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Logistics companies learn to move beyond vanilla services

Logistics companies learn to move beyond vanilla services
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First Published: Mon, Jul 28 2008. 11 39 PM IST
Updated: Mon, Jul 28 2008. 11 39 PM IST
Bangalore: The $120 billion (Rs5 trillion) Indian logistics business, growing at more than 8% year-on-year in tandem with the economy, has all the ingredients of a sector poised to be backed by private equity (PE) firms. It is still fragmented (indicative that there will be several mergers in the future), there is ample opportunity for value-addition and huge appetite at some firms to scale up.
Some logistics firms have found venture-backing and others are scouring for similar deals. Vishal Sharma, the founder managing director of Tuscan Ventures, an investment firm focused on the logistics business, compares the logistics business to information technology. Logistics, he says, is today where the software and business process outsourcing services business used to be eight years ago—a segment with huge growth potential especially for those logistics service providers that differentiate themselves.
The biggest driver of demand in the local logistics industry has come from the retail boom in India. With the emergence of organized retail—a format that still accounts for just 3% of the business—it will become important to have efficient supply networks, with well developed storage infrastructure. Scores of Indian logistics firms, starting from local mom-and-pop-run operations to those with countrywide networks, have been contracted by retail companies to transport wares from one point to another.
PE-backed firms, however, aim to offer something more valuable and are learning to differentiate their services a notch higher. As more companies have started looking at giving their entire supplies’ order to logistics firms, for instance, a few of them have started providing post-manufacturing services. “DRS has started assembling auto components for a company before delivering it to the end customer. Also, before moving tyres, they do a quality check,” says Nitin Deshmukh, chief executive at Kotak Private Equity Group. Last year, the firm, part of the Kotak Mahindra Group, had invested Rs100 crore in Hyderabad-based DRS Logistics Pvt. Ltd.
DRS has also started scaling up its warehouse business. “Warehouses will get organized in the future. Infrastructure is gaining importance,” says DRS chief executive Ramesh Agarwal. DRS has formed a separate warehousing arm, in which Kotak’s realty arm has invested Rs150 crore earlier this year. DRS, which had a turnover of Rs268 crore in 2007-08, says it may look at raising another round of funding. The firm plans to go public after a year.
Several others see the merit in such PE, or venture capital backing. Gateway Rail Freight Ltd, the container train operating subsidiary of logistics firm Gateway Distriparks Ltd, plans to raise about Rs300 crore to fund its expansions plans such as buying more wagons to carry cargo containers and also to set up inland container depots across the country. “We are looking to raise around Rs300 crore and are in talks with private equity players,” says Sachin Bhanushali, president, Gateway Rail Freight, declining to name the PE firm it is in talks with to raise funds.
Gateway has a licence to run container trains across the country—a business that experts say will consolidate in the years ahead.
The segment, currently with 16 players, will eventually have just five, predict some. “It is not possible for such small companies to survive on their own,” says Tuscan Ventures’ Sharma.
P. Manoj contributed to this story.
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First Published: Mon, Jul 28 2008. 11 39 PM IST