Ladies and gentlemen, good evening, and welcome to the TVS Supply Chain Solutions Limited Q3 FY 2024 earnings conference call. As a reminder, all participant 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 touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Narayanan, Head Investor Relations at TVS Supply Chain Solutions. Thank you, and over to you, sir.
Thank you, Michelle. Good evening, everyone, and welcome to the TVS Supply Chain Solutions earnings call for Q3 FY 2024 and the nine months ended 31st December 2023. We have with us today Mr. Ravi Viswanathan, Managing Director, and Mr. Ravi Prakash, Global CFO. Our financial results and investor presentation have been posted on the company's website and the stock exchanges. We will commence the call with opening remarks from our management team, followed by an open forum for Q&A. Before we begin, I'd like to point out that some of the statements made during today's call will be forward-looking in nature and must be reviewed in conjunction with the risks that the company faces. A disclaimer to effect has been included in the earnings presentation that has been shared. I will now hand it over to Mr. Ravi Viswanathan, Managing Director, to make the opening remarks.
Over to you, Ravi.
Thank you, Narayanan, and good evening to all of you. I would like to welcome you once again to our earnings call to discuss our Q3 and nine months FY 2024 performance. I will share with you the highlights of our performance, and my colleague, Ravi Prakash, CFO of the company, will then take you through the analysis of our performance. We look forward to interacting with you as part of the Q&A. I thought before I begin, I will provide a brief background of our company for the benefit of those participants who might be joining us on this call for the first time. TVS Supply Chain Solutions is an end-to-end supply chain solution provider with capabilities across the value chain. We operate our business in two segments. We call it the Integrated Supply Chain Solutions, or ISCS segment, and Network Solutions, or NS segment.
Technology is a key element of the value we bring to our customers, and we deploy an asset-light business model across both segments. Our presence spans four continents: Asia, Europe, North America, and Oceania. We have a customer base and in-house supply chain expertise that cuts across multiple sectors. Our customer relationships are highlighted by long-term customer association with our top customers. To summarize, TVS Supply Chain Solutions is an Indian multinational with a set of capabilities compared with the largest players in the sector. The management focus is on profitable growth and leveraging our capabilities and supply chain expertise. We are working towards our growth vision to be among the top 50 logistics companies worldwide. With that short introduction, I shall now move to the performance highlights for Q3 and nine months FY 2024.
We had another strong quarter, where continued growth momentum and margin expansion in the Integrated Supply Chain Solutions drove the company's return to profitability. The ISCS segment delivered double-digit growth consistent with its performance in the earlier quarters. Q3 revenues grew 14.7% year-on-year, and on a nine-month, nine-month basis, the segment grew 16.1%. It is important to point out that this strong growth was despite the United Auto Workers strike, which impacted our ISCS segment in North America for the month of October. On a year-on-year basis, the ISCS segment revenues grew across all our key geographies, India, Europe, and North America. Both expansion and current customer engagements and new business wins drove growth of segmental revenue in the ISCS segment. Another key highlight of quarterly performance was the margin expansion in the ISCS segment.
ISCS margins for the quarter were 10.5%, a 50 basis point improvement year-on-year. On a nine-month basis, the ISCS segments were 10.4%, which was 160 basis points higher compared to the nine months in FY 2023. Within the network solution segment or the NS segment, the Integrated Final Mile or IFM business revenues were steady on a year-on-year basis. There were some churn of customers because of which, which were offset by growth in other engagements and new wins. Global Forwarding Solutions or GFS business revenues reflected the global trend of slowdown in freight. Ocean freight rates for the quarter were within a narrow band, and freight volumes reflected the industry's 10- trend and were weak across trade lanes. As you might know, the situation in the Red Sea is something that is being watched carefully.
Attacks on fleet in the Red Sea forced changes in the shipping route, with liners choosing to travel around Africa to reach the Mediterranean or the Atlantic instead of through the Red Sea and the Suez Canal. This has resulted in increase in sailing time between Asia and Europe by 15-20 days. The delay impacted about 5% of our monthly volumes in December. Apart from the delay, this has also resulted in longer turnaround times, resulting in shortage of container capacity. Vessel owners are now levying surcharges for the longer sailing. This is one of the factors behind the spike in freight indices since end December. For freight forwarders like us, this surcharge is mostly a direct cost to the customer without gain in absolute margins.... You would appreciate that it is difficult to plan for such externalities.
