shared with you earlier. I would now like to invite Ram, Managing Director and Chief Executive Officer of Mahindra Logistics Limited, to give his opening remarks. Over to you, sir.
Good evening. Thank you, Shogun, and good evening, everyone. I trust all of you and your dear ones and your colleagues are well and staying safe. I hope all of you have had a chance to look at our results for Q2 FY 2022 and the presentation, which has been uploaded on the stock exchanges and the company website. I'll begin my remarks by providing an overview of the sector, the current market scenario, the operating environment we are in and our financial results for the quarter, which has gone by. As you look at where we are today with the reduction in the spread of the COVID pandemic, we have seen positive trends in most markets, with the notable exception of the automotive segment. These positive trends have accelerated through the second quarter.
The strong growth in vaccination statistics has resulted in opening up of more areas, and travel restrictions have come down, resulting in higher economic recovery, business travel, and discretionary spending. These trends have had a positive impact on the overall economic environment and created a need for logistics, as evidenced in the growth of e-way bills and the trend in petroleum product consumption in the country in the last quarter. The recent announcement of the Gati Shakti program by the Honorable Prime Minister marks a comprehensive vision for integrating a multimodal logistics transformation in the country. The stronger focus on productivity and integrated planning, combined with faster approvals and discipline of deviation, can be a catalyst for accelerating the sector's transformation. The Railway Ministry recently announced that 500 multimodal hubs will be developed under this initiative.
Further, we are looking at adding nearly INR 50,000 crore of extra investment in the sector over the next five years. All of these promise significant potential to accelerate the reforms which have already been happening in the sector over the last five years. In addition to the supply chain and logistics, the mobility sector has also started showing green shoots. There has been a marginal uptick in return to office in the BFSI and IT segment, though it's early days yet, and different firms are adopting different strategies. Air travel is now back to an estimated 60% of pre-COVID levels, and this is likely to further go up through the upcoming festive season. These trends should start driving increasing growth, first in services such as airport cabs, and eventually thereafter broadly across B2B and B2C mobility services.
Globally, cross-border logistics remains with significant challenges as there are large-scale shortages of containers and volatility in freight availability and costs, both in terms of ocean and air movement. These are impacting domestic business significantly in terms of their ability to respond rapidly in the midst of the highly integrated global supply chains. We do not see any short-term relief, as capacity is likely to be constrained over the next 12-18 months. Uncertainty with changing trade patterns and geopolitical shifts will further increase the volatility. Let me talk about individual sectors now in greater detail and begin with the auto manufacturing segment, which is our largest end market in our business. The auto manufacturing segment, especially the automotive segment, continued to see significant pressure during the quarter.
The global semiconductor shortages have impacted all the OEMs in India as well and resulted in sharp drop in volumes, especially in September 2021. This is probably more true for companies using diesel engines compared to gasoline engines. As a result, several OEMs took or extended increases in September due to the supply scenario. This resulted in significant demand and operational challenges for logistics companies, which operate in this market with high variability in volumes and higher detention time for fleets. The M&HCV segment continues to see low volumes, driven by demand environment, and we are seeing very limited improvement in H2 with our OEM customers. On a positive note, the three-wheeler industry started showing improved splits, though the intense cost pressure due to commodities continues. For us, this has been a challenging time with inconsistent volumes.
Lower demand, volatility has meant greater operational costs and resistance in absorbing fuel price movements during the quarter. Now, moving on to the farm sector. The farm sector continues to maintain positive momentum. With the overall macros remaining favorable, we continue to see positive trends with our customers. During the quarter, we did see more retail sales from a tractor and farm equipment shipping perspective, but production remains consistent, with a strong seasonal demand outlook in the upcoming festive month and the new calendar year. E-commerce, moving on to e-commerce. As all of you are aware, there has been sharp increase in overall volumes of e-commerce marketplaces. We continue to witness healthy demand traction from tier two and tier three cities and towns.
Through this year, an interesting pattern we are seeing is a significant trend by marketplaces to focus on adding new suppliers on their systems and platforms. The pent-up demand we saw during wave two, however, was not up to the same scale as last year, and global supply chains also impacted availability in some categories such as high-end electronic appliances. However, in the latter part of the quarter, we saw very strong traction, and we hope that this will be maintained through the festive season, which largely this year is coming Q3. We continue to see strong demand for electrification in the last mile and continued to grow in e-bikes as well, electric, e-based, last mile cargo delivery solution. Our consumer sectors are doing well during the pandemic, you know, period. Obviously, essential products were stronger.
Now with more discretionary spend coming in, we are seeing uptakes across FMCG, personal care, and food categories. The industry did have some disruption in the first quarter, but post that, consumer sentiments have improved. Rural demand has remained resilient, overall contributing to more and more customers in the industry focusing on launching new products in the market and also focusing on cost and initiatives. In electronics, appliance, and durables, there is a significant impact on cross-border logistics, as many manufacturers in these spaces depend on imports of components. As a result, we are seeing further attention by these companies towards optimizing their supply chains and, you know, improving their delivery base. FMCG companies continue to expand their footprint in new cities and markets as well.
As the pandemic has transformed consumer buying behavior, there has been a clear shift towards omnichannel requirements during this period, with many companies are piloting omnichannel distribution models. As all of you are aware, last year we won a significant program with Bajaj Electricals Limited, which provide them end-to-end supply chain logistics. That program has been in implementation for most of this calendar year, and we continue to scale up, and we remain on target for full impact, full ramp up from Q3 of this year, as we have indicated before. We have completed commissioning most of the network of distribution fulfillment centers and have activated new delivery nodes across the country. In terms of Enterprise Mobility, the mobility, of course, has been the most significantly impacted by the pandemic.
