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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, ladies and gentlemen, and welcome to the Q2 FY '23 Earnings Conference Call of VRL Logistics Limited hosted by Motilal Oswal Financial Services. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Mr. Alok Deora from Motilal Oswal Financial Services. Thank you, and over to you, sir.
Thank you, Michelle. Good morning, everyone, and welcome to the 2Q FY '23 Earnings Conference Call for VRL Logistics. We have with us Mr. Sunil Nalavadi, the CFO of the company. I would now hand over the call to Mr. Nalavadi to give opening remarks and discuss on the performance of the company. Thank you. And over to you, sir.
Yes. Thank you, Mr. Alok. Good morning to all participants. I'm Sunil Nalavadi here, CFO of VRL Logistics Limited. I welcome all of you once again for the earnings conference call of the company for the period ended September '22.
As we indicated earlier, the management of the company is going to focus only on the higher growth-oriented good transport business.
In view of the same, we have taken many steps, including sale of non-goods transport segment which were part of the company earlier. I also would like to thank the non-promoter shareholders who have supported our decision by voting in favor and our decision of sale of Bus Operations to the promoter entity. In Goods Transport business, we are taking many key steps to expand our business at unparalleled growth. The key steps mainly consist of expansion in branch network, addition of new customers, increase in infrastructure backup by increasing in our own fleet, enhancements in this space in the transshipment hubs and branches, route optimization in line with the increase in tonnage, et cetera. And this is going to be continued even going forward.
As we envisaged, we are on a track to increase our volume growth by 20% plus in the current fiscal year as compared to the last year. During the quarter, we have handled total tonnage of around 966,000 tons, which is almost 7% more than the previous quarter and 14% more than the same quarter of the last year. Further, in the current half year, we have handled totally around [ 1,858,000 tons ], [18,58,000] tons which is 27% more than the last year half H1. With this background, the total revenue of the company reached to INR 733 crores in the current quarter, which is again the highest ever revenue per quarter as compared to the previous quarters, which has resulted into year-on-year growth of 15% and quarterly basis, the growth is around 2%. The major contribution to the revenue is coming from our Goods Transport segment and the revenue from this segment reached to INR 650 crores in the current quarter. This has resulted into 14% year-on-year growth and 7% quarter-on-quarter growth. The growth in this segment is mainly from the increase in volumes without increasing in freight rates.
Apart from the better economic conditions and festival seasons in the current quarter, the increase in tonnage in Goods Transport segment is also due to expansion in network by the company. During the quarter, we have opened around 29 additional branches. And from April '21, we have opened totally around 188 branches. These branches have been contributed around 8% tonnage which is additional tonnage to the company. As we always mention that our industry comprises of many of or majority of the small fleet and unorganized operators. To curb on the evasion of the tax, which were supported by the unorganized operators in India, the government has modified the ease of regulations.
From April 2022 onwards, for the business entities who are doing the business INR 10 crores -- and INR 20 crores and above compulsorily they have to generate a e-invoice. The same limit has been reduced to INR 10 crores from 1st October 2022. This is further going to support us because of the increase in the compliances. We hope that the tax base by the government clearly indicates the business transaction needs to be done in a complied and organized way rather than the non-complied manner, which were being supported by the unorganized transporters by transportation of the goods. Due to which we are acknowledging from the market that many of the commodities transportation, which used to be transported only by the unorganized operators think that are gradually shifting to us.
To name a few of our products, let's say coconut product, and leather products, the Arabian nut or supari products, et cetera. On account of shift from unorganized operators and the expansion in our network, the base of the customers has been enhanced to 7 lakh customers, as against 4 lakh customer base prior to COVID. When it comes to the profitability analysis during the quarter, the EBITDA of the Goods Transport segment reached to INR 101 crores which is around 8% lesser than the same quarter of the last year and increased by 1.4% as compared to the previous quarter.
The EBITDA margin of Goods Transport segment in the current quarter is 15.56% which has reduced from 19% as compared to the same quarter of the last year and sequential basis, this has reduced [ 16.38%]. The detailed profitability analysis along with the reasons have been provided in Page #10 and 11 of the presentation.
Just to brief some of the reasons behind it, if you see the year-on-year decline in EBITDA is mainly on account of increasing lorry hire charges as a percentage to the revenue. This cost has increased from 7.25% to 10.16%. The increase in cost is mainly due to sudden surge in festive bookings during the fag end of current quarter, especially from Surat and Ahmedabad market. And to meet this requirement, we force to engage hired vehicles since our own vehicles were deployed in other routes and geographies.
Further, the lorry hire charges per kilometer has also increased. The toll tariffs are impacted in the current quarter and the percentage to the revenue of this cost has increased from 6% to 7.33%. The increase in toll tariffs is due to increase in toll plazas, tolls charge rates and increase in kilometers covered by the own vehicles. The another increase impacted on the margin is on account of increase in the employee cost. It has increased from 13.76% to 14.91% due to annual increments effected in January 2022. The decline in some of the costs such as vehicles repairs and maintenance, diesel costs and other expenses were supported in increasing EBITDA margins. The diesel cost is under control in spite of no bulk purchase from the refinery and the cost per liter is less due to reduction of excise duty by the government on periodical basis. The procurement cost of diesel, it was around INR 90 earlier. Now in Q2 this has been -- it is almost same of around INR 90 only.