Having said that, we continue to monitor the situation carefully to make best use of tactical pricing opportunities in this volatile market. On a year-on-year basis, our NS segment revenues were 24.9% lower. Our margins for the NS segment were consistent on a quarter-on-quarter basis at 4.4%. The Integrated Final Mile or IFM, we continue to implement pricing revisions and operational efficiency initiatives aimed at margin improvement. In GFS, our focus has been on procurement efficiency and operational efficiency, and that has helped soften the impact of low rates. Additionally, we have also taken specific cost reduction measures. On a consolidated basis, revenue for the quarter was 1.8% lower sequentially, and 6.4% down year-on-year. Adjusted EBITDA margins for Q2 were 7.8%, 70 basis points improvement year-on-year.
On a nine-month basis, our revenues were lower by 11.2%, year-on-year. However, our adjusted EBITDA margins were higher by 120 basis points, which drove a 4.1% growth in adjusted EBITDA, despite a double-digit revenue decline. So with this background, I will hand it over to Ravi Prakash, our Global CFO, who can walk you through the detailed analysis of these headline numbers.
Thank you, Ravi. Good evening, everyone, and thank you for joining our earnings call. Let me take you through the highlights of the financial performance for Q3 in the nine months ending December 31, 2023. Let me start by giving you a brief about the strategic interventions that we have been taking. If you recollect, in the last quarter's analyst call, we had explained that the discontinuation and sale of one of our subsidiaries to drive better focus on our core business, which was the Circle Express business. As part of that same journey towards simplifying our business and corporate structure, our board approved a draft scheme of amalgamation, which provides for the merger of entities with and into TVS Supply Chain Solutions. These are mostly wholly-owned subsidiaries in India. We have provided an overview of this on page 4 of the investor presentation.
The detail is also available in our disclosures filed with the stock exchange. Our expectation is the merger of these subsidiaries should create synergies in operations as well as drive business development. Another important step we took during that quarter was on repayment of borrowings. We've used the IPO proceeds and funds from other sources to repay all our long-term loans. We had indicated this in our earlier earnings call, but now we can report that we have completely paid our long-term borrowings, and the company now only has working capital debt on its balance sheet. Ravi Viswanathan gave you an overview of the business in the quarter, and in specific, the challenging revenue segment situation we are facing in one of our segments. I would however like to highlight how the China...
The company has been able to leverage very strong procurement, operating efficiencies, and discipline to deliver a positive EBITDA of INR 0.6 crores for the quarter and profit after tax of INR 10 crores. As we had indicated earlier, we had expected a quarter-on-quarter improvement, Q2 better than Q1 and Q3 better than Q2, and that is what we've been able to deliver. Talking about the core operational performance, we've been able to grow adjusted EBITDA margins 7 basis points year-on-year for the quarter. Adjusted EBITDA, just, as you might be aware, is EBITDA, which has been adjusted for, the employee stock option costs and any loss in foreign exchange translations, which are not operational in nature.
So continuing from Adjusted EBITDA, if you were to compute the EBIT or the operating income, again, adjusting for ESOP costs and loss in Forex, you will notice that even the EBIT margins have held reasonably steady by the difficult revenue environment. We have in the past spoken about our focus on operational efficiencies. This quarter's performance demonstrates this resilience and our ability to maintain our core operational profitability. In addition, we were able to gain the full benefit of the interest cost reduction from repayment of borrowing from this quarter. I'd like to again, once again, bring to your attention that we have repaid all our term loans. Let me move on to an analysis of key line items.
Revenue from operations for the quarter was INR 2,221.8 crores, compared to INR 2,262.9 in the previous quarter, and INR 2,373.4 in Q3 of FY 2023. Business development revenues contributed to INR 27 crores in Q3, which is approximately 10% of the recent revenue, and that trend has been consistent for the last few quarters. Revenue from operations for nine months was INR 6,773.87 crores, compared to 7,672.8 crores last year. I would like to point out that in nine months, the GFS revenue has dropped by almost INR 1,500 crores, but a significant portion of that has been made up through the growth in the supply chain segment, pointing to the resilience within the company's portfolio.