Our traditional customers in BFSI and IT and IT-enabled services continued to pursue work from home policies due to the impact of wave two. However, we have started seeing an uptake in that segment as well on a sequential basis and expect improvement by Q4 of FY 2021 as vaccination drives mature and mitigating measures for future waves are implemented more cautiously. For our business, we continue to focus on expanding in markets such as e-commerce and manufacturing, which has helped us in the quarter under review to register strong year-on-year growth. Given the pandemic, the market has moved in a significant way towards safety, and while this had improved before, I think it has accelerated significantly, especially for our enterprise customers.
Our continued long-term focus on expanding safety propositions helped us gain share with some couple of our existing customers, even though the volumes have dropped significantly. We are focused on evaluating measures and strategies to expand our services portfolio in areas such as on-call outstation network services, et cetera, and we remain optimistic about the opportunities around consolidation and growth in FY 2024 and beyond this year in this market. Let me now talk about financial performance for the quarter ended thirtieth September 2021. Revenue for Q2 FY 2022 increased by 22% at a consolidated level to INR 1,090 crores as compared with the same period last year. Revenue from the Supply Chain businesses contributed 96% and Enterprise Mobility contributed 4% of our total revenue basket for the quarter.
Gross margin for the quarter stood at 90.8%, down 10 basis points compared to the same period last year. EBITDA for the quarter stood at INR 52 crore, up approximately 14% from INR 46 crore for the corresponding quarter last year. PBT was down by 13% from INR 20 crore in Q2 FY 2021- INR 12 crore in Q2 FY 2022, and PAT was down by 37% in the quarter which has just gone by. Compared to last year, we did see some headwinds during the quarter. These included obviously, you know, the continued rise of fuel prices during the quarter between June and September.
While the scope of the increase has started maturing, the continued increase and the demand environment, especially in auto, made it challenging for us to be able to pass through the increase in the quarter which has just gone by. Additionally, with the trailing impact of wave two, several of our new projects which were launched during the quarter were delayed, and we had to deal with higher operating and spooled launch costs on account of the same. A lower demand from the automotive segment also affected our margins unfavorably during the quarter. Year- on- year, we also had, you know, didn't have the benefit of the significant level of other income we had in the same quarter last year.
Last year we had between the level of tax income which have contributed to the other income line, and obviously that is not there, was done significantly in the second quarter of this year and impacted reported earnings. The portion of revenue from Mahindra Group comprised 48% in the second quarter of FY 2022 compared to 51% last year. Let me talk a little bit about the segment performance for the quarter. Supply chain businesses increased from INR 804 crores- INR 978 crores for the quarter. Corresponding revenues from the enterprise mobility segment stood at INR 41 crores for the second quarter, up by 42% year-on-year.
The supply chain businesses continue to see an uptick due to the growing demand in e-commerce and consumer markets and our growing services portfolio in terms of freight forwarding, express and e-rail. Our revenue from the Mahindra Group supply chain businesses increased to INR 416 crores in Q2 at 29 to INR 484 crores. That growth was significantly driven by the growth in the agri business or the farm sector of M&M. Our non-M&M businesses grew from INR 287 crores- INR 495 crores in Q2 FY 2022, a 28% year-on-year increase. There we saw steady recovery compared to last year due to increase in demand in the markets I'd mentioned, e-commerce and consumer appliances durables, increased growth in services of warehousing, freight forwarding and last mile delivery express.
Our warehousing and value-added services for non-M&M FCL businesses, which is a key lever of our focus on integrated solution, have grown from INR 134 crores- INR 168 crores in Q2 FY 2022, registering a growth of 26%. Share of warehousing and value-added services in non-M&M FCL achieved 34% in Q2 and is comparable to the same period last year. During the quarter we added 1.2 million sq ft of additional warehousing space, which is in line with the targets and the which we have communicated to all of you in earlier calls. A key driver for growth during the quarter was acquisition of new business and expansion of current accounts.
During the quarter we continued to see traction winning new projects with consumer e-commerce customers with both existing and new customers. We continue to increase penetration in the electric vehicle two-wheeler segment of the automotive industry which we believe has very high prospects in the coming years. During the quarter, we also continued to see strong traction with our solution format, whether it's grocery and small part fulfillment centers, sort centers or integrated warehousing and distribution for our consumer customers. Some examples of that, we internalized the expansion of a temperature-controlled warehousing and distribution solution for a leading pharma company in North India. We also commenced warehousing-based, you know, inbound to manufacturing solutions for a leading two-wheeler electric vehicle manufacturer in the southern region of India.
Like last year, we have secured orders, you know, for our flex solutions in e-commerce. Going into the festive season, we have added 1 million and 1 million sq ft of temporary solutions for the same. The revenues for those will obviously flow through in the coming quarter, right. As the current quarter is where most of the festive season is concentrated. In addition to that, our services revenue continued to see strong growth, right. In our growth services, you know, freight forwarding has been a multiple growth area for us. You know, through the quarter we've seen strong traction there, both in terms of continued penetration in accounts in manufacturing and pharma. We've also launched charter services, which have seen some very positive traction through the quarter.
We believe that, given the continued penetration of accounts, we are upbeat about continued growth there. We've also seen strong traction in our express business. You know, that correlates very strongly to our integrated solutions approach. We believe integrated warehousing and distribution are an express business with key levers of enablement there. We have now expanded our network. We are serving nearly 5,000 pin codes by own network, and we continue to expand from adding density across the network as well. eDeL, which is our electric vehicle-based last-mile delivery business continues to grow. We continue to expand fleet there and have continued to optimize our utilization levels across the entire fleet. We've also now launched working with our customers higher tote sizes.