The quarter-on-quarter decline in EBITDA is mainly on account of increasing lorry hire charges as a percentage to the revenue. This cost is increased from 9.37% to 10.16%. The increase in cost is mainly due to sudden surge in festive bookings during the fag end of the current quarter, especially from Surat and Ahmedabad again. And Further, we forced to engage outside vehicle on account of this sudden surge in the demand.
Further, the vehicle repairs and maintenance charges on account of increase in the spare part rate has also increased. And the employee cost as a percentage to the revenue has been declined from 15% to 14.91%. On account of the increase in the volumes since the employee cost is fixed in nature, on account of surge in the revenues, the percentage to the revenue has come down.
Moreover, if you see the fuel cost, which is declined from 31% to 30% and this is mainly on account of declines in overall reduction in the procurement cost. In the quarter 1, the procurement cost of the fuel was around INR 93, which has been reduced to around INR 90.
I would like to quote another impact in the current quarter on account of sudden increase in the transit tonnage during the fag end of the quarter. Normally, this freight amount is around INR 45 crores to INR 50 crores at the end of each quarter. But in this quarter, this amount is increased to around INR 65 crores. Since these most of the tonnages are in transit, we have not accounted this tonnage as a revenue in the current quarter and further some of the expenses incurred on this transit tonnage has been additionally burdened on the P&L account. In our view, around 50 basis points of margins have been reduced on account of this.
The net profit of the company reached to INR 31 crores in the current quarter and decline in net profit from the run rate of INR 50 crores profit from the previous quarters is only on account of decrease in the Bus business. If you see the EBIT of Bus segment, it is around INR 17 crores, which has been reduced as compared to the first quarter. The reason is always if you see the Bus division the first quarter always you will see more demand and more profitability, whereas subsequent quarters, the margins of the Bus business will come down. Further, we are -- as we presented earlier also, the bus business is facing a lot of competitions, especially from the railways and even on the local air segment.
So on account of this, the overall -- there is a reduction in the demand. Our number of passengers have been traveling less in the quarter 2. And even realization per passenger has come down. On account of this, the bus business is impacted very badly in the current quarter. Further, there is a reduction of profit in around INR 3 crores to INR 4 crores on account of the windmill transactions. The windmill transactions have affected from 1st July to 1st July, and the profitability of other spend -- sorry, the August and September profitability have been -- have not been considered in the current quarter. Because of that, the profitability is reduced by around INR 4 crores to INR 5 crores in the current quarter. So on account of these 2 impacts, the overall profitability has come down. But in terms of Goods Transportation business, it has maintained EBITDA and EBIT level profit.
Other things are just I want to highlight about the Goods Transport vehicles. We almost -- we have put around 560 vehicles in the current half year. And as we committed the CapEx plan, we are on track and the rest of the vehicles are going to be added in the coming 1 year period. By September '23, definitely, this order is going to be completed. And another thing is about the net debt, which has increased from INR 130 crores to [ INR 164 ] crores. Inspite of increasing in the CapEx to the tune of around [ INR 170 ] crores in the first half year.
And as we disclose the bus transaction is going to be consummated in the quarter 3. And because of these transactions, the company is going to realize around INR 190 crores additional cash flows, the net of taxes. And this entire cash flows are going to be used for retirement of the debts. So on account of this, there will be savings in the interest by almost INR 3 crores to INR 4 crores in the quarter. So overall, on a future period, definitely, we are expecting that the tonnage will be growing in the range of around 20% on a year-on-year basis. And further, the profitability will be maintained -- at EBITDA level we are going to maintain at the range of around 16%. And at a PAT level, the reduction on debt is going to be supportive for us to increase at a PAT margins.
With this, actually I conclude my initial remarks. Now I request participants to ask questions.
[Operator Instructions] We have the first question from the line of Amit Dixit from ICICI Securities.
I have 2 questions. The first one is that you mentioned in your opening remarks that there was services provided due to sudden surge in festive bookings. However, the corresponding revenue was not so. Is it possible to quantify that revenue? And will it come in third quarter? And if so, what could be your margin -- EBITDA margin for rest of the year? That is the first question.
Yes. In the normal period of operations or even in the normal festive seasons, which are spread in months, this transit price will be in the range of around INR 45 crores to INR 45 crores value. But in this quarter, what happened, this amount has been reached to around INR 65 crores.
And this entire INR 65 crores has not been booked, is that what you're trying to say in the quarter?
Yes. This INR 65 crores in the transit spirit is not booked as a revenue in this quarter. And apart from that, what happens, there are certain expenses, which are incurred by the company.
Say for example, if the material is booked from Delhi, the booking office expenses have been increased, the booking loading and unloading charges have been increased. If it reaches to the transshipment hub, again transhipment costs have been increased -- incurred. And all these expenses have been already charged to the P&L account.
See in our estimate, if it would have a normal tonnage -- transit tonnage, the profitability would have been improved by around 50 basis points in the current quarter.
Okay. That's good. The second question is essentially if you look at the revenue growth in this quarter Y-o-Y it has been meeting volume less there [indiscernible]. And we have seen cost increasing. So is there any chance of passing the cost to the customer through price hikes?
Yes. Basically, see we are in a expansion mode as of today, and we are more concentrated to increase the volumes. Because of that reasons, we have not taken a call on the increase in the freight rates. And since we are maintaining the EBITDA level at around 16%, we want to continue this strategy even going forward.
If the increase in costs are beyond this level. Say if sudden increase in the fuel rates or something like that, which are beyond our control or which is -- we are going to -- impact on our EBITDA margins then we will think about the increase in the freight rates. Otherwise, we want to continue the same strategy, and we want to acquire more -- more and more number of customers and more and more number of the sectors which were in the hands of the unorganized players till date.
