MC Interview | We aim to diversify our business to generate a third of our revenue from non-road segment in the next five years: TCI MD Vineet Agarwal

Transport Corporation of India (TCI) is working hard to diversify its business and aims to generate one-third of its revenue from its non-road businesses in the next five years, the company’s managing director Vineet Agarwal told Moneycontrol.

In an interview, Agarwal said that his company plans to invest Rs 200-250 crore as capital expenditure to boost capacity of its non-road assets in the next four years. Most of that will be used to acquire new ships, containers and working assets, and for the construction of warehouses.

The logistics company reported a 13.5 percent rise in its consolidated revenue in Q2FY23 to around Rs 940 crore. However, its consolidated net profit fell 3.8 percent to Rs 103.3 crore due to a 200-basis point fall in operating margins. Agarwal said that the fall was seasonal in nature as TCI had sent ships for dry-docking in July-September and margins are likely to rise going forward.

Edited excerpts:

The government is also looking to increase Indian Railways’ market share in the cargo industry. How do you think that will affect the logistic market in India, which is currently predominantly dominated by the road sector? How will it affect TCI?

We have already started diversifying a lot into rail and coastal shipping. We have acquired rakes which we use to transport automobiles.

In the next five years, we expect one-third of our revenue to come from the non-road segment and as cargo movement shift from roads to other forms in India, we will also adapt. We expect that in the next two to three years, the road segment in India will stop gaining market share in cargo transportation. And then in the next three to five years, the gains will be higher on the rail side than the road side.

TCI witnessed a 13.5 percent growth in its consolidated top-line in July-September. However, consolidated operating margins fell to 11 percent from around 13 percent last year. What are the major reasons for your operating margins to take a hit in Q2 and what are your expectations?

On a consolidated level, the falling profitability is very marginal, it’s not too much. Essentially, what happened is that in our shipping business, freight rates on our international routes saw a significant fall in the past few months. This affected our profitability in Q2.

Our operating profit was high last year because of these high freight rates and we had been guiding the street as well that when freight rates fall, our operating margins will shrink. We have reverted to the pre-COVID-19 level for our operating profit margins.

I do not think that the fall in margins can be attributed specifically to any major issue, it is a change in the market scenario.

Secondly, we had three ships that went for dry-docking in Q2. And that meant that these ships were not available also for operations, and that affected some amount of revenues.

And thirdly, the costs associated with dry-docking had an impact on our profit margins, but I think going forward, Q3 should be much better. In FY23 we expect our top-line to rise 10-15 percent when compared to last year and our bottom-line to rise 10-15 percent as well.

What will TCI’s capital expenditure plans look like in the next few years?

In FY23 we are looking at a capital expenditure of around Rs 300 crore and going forward we are looking to spend around Rs 200-300 crore as capex annually to boost capacity for the next four years.

Most of the capital expenditure will be used for acquisition of new ships, containers, working assets and construction of warehouses.

We have six vessels currently and are looking to increase our fleet by adding at least one ship every year for the next four years. Around one-third of our capital expenditure will be used to acquire ships every year while the rest will be to buy other assets.

Is TCI going to focus on increasing its assets in the next few years at a time when most companies in the logistics sector are looking to become asset-light entities?

Our strategy is a little different from either being completely asset-light or completely asset-heavy. We sort of follow a middle-asset strategy, which essentially means that we will expand our assets in a phased manner but will also collaborate with other companies for our portfolio.

For example, we have about 1,200-odd trucks in our portfolio, but we operate with about 10,000 trucks at any given time. Similarly, we own around 2-3 million square feet of warehouses but we operate around 13 million square feet of space. It's the same with containers and other assets as well.

The idea is to have some strategic assets and the rest is outsourced on long-term lease or long-term contracts with vendors or even spot hire.

Shipping container rates have been falling since the start of the year but are still higher when compared to pre-COVID levels. How have the high rates affected EXIM volumes? By when do you expect container rates to fall to pre-pandemic levels?

We have very limited exposure to the global markets. We basically only transport cargo to neighboring countries like Myanmar.

Container freight rates have fallen by 30 percent in the last six months. Going forward, there are expectations of a recessionary environment in the global market and this will impact shipping rates as well.

I don’t think container freight prices will come down to pre-COVID levels. The availability of containers is better than what it was earlier. But challenges remain because it still hasn’t come to that equilibrium before the pandemic where enough containers were available in different parts of the world. That means that today, we are still facing challenges in certain locations, certain geographies where the overall container shortage is still there, and rates are still quite high.

Given that your cash flows have improved and debt has also reduced, are there any plans to diversify or foray into international markets?

No, our business is predominantly domestic, we have some operations to neighbouring countries but there are no definitive plans to expand our international operations as of now.

Fuel prices have risen quite significantly in the last year. What have you done to tackle this?

We pass on any rise in fuel prices to our customers directly as we have back to back contracts with them. So really, the effect is not too much on us. It’s a little bit of a lag effect.

Despite a comprehensive plan announced by the government to boost inland shipping, not a lot has been done on the ground. How do you see this sector growing in India in the next four to five years?

India moves about 6 percent of its cargo traffic through inland waterways, whether it’s coastal or river waterways, and that is a very low share. There has been a lot of progress in coastal shipping in India, a number of coastal ports have been opened up in the last few years. And even larger ports have been mandated to allocate berths for coastal shipping.

However, on the river waterways front, two national waterways were opened but cargo movement through these waterways is very limited.