We are working with customers in millions, so we are actually able to further drive cost optimization on last mile delivery for clients. Overall it's been, you know, that was been strong momentum, right coming out of these, deep, right, in terms of of revenue growth. Before I open up for questions, let me briefly also talk about the Medicine from the Sky project. Some of you have noted in the press that we that we partnered with we have partnered and associated the Medicine from the Sky project with Telangana government and the World Economic Forum to deliver vaccines using unmanned aerial drones, unmanned aerial vehicles. Right. In the state of Telangana, the pilots were successfully conducted in one district of Telangana.
We have conducted trials for the drone delivery operations in partnership with a particular associate of ours at Grene Robotics. Successfully delivered medicine as part of those pilots to multiple locations in the Hyderabad district of Telangana. We've also been working with our partners on deployment of different types of drones and payloads, and that work will continue to go on. While the program is in a pilot stage, we see some exciting long-term opportunities for UAVs in logistics applications, both in terms of last mile and distributed delivery, but also in terms of optimization opportunities inside our operating environment in our warehouses for areas like, you know, operations like inventory management and so on. We're very excited about that opportunity.
As we look out to the second half, we are expecting healthy demand on the back of a festive season, while pre-book volumes are, I think, trending positively. In our discussions with various automotive OEMs, there is a sense of semiconductor crisis receding, and we hope to see some uptake in both M&M and non-M&M auto businesses in the second half of the year. Some of the cost challenges which I mentioned earlier in my comments have already been addressed, and we are targeting a recovery on that front in the coming quarters. With this, I'll open up the floor for questions.
Thank you very much. Ladies and gentlemen, we will now begin the question-and-answer session. Anyone who wishes to ask a question may kindly press star one on your touchtone telephone. If you wish to remove yourself from the question queue, you may press star then two. Participants are requested to use handsets while asking a question. We will wait for a moment while the question queue assembles. We have the first question from the line of Niranjan Gajanan Sakalkar from Acuitas Capital Advisors. Please proceed.
Yeah. Thanks for the opportunity. I have a couple of questions. The first one will be, I understand your warehousing space has increased, but the overall warehousing space under management has come down. I just wanted to understand what is happening over there. That was the first question. Secondly, I want to understand how business has unallocated expenditure as a percentage number. If I see that sequentially on a half yearly basis, that's now we'll be comparing H2 FY 2021 versus H1 FY 2022. That percentage number has increased from 4.9%- 5.2%. I think in the earlier call, the team was guiding for a number between 4% and 4.5%. I want to understand how you look at this number and how you...
Any guidance on, what to expect going ahead?
Sure. Thanks, Niranjan. Yogesh, Rajan, do you want to take the second question first, and then Duggal can add comments into that as an answer for the first question?
Sure thing. If I heard the question right, our share of unallocable expenses have been same or a tad 10 basis points-15 basis points higher versus last year's, right?
Yeah, that's correct. Yeah. With an increase, basically. Yeah. Correct.
Sure. On that piece, I mean, the way that portion of expense is whatever gets directly attributable to a segment comes and reports under a segment piece. Central costs usually are what comes as unallocable piece or mostly the functional costs. What we have kind of said in terms of a full scale or standardized those percentages would be coming down is also absolutely right understanding and we stand by it. Given in this quarter, what has played out basically is, I mean, given our, you know, if you look at the overall numbers, I mean, it's in that fourth quarter range what you would have seen as well. In those cases, I mean, the percentage stands there.
I mean, as the revenue would increase, there would be nonlinear change in this segment of costs, and hence the percentage would come down. Given the scale what we are in line with fourth quarter, you would see a percentage similar to that, adjusting just for inflation changes.
Let me just add to that. Thanks, Niranjan. Just adding to that. We are investing, as we know, most of high growth areas like technology, both in IT and automation. We're also investing more into building out our warehousing infrastructure in terms of overall network. Those investments are not linear in nature. They are step-ups. Obviously the step-up is preceding the demand growth or volume growth. But as Yogesh mentioned, as the volume trades and comes back, it follows these actions. We do expect it to be in the percentage guide which I indicated earlier on over the next 12 months-24 months from a planning perspective.
Now in terms of warehousing space itself, I think what we have done this time is provided all of you a little bit more granularity. For most of our history, we have combined stockyards and the warehousing operations we run for stores, inventory and fully managed warehouses in one bucket. With our strategic focus, as you're all aware, has been really around growing our own warehousing network and kind of building low-value warehousing services, warehousing with services like stockyards. In line with this strategy, you will see that not only this year, this quarter alone, but for the last couple of years, we have been capping that.
As automotive volumes have come down, there has also been a precipitate drive from our customers to kind of reduce that stockyard spaces. In the long term, however, our overall warehousing space, which is both BTS, like Anil spoke, and our stored-in-transit space continues to kind of grow, and that's where both revenue and yield improvement will come from. From a long-term perspective, we expect that from a mix level, stockyards will continue to come down as a percentage of our mix. That will both drive the yield per sq ft, the revenue per sq ft and the overall revenues. This is something which you have hinted to before as well. Yogesh, I don't know if that answers your question.
Yeah. Thanks for that, sir. Also, if I could squeeze in one more question. Also when I come to the revenue growth, right, again, sequentially for the half year, H1 2022 versus H2 FY 2021, because the SCM segment has de-grown. Do you attribute that entirely to festive demand last year or is it more, something more to it, which I'm not looking over?
I'm not sure how to do that. I think, you know, on H1 basis, Yogesh you have to help me here, but I think H1 basis SCM has also grown significantly, right?
Sorry, I'm saying half yearly basis. Sequentially half yearly basis.
Okay. Maybe we just come back to that question, right? Is that okay? Can we just come back to that question?