Other income for the quarter was INR 21.6 crores, compared to INR 8.3 crores in Q2 and 27.7 crores last year. And for nine months, it was INR 38.1 crores. A brief explanation of how a few major line items have evolved. Freight clearing and forwarding expenses particular were have reduced driven by a decline in freight rates and procurement efficiencies. You will notice that the decline in freight and other handling expenses is greater than the revenue decline, pointing to the improvements in variable margin. They were down 34% and 44%, 44.5% year-on-year for the quarter and nine months. Employee benefit expenses for the quarter was INR 552.3 crores, versus 501.4 crores in the prior year, and 532 point in the previous quarter.
The key reason for the reduction in employee expenses in this quarter is the United Auto Workers strike in North America, which resulted in a reduction in the variable labor that we had deployed in some of our assignments. The year-on-year increase is driven by additional assignments that we have got in UK, which is absorbed within the gross margin of the ISCS segment. We have provided the segmental results for the ISCS and NS segments on page 21 of the investor presentation. Consolidated adjusted EBITDA for Q3 was INR 173.6 crores, about 7.8%, staying consistent with what it was last quarter, and about 120 basis points better than what it was a year ago. As I mentioned earlier, we have derived benefit from the reduction in interest cost as a result of the repayment of borrowings.
Because of all this, the combination of strong ISCS growth, strong EBITDA, and the reduction in interest meant that we've been able to achieve a breakeven profit of INR 0.6 crore, compared to a loss of INR 4.5 crore in the last quarter. In the tax line, you will note a credit of this quarter. That's because of the reversal of tax liability, which was created in previous periods in our overseas subsidiaries, and as a result, we have a INR 10 crore profit tax for the quarter. This concludes the summary on financials, and now I hand it back to Ravi Viswanathan.
Thank you, Ravi Prakash. So the key highlight of the performance is the fact that we've been able to navigate the difficult external situation while ensuring robust core operational performance. The quarter also showcases the inherent strength of our business portfolio. We've been able to both grow revenues and margins in the ISCS segment business consistently to help drive consolidated margins year-on-year. And if you just reflect on what Ravi Prakash said, that the Network Solutions segment, the nine-month revenue decline was close to INR 1,500 crores, but at the same time, the adjusted EBITDA for nine months was actually higher by almost INR 20 crores over the same nine-month period from last year. So it reflects a lot about the company's ability to focus on our core operations. Our business development efforts continue to deliver results.
You will see in the earnings presentation that in the quarter, INR 227 crores of revenue came from new business. During the quarter, we had new contract wins in both segments. We further expanded our engagement with the U.S.-based agri-equipment manufacturer, with increase in scope of work. Some of the new contracts we have won includes contract to manage freight for a European truck OEM, a 3PL solution for a large CV passenger car OEM, a tech support engagement with a global healthcare devices company, amongst many others. Our pipeline of new opportunities is strong and currently presents a revenue opportunity in excess of INR 4,000 crores. Our focus is really on, I think I mentioned it earlier, that we have, we have a global account management.
We are working on targeting large partnership with customers spanning multiple geographies. So the ability for us to bring all of our capabilities to bear and therefore be able to cross-sell with large customers, and also some of our core offerings to multiple geographies in which the customer is present, is something we've seen as a key initiative, and we are seeing early results of that. In summary, external challenges in the freight business side aside, we see positive demand drivers across our geographies. We are confident in building on our strengths to overcome external challenges and grow our business profitably. With that, I would like to open the floor for questions. Thank you.
Thank you very much, sir. We will now begin the question-and-answer session. Anyone who wishes to ask questions may press star and one on your touchtone phone. If you wish to withdraw yourself from the question queue, you may press star and two. Participants are requested to use only answers while asking your question. Ladies and gentlemen, please wait for a moment while the question queue assembles. The first question is from the line of Achal Lohade from JM Financial. Please go ahead.
Good afternoon, everyone. Thank you for the opportunity. The first question, you know, with respect to the NS. So if you look at the Network Solutions piece, Q3, there is a drop, and part of that is as you said about the Red Sea disruption causing some volume shifting. Can you elaborate a little bit here? And also, the second question I had with respect to seasonality, is there any element of seasonality, like 3Q to 4Q, one should see an increase? And also, you know, if you could give some sense about the volume, you know, increase or decrease on a QOQ, YY basis for Network Solutions, for the freight business specifically, please?
