MANAGEMENT DISCUSSION AND ANALYSIS REPORT [2014-15] Industry overview Logistics plays an important role in the business lives of all countries. Logistics ensure proper planning, flow of goods, services and information, stocking, warehousing, packaging, waste management and utilisation in the supply process in order to satisfy consumer demands as efficiently as possible. Logistics is considered as the backbone of the economy. This industry has become the basis in providing efficient, cost effective flow of goods on which other commercial sectors depend. The logistics industry in India is evolving rapidly and it is the interplay of infrastructure, technology and new types of service providers thereby enabling the service receivers reduce their logistics costs and provide effective services. The quality standard and availability of the services offered by the sector have decisive importance for the purposes of the goods, services and investments flowing into which are or, just the opposite, dynamising the economy and increasing employment opportunities. In respect of economic growth, logistic activities have both direct and indirect impacts. The direct impact is improving the performance of logistic businesses, serves the goal of dynamising the economy primarily by increasing investments, net exports and equalising the regional imbalances in consumption. The indirect impact is optimisation of logistic activities, contributes to improving the cost efficiency of the entire corporate sector, thereby increasing the funds available for investment. Logistics scenario in India India's logistics sector is poised for accelerated growth, led by GDP revival, ramp up in transport infrastructure, e-commerce penetration, impending GST implementation. This offers opportunities across the spectrum for companies in transportation, storage, distribution, and allied services,. Empirical evidence suggests that the Indian logistics industry grows at 1.5-2 times the GDP growth. Moreover, infrastructural bottlenecks that have stifled sector's growth and promoted inefficiency are being addressed by the government. Building of dedicated rail freight corridors will promote efficient haulage of containerised cargo by rail. One key advantage of the dedicated freight corridor is that freight trains could be run on time tables similar to passenger trains thereby reducing the transportation time to a larger extent. Setting up of various industrial corridors along the dedicated freight route will metamorphose the warehousing business– from small warehouses sbrad across the country to large, global-size warehouses concentrated in a few hubs. The proposed new goods and services tax (GST) regime and e-commerce will alter the landscape in warehousing, supply chain management and third party logistics business. GST implementation will be a game-changing event for businesses and particularly for organised logistics players. Logistics requirement for e-commerce will grow as exponentially as e-commerce. Indian Ports Sector India has 12 major ports and around 200 non-major ports. Around 70% of India's trade by value is moved via sea. Ports have around 95 per cent of India's export-import trade merchandise. Therefore developing the port sector is a critical element in promoting trade and economic growth. Over the years, a number of policy, regulatory, fiscal and financial initiatives have been undertaken to fuel growth. As a result, private participation has increased. Major ports have missed the target of handling cargo consecutively from 2012-13 and during the fiscal 2014-15 the traffic stood at 581.34 million tones around 4% lesser than the target of Ministry of Shipping. The handling of POL has declined in 2014-15 while that of the container volume remained at the same level as of brvious year. The utilization of capacity at major ports has also declined from 73% in 2012-13 to 58% in 2014-15. Mumbai and JNPT handled higher volumes than other ports. Overall, during the five year period 2009-10 to 2013-14, cargo traffic at Indian ports grew at a compound annual growth rate [CAGR] of 3.4 per cent. The growth was primarily led by the non-major ports, which grew at a CAGR of 10 per cent during this period, while major ports witnessed a net decline. As a result, the share of non major ports in the total traffic also increased from 34 per cent in 2009-10 to 43 per cent in 2013-14. Key trends • Non-major ports are growing faster and setting new standards. • Ports exploring new revenue growth areas. • Focus of shifting from port development to port-centric development. Outlook • Indian ports are likely to handle about 1758 MT of cargo by 2016-17 compared to 913 MT in 2011-12 registering a CAGR of 14 per cent and it is expected that the growing importance would be on the performance of the non-major ports. • By 2016-17, the end of the 12th Plan period, there will be a commodity shift from current POL to containers and coal in all the major and non major ports. • Capacity additions at non major ports are vital for the growth in the cargo traffic. • Though there were increase in the award of projects at major ports being a positive development, execution challenges are to be overcome. Due to viability constraints, construction activities yet to begin in many projects. • In the last four to five years, however, the sector has faced tough times. Growth in traffic and capacity addition has been subdued. Project