So what is the threshold profitability level that you're considering beyond which you would consider price hike?
Yes. EBITDA margins, see, our strategy is to maintain at around 16%. And see if it is below around 15% or so, then definitely, we will think about the increase in the rate.
We have the next question from the line of Rakesh from HDFC Mutual Fund.
Just wanted to probe a little bit more on the margins. If I look at your margins, forgetting about the first half of this year, you have been in the range of about 19% as 20%, 21% in the Goods segment margins for almost 7, 8 quarters in the past. And now you're talking about 16% margins. So just wondering that even with the higher volumes, why shouldn't our margins be going back to previous level? What explains the difference between 19% margin fee by growing versus 16% you're guiding now?
Yes. Basically, what happened since this 18%, 19% or even up to 20% EBITDA margins we reached in last year quarter 2, 3 and 4. But subsequently, what happened the diesel cost has been tremendously increased. But in spite of that actually we maintained our freight rate. And apart from that, there are increase in other expense also. If you see the toll charges, it has increased by almost around 1% to 2% to the revenue, only on account of number of toll plazas they have been increased, the toll rates have been increased.
And if you see the other cost, the lorry hire cost, a sudden increase on account of the festive season. But even the employee cost have been increased on account of increment which have been affected from April 2022. Since that 19%, 20%, which were there for the 3 quarters, but it is not a sustainable for going forward or even for a longer period. And since our focus has been shifted more towards acquisition of the new customers and new geography, new market, we want to grow on our top line with a maintenance of EBITDA level at around 16%. That's what the strategy has been fixed internally.
Sunil, I wanted to follow up on the same. Should we take that the -- during those 6, 7 quarters, the competitive intensity because of the COVID was behind and therefore you could charge higher margins, and now again, the competitive intensity is higher and to grow volumes, you need to give up those margins. Is that the way to think about it? Or is there any other way to think about it? Because you might not be taking a price hike. Does it mean the customers would remain sticky and you will have any opportunity to increase price hike in future as and when you get an opportunity?
No, basically, see since we are expanding in the new geography, we want to retain the price. And moreover, once the volumes grows at the expected level say around 20%, 25%. Definitely, we'll have operational leverage. And again, around 1% or 2% margin expansion is possible at that level. But this is going to take its own time. Until we reach at least around 1 or 2 years, around 20% growth, that possibility, we cannot see. And once continuously, we grow at a range of around say 20%, then going forward, then we'll have operational leverage. At that level, around 1% or 2% increase in EBITDA margin is possible.
Understood, sir. So one last question. Are you undercutting prices relative to your competition as and when you're expanding in the new geographies? Or you are at parity? Is there a large difference between your prices and the competition prices? If you can help us understand that.
No. Basically, in the new geography considering our the service strength, we are offering the competitors rate to the customers.
We have the next question from the line of Dhaval Shah from Girik Capital.
Yes, sir, just continuing with the last participant. So you mentioned in the new geography, you are offering competitive rates or the same rate to the competition. I didn't hear it correctly.
No, competitors rate. Same rate of the competitors what they're offering.
Offering the same rate. Okay. So now this -- focusing on volume growth. So in which geographies have you not taken the price increase. And by doing that, how has your rate card versus the unorganized sector narrowed?
No. Our rate card not narrow than the unorganized players Especially, in the comply transactions. See across the board we have not taken any freight rate increase. Either it may be new geography or even in the existing geographies. Since our thought process is to increase the volumes. When it comes to unorganized players, as even earlier I used to say, for the comply transactions, yes, definitely, they will prefer a lesser than our rate. But when it comes to non-comply transaction, they are -- they earn much of a premium rate. There, actually, we cannot compete this time, and we will not do that business.
Understood. Understood. Sir, now on the volume growth, so compared to the last June quarter, we would have gone into our newer geography where the distance travel by the truck would be higher. So your average realization -- so if -- average realization per ton per kilometer also would be higher. Now would that mean your revenue growth should be higher than the volume growth? Is my understanding correct? Should that be the way to look at it?
No. The realization per ton is a constant at around INR 6,700 per ton. The reason is, again, there is a growth in the existing market also. If you see the contribution from the new branches or geographies which is around 8% of the tonnage, additional tonnage we got from the last 1 year. But that itself will not change the overall realization rate. Since there is a tonnage increase in the existing market also, the overall realization per ton we are maintaining at around INR 6,700.
Okay, fine. And now about this debt on the book, and so by when can we see this transaction getting done and the debt on the books reaping the entire debt?
As I said, the bus transaction is going to fetch around INR 190 crores clear net cash inflow to the company. And we are planning to consume it this transaction -- this -- in the current quarter, the quarter 3 of this financial year. So definitely once this amount came into the company, then again our financial position will be substantially improved.
And apart from that, our focus will be on the main on the Goods Transport segment. And on the interest side things we are going to repay this debt entirely. So we are going to become a debt-free company once this transaction has been completed. And apart from that, every quarter, our savings will be in the range of around INR 3 crores to INR 4 crores. So that will directly add to our net profit.
Yes. So in this quarter also, you have this in the interest component, you have this -- Ind AS adjustment on that?
No. The Ind AS is going to continue even post the bus transaction. But the debt is going to reduce. And whatever interest related to this debt is going to come down. It will be zero.
Okay. Okay. So Ind AS component out of INR 15 crores will be how much? INR 6 crores, INR 7 crores?
