Bangalore: Last week, Karthik Menon was appointed the new vice-chairman of Sical Logistics Ltd, the Chennai-based firm that provides logistics services for bulk and containerized cargo. In an interview, Menon spoke about the firm’s restructuring, its investment plans and how it’s coping with the slowdown. Edited excerpts:
Sical Logistics had undertaken a reorganization and restructuring of its business. What was this all about?
The recent demerger of Sical’s non-logistics businesses into a separate company, Sicagen, was part of a comprehensive strategy to unlock shareholder value and get each business to focus on its key areas of interest. Sical focuses exclusively on end-to-end multi-modal integrated solutions for the logistics of bulk and containerized cargo. Sicagen provides trading and marketing services for construction-related industrial and retail infrastructure.
Business focus: Sical Logistics vice-chairman Karthik Menon.
Sical Logistics, which is a listed entity, delivers a portfolio of service assets in the transportation and bulk handling space across India supported by agency services. IDFC Private Equity has invested in this listed entity.
To segregate Sical’s customer-facing services from delivery infrastructure, we also created a wholly owned subsidiary, Sical Infra Assets Ltd, to house Sical’s ownership in concession-based, asset-intensive terminal infrastructure. Old Lane India has invested in Sical Infra Assets Ltd, which is an unlisted entity.
What are the benefits of this?
The immediate benefit is organizational and business focus and all the good things that come with focus—customers relate better with our brand and value proposition; the leadership and workforce can now develop the business in complete alignment with Sical’s mission; and investors know exactly where and how value is being generated.
The container logistics business (Sical Distriparks) has been transformed from an underachieving division into a significant and profitable business. Profitability margins have begun to rise appreciably in the bulk logistics segment as well. As the various components of our capital-intensive terminal infrastructure come on stream in the next few fiscals, we will accomplish our mission of becoming India’s end-to-end supply chain enabler connecting road, rail and port.
Sical Logistics will not make any new investments. Will this be done through separate special purpose vehicles floated by Sical Infra Assets?
Sical Infra Assets is a joint venture (JV) in which 74% is owned by Sical and 26% is owned by Old Lane. The origin of the JV was to house the capital intensive, long-term gestation based projects in the inland and port infrastructure space, including rail services, where we have a national licence for operating container trains.
Our intention is to build a larger portfolio of assets in the future as they come up for bids and assignment. However, projects that make more sense from the bulk logistics business perspective and do not meet the price-earnings expectations on the basis of project internal rate of return or equity internal rate of return on a stand-alone basis, yet make sense from a business integration point of view, might be housed outside this JV.
Will this plan help Sical raise money for new projects without diluting the Muthiah family’s stake in Sical Logistics?
The Muthiah family (founders of the company) has a clear return on investment strategy that is a combination of dividend and value accrual for all the stakeholders. Dilution or even an exit is subject purely to value realization. All options that will create long-term value for all shareholders will be pursued.
How is this linked to the firm’s strategic goal?
Annually, we move nearly 570,000 standard cargo containers and 26 million tonnes of bulk cargo, more than any other third-party logistics provider in South Asia. But our mission is to be an end-to-end supply chain enabler. Our strategy will start taking shape as our infrastructure assets come into play over the next few fiscals.
How is Sical coping with the slowdown?
Our core handling business is for coal and iron ore with a mix of cement and fertilizer. Liquid bulk is another specialized handling service. Coal handling continues uninterrupted as electricity from power plants is an essential commodity in today’s urbanized environment. Iron ore has seen a slowdown as well as huge price dips with the Chinese imports on hold. Fertilizer should pick up now as the stock positions are being set up for the upcoming planting season.
Cement is slow keeping the realty slowdown in purview. These are going to be tough times but we will be able to manage.
Have you put any of your investment plans on hold due to the slowdown?
None of our plans is on hold but we have phased out some of the investments and focused investments into lower gestation cycles so that paybacks are quicker even if at lower margins. Cash flow management is a key focus.
What are the plans for the railway business?
Sical Multimodal and Rail Transport Ltd, our container rail services company, is now operating from nine locations across India. Currently, four rakes are operating on the north-south corridor and east-central corridor. We will increase it to about six rakes, dependent on load factors.