implementation has stagnated due to issues related to land acquisition, environmental and security clearances, legal issues, etc. and constraints in investment by prospective investors. • However, the scenario has improved since on account of the new policy guidelines for management of land at major ports, new tariff guidelines for future public private partnership projects at major ports. • The government is also looking at promoting inland water transport and coastal shipping in a big way as these are among the most environmental friendly and cost-effective modes of transport. Considering the past experience and difficulties faced by the operators at the major ports, corporatization of the major ports, amendment in the model concession agreement are on the anvil. • Integrated logistics is the new norm of the industry, wherein a single service provider, provides end-to-end logistics services not only covering India, but also all through international network. Addition to services and cost rationalization across the function is expected to have an impact on the cost effectiveness of the overall cost of goods. As such integrated logistics is the new trend in the industry not only in India, but also globally. Container Freight Stations and Inland Container Depots are the areas which are prone to the vagaries of import and export. Many unorganized players are operating the CFS/ICD. This sector is highly dependent on the import / export of containerized cargoes for EXIM trade. Slow down in the global economy is a factor that affects this sector. Furthermore, handling of containerized cargo is linked to the shipping lines who normally nominate on behalf of their clients. This industry is prone to unhealthy competition among the operators and there are no regulations to guide this industry. Survival in this segment would depend on high efficiency operations leading private industry players to persist with load sharing to ensure high utilization. Logistics – an insight Infrastructural bottlenecks across modes (rail, road, waterways) have stifled the sector's growth. Capacity constraints and inefficiencies can be noted from the high transit time in rail as key train routes operate at >110% utilisation, thus leading to an average speed of 25 km per hour. The road sector is fraught with inadequate and low-quality highway availability, thereby limiting the trucks' size and impacting economies of operation. Despite being an economical mode of transport, railways has lost market share in freight movement to roads in the last few decades due to capacity constraints and freight rates. Compared to other countries, India's rail share in goods transport is quite less due to restrictions on movement of goods through containers and reserved for the Indian Railways and the high cost of freight and haulage charges as compared with other modes of transport. Another key constraint is administrative delays. Despite being a relatively low-cost country, logistics cost in India is higher due to administrative delays led by paper work—leading to huge inventory investments and wastage—and a complex tax structure. Also, low penetration of new technology in the supply chain process is resulting in damage of goods. India has the least warehouse capacity with modern facilities, and given the fragmented industry state (large share with unorganised players), investment in IT infrastructure is almost absent at required scale. With road and rail having its own challenges as medium of transportation, coastal shipping will lead the way as the most timely and efficient medium of transportation within India, but realistically speaking we have a long way to travel before this becomes an impactful reality. SWOT Analysis of India's Port Sector Strengths • Strategic location on world trade route • Presence of international shipping / port players • Around 90% of India's foreign trade movement through sea route Opportunities • Focus on port-led development • Coastal shipping and inland water transport •Port based SEZs • Commercial utilization of land • Cruise shipping • Ro-ro services • Corporatisation Weaknesses • Poor interland connectivity • High tariffs • Inadequate draught levels Threats • Global slowdown v Land acquisition challenges Challenges The following are the key challenges faced by the Indian logistics industry. Poor Infrastructure One of the major critical challenges faced by companies today is of insufficient integration of transport networks, information technology (IT), warehousing and distribution facilities. Acquisition of land is another major concern, that is holding back the development of various connectivity projects. Slow and cumbersome processes of approval add to the delays in project implementation. Trade Regulations Regulations exist at a number of different tiers, imposed by national, regional and local authorities. Regulations often differ from city to city, hindering the creation of national networks. Trained Manpower Trained Manpower in both the third party logistics sector and the manufacturing and retailing sectors is very weak at a practical level, i.e., IT, driving and warehouse as well as at a higher strategic level. Lack of Training Institutions The disorganized nature of the logistics sector in India, its perception as a manpower-heavy industry and lack of adequate training institutions has led to a shortfall in skilled management and client service personnel. Information