Yes. Out of INR 15 crores in a quarter, the Ind AS component is around INR 10 crores -- INR 10 crores, INR 11 crores.
INR 10 crores, INR 11 crores? Okay. Okay. So your actual interest payout is INR 4 crores?
Yes.
Okay. And this will -- this is what saving you will have.
Yes.
We have the next question from the line of Mukesh Saraf from Spark Capital.
On the presentation, you have mentioned about 8% of your total tonnage in the second quarter has come from the new branch additions that you have done last year and first half this year. So that means, I mean, organically, it's been a lower growth, I mean 4%, 5% growth. But just trying to understand how much more can branch network, first of all, expand. I think they've added less than 100 branches -- just about 100 branches this year first half. So how are we looking at this branch expansion? And secondly...
We are in the planning -- sorry?
And secondly, because of this new branch addition in newer geographies, how is that the lead distances, et cetera, may be higher and so the realization per ton et cetera how can that move. Because you had a significantly higher exposure to the West and South. But now that you're expanding, how will that change our numbers?
Yes. About the new branches, we are having a plan to open around 30 to 40 branches every quarter. And this will continue at least for next 2 to 3 years. So wherever potential areas are there definitely, we are planning to open new branches. And these are going to continue. And apart from that, when it comes to realization per ton, yes, as you said, since the lead distance is increasing. But overall contribution since it is in the range -- it will be in the range of around 8% to 10%. The impact of realization per ton will not be there. And going forward, once the new branches will be in the range of around, say, 250, 300 branches, then definitely the lead distance will be substantial. And at that moment, definitely we can say some improvement in the realization per ton.
Right, right. Okay. So you continue to expect only 8% to 10% kind of volume growth because of this branch expansion right now? It cannot become -- so it cannot be significantly higher?
Yes. Once the numbers further increase and moreover, what will happen since these branches are open very nearby -- near future. See what is happening, we have to spend some more time. See at least these branches has to require around 1 or 2 years to give substantial growth in the tonnage.
Now what is happening as a benchmark, we are having, at least these branches have to contribute 100 tons per month and these branches to reach a breakeven. And branches are contributing 100 tons by -- within a period of around 2 to 3 months and reaching the breakeven. To add to the overall profitability and growth in the tonnage at least those branches are required at least around 2 to 3 years. At that moment, there will be considerable jump in the tonnage contribution from these new branches.
That's helpful, sir. And...
Just I want to tell you. So even earlier, I used to say the new branches, there was the contribution where hardly around 2% and 5% in the earlier quarter. Now we reached to 8%. And in the subsequent quarters again this percentage is going to be increased.
Right. Right. Got that, sir. Secondly, in relation to this, these businesses going out, the bus business as well as the power business. Is there any possible reduction in the unallocable expenses at the corporate level, will there be some employees that would move out or maybe some rent exit that could come off? Because we do have INR 8 crores to INR 9 crores of quarterly unallocable expenses. So just trying to understand, is there some slack there that we could kind of...
Yes, proportionately that expense is going to come down. Even for bus segment, see that total expenditure component is in the range of around 12% to 15%. To that extent, those expenses are going to be reduced. And moreover, another thing. Since we are scrapping the vehicles, even on the scrappage policy, whatever it is going to effect from FY '23. Some of this realization of scrappages are going to support for margin expansion. Especially this will be treated as these other income, and that may support in margin expansion in next year.
Right. Right. Got that. And is there -- on the employee cost, is there an expected increase in minimum wages by the Karnataka state government or say any other state that you're present in? Is there -- reading that there could be a possibility of a very high kind of jump in minimum wages there?
So currently when it comes to the minimum anyway our employees are earning more than the minimum wages. So see, currently, the minimum wages is around INR 11,000 to INR 12,000 in different states. In Karnataka, it is around INR 12,000 per month. But most of our drivers and other people are earning more than this amount. Their earning -- average earning by the drivers is the range of around 27-plus salary or earnings per month. So once the minimum is revised accordingly the salary structure of the drivers will be changed. But overall, there will not be an impact on the company. Only if allocated value -- operational cost will change....
Okay. Okay. Got that. And just one very last one, sir, we're seeing your lease liability.
[Operator Instructions] We have the next question from the line of Vikram Suryavanshi from PhillipCapital.
Basically, I just want outlook on this news of bio-diesel we used to have very actively earlier. How is the current situation or outlook going by for use of this bio diesel opportunity? And the second question is that you have shared this probably higher as a percentage of sales. But can you give the outside basis on the kilometers percentage like to just to get an idea?
Yes. See one is about the bio fuel in near future, we are not having a visibility of increasing bio diesel. But in some of the locations, we started in the current quarter. But it is very, very small quantity as of now. And second thing about the fuel is, now entire fuel is consummating through the retail funds. Even the bulk purchase is ruled out because of the wholesale price is increased by the government.
So once these prices are going to be matched, and once these are going to get a benefit to us, definitely, we are the first people to start usage of the bio diesel. And the second thing about the highest kilometers what you said, yes, we will give that figure to you. If there is a cost increase of around 2% in the lorry hire charges per kilometer on a quarter-on-quarter basis. If you see the cost per kilometer year-on-year, it has increased by around 17%. And on an overall basis, the kilometers, the lorry hire charges we have incurred in the current quarter around INR 57 crores as compared to the earlier around INR 66 crores. And the number of kilometers in the current quarter is around [ 56,91,000] which are contributed by the higher vehicle kilometer in the quarter 1. And quarter 2, that there has been increased to around [ 65,28,000] kilometer. Whereas, last year, the same kilometers were around [ 40,39,000 kilometers ].
