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Logic of Logistics

The logistics sector has undergone a massive change in the past one year. Private equity players & retail investors have been enticed by the sector & the trend may continue with the sector's growth

Once upon a time, this sector was synonymous to the mafia and was held hostage to the whims and fancies of truck operators. But not anymore, the sector has had a facelift and has found many suitors, ranging from retail investors to private equity players. We are talking about the transportation sector, now referred to as logistics. In the past one year, the sector has witnessed a sea change as it has become more organized and has justified its presence in the Indian growth story.

The logistics sector, which came to limelight, not long ago, got a shot in the arm with the entry of private players in the rail container business. Of late, the sector has witnessed a string of M&A deals and is also the favourite of private equity players. As per the Rail Budget, the number of trains run by private sector operators is expected to increase to 50-55 by the end of 2008. At present the private sector run 44 container trains, while the state-run Container Corporation of India (Concor) runs 146 trains. The total container traffic is expected to be 26 million tonnes in 2007-08, including 2 million tonnes contributed by private players. The potential upside can be gauged from the fact that the Railways is working on a container traffic target of 100 million tonnes by 2011-2012.

In the recent past, a lot of big companies in the logistics segment have made it to the capital markets or have sought funding through the PE route. As many as 23 companies are listed on the exchange, which includes companies in rail, roads, marine transportation and a couple of courier companies as well. Some of the prominent PE deals in 2007 in the segment were Sical Logistics' stake purchase by IDFC PE, Credit Suisse Singapore and Macquaire Bank and Allcargo Logistics stake purchase by Blackstone. In addition to the above, quite a few deals happened in the unlisted space as well, which speaks volume about the potential of the sector.

However, there haven't been many fund houses that house these stocks, but the situation has certainly improving. Bharati Shipyard was held by 40 funds as on 29 February 2008, as compared to just 26 six months back, followed by Mundra Port, which was held by 36 funds. Great Offshore and Mercator Lines were held by 24 and 22 funds, as against 34 and just 5 funds, six months back respectively. One thing seems pretty clear: the firms that are into marine transportation score above the rest.

According to a recent study by Ernst & Young, India's logistics market is pegged at $40 billion and is expected to grow at 15-20% over the next 5 years. At present, only 25% of the total logistics business is outsourced, while the rest is handled by companies in-house. The key drivers of logistics outsourcing would be - trend of focusing on core operations, competitive pressure, increasing global trade and MNC investments in India. Increasing penetration of these MNCs in the established sector, coupled with growth in sunrise industries like retailing, food processing, gems & jewellery, and textiles will drive the requirement of logistics solutions at a much faster pace. The logistics industry is hampered due to poor infrastructure such as roads, communication, ports and complex regulatory structures. Over 50% of transportation in India is via roads and with the thrust on creating infrastructure in line with international standards, this will positively impact growth and efficiency of logistics companies.