VRL Logistics Ltd
NSE:VRLLOG
Earnings Call Analysis
Q3-2024 Analysis
VRL Logistics Ltd
During the latest quarter, the company's revenue rose by approximately 8% to INR 740 crores, bolstered by an equivalent 8% increase in tonnage to 1,092,000 tonnes, thanks to a strategic expansion of the branch network. This growth was further supported by a customer shift from unorganized to organized operators due to heightened GST compliance. Unfortunately, the Southern states, a key market comprising 40-45% of total tonnage, experienced a reduction in demand for agro-related commodities due to poor monsoon, impacting overall figures. In contrast, textiles and cloth commodities saw a seasonal uplift, helping to sustain growth.
The company has faced rising cost pressures that have taken a toll on profitability. While revenue increased, the EBITDA margin declined from 15.71% to 13%, affected by elevated employee costs stemming from annual increments and an expanded workforce necessary for the additional 120 branches opened during the year. Fuel costs also rose, in line with an increase in kilometers covered by the fleet. Although there was a negligible decrease in average fuel procurement cost thanks to bulk buying, other operational expenses such as vehicle repairs, toll charges, and tire costs climbed owing to the aging fleet and increased usage. The company's EBITDA has constricted from INR 108 crores to INR 97 crores due to these factors.
Heavy investment in capital expenditures, particularly in relation to fleet expansion, combined with accounting changes brought about by Ind AS 116 regarding rental expenses for long-term leases, led to a spike in both depreciation and finance costs. The latter increased significantly as net debt escalated from INR 46 crores to INR 271 crores within a year. As a result, there was a pronounced drop in profit before tax (PBT) and profit after tax (PAT), with the PAT percentage to revenue plummeting from 5.5% to a mere 1.85%.
The company is cautious with its capital expenditure plans, calibrating investments in accordance with tonnage growth trends. After aggressively investing in the first half of the fiscal year, the CapEx was dialed back in light of decelerating tonnage growth in the third quarter. The company anticipates that their growth in tonnage may continue at the current rate of 10% in the near term. Given its strategic branch network expansion, this rate may accelerate further. They're planning to add 25 to 30 branches per quarter to tap into untapped markets, which should support sustained tonnage and revenue increases over time.
The company has guided that there will be a modest increase in CapEx for FY '24, projecting around INR 260 crores. For FY '25, they estimate a further increase to between INR 275 crores and INR 300 crores. EBITDA margins are expected to remain between 13% and 14% for the current year, with hopes of improvement in the following year contingent upon favorable changes in fuel rates. Management is also counting on a decline in fixed expenses as a percentage of revenue, following improved tonnage growth, to aid in margin improvement. They are actively addressing the imbalance between fixed costs and growth, with the expectation that rental and employee expenses will start to represent a decreasing fraction of revenue as tonnage scales up.
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Ladies and gentlemen, good day, and welcome to Q3 FY '24 Results Conference Call of VRL Logistics 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.
Good morning, everyone, and welcome to the Q3 FY '24 Earnings Conference Call of VRL Logistics. So we have with us today Mr. Sunil Nalavadi, the CFO of the company. So I would now hand over the call to Mr. Nalavadi to give opening remarks and discuss on the performance of the company, and then we can take up the Q&A session. Thank you, and over to you, sir.
Yes. Thank you, Mr. Alok Ji. Good morning to all participants. I'm Sunil Nalavadi, CFO of VRL Logistics Limited. I welcome all of you once again for the earnings conference call for the quarter 3 of financial '24. During the quarter, the revenues increased by around 8% from INR 686 crores to INR 740 crores. The increase in revenue is on account of growth in tonnage by almost 8%, and the tonnage increased from [ 1,047,000 ] tonnes to 1,092,000 tonnes in the quarter. The increase in tonnage is mainly on account of increase in branch network of the company. Year-on-year, we added 120 branches, and these branches have contributed around 3.33% to the total tonnage in quarter 3 FY '24. Our strategy of expansion of branch network is going to be continued and planning to add around 25 to 30 branches every quarter, especially in untapped market. Apart from the expansion in branch network, the increase in contribution from the existing customers also supporting for our growth Further, we are acknowledging that many of the customers are shifting from unorganized operators to organized operators on account of the increase in compliance under GST law. On the other side, due to poor monsoon spread in Southern states during the current year, we acknowledged lower demand in these states, mainly in agro-related commodities. The Southern region is the main market for our tonnage contribution, which is contributing almost around 40%, 45% to the total tonnage. The agro commodities contribution declined in the current quarter by 5%. So the textile and cloth commodities has been picked up in the current quarter on account of festive season and maintained the growth rate of 14%. However, for the 9 months period, the growth in close and textile materials reached to 3%, which is below the average growth rate in tonnage. During the quarter, the realization per tonne is maintained around INR 6,670 per tonne. Since the freight rates are directly linked with the retail fuel rates in India and fuel rates are constant, we are maintaining the same realization. The increase in other costs other than fuel has not passed on to the customers. And the same is impacting on the EBITDA margins in the current quarter. The EBITDA has decreased from INR 108 crores to INR 97 crores, and percentage to revenues decreased from 15.71% to 13%. The year-on-year EBITDA decreased due to increase in employee cost from INR 104 crores to INR 127 crores. And percentage to revenue increased from 15% to 17%. The increase in employee cost is mainly on account of annual increments, which are effective from September '23, and increase in employees from 20,300 people to 21,200 people due to addition of new branches. And also, we carried out some internal promotion to the better performing employees. The fuel cost has increased from INR 204 crores to INR 225 crores, and percentage to revenues increased from 29.7% to 30%. The fuel cost is increased on account of increase in kilometers covered by the old vehicles in the overall kilometers operated by the company. However, the average fuel procurement cost is reduced from INR 89 to -- INR 89.34 per liter in Q3 FY '23 to INR 88.83 per liter in Q3 FY '24. The bulk purchase of fuel from the refineries at a discounted prices increased from 14% to 22%. Similarly, the vehicle repairs and maintenance costs, toll charges, tire costs are increased due to addition of old vehicles and increase in kilometers operated by these vehicles. The increase in these costs has been