Logistics Sector Overview The Logistics industry can be broadly divided into ocean freight, air freight, rail

freight, trucking and third party logistics (3PL) services. The size of the Indian Logistics industry is pegged at around USD 30 billion. The industry is expected to grow at a 13% CAGR to USD 54 billion by 2012. Drivers The growth in the industry is driven by: Increase in trade: The Indias foreign trade has been growing at 25% CAGR over the past five years and is expected to continue its impressive growth on the back of emergence of India as a manufacturing hub for garments, engineering goods, electronic hardware and other goods. Moreover, the high growth in domestic consumption and manufacturing outsourcing will further drive trade. Reforms in Government policy: The reforms in government policy and pro-industry initiatives like abolition of CST and private participation in rail, air and port freight services is driving growth in logistics. Increased Government spending in infrastructure: The Government plans to invest USD 44 billion in improving infrastructure across roads, ports, railways, and air transport by FY12. The increase in Government spending on infrastructure will lead to an increase in efficiency and catalyze the growth of the industry. Rise in domestic consumption and retail: Driven by changing lifestyles, strong income growth, and favorable demographic patterns, Indian retail is expanding at a rapid pace. The Indian retail market is expected to grow from the current USD 350 billion to USD 427 billion by 2010.This would drive the growth in logistics industry as the goods would need to be delivered from production centers to consumption centers. Containerization: Containerization is a growing trend in India because of the need for intermodal transport. This has resulted in low handling costs and reduced pilferage and breakage. Though containerization of cargo is occurs predominantly in foreign trade, the changeover to containerization is expected to occur in domestic trade as well. In FY07, bulk cargo grew at 8% while containerized cargo increased at 18.5%, reflecting the growing demand for containerized cargo.

The various industry segments and their growth rates are given in the table below: Logistics Industry Segment Road Freight Rail Freight Air Freight Port Related Logistics Express & SCM transportation Industry Size FY07 (USD billion) 10 11 2 4 4 Industry Size FY12E (USD billion) 15 15 5 6 13 CAGR

10% 8% 25% 10% 30%

Source: Thomas Weisel International Estimates

Industry Segment-Road Freight The size of the road freight segment is USD 10 billion. Approximately 65% of the freight is carried through roads in India. The road freight segment is highly fragmented with more than 16,000 trucking players. The large number of small truck operators, increase in fuel prices and poor quality of roads has led to lower profit margin for the trucking services companies. The leading trucking companies in

India typically dont own the entire fleet but outsource approximately 75% of their trucks to smaller transporters. Drivers Increase in quality of road infrastructure: Investments of USD 14 billion in highway development is envisaged by the Government including development of the Golden Quadrilateral connecting the major cities (Delhi, Mumbai, Chennai and Kolkata) and development of North- South and East-West corridors. Phase out of Central Sale Tax (CST) and implementation of Value Add Tax (VAT): Currently 3% CST is levied for interstate movements. This had led to preference for statewise warehousing to enable intra-state sourcing and distribution networks. The phase wise abolition of CST by 2010 would catalyze interstate commerce and consolidate supply chains networks.

Opportunities Consolidation The consolidation of supply chain networks and increasing share of organized retail will shift market share towards organized trucking companies. The consolidation would lead to the emergence of panIndia players with significant size and better profitability.
Higher Margins and Service Component

Capital Intensive

Low Margins, Highly competitive

Logistics Hubs and Distribution Centers The abolition of CST would lead to a switchover to centralized warehousing and hub and spoke distribution network. This would create a demand for larger distribution centers and logistics hubs. This should be an attractive opportunity for companies who would have the skills to manage these hubs as well as trucking companies looking to forward integrate into the supply chain of their clients. 3PL The changeover to a hub and spoke supply chain model will catalyze the demand for 3PL service providers. Auto and auto component companies have been frontrunners in outsourcing Supply Chain Management (SCM) and have already started the process of consolidating their logistics services providers. In retail and textiles too there is significant business potential for 3PL. Cold Chain Warehousing Logistics The retail revolution along with the increasing consumption of processed food products presents a growth opportunity for the cold chain logistics business in India. There are various companies trying to enter this high growth sector Concor has announced its plans to enter the cold chain logistics segment through its wholly owned subsidiary called Fresh and Healthy Enterprises; GDL has acquired 50.1% stake in Snowman Frozen Foods Ltd., a pan-India player in this segment. Courier and express players: Cost and time efficiency from smoother roads combined with expected growth in document shipments and high-value products such as mobile phones, network hardware, jewelry and branded drugs will allow the express industry to continue to grow at 25%-plus rate.

Industry Segment-Rail Freight The rails are operated in India by the Indian Railways (IR), a Government undertaking. The size of the rail freight segment is around USD 11 billion and is expected to grow at 8% year on year. Traditionally, IR has favoured carrying passengers over hauling freight, and as a result, railways has been steadily losing freight share to roadways. However, the pro industry reforms and greater private sector participation have started to catalyze the growth in this segment. Drivers Privatization of rail container operation: Container Freight Stations (CFS) and Inland Container Depots (ICD) were privatized in the last decade. In 2006, the government of India awarded fifteen licenses to operate rail container services across all routes in India. Currently, eight players have already begun their operations. Private players will need to have their own terminals (ICDs) with rail sidings to load and unload containers. Indian Railways is expecting an investment of approximately USD 2.5bn over the next two years for the purchasing of wagons, setting up of logistics parks and ICDs by the private players. Development of dedicated freight corridor: Indian railway has planned an investment of USD 6.25 billion over the next five years to remove all capacity bottlenecks. The projects include strengthening of the Golden Quadrilateral, strengthening of rail connectivity to ports and development of multimodal corridors to the hinterland.

