Mumbai: India’s logistics services providers are steadily expanding their limited supply chain network countrywide to cater to a growing clientele, but limited capabilities and poor infrastructure are slowing them down.
The $2 billion third-party logistics (3PL) segment is among the top five most targetted sectors for investment, as demand for transportation and ancillary services grows rapidly, and many firms are looking to cash in on this opportunity.
“This is the right time to get into this business if you have the money,” said Kunal Lakhan, a sector analyst with KR Choksey, which has buy ratings on Gateway Distriparks, state-run Container Corp of India and Mundra Port & Special Economic Zone.
“The sector is linked to trade and our economy looks buoyant. So, the whole space looks very attractive, at least in terms of volumes,” he added.
While the country is expected to clock a growth of over 7.2% in the year to March 2010, it is striving to once again get back to the 9% GDP rate of the recent past. This would hugely benefit the 3PL segment which, going by trade estimates, is growing at 20 to 25% annually.
3PL players such as Aqua Logistics, Arshiya International and Gateway Distriparks, among others, have ambitious plans to expand their range of offerings.
Aqua Logistics raised about Rs1.5 billion via an initial public offering in February while Arshiya International Ltd plans to invest Rs25 billion to set up five warehousing special economic zones across India by 2012.
Industry players now expect foreign logistics giants to step up their presence in this expanding market, which has so far attracted considerable attention from private equity investors.
“M&A (mergers and acquisitions) is likely to happen in this sector,” said Manish Saigal, executive director at KMPG Advisory.
Foreign firms with well established 3PL models would lead the way, he said.
“There would be consolidation in the next couple of years,” said Yogesh Dhingra, chief operating officer at logistics services provider Blue Dart Express, which is looking to buy local players to integrate its operations.
“You will see alliances, you will see mergers and acquisitions.”
DHL Express, an arm of Germany’s Deutsche Post, owns about 81% stake in Blue Dart.
Although the current market scenario of 3PL services can’t be compared with that of developed markets like Japan and the US there is tremendous scope for growth, brokerage Firstcall India Equity Advisors said.
It expects business in this segment to touch $3.56 billion in 2012 as logistic functions such as transportation and warehousing are likely to be increasingly outsourced to 3PL firms.
However, there is “no true 3PL” company in India till now with existing players providing only limited services, forcing their clients to contact multiple parties across various locations to meet their logistics needs, analysts said.
“In some cases, a handful of... ‘limited service 3PL’ companies are able to take over a small part of this value chain (e.g. trucking,warehousing), but there are still multiple vendors that a customer needs to connect with,” KPMG’s Saigal said.
India’s 1-billion-plus population generates huge demand for both goods and services, and to make operations cost-effective and efficient it is important to bolster the country’s logistics and related-ancillary infrastructure.
But growth in India’s $1.2 trillion economy is hampered by poor roads, ports, railways and airports.
The country is simplifying land acquisition to help its goal of building 20 km of roads per day and has allocated Rs1.73 trillion to infrastructure projects in the budget 2010.
Global slowdown and local regulatory issues had hit infrastructure investments, which would see the country miss its 2007-12 investment target of $500 billion.
“If you talk about catering to this demand, we are still lagging far behind. We need more players in this field,” KR Choksey’s Lakhan said.