and Communications Technology There are a lack of IT standards and poor systems integration and equipment. Poor Warehousing and Storage Poor facilities and management are to blame for high levels of loss, damage and deterioration of stock, especially in the perishables sector. Part of the problem is insufficient specialist equipment, i.e. proper refrigerated storage and containers, but it is also partly down to lack of training. Lack of research and development (R & D) of the industry Although both the practitioners and the academicians are increasingly aware of the importance of logistics and supply chain, however the field is still under penetrated as far as research is concerned. It is important to prioritize research and development so that various weaknesses in the industry could be identified and improved. Measures to overcome the challenges The following are few of the measures that can be taken to overcome the challenges as enumerated above. Infrastructural Improvements Needless to say, infrastructure is the backbone of every country's growth and prosperity and for the logistics industry to flourish in the developed countries, special emphasis has to be laid on the enhancement of the infrastructural facilities. Particular focus needs to be given on building world-class road networks, integrated rail corridors, modern cargo facilities at airports and creation of logistics parks which need to be given a status equivalent to Special Economic Zones. Creating Awareness & Establishing Training Institutions Overcoming the skill gap in Indian logistics industry requires establishing training institutions. It is necessary to realize the benefits which best practice in logistics can bring to the companies so that the overall service quality of the sector is improved. Gaps in training have to be filled not only at the entry level but also in the management cadre which could be made possible through specialized graduation and post graduation courses focused on Operations and Supply Chain management. Improving Warehousing facilities Good storage and Warehousing facilities are essential to the growth of the logistics industry. With the increase in the transportation of perishable products, agencies associated with logistics will have to give a lot of importance to enhancing the Warehousing facilities. Warehousing will also need to go to the next level taking into account the changing dynamics of JIT manufacturing, global procurement and new models of sales and distribution. Encouraging Research and Development (R&D) Emphasizing on R&D is essential mainly because it encourages the use of indigenous technology which can make the industry more cost competitive and it also leads to the improvement in services due to the use of better and more streamlined services. Particular focus needs to be given on research in process excellence which can help eliminate inefficiencies and bring Indian logistics on par with global practices. Estimated Future Growth The Indian logistics sector growth depends on the growth of its soft infrastructure like education, training and policy framework as much as the hard infrastructure. To support India's fast paced economy growth of logistics industry is very essential. It is estimated that the Indian logistics sector will continue to show robust growth of 10-15% annually, leading the pace of growth of the economy at large. Main demand drivers In 2015 the Global economic outlook and indeed that of India is expected to significantly improve as India Inc begins to tackle the economic downturn. With a new government set in place and with GST going to be Implemented in 2016, and with many policies are expected to be implemented which will give a fresh impetus to India's growth engine particularly in the corporate and SME sector which in turn will expand demand for the logistics sector. The biggest boost to the growth of the industry is coming from the increasing consumer demand, particularly in the Tier 2 and 3 sections of the country. This is being further fueled by the revolutionary growth being seen in e-commerce which is leading to logistics companies responding with new innovations in service since logistics is the most critical ingredient in the success of an online business. SICAL - Financial and Operational Performance Sical's major revenue share arises out of its operations from the Ports. Sical has its brsence in almost all the major and minor ports. Sical provides integrated solutions for multimodal logistics of bulk and containerized cargo by providing end-to-end services. Sical extends services under the categories of bulk logistics and container logistics. The bulk logistics comprises of port handling, CHA, Shipping Agency and road logistics. Sical has now ventured in to surface mining activities and has been awarded contracts at Mahanadhi Coal Fields' mines at Bharatpur and Lajkura. During the current fiscal, the joint venture company Sical Saumya Mining Limited has been awarded the contract for overburden removal at mining areas and subsequent transportation at the Lajkura and Samaleswari mines of Mahanadhi Coalfields in Odisha. The Port Handling division handles cargo for TNEB at Kamarajar Port and also handles various other commodities such as dolomite and limestone at various ports. Customs House Agency division provides services for clearing and forwarding of goods through customs for imports and exports. Ship Agency facilitates