We have the next question from the line of Shrinidhi from HSBC. :p id="306336656" name="Shrinidhi Karlekar" type="A" /> Sir, first question on also revenue growth outlook, more importantly, volume growth outlook as we go into H2. I know you guided for 20%. I just wanted to know how has been the lower threshold for invoicing that is starting to kick in from 1st October, resulting in increased inquiries for you?
Yes. Definitely there are -- see we monitor based on the product price, just -- I mentioned some of the products which were completely in the hands of anonymized people. Those products are shifting to us.
And in terms of number of customers, there is a group of people. See 1 coconut product in 1 particular market is -- that entire market is going to see to us in that way.
You're equipped of the number of customers based on the product-wise, there are a lot of things are, and we are doing -- and there is substantial increase in the destinations of these products. So that's the reason, whatever government is going to take steps. Now we invested INR 20 crores to at least reduce to INR 10 crores. And we're expecting that all GST-registered people are going to generate an invoice and that policy may come soon. So once it happens, even the people are having a turnover of around INR 40,00,000, INR 50,00,000 turnover, they are liable to generate an invoice. In that scenario, definitely, it is going to support the slot this year or next year.
Yes. And I'm wondering, is this incremental revenue growth that you are seeing because of this normalization? Is it a similar margin business? Or it is coming at a lower margin?
Yes, definitely, it is a similar margin business. And because most of these retail rates, we are rupees-based company. We do not have contracts with these customers. So this is just always we used to highlight about this paid and to-pay customer. So most of these customers come under these categories, paid or to-pay, which is almost 70% of our business as of today. For these customers, we do not have a contract. Those customers have to follow the rate chart issued by the company.
Great. And sir coming back to a question...
New customers in this category, obviously, they have to book as per the company's rate cuts.
Right. Understood, sir. And coming back to your margin guidance, which you said that is we are expecting about 16% kind of margin. Sir, if you look at this quarter margin, you did an almost 16% margin and this quarter had several one-off kind of things. So wondering if those one-offs kind of normalize, shouldn't your margin go back to 17%, 18% kind of level as we go into second half?
There is a possibility of around seeing us around 1% or so because these areas are going to come down and even the transit tonnage, what we are talking, that is -- that may even fit in the next quarter. But the stand-still around 18%, what we are talking, definitely isn't going to take the time. So once our -- the strategy of volume increase, just continues to increase around 28% in the next 2 to 3 years. So for that definitely, we can look margin in the rate of just around 18%.
Okay, sir. And last one, sir, a bookkeeping question. Would it be possible to tell us how much was the total tonnage you did in full financial year last year?
Yes, last year, I said half yearly, we did this.
For the full year, sir, I wanted.
Full year, I'll surely apprise you, okay? Half-year information is available as of today.
Yes. INR 18,00,000 something you said, right?
Yes. INR 18,00,000, to 3,000 tons. And the full year basis, we did around 36 -- 32,00,000 tons.
32,00,000?
Anyway, I will share you, apprise you on that, okay?
We have the next question from the line of Vikash Khatri from Aviral Consulting.
So my question is the kilometer of running you have given last year, 40,00,000 kilometer to this year, 66,00,000 kilometer, increase of almost 65%. Is it due to having any relation with the retirement of your own fleet that market engagement has increased that's why your lorry cost is going up? And if so, then what's the outlook in the coming days in terms of your old vehicle retirement to what, say, the lorry had? And the second question is that you are adding new segments like you gave, coconut, leather, supari. What's the impact on the top 4 contributing categories of the volume like VRL is known for that clause. So how that is moving up and how it will be in coming date. And the third question is related to your existing this business. So are there any plan to enter in related business like rail track?
Yes. Just to answer about the lorry, it's kilometers, this is -- the kilometers having increased, it's mainly on account of certain certainties, volumes, especially in Surat, Ahmedabad and some of the locations in Punjab, the Ambala and other places.
But this is one-off increase in the kilometers. And going forward, definitely, it'll not be this kind of a percentage. Overall, it'll be in the range of around 7% to 8%, not in the range of around 10%, 11% in terms of kilometers. That's one. And second thing…
What is your own vehicle versus outsourced vehicle ratio?
Yes. So your next question is related to the Wind Power Project. The Wind Power Project, yes. It is a one-time investment we did long back in the financial year 2006, '07, only for the tax planning purposes. And since we got the complete benefit on the tax side and even on the return on this project, so we got a good offer and we followed that project.
And in the near future, we are looking -- we are not looking for any such kind of investment and not focus will be only on the good transport business going forward. When it comes to product wise, yes, the clause, so we are doing around 18% to 19% of the overall tonnage and agriculture commodities in the range of 7% to 8%.
And when it comes to the food and FMCG products, we are doing around 9%. And the electronic goods, we are doing around 7%. And the metals hybrid are in the range of 8%. So the major commodities are the clot, and rest of all in the range of around 6% to 8% to the overall tonnage contribution.
So we are not depending on any particular success. And even if you see the customer base, we are having a 7,00,000-plus customers. And the top customer contribution even is not more than 1% to the revenue. That's how the spread in terms of the customers or even in terms of the product.
We have the next question from the line of Sanjaya Satapathy from Ampersand Capital.
Sir, my question is that you're trying to get -- gain market share through a bit of aggressive pricing strategy. So is that something which is going to be negative for you in the long term because you may get -- like, to get into parcel business or something?