compensated by a decrease in lorry hire charges by 2.86% to the revenue. The lorry hire charges have been reduced on account of low dependency on the hired vehicles in the current quarter. The toll charges further increased due to increase in toll plazas from 1204 to 1367 plazas, and also due to increase in toll rates and routes. And loading and unloading charges also increased on account of increase in rates, resulted into increase in variable costs and impacted on the EBITDA margins. The rent expenses, which is fixed in nature, is increased due to increase in number of branches and increase in space [indiscernible] branches and transshipments during the quarter. We increased the space in key locations considering our expected growth in tonnage for the subsequent period. The same is resulting into lower utilization of space in the current quarter and impacted on the EBITDA margin. The EBITDA of the Goods Transport segment is reduced by 4% from 9.57% to 5.41% on account of increase in depreciation. The depreciation and amortization cost is increased from INR 42 crores to INR 57 crores due to increase in CapEx and also increase in ROU as per Ind AS 116 on accounting of rental expenses for a long-term lease agreement entered by the company. The finance cost has increased from INR 15 crores to INR 21 crores, owing to increase in net debt from INR 46 crores as of December 31, 2022 to INR 271 crores as at December 31, 2023. And also increase in lease liability as per Ind AS 116 on accounting of rental expenses of long-term lease agreements, rentals and enhancement in branch and transshipment space. The decrease in EBITDA and decrease in EBIT resulted into decrease in PBT, and also same impacted on the profit after tax of the company. The PAT for the current quarter is around INR 14 crores, which has been reduced from around INR 38 crores, and percentage to revenue reduced from 5.5% to 1.85%. On a sequential basis, the revenue increased by around 3.32%. Again, the increase in revenue mainly contributed by the increase in tonnage. During the quarter, the realization per ton, again, it is maintained. The EBITDA has decreased by 1% in the current quarter on a sequential basis from INR 97 crores to INR 96 crores. And percentage to revenues also decreased slightly from 13.6% to 13%. The decrease in EBITDA margin is on account of increase in employee costs, which has increased from INR 118 crores to INR 127 crores, and percentage to revenue has increased from 16.5% to 17.23%. The increase in employee cost is due to annual increment effective from September '23. The remaining costs were compensated each other and not impacted much on EBITDA margin. The rent expenses as a percentage to revenue has decreased. However, the same is impacted on increase in depreciation and finance costs based on accounting under Ind AS 16. The EBIT margin also reduced in the current quarter from 6.38% to 5.41% on account of increase in depreciation from INR 52 crores to INR 57 crores owing to increase in CapEx and also due to increase in ROU as per Ind AS 116 on an accounting of rental expenses. The finance cost has increased from INR 21 crores to -- from INR 21 crores -- the finance cost has increased to INR 21 crores from INR 18 crores, owing to increase in lease liability as per Ind AS 116 on accounting of rental expenses of long-term lease agreements. However, the net debt is reduced from INR 280 crores to INR 271 crores. So decrease in again, EBITDA slightly. And again, the EBIT margins impacted on the slightly decrease in profit before tax and also same impacted on the reduction in profit after tax in the current quarter as compared to on sequential basis. During the quarter, we invested into capital expenditure of around INR 25 crores, predominantly for the purchase of additional vehicles. The CapEx is lower in the current quarter considering the lower growth in the tonnage. The net debt of the company reached to INR 271 crores from INR 280 crores as of 30th June 2023. Going forward, in the near term, our growth in tonnage may be in line with the current growth -- going forward, in the near term, our growth in tonnage may be in line with the current growth rate of around 10%. However, considering the network expansion, it may reach to much higher than the better growth rate as of today. And the realization improvement is possible only after the changes in fuel rates. Until that time increase in other costs will impact on the EBITDA margins. The rental and employee costs are fixed expenses. The impact of these expenses is much higher in the current quarter due to tonnage growth in not at expected level. And same expenses as a percentage to revenue will gradually decline [ at rates to ] growth in tonnage in the coming days, and it will support the increase in EBITDA margins to some extent. Please note that increase in depreciation and interest in the current quarter is fixed and periodical in nature. We are hoping that once the tonnage growth reaches better than the current level, these expenses as a percentage to the revenue will be reduced and which will support us to increase in EBIT and PBT margins going forward. With this, I conclude the initial remarks. Now may I request the participants to go for question-and-answer session. Thank you.
[Operator Instructions] The first question is from the line of Amit Dixit from ICICI Securities.
Yes. I have 2 questions. The first one is on the CapEx. So CapEx, if I look at the 9 months CapEx, it is quite low than what we were targeting at the beginning of the year. So what would be your CapEx target for FY '24? And whether there will be a spillover from FY '24 to FY '25 and hence, the target for FY '25 as well?
Yes. Basically, see, again, our CapEx plan always is in line with the tonnage growth. So if you see in quarter 1 and quarter 2, aggressively we invested into CapEx. Wherein in quarter 3, considering the tonnage growth, again we reduced. So we can timely adjust our CapEx. Even though there is a commitment with the OEMs, but this CapEx can be spread in subsequent period. So that's the reason always it is in line with the tonnage growth. If we are expecting around 15-plus growth in the tonnage, then definitely CapEx will be in that line because always whenever the CapEx will -- whenever the tonnage will increase to that extent, actually, we need to increase the CapEx because most of the tonnage we wish to cover through our own vehicles.
So what would be, sir, CapEx guidance for FY '24 and '25?
The guidance, it is around 15% more than the currently what we are investing. See, for 9 months, we invested INR 223 crores. And for next quarter, again, it will be in the range of around INR 25 crores to INR 30 crores. So on a full year basis, it will reach around INR 260 crores and -- for the current year. In addition to this INR 260 crores, so in FY '25 and -- '24, it would be around INR 260 crores, and '25 will be around INR 275 crores to INR 300 crores based on the current trend. Then if tonnage growth is beyond this limit, then definitely, it will be more amount.
Got it. Got it. Very clear, sir. The second question is, since you highlighted that there are several moving parts now with fixed cost getting higher because of the increments and all, and tonnage growth not moving as we expected initially. So what kind of EBITDA margin are we targeting in current year and FY '25?
