Logistically speaking

Arshiya International is raising the stakes in the free trade warehousing zone business

A nondescript road leads to Arshiya International’s free trade and warehousing zone (FTWZ) in Panvel, a suburb outside Mumbai. Once the gates open, the potholed road transforms into slick tarmac and polished, spit-free pavements. It is almost nothing to look at first glance — a few warehouses and rugged brown hills in the distance.

But pay a little more attention to detail and oddities start to jump out. Closed-circuit cameras with 10x zoom monitor every inch of the 165-acre plot, there are funny looking drains on the streets and yellow-helmeted workers pour out of monstrous warehouses. These warehouses hold everything ranging from plush luxury cars, exotic wines and cutlery to hazardous chemicals and washing machines. The radio tagged and patented racks are manned by a robotic arm that can pull contents from stacks that are over 20-feet high. Each warehouse is customised to whatever products it holds.

One such warehouse has temperatures that drop to -30 degrees Centigrade. The entire complex is also earthquake proof, has its own bank, medical facility, customs office, dedicated rail services and an unrivalled security agency headed by a retired army colonel. Welcome to Fortress Arshiya.

No photography is permitted inside the warehouses. This is where companies such as Casio, Cisco, Kodak, Fujitsu, Audi and Davidoff store their import and export goods before they set out for their final destination. Not surprisingly, they’re cagey about revealing what they have in store. It’s not only consumer goods companies. The Indian subsidiary of Soilmec, an Italian heavy ground engineering equipment maker, is a case in point.

Ever since Soilmec chose Arshiya as its regional distribution hub in October 2011, it hasn’t had to worry about paying duties on unsold equipment and unused spares, or finding multiple storage units for exports. This lets the company work in India with considerably reduced working capital. Sanjoy Chakrabarty, MD, Soilmec India, puts it like this: “Arshiya provides us with the flexibility to serve the market in time, and reduces long lead times that become impediments to our business.”

The Indian government launched the FTWZ scheme in 2006 to encourage international trade in India. Essentially, in an FTWZ, importers don’t have to pay duties such as customs and value-added tax; goods moved to the FTWZ from within India are considered deemed exports; there’s no service tax on value-adds like sorting, labelling and packing inside the FTWZ; and onsite custom clearance also saves time and makes for hassle free re-exports.

Arshiya is the country’s first fully functioning FTWZ — the Panvel unit started operations in late 2010, while the one at Khurja near Delhi started in January this year. Arshiya’s other verticals include cargo trains, domestic distriparks, transport and handling of goods, logistics and supply chain management, and logistics enabling IT.  It is also the second-largest private rail player in India after Gateway Distriparks and Concor.

The logistics business comprises three subgroups and Arshiya is present across all  three of them: transportation (via road, rail, shipping and air), storage (ports, warehouses, FTWZs, container depots and parks), and value-added services (third-party logistics, freight forwarding and couriers). “We do end-to-end supply chain management,” says Ajay S Mittal, the soft-spoken CMD of Arshiya International. “We pick up your cargo, take it on our trains and trucks, store it at our distiparks or FTWZs, add value to it by sorting, labelling and packing it, and then re-transport it to the end customer. No one else in India does this at present.”  

 Moving first and fast

Back in 2006, it was real estate players such as Shipco Infrastructure, DLF and J Matadee Eco Parks that got the SEZ-FTWZ licences. Mittal’s background in real estate (he comes from the Mittal family of builders) came in handy here. He had the expertise to navigate the SEZ policy as well as experience in large-scale land acquisitions — most of his competitors are yet to tie-up finances and acquire land. In fact, new entrants will require at least four or five years to get their land and licences in place. 

Arshiya hasn’t been sitting pretty on its lead. It already has third-party logistics (3PL) capabilities to add more value to goods once they land at the FTWZ, and can transfer goods to and from one place to another — its competitors can’t. If the other players see rental income as their key component of revenues, Arshiya eventually hopes to earn 10 times more from value-added services (VAS). Already, it earns  about twice as much from VAS as from rental income. 

Arshiya was earlier known as BDP India back when it was established in 1999. It was an oddball partnership between Mittal, who was then a chemical trader, and US-based logistics provider BDP. The deal came about because Mittal decided to manage the delivery of his shipments on his own — chemical importers like him were able to play on the price arbitrage till the internet levelled the field with information. Mittal wanted to increase his margins and ensure on-dot deliveries. Thus was born the logistics partnership with BDP, the first of its kind.  

Mittal invested Rs.50 lakh into the business and carried on with his trading. “Eventually, I realised that I was making more money from delivering the chemicals than by trading them,” he smiles. By 2004, after four years of understanding the nitty gritty of the logistics business, Mittal was convinced that is where his future lay. He sold his chemical trade business and reworked his logistics division to offer clients integrated logistics solutions. Soon enough, companies like BASF, Videocon, AMD and Mahindra & Mahindra signed on. In 2006, Mittal acquired an ailing listed company called IID Forgings. It was into forging steel parts but IID had hardly any business when Mittal acquired it. However, it was useful for effecting a reverse merger of BDP India into it. Mittal renamed the company Arshiya after his daughter, and hasn’t looked back since.