No, that is a healthy growth. If you see many people are trying to encourage -- by healthy losses, they are incurring and growing in the market. But our strategy is totally different. We want to earn a minimum operating margin and growth. So our growth, what we are saying is it is completely healthy growth. It is not at all risk this for us.
Understood. And sir, last question is that the promoters are going to buy out this bus business. So how are they going to fund that acquisition? Because there are some speculation that they will sell VRL shares in the market to raise fund.
We are planning internally among the promoters. And definitely, it is their plan. We don't want to comment on that.
Okay. Okay. Okay. But when all these transactions likely to get over, the whole uncertainty will go away, is there any idea?
Yes. In quarter 3, we want to complete this transaction because we received the shareholder approval by 28 October and definitely, we are going to complete this transaction by the end of this quarter.
We have the next question from the line of Ash Shah from Elara Capital.
I just wanted to confirm 1 thing. Earlier, you mentioned that 75% of the customers are to-pay customers, right? If I'm not mistaken.
Yes. Paid and to-pay.
Okay. Paid and to-pay.
Yes.
And also 25% will be contact business.
Yes.
And also one more thing, so since the bus segment is going to be covered out into a new entity, so the management bandwidth will be divided between the 2. So how are we planning to deal on with the situation, if there is any?
Yes, even currently, see that bus business is completely renewed by the independent professional management. There is a technical team who are running independently. And apart from that, the operational person is from the inception of the bus segment. Actually, he is leading that business and that person is going to continue as head of this operation.
And about the management rule is, especially on the policy metric, definitely, even currently, their involvement, even with these companies, since that segment is running. And going forward also, whatever policy level decisions or policy level participations are required definitely, there is no involvement. But on a day-to-day operations level, there is an independent team who are going to handle it. And currently, that's how the structure is, and even going forward, that's how the structure is going to continue.
We have the next question from the line of Suraj Nawandhar from Sampada Investments.
So on the time line, you received over 1,600 trucks, actually, as [ relation ] order with Tata and Ashok Leyland?
Sir, will you repeat your question, please?
As said earlier placed, 2 to 3 quarters ago, we had placed a big order with Ashok Leyland and Tata Motors, of 1,400 or 1,600 trucks, but please correct me if I'm wrong. So what is the time line to receive all those trucks? And then…
Yes. As we informed earlier, sorry?
Sorry. Come again, sir?
As we informed earlier, this order is going to complete by September 2023 and we are on a track. So by September '23, all these vehicles will be purchased.
Okay. So is it going to be a state-wide delivery like, 18 months or give us, like, 100 plus or anything, like, they will give us everything at one go?
No, no, no. See, currently, in the quarter 1, quarter 2, we added substantially good number, almost around 600 vehicles in the first half year. This kind of acquisition is going to continue. See, another 600 vehicles are going to be added in next half year. So by that time, around 1,200 vehicles will be added, and another 400 vehicles will remain. That will be added by September '23.
So sir, can we expect this then, having established, to go down substantially in the next 6 to 8 months once we really -- we see the delay of all the trucks?
I think they are growing on a volume side also. The substantial reduction will not be there. But at least, there will be reduction of around 2% to 3% on overall kilometers.
Okay. And sir, if I understand correctly, textile contributes the largest percentage share in volume day-to-day, right?
Yes. It's around -- 80% to 90% of the volumes are coming from textile.
So how will a slowdown in textile be affecting us, because we are seeing a really bad recession, global demand from many companies, so how is it affecting us?
No, really, if it is -- textile is -- was contributed around 14% to 15% to the volume. Now that the contribution has increased to around 18% to 19%. The reason is earlier, as we mentioned, we were not having a proper infrastructure fitly suited, and we were not having corporate branch network in the untapped market. Now what is happening, from the last 2 years, except this COVID impact, we are having the proper infrastructure at Surat so that we can book the cloth material from Surat to across India.
Earlier, we used to do only from Surat to South predominately. Now that has been expanded from Surat to South, Surat to East, even Surat to North. That's how the contribution from the overall textile is increasing. So we are not depending on a few customers over there, which are going to impact on our total volumes. We are depending on the total market and a lot of new customers have been added in this segment.
And sir, are we -- have we seen the numbers, like an upfront cap, like let say, 25% of our volumes, let's say, actually reach 35% of the volumes, you will stop taking any more volumes from textile, because then our dependence on 1 sector will increase. So have we put any cap on any particular sector?
No, we do not have any cap or any minimum deployment of each segment. See, when it goes to our branches, we handle all kind of commodities. And regardless and liquid product, we are handling all commodities. That's why we are not depending on any sectors. And if you see the next sector who is contributing -- whose contribution is the maximum, which is in the range around 58%, that's how it is widely spread. We are not depending on any customer. We are not depending on any particular product. So our volumes spread across the industry and spread across the customers. Even in slowdown, some of the products are not going to impact on -- our overall volumes.
We have the next question from the line of Krupashankar NJ from Spark Capital Advisors.
I have a question relating to your branch addition. If I'm not mistaken, you said about 30 to 50 branches added per quarter. So are you seeing that these branches will get added more in geographies where -- because typically, like, for example, in last year, you added around 44% of your new branches in the Northern and the Eastern region. So is there focus on expanding more branches to go there? Or is it good that it's really focused on South and West where they're relatively stronger?