Yes. For 9 months, say, our EBITDA margin, we reached around 14%. And in the next quarter, again, we are expecting around 13% to 14% EBITDA margin. On a full year basis, it will be around 13% to 14%.
And for next year, can we expect some improvement because of...
Yes, definitely -- just we are waiting for the changes the fuel rate. So until the election, it will continue at the current basis. [indiscernible], either increase or decrease, both aspects will support us. Because the moment it will decrease, see, we no need to pass on that entire benefit to the customer. That is point number one. Because even after -- from the last 1 year, actually, we have not changed the freight rates. Even in the case of decrease in the fuel rate, no need to pass on that benefit to customers. If it increases, since the gap of increase in sales, the freight rate is very low. So that immediately we can take an increase in the freight rate across all the segments. So in that case, definitely it will support for increase in our EBITDA margin. Just we are waiting for the changes in fuel rate.
And the next question is from the line of [ Manan Shah ] from [ Electrum PMS ].
So my question was what advantage do we see in being asset-owned rather than being asset-light? Correct me if I'm wrong, but wouldn't our margins be better if we go for an asset-light model?
No, it is not the case. Because all along, our strategy is to own the infrastructure and operate. So -- and during -- there has been many times actually, our margins were much, much higher than as compared to other operators. But during this time also what is happening in the last 1 year since we are unable to change the freight rate, that is impacting a little bit on the margin side. But if you see on the capital expenditure side, we are very much composed on the expenses, utilization of the assets, utilization of the infrastructure. See, those are not at all reasons for the impacting on the margins. The Impacting on the margin is mainly on account of the freight rates versus the increase in expenses. And most of the increase in expenses are related to, one is, some of the variable costs, like toll expenses and other charges. And the employee cost, again, there was a huge gap for employment -- increase in employee cost. So that actually be effective in September. And since it is fixed in nature, then gradually again, it will come down as a percentage to the revenue. And the depreciation and, again, finance costs are increasing because of the Ind AS accounting. We -- on a lease basis only, actually, we expanded many of the premises. So there, actually, what is happening, as per the Ind AS 116 accounting, most of the expenses are shifting, are accounting in the depreciation and finance cost. That's how the margins are impacted. But only of the [indiscernible] assets versus the margins, these are not directly we can compare.
Okay. But if we are asset-light, so we can pass all the fuel cost increase and everything to the customers, right?
No, just we cannot do that. Because, again, if it is asset-light, again, it will depend on third-party infrastructure, and how third-party will decide, the entire margins will depend on that. Here, what will happen, in our case, we have a control on asset. We are having a control on services. But the only thing we actually, since the fuel rate is concerned and most of the customers who're there referring to Ind AS, is always linked with the retail fuel rates. "If fuel rate is not increased, why you're increasing the freight rates." So convincing of increasing other expenses, which is very difficult in this industry.
And the next question is from the line of Krupashankar from Avendus Spark.
The first question is on the entire pricing philosophy, which we have. So given that there have been substantial price increase, then we generally take price hikes, annual price hikes in the month of March, while all the escalations happened towards in the third quarter with respect to employee and so on. Is there a way in which we can sink it with these escalations itself rather than waiting on absorbing the cost over 5, 6 months given that freight rates is more or less not in our control? So any thought process? And the industry freight rates is not under our control. So any thought process behind the pricing philosophy changes if the management is thinking anything about it?
Basically, see, earlier, the fuel rate used to change around 2 to 3x in a year. Just I'm going back to around 4, 5 years back. During that time what used to happened, so once in a year from the April itself, every year we used to release our change in the freight rate. That was the concept. Now gradually what happened, the fuel rates started changing on a daily basis. At that time, even our freight become -- daily basis we started changing. In the sense, once in quarter, once in half year or twice in half year, we were changing the rates. But currently, what is happening in the last 1 year, since the rate in -- fuel rate is not changing. So again, we are not in a position to increase the freight rates. That's what the scenario. But the other expenses, say, like employee costs and all, these were due in the April '23 itself. But we postponed for another 5 months and with increase employee cost or -- increment to the employees effective due in September, that is before the festival season. Now we push for 5 years. At that moment, again, you can see the fuel rate, again, it is constant. Even at that moment, we were unable to change the freight rate. That's how the impact is on the margin side. And we expect that tonnage growth definitely will be around 15% to 20% in the beginning of the year.
And in first quarter, we reached that growth. But subsequently, what happened again, because of critical monsoon conditions, especially in the Southern states, which is a major portion of our business area, that started impacting. You see this region has grown hardly around 2% growth in the year. Since we are carrying out the expansion of the branch network, focusing on the untapped market, we are still in a position to maintain the growth of around 9% tonnage. But even during at this growth, it is not enough to maintain or increase the margins. So one is our tonnage growth has to reach at least 15% plus. Then at that time, again, we've to reach EBITDA margin of 16%, 17%, or we have increase the freight rates now. Freight rate increase, yes, we are waiting for the changes in fuel rates. Then immediately after that, definitely, we are going to carry out that activity.
Right. So with respect to the tonnage growth, are you citing that given that if -- what is the expectation for FY '24 as a whole, sir? Was it 10%?
Yes, around 10%.
So that translates to fourth quarter having a 15% plus growth, right?
No ,in fourth quarter, again, it will be similar 9% to 10%. The reason is, see, the monsoon will not change from the current period until next quarter. So this will -- the impact of this, the poor monsoon will continue in the next quarter as well. And we are hoping that if things change from the Q1 -- from Q1, actually, we are expecting to see change because, again, the new monsoon period will start. And we are hoping that there will be, again, fresh demand from the market.
Right, sir. Right. Then -- so logically, I mean, looking at your branch expansion speed continuing. And while we could see that compared to last year, this year, the contribution from new branches had slowed down. Anything to read over there? Because you're still hopeful that even newer branches contribution would go up substantially. Is there any specific trigger due to which it has been relatively weaker this time around?