Okay, thank you, Achal. Let me just take the first part of the question, and then Ravi Prakash can take the second part. If you look at our network solutions business, the Q1Q decline, I would say it is more a global trend on the forwarding business. The Red Sea actually is not disrupting the, it's taking I just said that it takes longer time for the longer sailing time to the vessels. And as a result, the some of the delivery which are supposed to happen in December are gonna happen in January.
So I would say that is a very small portion of the revenue decline, but I would say the larger volume decline is price-based, which all of you are well aware of. We are coming off, you know, absolute COVID peak of $4,000-$5,000, which is about a steady state of about $2,200-$2,265 kind of numbers. So that's probably the reason for the revenue decline more than thing. And on volumes, Ravi Prakash, you want to add anything specifically and also about the IFM seasonality?
Achal, maybe let me supplement what Ravi Viswanathan has already said. The Red Sea impact in December was probably to about 5% of our volumes, and therefore, 5% of our revenues. And that revenue should come through in January. It will give you a sense of what it was, 5% of the month of December's volume is what I'm talking about. In terms of seasonalities, October, November, December, December is a bit of a soft month for the IFM business in the U.K. And normally, if you compare a Q2 versus Q3, Q3 is normally softer, and Q4 is slightly better than Q3. Maybe I'm not putting an exact number on it, but in general, the trend would be that Q3, you would expect it to be a little bit softer, right?
In, in February, the one thing that you will have to keep in mind is there is Chinese New Year. But in general, if you are talking about Q3 results, IFM softness, because of December, as well as the, Red Sea, like I said, impact of 5%. That was what it is. Other than that, volumes I think have held steady or probably slightly lower in trading for some of our key customers, and we are looking to business development to make it up.
Understood. Because when I look at the freight rate, it's gone up 5% QOQ, while we have seen a drop, you know, roughly about similar 5% QOQ in Network Solutions. That was the reason I thought I'll ask this question. The second question I had was with respect to the cost reduction measures. You know, sir, if you could highlight, you know, what actions have been taken, the efficiencies, if you could quantify these pieces, please.
Yeah. So, Achal, I'll address the cost, but maybe if you don't mind, can I just make one more comment on the top line? Because it's important. In this, it is not in the network, but in the supply chain segment, the impact of the UAW strike was about $2.6 million for the quarter. So that's something that please do keep in mind. Now, coming back to the cost measures, we have taken significant steps both in the for freight forwarding business and the IFM business to start step changing our overhead structure. So in Q3, those cost measures have already gone into place in multiple geographies in GFS, in the freight forwarding solutions.
The cost actually includes some of the restructuring costs that we have, the P&L includes some of the restructuring costs that we have taken in Q3. They are expected to continue in Q4. So you will... The cost measures in IFM, again, similar, we have taken steps on the overhead side in Q3, but a significant portion is going to happen in Q4 as well. The objective of all this is, I think it's always message that very soon we would like to get back to the normalized margins in this segment. Right now, the margins are around 4.8, 4.9, and we were always aiming to get to a 5.6% here, and these steps are towards getting there.
Got it. So is it fair to say that, given the impact of these actions, in the near term, there will be pressure on margins of AIS, and in couple of quarters or three quarters, it should start showing improvement? Is that a fair understanding, sir?
Absolutely. So Achal, Q3 had restructuring costs in it. Q4 will also have some restructuring costs. I can't talk about the exact number, but it's likely to have. But the benefit should definitely start showing up from Q1 of FY 2025.
Understood. Sir, another question I had, with respect to the restructuring the slide, what you have added in PPT. Can you elaborate a little bit as to, you know, those five entities? How does it work in terms of any impact?... in terms of operations through financials?
Yes.
This amalgamation?