No, no. More focus is on Eastern and North market and even the Northeast market. So most of our new branches will be added in those areas. See South and Western department, whatever requirement is there, only on those relations we are going to add a branch. But the expansion model, what we are talking, that is only in the Eastern, North and Northeastern geography.
Understood. So the point you were saying earlier that around 100 tons per month is acquired for breakeven is achieved even in these geographies, more than -- that you each mentioned?
Yes. This 100 tons per month requirement is for each and every new branch in respect of the geography.
What I meant was it was taking over 2 to 3 months to breakeven. Is that the case with new branches opened in North and East as well right now?
Yes. The new branches where we are opening, these branches are taking around 2 to 3 months to reach 100 tons. And by that time, it will reach breakeven. Where expenditure incurred over 1 or 2 months, definitely it is going on the P&L. And growth-wise, the profitability contribution and growth in the turnover will be more realized after 1, 1.5 years. That time, actually, the real contribution from these branches, the profitability contribution will be emerged.
Great, sir. And then related question is -- so what I can see in your balance sheet is that these lease liability proportion has gone up quite substantially. That's finally really because of branch addition? Or is there any hubs also which we have renewed relating to higher cost, which is translating to this higher new entity?
No, along with the branch expansion we had led, even space expansion is required in some of the key transhipment hubs, so that's how actually we carried out in the last 6 months. And for all these, actually, we have entered into new lease agreements. So because of that, the fee liability is increased.
How many hubs have you changed this, sir?
Yes, around 10 to 12 locations in a major area we have changed. But even at a small scale entity, almost around 20 we have processed. And the major changes happened in around 50 to 60 locations in the first half year.
Understood. Understood.
Visibility in some of the places like Pune, Ahmedabad, Raipur, Salem, Chennai, Kanpur, Delhi, Kolkata, Pune, Bharta, Guwahati, Siliguri, [ Katihar ]. In all these, actually, places, we have announced our state, and a lot have volunteered coming in those areas.
And one more, just, I want to mention about space expansion. Always, we will have a vision that even after 3, 4 years, this should not be changed in the space. If there is a requirement of 50,000 square feet, we initially go for a 1,00,000 square foot. If requirement is 1,00,000 square foot. If requirement is 1,00,000 square feet, then we go for 1,50,000 square feet.
We always keep a vision that in the next 4, 5 years, also the space should not be changed. Because of that vision, initially, the calculation of it will be around 50%, 60%. Gradually, the calculation will increase around 70%, 80%. So because of this reason also, there'll be some burden of expenses in the P&L.
Understood. Understood. Now all this benefit of operating like this will be reflected after a year or 2 when…
Yes. Definitely 1 year, 1.5 years, then definitely, the clear visibility come and definitely the margin expansion is possible.
We have the next question from the line of Alok Deshpande from Edelweiss Securities.
Sir, you mentioned about the time line of this new fleet addition that is going to come. You added about 500 so far in H1, another 500, 600 in the next -- this second half this year. So as this addition happens, do you see a possibility until you sort of settle down with all these new additions that there can be some case of underutilization of capacity while until probably the second half of next year? Or do you think that utilizations are up and down even for some of these new additions?
Since the vehicle generally is always based on our requirements, from the date of registration itself, these are -- these vehicles are going to be utilized. So to that, depending on the outside vehicle will come down and the regulation of all the vehicles. This will -- in our circulation will be maintained even for the new vehicles.
Sir, second question on the sale of the bus operation business. Now given or assuming this will be completed this quarter, so should one assume that starting Q4 of this year, that segment will not reflect in your book of accounts? Or will that be next year?
Yes, once this transaction is consummated in this purpose, and from Q4 onwards, those numbers will not be there. It'll be a discontinued business. And similarly, if you see the wind power project now, so this project has been -- the effective date was around 1st August. The rest in September revenue and profitability have not been accounted in the current quarter. The same similar numbers will appear in the next quarter now looking forward.
We have a next follow-up question from the line of Dhaval Shah from Girik Capital.
Yes. Now given we are expanding so aggressively, will there be a higher increase in the employee cost in terms of more incentives? You'll need more manpower. We are also expanding the -- maybe creating more senior people, because the expansion is happening at the rate which you have not seen in the past. So will there be a substantial change in the employee count, the kind of employees we have, the employee mix?
Yes. And then when we increase the number of branches, definitely the number of employees are going to be increased. And we do a lot of these -- we are doing internal promotion to the people, giving promotion to the people who are going to handle these new geographies. We are sending some of the expert people who are already in the company, who are very loyal to the company during the years, the lot of it, with all these promotions.
To that extent, definitely the absolute amount of the salary is going to increase. But since the volume growth are better than -- at a -- growing at around 14%, 15%, even 20%, the percentage of salary, our employee cost percentage to the revenue will come down. But in absolute terms, yes definitely, there is some incremental cost with that.
Yes. So our employee cost has been around, say, I mean if you just -- this run rate of the current quarter will be INR 430 crores, INR 440 crores, like, INR 430 crores around. Now this absolute number will grow at what rate over the next 3-year period?
Now if you see the first quarter…
We were INR 106 cores in first quarter, second quarter INR 111.
Yes. So it was around INR 106 crores, now in second quarter, it is similar, some around INR 4 crores, INR 5 crores incremental costs will be there every quarter.
Every quarter, INR 4 crores, INR 5 crores? So okay. So for the next 2 years, every quarter-on-quarter, you will see INR 4 crores, INR 5 crores additional employee cost is what you mean?
Yes. In the normal scenario, unless we do the incremental letter, a Board renewal, to all employees.