No, always what will happen, if we open a branch in untapped market. Say, for example, in the UP. Again, that branch will not do business only in UP because it depends on demand in other regions also. See, most of the UP materials will move to Karnataka and Southern region. If there is no demand in Southern region, then that will impact the tonnage contribution from the UP branches also. That's the reason the same trend is continuing. Since the Southern region is -- the tonnage growth is slower, then it impacts even on the newer branches also.
So earlier, the new branches used to contribute in the range of around 4% to 5%. Now it has been decreased by around 3%. So it is not belong to one particular place. It depends on the entire region. And again, delivery point is also equally important.
And the next question is from the line of Anshul Agrawal from Emkay.
Great. I had a couple of questions. First one, when do we start seeing the benefits of owning trucks versus leasing external trucks come -- or fructify in our margins? My question is based on, even in this quarter, sir, we have seen 20-odd percentage decrease in lorry hire charges, but that has been completely offset by vehicle running expenses and other stuff. So when do we see these benefits of owning trucks kick in into our gross margins?
No, basically, see, as I said, we add or increase our vehicles only when there is a demand. So we will not have adding capacity and the surge for the tonnage. So even in the current quarter, if you see, there is a -- given the lorry hire has increased a little bit, I mean, the fuel cost has decreased and there are decrease in other expenses also. So basically, my point here is whenever we add a vehicle, always we utilize those vehicles with 100% capacity. And then only we go for hired vehicles. See, we do not have a long-term contract with the outside vehicles. Only we have a contact on a spot basis, then only we engage the vehicles. So the benefit of owning the vehicles come from the moment we purchase the vehicles, not that actually, we have to wait for a load or something.
Okay. Okay. What would be our truck utilization levels in the current quarter versus, say, last quarter?
The current quarter and last quarter, again, the hub-to-hub operation vehicles are operating in full capacity, 100% utilization. And, again, hub-to-branch utilization levels are around 60%, 65%. And we always are better because these are all scheduled vehicles. Every day, the branch to hub, the vehicle has to operate.
Okay. We are not seeing a dip in utilization levels despite adding capacity? That is what I tried to understand.
No, no. And just I want to give another example. If you see this growth in tonnage on a quarter-on-quarter basis, it has increased around 2%. And similarly, the capacity has also increased hardly 3%.
Okay. So capacity will also track volume tonnage growth on a quarterly as well as on a Y-on-Y basis as well, it goes hand in hand?
Yes.
Great. And sir, do we have any planned incremental ROCEs for these new trucks that we deploy? I'm trying to understand what will our ROCE profile look like, say, a couple of years out once we have seen the entire CapEx go through that we have deployed in '23?
Basically, in good times, see, our return on capital employed, we reached even 25%, 26%. So whenever we are having good margins and you can see our ROCE reach to 25%, 27%. So that is our target to achieve that kind of ROCE. And it is possible. So this -- see, for the year actually what is happening is impacting because of the freight rate. But to some extent, volume growth also not at an expected level. But since both will go hand in hand, then definitely, our ROCE will be in the range of around 25% to 27%.
Okay. And sir, our medium to long-term volume targets, volume growth targets should be still 15%?
Yes. Current year, see, as I said, in the Q4, again, it will continue with in line of the existing growth. And from Q1, we have expected better growth based on, again, the new monsoon season, how it will come up? The [indiscernible] will start speaking from the month of April and how the monsoon [indiscernible]. And depending on that, we are expecting our growth will be better in FY '25.
And the next question is from the line of [ Dhananjai from ASK ].
Just a couple of questions; a, which segments are we seeing good growth from and which segments are we seeing weak growth from?
You are saying the zone-wise or product-wise?
Zone and product and end customers in terms of which industries are they focused on?
Yes. Basically, you see, we -- on a 9-month period, we did a good growth in the Eastern market and even the North market, Northeastern market, which grown -- the Eastern market has grown almost around 25%. The North grown by around 17%. The Northeastern growth is 24% since the base is small. And Western region, we have grown around 10%. But South has grown by around hardly 2.9%. But South is a major contributor to our tonnage. Almost around 40%, 45% tonnage is coming from the South.
And would this be just because of the cyclone? Or are there any other factors?
See, according to us, there is a dip in the agro-related commodities. It has declined almost 5%. And the total contribution from the agro commodities, it is round 8% to 9% of the total tonnage. But it has degrown by around 5% in the current quarter. And similarly, the cloth and textile, which is a major, again, contributor in a goods. It is contributing almost around 18% to 20%. But the growth of cloth and textile in the current quarter, it is around 14%. But on a 9-month period, the growth is hardly 3%, which is below the average growth rate of the tonnage.
And any particular end customers which have done really well in terms of -- maybe not company names, but any particular segments which have done well and which you're seeing some decline coming from?
Yes. As I said, these are all in the consignee market only, the cloth and textile, agro related. Basically, our customer base is from the consignees. In a sense, almost around 60%, 65% of our business is on a prepay basis, whereas still consignee is our customer, the person who is receiving the good. So within this category, again, the main products which are declined is, one is agro-related commodities and second one cloth and textile is not at our expected level growth.
Okay. And what about competitive intensity? Is that increased, decreased over time? And how are we seeing that? Have you been able to gain market share maybe from some of the competitors? Or how is that coming along?
Yes. Basically, the operators, which are operating in these commodities, most of the operators' situation is even much worse than our position. But we are gaining market share basically because of the increase in compliance levels and other things. And when it comes to other segments, in the sense, the newer markets where we are entering, the North, the Northeast, and the Eastern market, there, actually, we are creating a lot of new customers. That's the reason actually our growth is much, much higher rate, around 25%, 20% -- 20% to 25% growth is coming from those regions. And another thing is the South and Western, we are having very strong position. And not only that, our service level cannot be matched with other operators. Because of these external factors, there is an impact on the tonnage. But what we are expecting is once things are changed in this region, definitely, our growth will be much, much better in the coming days.
Sure. And last question, if I squeeze in. Longer term, maybe after [indiscernible], what kind of growth rates could we see on a steady state basis?
You're asking overall growth rate?
Yes, what could we see for the FY '25 or '26?