So if I talk about the five entities, four of them are wholly owned subsidiaries, Achal. Global Trade, Trade Solutions India, so TVS SCS Global Freight Solutions is the Indian subsidiary of SCS India, which has the freight forwarding business. That will get amalgamated into the standalone company. White Data Systems is a technology provider for both the network solutions and ISCS solutions. SPC International is a repair business, which is more in line with the IFM business. Flexol Packaging is a packaging business. So these four are wholly owned subsidiaries when they are merged into SCS India. For investors, actually, SCS India then truly represents, except for one or two subsidiaries, the full breadth of our India business. Today, we are having to actually pro forma present the size of India business, and of course, it'll be very transparent.
The two other benefits is when we bring the resource from all this into SCS India, we expect a significant improvement in business development because now all products, network solutions and ISCS, can be offered under one legal entity and one umbrella to all our customers. There's obviously, you know, knowledge and leveraging of customer contacts, so that's one big benefit. Then, of course, there are the obvious benefits in terms of operational synergies in the support functions as well as the compliance part. Last, of course, cash pooling as well, because you get much better leverage and cash. So that is the reason that these four entities... And we have actually indicated as such in even during our IPO journey, that we will be looking to, over a period of time, simplify our corporate structure, and we have taken that, step.
Mahogany Logistics is actually a shareholder of TVS SCS. It's a fully owned subsidiary of Mahogany, another company, which is also called Mahogany Supply Chain. And Mahogany, so which is just being merged and simply there is no impact to PNL or shareholders, because it's just simply replacing the shares of Mahogany Logistics with SCS shares, which have been issued. Either in the quantum of the shares or the shareholding percentage, there's no change.
Okay. Okay. Sir, just wanted to understand with respect to India business, sorry, not India business, for the segment, you know, for the supply chain and for the network solution. Would you be able to give us the PBT margin? Because sometimes the leases also have a favorable impact on EBITDA or EBIT level, but PBT level, it may be similar. If you could, if you have it handy, can you help us understand what is the extent of margin improvement at PBT level for both the segments?
Achal, I normally we have not disclosed the PBT margins, in the margin at the, at the India level. Maybe, let's see, maybe in the future we can take a look at it.
Right. No, sir, actually, I wanted at consolidated level, the Network Solutions and the ISCS business. What is the PBT margin improvement, specifically for the supply chain business, supply chain segment?
So, Achal, actually, the supply chain EBITDA margin improvement should actually flow through the PBT, other than the benefit that we've got through borrowings. Whatever you see there, but, more or less, a lot of it should flow through the bottom line.
I understand, sir. Okay, I think, you know, I'll stop here. I'll fall back in the queue, sir. Thank you so much.
Thank you. The next question is from the line of Jainam Shah from Equirus Securities Private Limited. Please go ahead.
Yeah. Hi, sir. Thanks for the opportunity. So my question is related to the Red Sea issue. So as you highlighted that just in December, there has been some volume impact. Just wanted to understand how we are expecting the impact on the volume for this particular quarter, and has there been any major change in the realization for the same that we are witnessing as of now?
Right. So, Jainam, the December volume shift is more because the deliveries happened in early January and not in December, as we anticipated. We don't expect a volume shift to... This is unplanned, and we didn't quite anticipate it, and that's the reason why we called it out. We don't expect a volume shift because of the Red Sea. As yet, we don't see signs of that. But what we are seeing is that there is a markup in the pricing, and we are hoping to get the upside of that, especially on the European trades.
Got it, sir. So for the quarter, near term or at least medium term, how we are seeing this particular segment?
It is, let me just say, the trade business per se, we don't expect the pricing to significantly change other than the Red Sea-related surge, which we would probably see in Q4. But otherwise, I think the pricing will be in a narrow band around $2,200-$2,300. So pricing will be hopefully very stable. We are looking forward to an uptick in the volume, especially in some of our key customer, but that's something which is, you know, we need to watch that space, because volumes have been more or less flat to a tight decline over the last two, three quarters, you know, following global trade.
Got it, sir. Got it. Thank you so much.
Thank you, Jainam.
Thank you. A reminder to all the participants that you may please press star and one to ask questions. The next question is from the line of Sumit Kishore from Axis Capital. Please go ahead.
T hanks for the opportunity. I think this is a follow-up on an earlier question, Achal asked.
I'm sorry, sir. Sir, your audio is not clear. May we request you to use your handset, please?
Am I audible now?
Yes, sir. Please proceed.