and ensures quick turnaround of ships at berth at all major ports. Road logistics transports various cargoes ranging from dry bulk to project equipments through own trucks as well as hired trucks. The Road logistics comprise of cold chain operations as well warehouse management. The Company has commenced transportation of coal through Road-Rail-Sea route for the power plant of NTPL Limited [Neyveli Lignite Corporation] at Tuticorin. The Company has also was awarded surface mining contract by Mahanadhi Coalfields for two of their mines in Odisha [Lajhukura and Bharatpur]. These contracts are expected to improve the performance and profitability of the company to a greater extent. Sical Multimodal and Rail Transport Limited comprises of Container Rail and CFS operations. Rail division operates with 7 rakes and has own as well as leased containers for its operation. The container trains are run on Pan-India basis in various sectors based on requirement. Apart from handling containers through train for various customers including movement of materials for Hindustan Copper Limited. The CFS Division of the company is engaged in the CFS operations at Chennai and Tuticorin. The Company is in the process of establishing a CFS facility at Vishakapatnam to re-establish its brsence at Vizag. The commissioning of the iron ore terminal project at Kamarajar Port [erstwhile Ennore Port] could not be commenced during the year due to the brvailing ban imposed by the Government of Karnataka on the mining and transportation of iron ore from out of the state of Karnataka though the Apex body allowed mining for domestic consumption imposing restrictions. The Company has made constant rebrsentation before the appropriate authorities seeking permission to handle alternate cargoes in this terminal and the Port authorities are in the process of obtaining proposals from prospective bidders for converting this terminal to handle coal. The project activities of mechanization of the deep draft berth at the New Mangalore Port could not be continued due to the brvailing situation on iron ore export. The profitability of the Joint Venture operation by PSA Sical at Tuticorin continues to be under brssure due to royalty and tariff related policy matters. The Company is in the process of resolving these issues. Sical – The way forward Sical is in the process of consolidating its operations in the ports and exploring opportunities in Ports where there is no brsence. With this in view, during the year under review, Sical has begun its operations at Kandla. Further to this Sical is venturing into surface mining as well transportation of coal through Road-Rail-Sea and overburden removal at Mining areas. With this opportunity, Sical is poised for a prosperous growth in the years to come. Sical is also in the process of strengthening its activities in the area of road transportation and other related areas. Sical is also in the process of operating and maintaining cold storage warehouses. With the co-operation of all employees, the Management expects Sical jumping from heights to heights on year on year. Internal Control Systems and their adequacy The Company has put in place proper and adequate internal control systems which would automatically have the internal checks and balances then and there when transactions are executed. The Company is in compliance with the various statutes of the Government and statutory authorities. Internal Audit has been entrusted to an external agency and periodical review is being carried out by the Management. The Internal Audit findings involving high risks are reviewed by the Audit Committee at their meetings to check on the adequacy of internal controls and suggest measures for further improvement as well for mitigating risks. Human Resources / Industrial Relations Cordial industrial relations brvailed in all divisions throughout the year. Employees are considered to be the wealth of the Company who are instrumental in making the company reaching the targets and goals as envisioned. With the focus on development of skills in the employees, the Management has evolved best practices in evaluating the performance of the employees at all levels and provide growth opportunities in their career. Employees were sponsored for various seminars, symposiums and workshops organized by external agencies to enrich their knowledge and implement the best practices in their work place wherever feasible. Cautionary Statement Except for the historical information contained herein, statements in this Management Discussion and Analysis Report which may include words or phrases such as “will”, “aim”, “will likely result”, “would”, “believe”, “may”, “expect”, “will continue”, “anticipate”, “estimate”, “intend”, “plan”, “contemplate”, “seek to”, “future”, “objective”, “goal”, “likely”, “project”, “should”, “potential”, “will pursue” and similar exbrssions or variations of such exbrssions may constitute "forward-looking statements". These forward-looking statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those suggested by the forward-looking statements. These risks and uncertainties include, but are not limited to our ability to successfully implement our strategy, our growth and expansion plans, obtain regulatory approvals, our provisioning policies, technological changes, investment and business income, cash flow projections, our exposure to market risks as well as other risks. |