Yes. As I said, see, even with this [indiscernible], actually, we are growing at around 9% to 12% in the current year. And definitely, with monsoon and all other changes, then definitely again, we can be back to at least around 15 plus growth in the tonnage.
Okay. And you may -- realization, you will stay the same?
The realization is, as I said, this is directly linked with the fuel rate. And we are hoping that post election, then definitely, there are changes. We are expecting changes in the fuel rates. And before election also, if government announce something, some reduction on fuel rate, again, it is going to benefit us. Because from the last 1 year, we have not changed the freight rate. Even if fuel rate get decreased, then no need to pass on that benefit to the customers.
And the next question is from the line of Jainam Shah from Equirus Securities Private Limited. The current participant has been disconnected. The next question is from the line of Vikash Khatri from Aviral.
My question is we have onboarded too many new vehicles in the last 2 to 3 years. And new vehicles are more efficient in terms of mileage and the fuel capacity. So how it has converted to our profitability uses of new vehicle? Second question is related to interzone, intra-zone. Our most of the new branches are coming in North and East. So is there any change in the pattern of interzone versus intra-zone business, While on the other hand, my overall per ton realization is constant?
Yes. The first thing about the efficiency out of the new vehicles. Yes, definitely, in terms of mileage and other things, again, this BS-VI vehicles are -- in mileage terms, there is no much efficiency of these new vehicles compared to older vehicles. It's more or less same. But in terms of capacity, these vehicles are different what we are adding today. In the sense, we are concentrating more on a higher capacity basis. Not only that, we are increasing the space of the vehicles. In the sense, we are using a longer body -- the length of the body is almost around 32 feet, which is maximum permissible limit within this category, permissible limit. So basically, we are looking for the increase in the space of the vehicles, plus the adding of the higher capacity vehicles, that will lead to less dependence on more number of the vehicles. And we can point to point, actually, the utilization levels will be more or the single vehicle can carry more load instead of engaging multiple vehicles. That's the advantage. But in terms of operational cost is concerned, one is, to some extent, the loading/unloading charges, that is one -- again, it is a variable cost completely. And fuel cost also, again, it is completely related. See, there is not much efficiency improvement coming to earlier vehicles versus the BS-VI vehicles. So that's the reason the efficiency is -- overall, the employee cost and the other fixed costs what we're incurring, to some extent, there is efficiency in those matters rather than the variable cost. So because of change in the new pattern, the margin improvements is not much higher side. Then second thing, as you said, that the zone-wise contribution, yes, we are much growing in the North, Eastern and Northeast regions. And since the base of these zones are in the range of, say, 10% to 15%, or even North is contributing 20%. So immediately changing the overall contribution from the zones is not so high. But what we are doing currently in the East and Northeast and North, the interzone contribution is not so high as compared to the Western and Southern zones. So gradually, still our network has to be expanded beyond the existing level, then only we are -- you can concentrate more on the interzone or even intrastate tonnage growth. With the current spread of our branches still, we cannot more concentrate on the intrastate or intra-zone transportation.
Okay. So there is no change in the mix of interzone and intra-zone in last 2 to 3 years?
Not much, not much. But it will take another 1 or 2 years. See, if we add -- that is a good growth aspect actually. That area is where the intra-zone and the intrastate transportation, still we're not concentrating much in those newer zones. But going forward, if you add around, let's say, at least 25, 30 branches every quarter, so that will support us for even to start the intrastate transportation in states like UP, Bihar and even West Bengal. So those are additional areas of possibilities of growth in tonnage going forward. See, once the network is increased, definitely, we will have -- you can have a control on the services and even we can compete with those local operators.
And the next question is from the line of Krupashankar from Avendus Spark.
My question is already answered.
The next question is from the line of Anshul Agrawal from Emkay.
Sir, correct me if I'm wrong. Last quarter, you mentioned we are going to take 5-odd percentage freight rate hikes for contractual customers from December. Any update on this, sir?
Yes. Actually, we approached all contractual customers to increase in freight rate. And the contribution from those customers is around 20%. See, almost around 50 to 60 customers have been accepted, but not exactly 5%. Some customers have accepted 2%, 3%. Some customers accepted even 7%, 8% also. See, considering the overall tonnage, that percentage is very low. So that's how it will benefit us to maintain the realizations on an overall basis rather than increase in the realization on a good number.
Okay. And a follow-up question to the previous participant's question. Once we sort of densify our networks, won't the intrastate increase in loads impact our realizations because our kilometer travel transported -- per parcel kilometer traveled or transported will decrease? How should we look at it this, sir?
No, basically, even today, the 6,700 realization what we are able to do. In the long route, actually, the realizations are -- so there is INR 1,100, INR 1,200 difference per tonne also. Since our density of routes, especially in South and West, we are operating in a even short-haul basis, there actually, our realization range is around INR 3,000, INR 4,000 per tonnage. So within Karnataka, our realization is INR 4,000 per ton. It is contributing major tonnage to our overall tonnage. Like this. So it all depends on our route. But there, actually, what will happen if we start intrastate and intra-zone, especially in the Eastern and Northeast states, there actually, the tonnage growth will be much higher. So instead of the long route, if we're carrying 1 route is short haul, we can carry 3 or 4 loads -- even in the same time. That's how it is. Actually, see, on the other side, the tonnage will be in support, but realization will be lower. See, realization, always we have to go with on a route basis, that is more important.
And the next question is from the line of Mukesh Saraf from Avendus Spark.
My first question is on the pricing, that you mentioned that it's getting difficult in terms of increasing prices with your customers. Just trying to understand, sir, what -- is it because of competition, maybe unorganized or organized? What is the alternate that the customer has, basically, say already, I mean, you had mentioned last time also that unorganized players are probably more expensive than VRL. So why isn't that we have this kind of a pricing power that we can pass through some of these costs? Is that risk of us losing market share, is the question, basically?