Yeah. So I'm on slide 20. See, I just want to clarify on the seasonality bit. So when I look at the nine-month FY 2023 Adjusted EBITDA, it was about INR 345 crores, and the full year was at 655 crores, which means that the fourth quarter last year was almost as big as nine-month FY 2023. Is there something obviously I'm missing here, or the fourth quarter, upcoming quarter would basically end up being a big decline on a year-on-year basis?
Sumit, can you just repeat the question once again?
I am on slide 23, and I'm probably missing something here, but adjusted EBITDA in nine months FY 2023 was INR 345.8 crores.
Right. Yeah.
Full year was INR 65 crore, which means that fourth quarter last year was something like INR 340 crore of EBITDA. So is there some seasonality that I'm, you know, missing completely here, which happens in fourth quarter or, you know, at the current run rate, it appears that the fourth quarter would see a decline.
I think, Sumit, thanks for pointing this out. See, the run rate is normally around INR 160-170 crores per quarter.
Right.
So let's just come back to you on the comparative number, because we don't expect any decline in the EBITDA in the fourth quarter. So it's actually the comparative number. Let's just double-check the way the EBITDA has been calculated.
Basically, there's a big seasonality then, because if the fourth quarter number last year was as big as the nine-month FY 2023 number, I, my understanding probably was not as clear on this point.
Yeah.
Yeah. Thank you.
So yeah.
Kishore, sir, are you done with your questions?
I was done with my questions. Thank you.
Thank you.
Sir, I will, before the call is over, we will clarify that number for you in a minute, Sumit.
Okay, sir. Thank you so much. Participants, to ask questions, you may please press star and one. We'll take the next question from the line of Saumil Shah from Paras Investments . Please go ahead.
Hi. Thanks for the opportunity. So my question is on the debt side. After paying our long-term loans, now we have about INR 750 crores of working capital loans. So on this, what would be our quarterly interest outflow? And, are we also planning to reduce our short-term loans?
So we are right now running at an average interest rate of around maybe 7.5%, on a weighted average basis, I believe. So we, on an annual basis, we should probably be looking at about maybe INR 60-65 crores of interest, on the, on this, debt, right? The working capital debt, I would expect it to move in a narrow band. See, between quarters, depending on seasonal demands, it may go up or down a little bit, but I would expect it to move in a narrow band at this stage.
Okay. So I mean, I mean, interest outflow, I mean, how much can we calculate on a yearly basis? Would it be INR 100 crore plus number or a less number?
Oh, in fact, it would be, if I take the Q3 number of interest, that's probably a good indication. It's definitely less than INR 100 crore.
Okay. Sir, we have been going at a revenue CAGR of 20% for the last two years, but it seems this year is going to be a de-growth year or a flat year. Any guidance on FY 2025 or FY 2026 on the revenue and EBITDA front?
Look, we don't want to put an absolute number on it, but what we will say is the momentum in the supply chain business is something that we are quite it continues, right? And we expect that once the Q4 numbers are out, you'll pretty much see the network segment where it is kind of settling down. Because over the last couple of quarters, you've seen that the run rate is settling down into a pretty much a stable number. So then we can actually yeah, based off that, so that will be a good base to calculate the next few quarters. We'll be in a better position to comment on that by end of Q4. But one thing I do want to talk about is our focus on business development, which is adding about 10% of our revenue. That does not change.
Sorry, could you please repeat that again?
Business development, which is adding about 10% to our revenue, that focus does not change.
Okay. Okay. And, sir, on your, in your presentation, you have mentioned your growth vision of, 2.25 billion-dollar company and, $100 million profits. So this is for which year? I mean, internal, I mean, you have set any targets?
Yeah, we've followed FY 2027 as the target year for that.
Okay. Okay. That's it from my side. Yeah. Thank you and all the best.
All right. If I may just clarify for Sumit Kishore, the nine-month EBITDA, that number on the presentation, we will correct, Sumit, thanks for pointing. The number was INR 514.4 for nine-month FY 2023. It's on page three . It's on page 20, Sumit. I think in that one chart, it was put down erroneously. The correct number is put down on page 20.
Thank you, sir. The next question is from the line of Arif, an individual investor. Please go ahead.
Hello, I'm audible.