I meant I was comparing the revenue growth sequentially on a half-yearly basis, basically H2 FY 2021 versus H1 FY 2022. The SCM segment revenues have de-grown by 6.7% as you know. I want to understand if that is entirely, can you attribute that entirely to the festive demand last year or there is more to it. I mean, if there is more to it, any specific reason for de-growth?
We just come back to you, Yogesh, on that question. We include all of the data. All right? Because that's not the way that I'm seeing, but just hang on, we come back to that.
Sorry, Ram, if I just add here to just clarify. H1 of last year was INR 1,196 crores, which is INR 1,818 crores in H1 of this year. This is a growth of almost 52%. However, H2 of last financial year, if you look at it, to H1 of this year, definitely there was a, I mean, the festive peak of Q3, what you would have seen in the second half of this thing, would have played a role. However, growth, what you see is in this first half versus last year's, in addition to disruptions, we got, you know, a part compensated, is added by new wins and additional businesses what we have signed up for.
Can we go to next, please?
Yeah. We are going to the next question, sir. The next question is from the line of Vikram Balasubramanian from PhillipCapital India Private Limited. Can we proceed?
Yeah. Good evening, sir. What was the growth in freight forwarding and express business in this quarter? Is there any change in CapEx plan, or when looking at the slight headwinds, will the execution of CapEx slow down? If you can highlight on CapEx plan and cash balance.
Maybe once the CapEx plan and cash balance first, and I'll come back to the segment growth numbers and plan for those.
Hi, Vikram. On CapEx for this year, what we had kind of guided as we started the year itself, given the additional warehouse space what we are adding is at a accelerated pace than what we have seen in the previous years, would have a little bit higher CapEx. What we were looking for is between INR 80 crores-INR 90 crores for this financial year. Right now, I mean, at middle of the year, we still stay on track for that.
Okay. Vikram, to your other question, freight forwarding growth right in Q2 year-on-year in last year compared to this year was approximately 75%, right, in terms of year-on-year growth. Express grew around 30-odd% year-on-year. Slightly above 30%.
Okay. This freight forwarding that very high growth may be also because of these, high freight rates, or we have seen significant growth even in volume also?
It's a combination of three things. It is one, obviously the overall increase in freight rates themselves, which have gone up quite significantly, like year-over-year as well. The second thing which is happening for us to drive growth is really been penetration in some markets as we continue to drive synergy the rest of our SCM business. That's particularly I would say on engineered products and pharma. The third piece has been we launched newer services like charter, which have helped us grow.
Understood, sir. This execution of 4 million sq ft warehousing, particularly NCR, Vikarabad, Chhattisgarh and Pune, they are on track and when we can see that execution to complete?
We are on track. I think, you know, we expect, as I said earlier, by Q2 of next year for us to be able to complete all that capacity. All this capacity is inflection growth this year.
Got it. Thank you, sir.
Thank you. Participants who wish to ask a question, kindly press star one. The next question is from the line of Prateek Kumar from Antique Stock Broking. Can we proceed?
Hello. Yeah. Good evening, sir. Thanks for the opportunity. I have one question. I wanted to ask that what has been feeling like company's margins, like if we see PBT margins instead of like focusing on EBITDA margins because of some major impact which has been seen there and probably that will also continue to have impact on depreciation. Instead focus on PBT margins. That margins have come down from 4% in, when we like IPO'd, like we had like 4% kind of margins in 2019 continuously slipping every quarter. Now except for that one Q1 2021, the margins this quarter are like all-time low. What is particularly I mean, we had a thought that because of better warehousing mix, better customer mix out of Mahindra, our margins will directly improve.
Margin seems to slip every quarter on a PBT basis. Can you highlight something on this?
Sure. I guess, I think, if you look at it, I mean, I would say directly some of the observations are accurate. We are lower than the peaks which we have had in the past. There are two, three factors in the quarter itself, Prateek, which have been impactful, and I already mentioned those in my comments. One thing which has been there for us has been the quarter-on-quarter increase in fuel. While that's mitigated itself given the demand environment, especially in some of our larger segments, we're not able to see the pass-through benefits in the quarter which just went by. Now these increases remain fairly large, could take and continue impact over nine months.
Therefore those are having a hard time to pass through, you know, in the middle of pandemic phase and so on. We are not disappointed with pass-through mix to this. The second one has been that, you know, as I said, in my comments as well, the second quarter of each year is normally when we are preparing to launch many projects, especially in line with the festive season, and being able to capitalize on the demand from the third quarter onwards. This year, because of the impact of wave two and the trailing impact of that, many of those projects got delayed, and we had to actually increase spends to get those capacities online, in line for the season. Right?
That obviously impacted us in the quarter as well. The third thing, which has been there, is just a sudden dip in automotive, especially in September, both in M&M and non-M&M segments. Actually, M&M, you know, especially in the M&M side, you know, had a lot of challenges in terms of transportation logistics and optimization. On the non-M&M side, non-PV deals had a big impact. We have a higher share of warehousing and warehousing-based services there. So a large number of non-PVs suddenly had a significant impact, right during the month.
That aside, you know, we actually the underlying levels continue to see, you know, improve traction in terms of the very things which you said playing out, Prateek, which is, the segment itself playing out, right, and being positive. Yes, 2021 was slightly different. The drop in automotive was very sharp. Automotive was 72% of our business at that time. We had to do a lot of work to refocus resources, right size, organizational direction and so on, and there were transition costs in doing this, in doing that. Right now I think except for the three things which I said, we are, you know, we are changing, you know, in, you know, trending the right way.