See, again, in some of the markets where we are operating, especially the textile, and even some of the agro-related commodities, see, there actually, the whole market structure is in such a way that organized players, again, contribution is around 20%, 25%. And still 70%, 75% contribution is coming from the unorganized or small fleet operators. Since even those operators are not in a -- even they are not increasing the rates. And if we increase the rates, again, along with the slower demand again further, it will impact on our tonnage. That's the reason, again, we have to go with the market trend in those areas or those markets wherever we are having competition from these operators. But gradually, the competition will come down. And again, see, most of these operators or most of the customers also, they are having a trend that the freight rates are linked with fuel rates. That's why we are in a position to take sudden increase in the freight rates and show some good realization.
Right. So basically, if I'm understanding right, it's competition from unorganized that is resulting in this kind of being unable to...
Yes. Since everybody is maintaining same rates. So we don't want to take risk by increasing the rates and impact on the volumes.
Got it. Got it. So -- I mean, just understanding last, say, few quarters, you had been mentioning that unorganized is weaker and weaker, and the customer wants to shift to organized because of the invoicing, et cetera. I mean I think that trend still playing and still the customer will prefer an organized over an unorganized?
Yes, there are certain operators, the decent size operators, actually, most of them are converting into compliances. And again, see, those operator tonnage, means the percentage will come down. See, currently what they are having the total industry size of around 70%, 75%, that percentage will come. But overall, there are some decent operators always, they will be in the market. And again, they are shifting, they are increasing their infrastructure. In the sense, basically, they are converting into compliance mode.
Got it. Got it. And secondly, we are also kind of inducting a lot of larger vehicles. Are we forced to pass through some of these benefits? Because per unit, obviously, the cost will be lower when you ship through these larger vehicles. So are we also kind of passing through those benefits to the customer?
No, I'm not getting, larger?
So if we're using a larger truck, our unit cost obviously comes down, sir. The unit cost comes down. And so are we kind of also reducing the prices accordingly for the customers?
No, no. See, internal, whatever benefit we are having, still we are retaining that. Not exactly equally we are passing it on to the customers. But wherever we are entering the newer market, actually, we are offering very, very competitive rates to the customers. So that's the reason actually it is compensating on each other. In some rates, wherever we are gaining a benefit out of our internal controlled mechanics. There, we are gaining, but we are passing that benefit to the newer market.
And the reason, sir, we are [indiscernible] on this is because it seems to be a sudden change in this -- I mean, until last quarter, I think your commentary suggested that the pricing is possible and unorganized is losing. But this quarter, I think the commentary from your side has changed suddenly. So that's the reason just trying to understand, what has led to this sudden change, so...
No, that's why I told you -- with contractual customers, even though there was a long gap but 100% of the customers are not accepted. But we have not discontinued the contracts. But similarly, if we do in a noncontractual customers, then we will not have a proper control because the whole market will get disturbed. That's the reason -- and moreover, none of the operators are rising the freight rate. So with this trend, actually, we don't actually take a risk as of today.
[Operator Instructions] The next question is from the line of Jainam Shah from Equirus Securities.
Sir, this quick relates to the GST. So if I'm not [indiscernible]. So sir, what I've been hearing is that we are having a window until 15th March to convert it into forward charge, and there might be possibility of having claiming the GST credit is we've converted to that, but there might be chances that we might be -- like some of the customers might not be getting the credit if we convert to the forward charge. So what is the stance on that? Are we moving to forward charge? And if at all we are moving, then how much of GST credit we would be getting, which will eventually improving our margins?
No, basically, see, we are having a good scope of input tax credit. But ultimately, what is happening, it depends on the end customer. In our case, what is happening, most of the commodities, what we are carrying those categories are taxable at the rate of 5%. For example, cloth and textile. Majority of the goods are taxable at 5%. Even most of the cashew nuts, agarbatti, and even coconut product and betel nut, these are all products actually taxable at 5%. Even leather products, for that matter, which is, again, a major contributor to our tonnage, which is taxing at 5%. Now actually, what we did, see, we are continuously we are putting efforts that whether we can ship to the [indiscernible] . Because the [indiscernible] is going to benefit us like anything. If at 12% official, we are having a lot of input tax credit. In a year, actually around INR 140 crores, INR 150 crores credit we're having. But ultimately, what is happening, it depends on the end user. So we inquired with some of the customers and one-on-one basis with the large customers also who are into these categories, like cloth, footwear and even the cashew nuts and all. But none of them are in a position to accept the 12% GST because they are already sitting with some of the credit in their book and the utilizations are very lower at their end. That's the reason, actually, they are unable to accept our increase in the GST rate. With this kind of import, thus, we are holding on that decision. So as of now, again, we decided -- see, in December, we did -- we worked out on that. But ultimately, the customer's feedback is not an acceptable manner. That's the reason, again, we are holding on that decision.
Got it. Got it. So maybe near too it might not be possible to...
Yes, yes.
Because INR 130 crores, INR 140 crores is quite big number. Might be...
Because most of the infrastructure is owned by us. Even the purchase of the vehicles, we are paying 28% GST. And even all spare parts, tires, everything -- see, for new tires, we are, again, paying 28%. Spare parts and all, we are paying 18% GST.
Correct, sir. Correct. Got it. And sir, on the cash EBITDA margin, so how much rental we would have paid in this 9 months which have been eventually booked in rental and -- in the interest and depreciation part? Even yearly number, estimated number would work, which is like eventually coming below EBITDA line item.
Yes. On an interest part, in the current quarter, other than Ind AS, it is around the INR 6 crores.
Okay. Okay. So out of INR 21 crores, INR 15 crores is Ind AS?
Yes.
Okay. And for the depreciation part?
And on depreciation part, it is around INR 36 crores.
INR 36 crores...
Yes.
Okay. So total would be INR 50 crores, we would have paid. So, sir, our EBITDA number is at around INR 96, INR 97 crores and we are paying around INR 50 crores for the rental, which is eventually leading to EBITDA margin, pre-Ind AS EBITDA margin or even pre-Ind AS EBITDA number of only INR 50 crores. So how we are looking at this particular thing, like we are expanding the branches and these expenses increasing, but on the other side, tonnage is not increasing?