Yes, sir. Clearly we can hear.
Yeah. So I want to ask about the depreciation you have currently. So basically, I think that we have around 2,300 kind of coming fixed assets. But where is the depreciation? Why is the depreciation at about INR 500 odd crore per year? How should we see this number? And with any operating leverage here, I mean, as we are a fixed business, how should I read this number?
So, the depreciation number includes two parts. One is depreciation on property, plant, and equipment. That number is about, I think in the... On an annual basis, I would expect it to be around INR 120 crores, right? And, amortization of intangible assets would probably add another INR 50 crores or 30 crores. The balance depreciation is what I call right of use, or in-case depreciation. It is basically leases which are capitalized on the balance sheet, and that's why you see such a high depreciation level.
Okay. And as we grow our business to $2.5 billion, so this depreciation number would not be slowing, right? I mean, it should be much lesser than what we see today.
So what will happen is, our capital expenditure, normally we budget between INR 100-110 crores annually on property, plant, equipment, and software. So that would be our, normal CapEx. In terms of the right of use assets, they would grow much slower than what our revenue grows. So in fact, if I take the CAGR between 2020 and 2023, my recollection is, the right of use assets depreciation grew at between a 4%-5%, whereas our revenue grew upwards of, double digits. So in general, you, you will see leverage from the existing depreciation.
Thank you. So my second question is, so we have a target of $100 million in the 2027, right? So to achieve it, what's the return margin we should be looking at?
You should look at about double digits. 9.5%-10% is the number that we are seeing at the consolidated level. We are today at about 7.8%.
Okay. Thank you very much.
Thank you. The next question is from the line of Amit Kumar from Shikhar Investments. Please go ahead.
Yeah, thank you so much, sir. Just one question, and I'm just sort of looking at the company for the very first time. I'm just wanting to understand this. There is a very large materials-related cost, you know, in your expense, in your direct cost line. So slightly, just want to understand, we've not seen this, you know, in a services-related logistics business. Can you clarify what this is?
Yes, I can do that. So, if you look at the, I mean, if you look at the capabilities that we have, one of the capabilities we have is sourcing and procurement. So for a few large customers in the U.K. and U.S., we actually do the purchasing and have the inventory on our balance sheet before we sell it to the customers. So it is not done in isolation. It is done along with other services that we provide. So, for example, we may be providing warehousing, sub-assembly, freight transportation, et cetera. Along with it, we may also be providing, what do you call? We may... Our buyers may be sourcing, and we may be stocking that material, and that is the material cost that you see.
There are a few large customers we do for, we do this business for in the U.K. and the U.S.
So is this, you know, different, you know, principal business lines do you have? I mean, which business line would be, would be the, which business— Under which business would, you know, this, you know, sort of trading, you know, happen?
ISDS.
ISCS. Okay. And, you know, specifically, if you can just sort of quantify, you know, what's, what's the gross margins, you know, do you do in this particular line? I mean, is it sort of possible to sort of break down the revenues that you are generating from this particular, you know... It seems like a trading business to me. Would it be possible to sort of break, you know, give some sort of understanding of, you know, how do we sort of look at this, you know, in terms of, margin perspective, either at the gross or at the EBITDA level?
So I want to clarify, this is not a trading business. This sourcing and procurement of materials is always done in conjunction with other services that we offer. So, for example, for a large beverage company in the U.K., what we do is, They give us a forecast. We actually do the inventory planning. We purchase the spare parts, keep it in our warehouse, deploy them to their engineers. So the contract is in the combination of all these services. Similarly, for a large customer in the U.S., we actually take a set of families of spare parts. We place the orders, we bring the material into our warehouse, we store the material, we submit the material, and supply the subassemblies to the customer.
Got you.
So you will not have a situation where we are simply buying material and just sitting like a pure trading company. That is not what we do. And that is the reason why I will not be able to call out a specific revenue on this material, because the contract will be a consolidated contract for all the services that we offer, and the material cost is one element of it.
Okay, okay. Understood. Understood. That's just fine. Thank you.
Thank you. Before we take the next question, a reminder to all the participants that you may please press star and one to ask questions. The next question is from the line of Achal Lohade from JM Financial . Please go ahead.