But an increment will come, right? Increment is a part of...
It is not an immediate thought process, because we have already did it in FY '22. This is not the immediate thought process. But until that time, definitely around INR 4 crores, INR 5 crores on every quarter, it is going to increase. Because one is the new branches over there, we are appointing the new people and we need new support to staff also.
And a lot of this internal increments to the people who are shifting to the new geographies. All these expenses are continuous expenses we are doing. And the more focus is only to establish these branches and stabilize these branches and increase the volume. That is what the strategy is.
And this unallocable income and expense, how will that be after the sale of the bus transaction?
There will not be any unallocable. That impaired expenses will be treated as only go, stand for segment expenses. And moreover, some of the expenses are going to shift to even bus operations. So on a net basis, the unallocable around INR 4 crores to INR 5 crores. Expenses are going to be treated as GT segment expenses.
Okay. So our expenses record reported in the second quarter, INR 4 crores to INR 5 crores will be -- will become part of the GT segment.
Yes.
Okay. And the rest will go up?
This rest will go up. And even we have to address unallocable expenses, unallocable revenue also, right?
Yes. So revenue, how will that be?
After adjusting all revenue and expenses around INR 4 crores to INR 5 crores additional expenses will be there, unallocable expenses. That will be treated as the GT expenses.
So net, net signal. Okay.
Yes.
Okay. And how much is the gross debt right now on books and cash?
The cash is around INR 11 crores to INR 12 crores.
Okay. And gross debt?
And that will continue as it is.
Okay. So net is INR 169. Okay. Okay. Okay. So by 31st March, given the transaction happens as expected, there will be net cash comp, there will be 0?
Yes, we are expecting that. And we're, actually, where we'll see the capital also. But anyway, the internal accruals, they are going to support further and this fund is completely utilized for the repayment of debt. Again, there will be savings on the interest. The balance is still even more stronger and even on the leverage side, the company will become a debt-free company.
Yes. So how much CapEx is due for Q2, Q3? Sorry, Q3, Q4 of this year?
Yes, around -- average around INR 80 crores, INR 85 crores CapEx will be there. That's how it is even there in the Q1 and Q2. That will continue. And substantially, it is for the vehicle addition, the boost stands for the vehicle addition.
Okay. And the same figure say INR 160 crores, INR 170 crores, you'll be spending next year, FY '23?
Next half year. Yes. Next half year.
Sorry?
Next half year. This INR 170 crores has been already invested in first half year now.
Okay. And INR 18 crores is for…
So there is a similar investment in next 6 months until March '23, and again, further, there will be similar investments till September '23 on a half yearly basis. Post to that, again, we analyze how the requirement of the vehicles and again, we will derive our CapEx plan.
As the line of current participant has been disconnected, we move on to the next participant, and the question is from the line of Shrinidhi from HSBC. This is a follow-up question.
So just wondering, is the growth from corporate client is higher than your overall growth for the last 2 quarters? And is the profitability in corporate clients significantly lower than your overall profitability?
Proportionate growth will be there. This contribution will be there in around 20%, 25%, even going forward. Wherever we are entering into a new geography and one product, what we have -- I have mentioned, these are all the paid and to-pay customers.
Okay. And how is profitability in corporate customer lower than your overall profitability?
It is, again, similar profitability because the corporate client is our sure business and we can plan it properly. And moreover, some of the diesel explanation classes are there in the corporate client agreement. So prices are continuously revising in the corporate client, but that is not the case in paid and to-pay customers. So on an overall basis, even margin side, it'll be similar margin in our accounts customer as well as paid and to-pay.
[Operator Instructions] The next question is from the line Alok Deora from Motilal Oswal Finance.
Yes, sir. So most questions have been answered. Just want to understand, so as this CapEx progress, what's the -- how much would be the lorry hire percentage now going forward as a percentage of the total requirement? Because the CapEx we have done in 1, it's also now -- it's progressing at INR 80 crores, INR 85 crores per quarter. So this…
Yes, around 6% to 7% per kilometer we have to do it outside vehicle. The reason is in some of the rules, they will not be written lower and some of the local, from hub to spoke, actually, we are engaging the higher ratings. Those scenarios, we will continue. So overall, this is within the range of around 6% to 7% of the total kilometers from the outside, where it is. There will be certain demand on account of some of the festivals and all. To me, that one-sided demand, actually, we have to engage outside retails only.
Sir, we do not have anybody in the queue.
Yes. I wish to, again, give a closing comment. The management is highly focusing on the goods transfer segment, and there will be a lot of expansion in this segment going forward. Our focus is on more on a volume growth. And once volume growth are happening at the expected level, definitely, we can maintain EBITDA margins. And currently, our expected EBITDA margin is around 16% or so, and this may improve around 50 basis points or up to 100 basis points in the next quarter on account of some of the key increase in the expenses in the quarter 2, especially on the lower areas that is or even on the front of the nonrecognition of some of the revenues and incurring of expenses on unrecognized revenues. So going forward, I was focusing more on development and branch expansion and only on goods and food segment. Since we are having a proper infrastructure backup, we'll not face any threat of scarcity of the vehicles or other parameters in the industry. And apart from that, since our customer base is widely spread, we are not depending on any product given the slowdown in the economy or recession, if we are expecting, definitely, that is not going to impact directly on the company. So definitely, we are more focusing on the healthy growth, not just incur the losses and grow the business. We are growing healthy. That's what actually I want to give as closing remarks.
On behalf of Motilal Oswal Financial Services, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.