No. On the branch side, there is not much of an Ind AS impact because most of the shorter agreements will be there. Because we carried out some of the increase in space of the larger transshipment hubs. That actually earned a long-term lease. There actually, there is an enhancement in the depreciation and interest part, or even the rent expenses. But we are already -- kept already all the infrastructure facility, enhanced the spaces in most of the transshipment hubs. So going forward, no need to incur or enhance further transshipment areas. So if you have a further drastic -- there will not be expansion at all because we have already carried out that exercise. So this will be fixed in nature at least for 1 or 2 years. Then based on that, whatever incremental EBITDA will be there, then definitely -- increase in the normal EBITDA. The rental expenses, see, what I'm saying basically? The rent expenses will have its own control because the expansion will not be there in the future. So those expansion exercise have been already carried out, and we are having enough space in most of the transshipment hubs as of today.
And the next question is from the line of Prathamesh Dhiwar from Tiger Assets.
Yes. Sir, just wanted to know the revenue mix on the basis of different states, like which states contribute how much to the revenue?
No, zone-wise we're having. South zone is contributing around 40%, 45% to the tonnage. This is based on the origination, what I'm saying. And North and the West in the range of around 20%, 25%. And remaining around 5%, 10% is coming from the Eastern and Northeast.
Got it. And I think, as you said in your opening remarks, the agriculture segment contributed around 40% to 45% in revenue. So going forward...
No, no, no. agro sector contributes around 8% to 10%. That has degrown by around 5%. But Southern zone contributed around 40%, 45%. But that Southern zone growth is hardly around 2% to 3% in the current 9 months.
Okay. So are you planning to diversify into other segment or like what you plan, if I can get some understanding on that?
The plan is whatever network expansion we are doing, actually, we are doing in untapped market, especially in the Eastern, Northeast region and North regions. There actually, it is a newer market, and definitely, we are expecting very good growth from those regions. As I said, those newer regions are growing in the range of around 20%, 25%. So definitely, that trend will continue. And most of the branches are, again, interlinked also. Say, for example, if any branch we open in the North, if demand is lower than South, again, origination from that branch also will get impacted. So overall, it is integrated to each other, but those branches are showing better performance because these are all newer market and base is very low.
Got it, sir. Sir, I want to talk about the realization front. Like as you said, I think South gives you the highest realization. So can you give any guidance on FY '25 and '26 on the realization basis? I think on volumes, you have given around 10% to 15%.
In this year, we did a volume growth of 10%. If things are normalized in the next year, definitely, our volume growth will be more than 15%. On the realization front, what is happening, is directly linked with the fuel rates. If fuel rates change after the elections or something, then immediately we'll carry out the increase in the freight rate. That's how the realization will change. But it's all directly linked with fuel rate.
And the next question is from the line of Kushagra from Old Bridge Asset Management.
Just 1 question, sir. Can you give us the tonnage breakup between intrastate and interstate in your overall tonnage right now? And how much do you aspire to take? I mean, because you mentioned somewhere earlier in the call that going forward, as and when your branch network expands, probably the intrastate movement might increase, like you have in Karnataka, which has comes at lower realization, but overall volume growth was quite significant. So just wanted to understand where we stand now and how much do you aspire to take it forward? Even if you want to give a color, let's say, zone-wise, for example, South would have a higher intrastate, Western and North may not be as much. So a broad color over there and where things are headed will give a good color.
See, for North, East and Northeast, we do not have much of inter-region services also, okay? So whatever we are doing from Northeast and Northwest, which is almost around 30% of our business. There actually is completely interstate. We do not have much of an intrastate service in those areas. When it comes to the West and South, yes, we're having the intrastate. And see, South is around 45% of the total tonnage, out of which around 50% to 60% is intrastate. And similarly, when it comes to West, which is contributing, say, around 20%, their intrastate is -- or intra-region is, again, in the range of around 8% to 10%.
Okay. So just a fundamental question...
On an overall basis, the intra-region, it will be around 35% to 40% of the total tonnage. So remaining all is -- it is interstate and inter-region also.
And how do you -- so going forward, probably as and when your branch in Northeast expands further, probably your intra might go higher than your interstate, right?
Yes. Currently, see, in Northeast and Northwest, we do not have intrastate services. So there, actually, once the density of branches increase, we will start even intrastate and intra-zone services as well.
All right. So apart from the volume growth support, which comes from the intrastate, can you give more color with respect to the profitability? And the benefit of unorganized to organized shift in terms of consolidation and everything which you have spoken about in the past couple of quarters on the GST requirements, [indiscernible] requirements and all. Are these benefits aren't more on interstate than intrastate? And just -- so just wanted to get a perspective why focus more on intrastate rather than interstate?
Yes. See, for intrastate services, always the compliance level is very high. In most of the unorganized, actually, they are not depending much on the interstate services because the authorities differ from one place to another. For example, if we want to move material from, say, Bangalore to Delhi, each and every official state is -- can be verified our vehicle and verify the documents.
For unorganized operator operating for interstate services is much difficult as compared to intrastate. In most of the intrastate services, what they do, the service can be completed within 12 hours,24 hours, like this. So there, the noncompliances are still on a higher side. So there, the competition from the unorganized is much higher. Even in the local market, if you see, some people are -- individuals are operating like Tata Ace, 407 vehicles. They are operating point-to-point service, within a 200, 300 kilometers. There actually, we cannot compete with such operators. We cannot render our services in those areas. Because they're having a small vehicle, give point-to-point services, no overheads, nothing. And rates are very, very cheap rates.
Right. Exactly. So this is where the question was. I mean, given the benefits of unorganized to organized and sector consolidation is more on the interstate and longer route, why not focus more on them rather than the intrastate volume? This was the question, actually.
So intrastate, see, basically that's the reason, currently what we are doing, see, we are not opening branches in Southern region. Whatever we are having is intrastate as of today and interstate as of today, we are maintaining it. Similarly, in Western region also, we are not opening much of our branches. The reason is we don't want to do intrastate services over there. See, our focus is open branches in the North, Northeast area and connect with the South, connect with the West, and connect with the Northeast, like this. So we are more concentrating on the longer route and interstate services. But going forward, if the branch density improves, see, like a state like UP, currently does not have any intrastate service. Currently, we are having around 56 to 60 branches in UP alone. But if that branch set to around 200 branches in UP, that is possible. In UP, still, we can open another 140, 150 branches. If our density reaches to that level, then we can have an intrastate service also in UP. That is added advantage for us.