I'm confident that in the coming quarters you'll be able to see that recovery, right, you know, playing itself out. There will be some of this impact of Ind AS 116, because the way the standard is, you know, the cost charges are front loaded. That does impact, you know, earnings compared to a pre-Ind AS 116 model, in the short term. But through the life cycle of the project in latter years especially, that actually sometimes comes back. So it's really a timing issue. I won't labor much on the impact of that. It is there in the current, you know, in the financials in terms of P&L review. But on a continuing basis that will normalize itself.
The larger challenges we have, the points which we discussed, elaborated on, Prateek. In coming quarters, you know, and I'm very confident that we will be able to get the profit recovery, you know, back on stream, right, especially on the back of enhanced 16% momentum on FVL.
Thank you, sir, for the elaborate answer. My second question is on asset growth for Q3.
Mm-hmm.
Like during the first week of internet sale at Amazon, Flipkart, it seems the growth was slower than what I think industry was expecting at around 20%-25% versus a base growth of 60%. How are you seeing in terms of traction for like logistics industry, like in first month of festive sale?
Festive sales this year, I would say it's kind of two things to look at. I think if you have growth, I think growth is there and growth is robust. Is it in line with expectations or anticipation? I think growth has been in the early part of the season more muted compared to what anticipation was. I think both those statements, Prateek, are accurate. Now, why is that happening? I think that's largely being driven by you know, there are a couple of big factors there. I think one has been that the in some categories like larger appliances, et cetera, there have also been supply chain issues.
As you know, a lot of electronics is cross-border in nature even today. There have been challenges in terms of supply. Across the industry, we have taken time to get free, right? That's been a challenge in terms of being able to capitalize on the full demand. The second thing I think is pent-up demand this year in general has not been as strong as was anticipated. I think people are probably anticipating the same kind of pent-up demand which was there last year. That's kind of actually not playing itself out. From our perspective, I think what we have been seeing fairly consistently is that you know, we are not focusing just on account expansion, but we are also focusing on category expansion.
We think that we are focusing on category expansion is critical to be able to build complexity, plurality to some of these kind of trends, because they will happen. You're not gonna hit the ball out of the park every quarter or every season. That's an important part of our strategic direction. It's still very early in the quarter, right? You know, the big part of festive season is yet to come. I will see how our full festive season are, and what the programs are. We are quite still upbeat that the latter part of the festive season will probably end up becoming much better than the first part, than the first early part of the season.
Definitely, you know, we have, you know, the first early part of the demand was more predictable. We had more stable or plateau kind of volume trends rather than sharp peaks. That should come in. Hopefully, we are all optimistic that we have reset certain account in the second part of the season.
Thank you, sir. I'll get back to you.
See, if I just add a point for you a little bit more, I mean, since you quoted our IPO level performance at the start. I mean, we listed in November 2017, which means FY 2018, and from there till FY 2020, if you look at each of the years, we had grown. I mean, our profitability was higher than at the time when we, at the PBT level, you know, at the time when we went for IPO. It is, you know, as Ram was explaining FY 2020 and FY 2021 disruptions which flew in our end markets as well as environment at large impacted and, you know, kind of reflected in the results. I mean, till FY 2023 or three consecutive years, the numbers we did improve on and have stayed at that.
Thanks, Yogesh.
Sure, sir.
Thanks.
Thanks for the update.
Thank you.
We have the next question from the line of Mukesh Saraf from Spark Capital. Can we proceed?
Yes, sir. Good evening, and thank you for the opportunity. Firstly is on the fuel price hikes that you wanted me to pass through. Just trying to understand, I mean, the general sense we had is that the pass-throughs largely happen automatically. Is there just you know some change in the way the contracts have been structured? Or is it like a difference between how a Mahindra and a non-Mahindra contract is structured? And could you just give some sense on you know the cumulative of you know the entire pass-through?
Hi, Mukesh. How are you doing? Our, I mean, there's no difference, like no material difference between the way the customer contracts are structured, Mukesh. We know any index pricing contract typically has triggers in them, right? The way it would work is if the index base is 100, it increases by 8%, you know, it would trigger a pricing reset, right? Typically, what happens and very often, you know, the pricing resets are done prospectively and not retrospectively, right?
Typically what happens, Mukesh, is if you look at fuel prices in India, and you look at them historically, they end up having, you know, a few sharp increases over a period of time and not a continuous move going upwards. Historically, what has happened is we see the sharp bump up, we kind of breach the trigger. Because we breach the triggers, we are able to put the pricing increases in fairly quickly. Then we think it's happening in these short windows of time. Like, you have a few spikes every year, and then you do a reset on those spikes.
Mm-hmm.
What has been a bigger challenge in this year has been just the fact that the pricing keeps on rolling itself out. As it's rolling itself out, in the window between those triggers, we have to, you know, we end up having to, you know, manage that window. Historically, we also on the buy side actually cause more sales triggers back on the buy side as well. That's actually how we improve ourselves, Mukesh. Right?
Sure, sure.
That being said, however we do that sometimes when the escalations are continuing, you know, service levels tend to fall down. Right? Because we also have contractual commitments in service, we trade off things like that in terms of optimizing the buy price versus ensuring that we maintain the service levels. Just the continued spikes have been an operating challenge there, given the volatility in demand as well, right? Just a mix of those factors coming into play. Structurally, however, there is no change. In fact, there are more safeguards now. That said, all our contracts do have, in almost all cases, back-to-back parameters to ensure that we mirror on the buy side and the sell side.
We do have to track it very closely almost on, you know, on a weekly basis given the environment we are in right now. Right?
Right.
That's, yeah, it's been a lot of blocking and tackling.
Got that. Basically, I mean, we are already, you know, by the end of October, and so, I mean, by now, or by the end of this quarter, I mean, obviously if fuel prices, you know, assuming they stay flat. We should be able to pass through it entirely.