Opportunities Rail Operation The private rail container operators in India are currently operating with 22 rakes. The private players are currently not seeing any pressure on pricing and are steadily increasing the market share by giving better services than Concor (the freight handling arm of IR). Inland Container Depots and Warehousing ICDs will benefit significantly from increased containerization of goods and entry of private rail operators. Presence of railway siding would play a key role in freight handled and throughput of the ICDs. Another critical success factor for ICDs would be road connectivity and proximity to industrial belts or SEZs. Wagon manufacturing The entry of private players in rail operation and increased demand from the railways will drive demand for wagon manufacturers in private sectors. Industry Segment-Ocean Freight The major Indian ports are being stretched to maximum capacity. The total port capacity at major Indian ports in FY07 was 484mn tons while freight volume handled was 464mn tons. The increased domestic consumption and manufacturing growth has resulted in high growth in the Exim trade in India. The Ocean logistics industry involves various intermediaries like freight forwarders (originates freight), customs house agents (offers customs clearing services), multi modal transporters (either shipping companies or freight forwarders that are allowed to transport the cargo by more than one mode of transport), and inland container depots & container freight stations (provides services like stuffing, de-stuffing, warehousing etc.).

Trucks/ Trailers

Container Trains

Exhibit: Concept Diagram of the Ocean Logistics Industry, MTO: Multimodal Transport Operator; CFS: Container Freight station; CHA: Custom House Agents; FF: Freight Forwarder

Drivers Private participation in port infrastructure: One of the key factors for improved port infrastructure is private participation in port operations and ancillary services. Private operators are presently operating all major container terminals at ports in India. Also, private ports at Mundhra and Pipavav and the upcoming private port at Rewas (owned by Reliance Industries) in western India are augmenting Indias bulk and container cargo handling capacity. In addition, numerous ICDs and CFSs are being operated by private players. Large investments flow into ports: The major ports in India, public and private, are making large investments in increasing port drafts to accommodate mainline vessels, enhancing the capacity of their container terminals and improving rail and road links to and from the ports. The Indian government plans to spend USD 13 billion during FY06 to FY12 for these initiatives.

Opportunities CFS and ICDs Standardization of containers promotes a mechanized form of cargo handling. Containerisation has also led to demand for services of ICDs and CFSs for stuffing/de-stuffing of containers and also custom clearance away from the ports. The rationale for market players to set up CFSs and ICDs is to offer complete bouquet of services to their customers. There seems to be a danger of overcapacity in the sector because of unplanned growth. The ability to control traffic flow is the key for operating a CFS. A CFS/ICD that operates its own container terminal, freight forwarder or shipping line is well positioned to benefit from the surge in ocean freight. Integrated logistics companies Companies in the business of consolidation are moving towards owning assets in the form of CFS/ICDs and container trains. Going forward it will be essential for a container logistics provider to have a presence across the entire value chain from point of origination to final destination. This would entail having an international presence or tie-ups with overseas logistics companies. Multimodal transport operators Another growth area would be Multimodal transportation, driven by growing international trade and expanding domestic demand for efficient supply chain systems for the retail and manufacturing industries. Multimodal transportation in India is governed by the Multimodal Transportation of Goods Act and requires a license by the Government of India to operate. Project cargo handling Handling of project cargo involves transportation of equipments and products on a turnkey basis. The turnkey logistics for project cargo comprises of over-dimensional (ODC) and over-weight cargo (OWC). The scope of work begins from packaging of the cargo at the factory point any where in the

world, to delivery of the same at the project site. It involves ocean and land transportation, customs clearance, route survey, documentation, obtaining of NOC and other permissions from Government departments and arranging heavy lift equipment and inland transportation to its ultimate destination. This would see a good growth with increasing investments in oil and gas and the power sector. Equipments Equipments form a critical part of the infrastructure for ports. Equipment manufacturers of reach stackers, forklifts, tractor trailers, cranes etc. will see huge demand from the CFSs and ports. Private Equity/M&A Activity An indicative list of SME deals concluded in the logistics sector in 2007 is given below. According to Venture Intelligence estimates, the logistics sector attracted private equity investments of more than USD 250 million in year to date and accounted for 3% of the total private equity flow into the country for the same period.
Amount in USD million

Investor/Acquirer Global House

Investee

Sector Logistics Logistics Logistics Shipyard Shipping & Logistics

Stake

Investment Reach (Cargo Movers) and Sical Logistics Kausar India Tebma Shipyard Ocean Sparkle

Investment Company Description Value NA 5 Surface transport logistics provider for auto ancillaries, capital goods and power equipments. 23 Integrated multi modal logistic service provider for bulk and containerized cargo. 3 Surface transportation services provider, predominantly trucking services. 23 Leading player in the ship building industry in India 18 Comprehensive services port operations and management

Credit Suisse Macquarie Bank Gati Limited ICICI Ventures

10% 53% 33% NA

India Equity Partners