Understood. Understood. Sure. This is more like a natural flow of things in your business growth?
Yes. Yes.
And the next question is from the line of Lokesh Maru from Nippon India Mutual Fund.
Sir, my question is more around what is the difference in competition in our home ground, which is the Southern areas and the Western versus what you are witnessing in the newer regions like you said, North, Northeastern? What is the difference in organized, unorganized on the pricing or the general nature of competition?
Yes. Now actually what's happening, across all the states in India, there are same compliances, be it Karnataka, be it UP, be it Bihar. You take any state, there are same compliances. Earlier, each and every states were having separate compliances, and people used to take advantage of that. Now what is happening across India, there are same compliances. It is advantage for us that -- see, people cannot question on the compliances. Earlier what has happened, in states like Bihar, UP, we were unable to do services. We were unable to open a branch -- because that much of very high competition or high noncompliances were there from the local operators. Today, that is not the scenario. For the interstate services, basically, the compliances are very high. And the operators are answerable to different, different tax authorities in different jurisdictions. Because of that actually, even the small fleet operators also, they are very careful while doing the interstate services. And intrastate service, still there are the noncompliances are existing and people are taking advantage. That's the reason we are not focusing much on an intrastate servicing, even in North and Eastern areas.
So our focus is currently open newer branches and concentrate more on interstate services. That's what we are doing. And that is giving good results for us. As I said, the newer branches alone contributed around 3% to 4% in the current year. I think, a very good contribution from the new branches. So that's the reason our focus is currently only on that aspect rather than again start intrastate and all these things in those areas.
Sir, and I understand that a lot of load that we carry, even from which originates from South, like you said, will come down maybe in the manufacturing hub, et cetera. So when you take this to, let's say, Northeast or West, what are our fill rates or utilization rates? What is the difference in forward and return utilization?
Yes. See, it first happened in hub-and-spoke model. [indiscernible] operational with complete utilization. So that's the advantage of hub-and-spoke model. We get our structure or our allocable of vehicle will be in such a manner that both sides, we have to get 100% load capacity. And apart from that, while we are engaging the outside vehicle even at around 5% to 6% of the total fleet set? It's only because of to match the load pattern. In the sense, one side, we'll have a load -- the return load will not be there. At such routes, actually, we are engaging outside vehicles. So always, we will see that our own vehicle should get a load in both -- on and off -- as well as the return load. And wherever there is a return load issue or something, then we are engaging outside vehicle. And in spite of that, we face some of the issues that our vehicles will not get a return load. In that case, actually, we are engaging our vehicles for the full truckload. Currently, the full truckload is, again, 7% to 8% of our total revenue. This revenue of full truckload is not our foray. We are not focusing on the full truckload. But to only send back these vehicles to the original destination, we are engaging these vehicles for a full truckload. This is how the structure. See, always we go with the utilization. See, we are very cautious on that. And that's how the hub-and-spoke model -- support for us to use the infrastructure properly. So even if we open any branch in the North area, Northeast or any remote area, it is not that the vehicle utilization will be lower. If it is a one-side load, then we engage a smaller vehicle and which is the outside vehicle. That's how it is.
Okay. So utilization from hub to hub is completed on both the ways. But it is only from the hub to branch, which will just ramp up with time as we spend more time in the region?
Yes. If it is a slower demand and slower market spot basis, we engage outside vehicle, and we bring the goods to the hubs.
Okay. Okay. Sir, last question. Just to understand, like you have mentioned on intrastate and interstate. So within the intrastate logistics and within [ low 3PL ], what kind of competition exist in India? And if you could help bifurcate that into organized and unorganized, how many players are there?
See, most of the intrastate competitions are in the hands of the unorganized operator, all small fleet operator, I can say. And even in today's world, what is happening, most of the individuals are servicing, see, from Bangalore to 200, 300 kilometers that individuals are covering, And even say, from, say, Mumbai to 200, 300 kilometers, most of the individuals are operating with a single vehicle. They can give point-to-point service and in-a-day services.
No, sir, I meant interstate market.
Sorry?
No, sir, I meant the interstate market across different states, that market...
Unorganized contribution is coming down drastically because of the increase in GST law, GST compliances. There, actually, we are having a lot of scope to grow. And even in the current scenario also, there is a good growth in the state-to-state operations rather than the intrastate operations.
What is our edge and our position within that market and that competition?
Where?
In the interstate markets, in the interstate logistics transportation since it is a large...
See, interstate, wherever we are entering the newer market, we are offering a concessional rate as of today. But wherever there are strong routes, we are maintaining our rates.
That was the last question. I would now like to hand the conference over to Mr. Sunil Nalavadi for closing comments.
Yes. Thank you, all participants. Yes, it's good that many of them interacted about the inter and intrastate movement, how the structure in India. So basically, our focus as of today, more is on the interstate services. And wherever we are opening new branches, and all in the remote area, those are all -- most of these branches are contributing for the interstate services. And as I said, definitely, the opening of branches is going to give a lot of advantage for us in the coming days. Basically, once the density of the branches increases, we will have a lot of advantage. So states like UP, Bihar, especially in the North side, even Punjab, Haryana, so those states currently, we are not in a much of intrastate services. So going forward, density of branches is going to support us not only for interstate. And once the compliance starts increasing further, then definitely, we can concentrate on intrastate services also or intra-region for that matter. So with that, structure-wise, we are having the -- structure-wise is the best structure in India what we're operating today. But due to some external issues, especially the -- one is monsoon and other things little bit impacted on volume growth. And the freight rates, again, we are unable to increase because completely it is linked to the fuel rates. So we are expecting these changes very soon. And definitely, we are back to our good margins as well as good growth. That's what actually I want to say again. With this closer remarks, I wish to conclude this call. And thank you, everyone, and thank you all participants for your patient hearing. Thank you.
On behalf of Motilal Oswal Financial Services, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.