Yes. I you're right. You know, like I mentioned in my opening comments that, you know, most of the time we get compensated through timing, because timing is the driver in the compensation. We have been compensated most of this already.
Got that. Secondly, on the space and the management, the stockyards have come down from 6.5 million sq ft to about 4 million sq ft. Have we already seen the revenue impact of that in the second quarter or will it happen towards the end of the quarter and hence that impact is going to come more from the third quarter?
No, I would say we've seen most of the revenue impact. Obviously it's all, I mean, it's a lot of space. We are settling them down one at a time, over a period of time, U.K. I think most of that has been baked in. Stockyards generally tend to be also a very low revenue yield, right? It's just a large parking lot, right?
Sure, sure. Understood.
It's always free of.
Yeah.
It ends up being cheaper real estate as well.
Sure, sure. Understood. Just one bit, when I look at the non-Mahindra SCM revenue, I see that the transportation within that has probably grown at a slightly faster pace than the warehousing revenue. So about 30% versus 25%. Is it that this whole express business is included in this non-Mahindra transportation? Is that one of the reasons?
What you see there, of course, is pure transportation kind of service lines which end up being your freight forwarding, your express and your inbound, right? It's a last mile delivery. Especially freight forwarding and last mile tend to actually be fairly, you know, fairly kind of lion's share of all SCM businesses.
Sure.
Those service lines actually accentuate the gap. That's one. The second one, I think what you see, U.K., is really genuine because we carry inventories in all our warehousing grade of returns, and services. Typically what happens is that, you know, when things go down, like we have a dip here, dip quarter because the view is down, et cetera, when these run up way to happen, we see the warehouse revenue shrinks much lesser than transportation as well. The bounce back happens. The bounce back actually basically mirrors the returns.
Right. Understood that. Because you mentioned the freight forwarding bit, I noticed that the revenue growth is very strong, the margins have come off. Again, is there just a pass through element which should kind of normalize?
No. I think just the kind of, you know, because this, I think honestly, we went through something earlier, or I don't know, quite the first things I raised this question. Now, obviously the market there, we are seeing some part of our revenue growth is just because of secular inflation, which has been very sharp. Even dollar margin or even rupee margin on index revenue base turns out to be a smaller percentage.
Right. Right.
Just that actually. We are highly efficient in managing, you know, because we, you know, are really trying to optimize, you know, how to protect percentage margins with clients because the customers are also under significant stress because of inflation.
Right. Understood that. Thanks a lot for this. I'm very glad to hear.
Okay.
Thank you.
Thank you. We have the next question from the line of Pranay Roop Chatterjee from Burman Capital. Please proceed.
Good evening to all. Am I audible?
Yes, Pranay, you are audible. Please carry on.
Hi, Ram and Yogesh. Hoping you are well and safe. I had a few quick questions. In your annual report, you have guided for 20 million sq ft warehousing addition over the next 36 months. I just want to check first of all if that guidance is still intact.
Well, Pranay, I think I clarified this, I think in the earnings call for the fourth quarter of FY 2021, that 20 million is a time-bound view and an aspiration we have in line with that broader INR 10,000 crore aspiration, right? What is important was that the figure which you shared in that preview that we have contracted INR 4+ million already. This is under construction. Those, as I said earlier in this call, as well, are pretty well on target.
Got it. Thank you. Secondly, could you please help me with the split between right-of-use assets and other PP&E items for, as it stands at the end of this first half?
Sure. UK, can you take that please?
I was looking for.
Pranay, if you can repeat that question, I will request Yogesh to respond to it.
Sure. You were looking for a difference on depreciation for Ind AS 116 and fixed assets.
No. Basically, you took both your PP&E assets and your write-offs and you report it together, and it was at about INR 409 crores as at the end of the first half. I just wanted to understand the split between that, like in the net block basis, ROU versus the other items in PP&E.
Our net block without ROU as of September 30th would be INR 165 crore.
Got it. Thank you, Yogesh Patel. Last question on my side. So I was doing a simple calc. I was trying to figure out in terms of your lease expense that you are paying, basically the item you book in your cash flow. Lease expense, firstly, it has been actually going up over the last two years. It was INR 3.5 crore in 2020. There has been INR 4 crore in 2021, and in the first half it has reached INR 5 crore.
I understand that when your mix is changing towards grade A from stockyard, logically that should go up. I wanted to understand if the entire increase in this first half attributable to the change in mix or are the rental rates going up in the incremental capacities that you added. Yogesh, you want to take that?
Sure. Yes. The newer warehouses, I mean, if you see the warehouse split itself or our total space, I mean, you did see that, Stockyards did come down, which is a lower rental space. Relatively the space which we have added almost 1.3 million in the quarter on a gross basis would be standard warehouse space itself. The rentals for them is differentiated, and that would be a standard commercial grade usage rental cost. From that perspective, the blended rental per sq ft comes up. That's from that perspective, yes. The absolute amount which is increasing is just reflective of higher absolute space, you know, which we are signing up for.
Got it. I was more speaking in terms of the per sq ft which has also gone up, right, compared to last year. INR 4 crore versus above INR 5 crore in the first half annualized basis.
On a per square feet, like I earlier explained, the fact that, you know, Stockyards has decreased also would give you an increase on per square feet becoming higher.
Got it. Thanks for that. That's it. Thank you. We can go to the next question.
The next question is from the line of Mr. Mayur Parkeria from Wealth Managers. Kindly proceed.
Good evening. Am I audible?
Yes, Mayur, you're audible. Good evening.
