Jagannadham Thunuguntla, equity head, SMC NEXGEN Capitals, says, "Several companies were earning around 50 per cent of their revenues from capital market-related services like distribution of IPO, NFO, Prospects. These companies have been hit badly." He adds, "We can witness several mergers and acquisitions in the logistics sector due to overall slowdown in the economy."

1. Slowdown chokes logistics
This sector will underperform broader market for a few quarters, but will turn around at
the first signs of economic revival
Nov 16 2008
By Anand Rawani
Erwin Rommel, the German Field Marshal during World War II, could best explain the importance of
logistics, as he was defeated in War due to logistics failure. Logistics mainly involves the integration of
transportation, warehousing, information, inventory and packaging. The growth of the logistics sector is
very much dependent on the growth of the overall economy. A growing economy means rising demand
and hence more movement of goods, resulting in rapid growth of the logistics sector.
Overall, the domestic logistic market is fragmented. However, in the organised segment, only a few major
companies control a major chunk of the market. Logistics companies have been performing well but due
to the recent slowdown, several questions have been raised on their performance. According to H R
Srinivasan, Core group member, CII Institute of Logistics, the sector should continue to grow by 12 per
cent per annum. He further says, quot;Logistics is a derived demand and any slowdown in manufacturing or
consumption is bound to affect the sector. In an overall context, the major impact will be on the Exim
logistics, which will be seriously affected. This is already evident in falling shipping and air freight rates.
However, on the domestic sector, the impact would only be marginal.quot;
In terms of performance, some companies like Allcargo Global and Gati have lost 43.25 per cent and
74.79 per cent. Unfavourable performance of the capital market has also affected several courier
companies adversely. Jagannadham Thunuguntla, equity head, SMC NEXGEN Capitals, says,
quot;Several companies were earning around 50 per cent of their revenues from capital market-related
services like distribution of IPO, NFO, Prospects. These companies have been hit badly.quot; He adds, quot;We
can witness several mergers and acquisitions in the logistics sector due to overall slowdown in the
economy.quot;
Financial performance
A group of seven companies, which holds the majority of the market share, has jointly gained around 10
per cent in the last quarter in terms of net sales compared to a negative growth of 6.61 per cent in the
quarter ending June. The performance of Gateway Distripark was best among these companies. It grew
by 17 per cent in the past quarter. Other players such as Gati, Allcargo Global and Container Corp have
grown by 2.30 per cent, 9.47 per cent and 9.79 per cent, respectively, in the same period.
Growth drivers
The growth of the logistics sector is directly related with the growth of overall economy of the country.
GDP growth has been robust in the past four to five years. Last year, the economy expanded by over 8
per cent. In spite of the slowdown, India is expected to grow by more than double the rate of the expected
growth of many of developed economies, which gives enough opportunities to logistics companies to
make profit.
World trade volume
Last financial year, India achieved an export volume of $155 billion. The government has set an export
target of $200 billion, which will further create opportunities for the logistics companies. To achieve the
target, the government has taken the initiative to improve infrastructure facilities, including roads, railways

2. and ports. But in the past few quarters, export growth has come down due to global slowdown. According
to a report by Goldman Sachs, Exim growth will slow down to about 14 per cent this fiscal year from 29
per cent growth in trade over fiscal years 2004 to 2008.
Retail capex plans
Many business houses have plans to enter in the Indian retail business. They have plans to invest a huge
sum of money, which will be sources of revenues for logistics companies. For instance, Reliance plans to
invest Rs 25,000 crore and Aditya Birla group Rs 15,000 crore. By 2010, Pantaloon also wants to have a
retail space of 30 million square feet.
Infrastructure building
The spending on infrastructure is expected to treble in the 11th five-year plan compared to the previous
plan period. According to the Goldman Sachs report, quot;Logistics sector, which is inherently dependent on
the quality and scale of infrastructure available, will be a key beneficiary of this event.quot; The National
Highway Development Project (NHDP) aims to develop two-lane highways to into four-six lane highways,
which is going to improve the quality of the roads. With this, the market share of the road transport in the
overall logistics sector is going to go up.
The Goldman Sachs report expects that the size of the planned investment in the railway infrastructure
will touch $63 billion in the 11th five-year plan. The dedicated freight corridor, one of the largest projects
of the railways, will develop two corridors in the first phase. This will connect all the four metros —
Chennai, Delhi, Kolkata and Mumbai — and possibly reduce transit time by 40 per cent to 50 per cent.
More than 90 per cent of the international trade takes place through seas. With an export target of $200
billion in 2008-09, government plans to spend around $14 billion on development of ports. Around 60 per
cent of the planned expenditure may come through private participation. The government also plans to
increase the port capacity by 100 per cent and expects the port traffic to grow by around 8 per cent.
Regulatory changes
Inclusion of value-added tax was a welcome step for Indian logistics firms. On the back of several local
taxes and central sales tax, logistics firms have been facing difficulties. With the standardisation of tax
structure, third-party logistics is expected to gain more market share, which is below 10 per cent
compared to more than 40 per cent in the developed nations. “We expect the phase-out of the current
central sales tax of 3 per cent by April 2010 to spur demand for specialised 3PL providers, leading to a
higher scale of operations for these companies,” the report adds.
Risks involved
Since the correlation of logistics sector with the economy is very high, any slowdown in the economy will
decelerate the growth of the logistics sector. The impact of the global turmoil will be severe on logistics
sector. According to Goldman Sachs, every one per cent drop in world GDP could mean a 4 per cent
drop in freight. We have already seen several industries like auto cutting their production, which means
less business for logistics companies.
Exporting companies are facing a slowdown in demand in client countries, while high importing cost due
to unfavourable currency fluctuation is expected to decrease the volume of imports also. Still, connectivity
is a big issue. The government has several plans but it would take some time for their implementation.
Boom in the retail sector is expected to boost the growth of the logistics sector. However, in the ongoing
turbulence, retail sector faces serious hurdles, which would translate into falling revenues for logistics
companies.
Conclusion
With the slowdown in the Indian economy, stocks from the logistic sector are likely to underperform the
broader market indices in the next few quarters. But the first signs of a revival of the economy are going
to come from this particular sector only. So, keep a watch on the fundamental performance of these
companies on a quarterly basis. Any revival in these companies will give a reliable indication that the
economy is back on the growth track.