Thank you so much for the follow-up opportunity, sir. Just a clarification with respect to the other income, INR 21.6 crore in Q3. How do we read that? Or, you know, is there any one-off in there?
So, Achal, actually, it's a combination of a couple of things. In the other income, we have an exchange gain of about INR 12 crores, right? Just give me a minute. I'm just giving you the breakup, right? Yeah. So, yeah, see, there is interest income in there from bank deposits. In fact, if I take interest income from bank deposits and refunds, that's probably about INR 6 or 7 crores, and the balance is exchange gains.
Understood. The second clarification is with respect to the resolution of INR 250 crore, you know, in terms of investments. Can you just clarify on that, the board has approved some resolution?
Yes. Achal, thanks for actually for asking this, because this is an important one. In general, SCS, the way it manages its investments is we leverage our cash flow across the world to deploy to the most profitable opportunities. Today, the reason that the board has approved this investment is for two reasons. One, if there are any large deals coming through the pipeline anywhere in the world, and if the subsidiaries there need support, in terms of initial investment, the board would look at this as an enabling provision to have management to deploy funds quickly. Many of the large customers we are working with have started asking us if they're, if we are willing to make capital commitments for large deals between five to 10 years.
For example, the Centrica deal that we had last year, there was a point when the customer was willing, asking us to consider capital investments, but in the end, they did it themselves. So to either do capital or even to start up a large project, if there is funding required, management. The board wanted management to have the flexibility to be able to deploy funds. Now, why from India overseas? Because if you look at the marginal cost of cash right now, India has now come very close to the rest of the world. So it's just a matter of having an enabling resolution in place for us, if needed, deploy. That doesn't mean that we are immediately doing the INR 250 crores. We expect that this should be helpful to us in the next 18-24 months.
It's just that the board has actually kind of given management the discretion.
Understood, sir. Thank you for the clarification. Just a related question, you know, with respect to the new business momentum. Now, we are clearly doing very well on that front, anywhere between 7%-10% contribution. But I just wanted to check in terms of the momentum, are you saying it's accelerating from what it was, say, a two quarters back, or, you know, things are as they were, and we're looking at kind of, you know, 10% contribution from the new business every year? Could it go to 20%, 25%? Are you seeing that kind of deal pipeline? That was the question I had in mind, sir.
So, Achal, let me take that question. So, you know, our business modeling is around the 10%, and it is more or less in that 10% range. But one of the things that Raviprakash just told you about, the INR 250 crore enabling resolution, is really because we are seeing a lot of good opportunities in the pipeline. What Centrica has done is to get us a seat at the table for larger deals. So if we had one or two deals of that size in the past, we probably have four or five in the pipeline currently. And therefore, there is every reason for us to believe that the percentage will go up over the next, I would say, 18 months.
And as you know, especially in the ISCS segment, the deal takes a little bit longer to cook than in the Network Solutions segment. So we are seeing a significant improvement in the health of the pipeline in terms of large deals, and that's one of the reasons why that enabling resolution helps. And to answer your specific question, can I expect it to be 20%, 25%? I would say we would like to get to a number which is mid-double digit, mid-teens to start with, but that's really a possibility given where the pipeline is today.
Excellent. That's very heartening to hear, sir. Just one clarification, you know, with respect to Centrica. Has it started contributing to the numbers now, or it will start from FY 2025 onwards?
It has already started. From, in fact, from May onwards, it has started, Achal. The full run rate will be expected in Q4 of FY 2025 or 2024. Currently Q4, I mean, that is Q4.
Great. This is very helpful, sir. Thank you, and wish you all the best.
Thank you.
Thank you. Ladies and gentlemen, that was the last question. I would now like to hand the conference over to the management for closing comments. Over to you, sir.
Thank you, and I would like to thank all participants for being part of this discussion on business performance and outlook. These are early days in our journey as a listed company. We have a clear vision in terms of where we want to be as a global logistics company. We'll continue to work along the path of growth with focus on margins and profitability. Thank you all once again. It's a pleasure interacting with you. Looking forward to speaking with all of you soon.
Thank you, members of the management. On behalf of TVS Supply Chain Solutions Limited, I thank you for this conference. We thank you for joining us, and you may now disconnect your lines. Thank you.