Yeah, you know, good evening to Ram and Yogesh and the team. Actually, I don't know how much you'll be able to add more because I understand you've given some explanation on that. Honestly, let me be a little candid here. You know, the satisfaction on the margin front remains far from you know understanding wise. Because and I'll get a little longish comment over here from my side so that you can add more if possible. You know, over the last two years, we've been adding that, you know, integrated solutions, warehousing, increasing mix, increasing mix of e-commerce, pharma, other sectors.
Further, in terms of, you know, the non-Mahindra part, all of this, when we look at all those bricks, you know, all those bricks have been moving in the right direction for us, as far as the narrative is concerned, also as far as the numbers are concerned. If you look at the transportation growth in the quarter, and if we remove the 75% year-on-year growth of the freight forwarding within that, the core transportation where the fuel actually hits you would be relatively lower. Yet the, you know, warehousing has increased by 27%-28%.
Still, when we look at, as the point you rightly mentioned, you know, from the magnitude of margin erosion, and not only for this one quarter but over the last two years, which has been there, you know, we are at a PAT margin of 1%. You know, as an investor, this gives us a very vulnerable situation and, you know, kind of makes us very scared about the situation that why is that narrative not playing out in numbers, quarter after quarter, despite the top line growth being in place. It will be great if, you know. And also the fact that is it that, in reality the auto or the M&M business has been more profitable to us compared to the others?
Is that the kind of situation? Because when we look at five years down the line, let me be very honest, what I'm trying to ask is, can we at a INR 10,000 crore? I understand it's an aspiration and not a guidance, but at a INR 10,000 crore revenue, can we make a INR 300 crore PAT? You know, that is the simple question which we are looking for, you know, in terms of understanding. Because unless that happens, a lot of things become difficult, yeah, and for long-term investors.
Mayur, let me add a couple of more points and, you know, probably Ram can join.
Sure. Go ahead.
Mayur, if you look at what has played out, you know, obviously quarter-on-quarter, the scenario has been fast evolving. There are differences to be observed which are at different line items. Just to draw your attention to our P&L. In first half of this financial year, if you look at it, on the other income line, which we have not spoken at all in any of our communication till now, we are lower by INR 7 crore, which was one of we had got last year, has got offset with business profits generated.
In addition to that, if you also see the Ind AS method of accounting for leases, with the increased leases what we have signed up for in first half of FY 2022, the impact on PBT because of Ind AS method of accounting, if I would have accounted based on Ind AS 17, my PBT would have been higher by INR four and a half crores. I mean, from that perspective, there are, you know, different reasons other than environmental, which obviously Ram has detailed earlier, and you absolutely are aware since we all are in the same environment, plus you have tracked us. Is something which, and the fix which we are doing from a solutions or integrated logistics or more stickier businesses has a. I mean, you did mention five-year plan, INR 10,000 crore aspiration.
I mean, everything, obviously these acts or activities are, you know, directed, you know, obviously from our end more towards our vision per se, and those fixes which we have, you know, or the businesses, multi-year integrated logistics businesses are to contribute towards that. What you have seen right now is obviously, I mean, we obviously are explaining our quarter numbers, and we have done that without even mentioning that, you know, in the quarter there is an INR 4 crore reduction in other income itself, which was a one-time anomaly.
Yogesh, are we saying that because of lease accounting and because of hyper fast growth which we are witnessing, the up-fronting which happens because of the obvious accounting standard will continue to remain there and will also impact the margins which they may increase, but it may increase at a slower pace or that impact will remain there. Is that the point also which needs to be understood?
No. It is.
You just go ahead. Sorry.
Just one point. What you see here up-fronting right now is a growth from a lower base. Now, these new facilities, what we have added in last one year, I mean, start becoming, I mean, lower cost resource. I mean, so it's a reducing amount basis, right?
On a linear basis, I mean, if it's a five-year thing, first two years I, you know, account higher cost, the last two years I account lower cost. That gets offset with newer facilities get added and the whole older facilities of that volume being there. You would not see a ever impacting thing on P&L, but as we start, this particular thing at one time, this is what's playing out right now. Ram.
Many areas. First of all, I'm glad you asked the question 'cause I'm sure it is in mind with several people. It's good to actually have this direct and honest articulation of. Because I'm very responsive in two to three years, I mean, Yogesh has already spoken about it. But just 2 points-3 points. First, I think till the fourth quarter of 2020, we did actually show quarter-on-quarter comparable margin improvements in general, in terms of gross margin as a trend line. That's one thing which I would just call out. The second thing I think is that in the last two years, we have seen a lot of resizing of the business.
As we kind of resize the business, and you're right that, you know, that many of our, the building blocks we are putting in are directly the ones we think will take us to an end state, which we're optimistic about, and confident about. I think there is a transition period, transition element there. And that transition element is in two things, right? First of all, we've obviously seen a lot of things moving up and down in terms of external demand. You know, volumes came down quite dramatically, which obviously had a significant impact on margins. We are now recovering like that, and we are putting investments in areas like technology, which are a bit ahead of the curve, and therefore, we are probably a bit non-linear to the long-term, to the underlying earnings potential.
A good example of that putting capacity ahead of demand is the warehousing addition which we are doing. We are putting a significant amount of addition right now because we are confident about the earnings potential it has, not just in terms of sustainability and long-term perspective, but more importantly, in terms of strategic value proposition to our customers, and in terms of the fact that it is a creative dimension. Now, the first thing you know which I would call out, right, is one more short-term thing, right, which is a question we had around fuel. If you look at the quarter which just went by, right, you know, transportation income, which is excluding the freight forwarding business, was around INR 510 crores, right?