Charging ahead

Eight years down the line, Arshiya’s business plans include developing five more FTWZs and complementing its five distri and cargo parks near Mumbai, Delhi, Chennai, Kolkata and Nagpur. Eventually, Mittal wants to connect all the storage hubs to the cargo loading terminals through a network of 150 trains and provide last mile connectivity via trucks that he has hired on a need-to-use basis.

The company is among a handful of players who got a pan-India rail licence in 2008, when the government allowed it. “About 60% of India’s traffic moves by road,” says Mittal. “There’s a big opportunity here. To take just one case, globally, 26% of automobiles are moved by trains. In India, the comparative figure is just 3%.” 

Players such as Gateway Distriparks, which have been in the business longer, broke even only recently but Arshiya’s rail operations have been in the black since inception. “We have long-standing relationships with our clients,” Mittal explains. “We have long-term rail cargo contracts and we even receive advance payments for some of them.” Kotak Securities expects Arshiya’s container rail business to post a Compound Annual Growth Rate (CAGR) of 15% until FY15. Last month, the company signed a 10-year lease deal with the Indian subsidiary of Chicago-based Gatx group to lease railway container trains. Gatx will provide Arshiya with 10 new trains, to begin with. This will allow the company to scale up operations without tying up monies in capex. 

Though a far way off, elements of Mittal’s vision have already started falling in place. Arshiya has acquired clearances and land for all its FTWZs, except the one in eastern India. The Panvel and Khurja FTWZs are already operational and construction will begin soon at the Chennai facility. “Having a FTWZ at Chennai means we can serve some parts of central India, too, till the time the Nagpur facility turns operational,” says Mittal. By the end of FY14, Mittal expects to take the total number of warehouses at both its FTWZs and its Khurja distripark to 35 from the current eight.

“I see no competition in the FTWZ business for the next five years,” says Mittal. He clearly has the first-mover advantage given that other players that Outlook Business spoke to are reluctant to enter the business because of cost and issues related to acquiring large tracts of land. Mittal is of the view that the Indian logistics opportunity is so big that players are actually complementing each other rather than working at cross purposes. “Allcargo Logistics uses some of our trains and we use some of Gateway Distriparks’ storage,” he points out.

The FTWZ is not only Arshiya’s fastest-growing business, but also has the highest margins (see: Fast track). Employee count has also been increasing steadily: from 550 in FY11 to 1,250 a year later. And analysts expect the FTWZ business to grow by over 100% between FY12 and FY14. It helps that the Indian logistics industry, valued at about $105 billion now, is expected to double to $200 billion by 2020.

In evidence of this, consider the following. The Indian Ports Association expects containerised cargo handling to grow at a CAGR of 12% over FY11-17. Mittal expects the introduction of goods and services tax (GST) to be a game changer. “Logistics players will be able to function on the hub-and-spoke model with GST,” he says. “At present, companies end up stocking goods at various warehouses because differing state taxes hike up costs. With storage in one place, economies of scale will kick in.”

Moneywise, Arshiya has divided its expansion plans into three basic phases. The western and the northern FTWZs, as well as the northern distripark and rail infrastructure, are to be developed in the first and second phases. Of the Rs.3,160 crore earmarked in total for this, around Rs.2,797 crore had already been spent by FY12. 

Already, there’s a high level of debt on the company’s balance sheet. To part-fund phases 1 and 2, the company had raised debt of Rs.2,000 crore from domestic financial institutions. Analysts point out to the strain on the profit and loss account, thanks to rising interest costs. Rajesh Kumar Ravi of Karvy Stock Broking points out in a report that Arshiya’s interest outgo is rising as most of its expansion is funded through debt. “High interest cost of Rs.34 crore in Q4FY12 moderated PAT growth to 44% YoY to Rs.27 crore,” says Ravi in his report.

According to Karvy, the ongoing expansion plan across FTWZ and rail divisions would stretch the debt-equity ratio. However, the brokerage house expects the increased operating cash flow to reduce the stress on the balance sheet from FY13 onwards. “We expect net debt to equity to moderate from 2.1 times to 1.8 times in FY14,” says Ravi.

Mittal too chooses to play down concerns over leverage. “For most infrastructure projects like ours, it’s far more — even 4.1 times or 5.1 times, in some cases. Comparatively, we are much better placed,” he says. Also, he points out that Arshiya has started paying back its interest outgo on debt and is reaching a stage where it is paying off parts of the principal amount as well. As for raising more money for expansion for phase 3, Mittal says he may raise more debt. “I am comfortable with a debt/equity ratio of 3.1,” he says. “We are far below it at present. This gives us enough scope to raise more funds through debt.” 

Mittal adds that an equity dilution could also be an avenue for raising funds in future. Incidentally, as of March 2012, the promoters have pledged more than half of their 43.2% holding. 

For now, the success of the FTWZ holds the key to Arshiya’s growth. “Execution delays can put the viability of the projects into jeopardy, and strain the already leveraged balance sheet,” points out Fullerton India in a report. 

That indeed is a big risk. But Amit Agrawal, research analyst at Kotak Securities, says that indicators from the Mumbai FTWZ operations give earnings visibility of Rs.320 crore till FY13. Which means Arshiya International is poised to transform itself into an integrated logistics service provider. Looks like it may well be worth the while to watch Mittal’s baby grow.