In that 500, which is, let's say, purely directly fuel cost to your point, right? Even, you know, we've seen roughly a 5%-6% increase in fuel costs between June and September in almost all our operating markets. Further indexed frequently, there are averages of 5%-6% kind of growth number over four months, which if you take it, is actually almost INR 30 crore. Right, a substantial and large amount of that has been passed through, but it is still very relevant and impactful. Okay. There is a timing issue which is related there, but that impact will start coming down only as we benefit more and more with warehousing-based services. That's a direction we are already on precisely for this reason, right?
In the short term, given that we are still 70% ish background transportation business on the non-Mahindra side, I mean, on the Mahindra side, is even higher. There is a larger, enduring impact in terms of the transportation, the fuel increases. They are material. The other thing which is a clear impact is the accounting standard change. We don't see. I don't like to explain that, because I think, you know, beyond because it is, you know, we're adding capacity from an enduring benefit perspective. We are putting, somebody asked this question earlier on saying that if we look at 20 million sq ft over five years, so we are putting a substantial of that obviously upfront.
We're adding 5 million sq ft, close to 5 million sq ft of capacity now. Therefore, going forward, we think depreciation may be between the current curve when we get more benefit at a basket level. What we see going forward is that debt line will start maturing, but the revenue benefits will start coming in. Today, because it's a very large sudden spike that it is actually impacting us because it's sudden one-time spike. As you come down to future years, we usually add 2 million sq ft-3.5 million sq ft a year. You will see the effect what we're adding right now.
The Ind AS 116 curve starts maturing, as Yogesh said, we expect the debt lines actually means right at a much flatter level compared to the revenue lines. Right. Now from a going forward perspective, I'm sure some participants will have those fair questions and if we get to INR 10,000 crores, you know, how will we get. Will we be able to get to INR 300 crores? I think that's, you know, the few ways to do that come with a mathematical view.
If you look at it saying that from INR 3,500 crore-INR 4,000 crore, if we add INR 6,000 crore more of revenue, even at 9.5%, 9.8% gross margin, right, we are going to expect to get a substantial amount of gross margin increase. We don't expect our expenses to actually going up in line with that. As I said earlier on, the debt curve should start tapping out. If you mathematically work it out, I said, yes, I would say INR 300 crore is definitely in the ballpark. We still have to do some margin increase in terms of gross margin, probably 30 basis points-40 basis points. If we, you know, with the cost management efforts we have, the volume has to play itself out.
That's why I think the volume momentum is so important in asset light business. Again, this is something which all of us have pointed out to you over the last two years, that slightly over two years, that Abhinav is gonna get back to revenue momentum. That's what we are trying to consolidate and build on right now.
Thank you. That was quite detailed. One is that, so you know, as analysts and as investors also, we would you know, continue to see PBT margins as the key part. I understand company may look at gross margins and other levers of margin because we are unable to, you know, from outside, we are unable to gauge the impact of paying debt separately, depreciation separately, interest separately. We would appreciate if you know, the focus remains on PBT because at the end of the day it's also important. Because we don't understand what goes into gross margins clearly, because you know, if rent is categorized, because there's a substantial increase there and yet the gross margins show increases.
We will remain focused on PBT and understand the explanation which.
No, that's the right thing. It's the right thing to focus on. You know, I do appreciate the question and I'm glad that you asked. Yeah.
Just one thing, Ram, one thing. You know, we are seeing a lot of competition, increasing actually focus on multimodal in real sense in terms of rail and other things. Where are we on that side in terms of multimodal, and where are we in terms of composition today outside the road, transport, if you can have any color on that, and how does that shape up for us?
Yeah.
Thank you. That has been my last.
I think so multimodal, and I have to address this. I think it may be in a meeting with you as well. Multimodal is not a panacea to all problems, right? Multimodal is important at a national logistics mix level, but it really starts breaking even above 1000 km, right? Below 1000 km, multimodal is not actually a very viable option. If you look at the parts of our businesses like last mile delivery, if you look at distribution, for example, those are places where multimodal actually doesn't play out. Multimodal only plays out best in long distance line haul, right? Which is at least 800 km, ideally 1000 km or more for the right moving patterns. Right?
Now, on that space, which is large, where a lot of our truck carrier, meaning that we call units, outbound truck units actually happen, right? As well as, some, you know, we do some commodities there that could be, have been included in our current category known as commodity focus. If you look at larger volume traffic, which is above 1,000 kilometers, we today have around 13% of our volume in that part of our business which grows at a good rate. Right? A lot of that goes with CONCOR, which is a government provided rate system as opposed to the AFTO, which is more privately owned carrier, the rakes. But 13%-17%, it wobbles around every quarter based on how the automobile industry is doing, how their demand patterns are.
Between 13%-17%, let's say 15% on average is what we are in the 1,000+ km market, right, with centralized loads. In the place where it works, we are actually reasonable in terms of our multimodal capability.
Okay, thank you so much, and wish you all the best.
Thank you. Just the next question from the line of Snehal Naik from Dudhani Financial Limited. Kindly proceed.
Hearty hello.
Excuse me, Snehal Naik. Snehal Naik, your line is unmuted. Kindly proceed.
In interest of time, can we move to the next question, and then you can come back?
Right. Sir, that was the last question. We would like to hand the conference over to the management for any closing comments now.
All right. Thank you all for a very engaging discussion, right? I hope we were able to answer all your questions satisfactorily. However, should you need any further clarifications or would like to know more about the company, please feel free to contact our team or SGA, our investor relations advisors. Thank you all once again for taking the time to join us on the call. On behalf of Mahindra Logistics and all our extended family, I wish you and your family and your colleagues a very happy festive season. I wish you a very happy Diwali, and thank you all for joining us today. Thank you.
Thank you. Ladies and gentlemen, on behalf of Mahindra Logistics Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.