Wal-Mart Entry Spurs TCI Spending on Logistics: Corporate India
Transport Corp. of India, the nation’s third-largest logistics company, plans its biggest investment in five years to prepare for a jump in freight demand as retailers such as Wal-Mart Stores Inc. (WMT) open stores.
The company will spend 1.5 billion rupees ($28 million) in the year to March 31 to add more trucks and build warehouses, Joint Managing Director Vineet Agarwal said in an interview. The spending may help Transport Corp.’s supply chain division, which offers warehousing and packaging, to expand more than 20 percent annually through 2017, he said.
The operator plans to add 1,000 more trucks in five years, Agarwal said, as India’s decision to allow foreign investment in retail stores will help create more supermarkets and boost transportation of farm and factory products. Deutsche Post AG (DPW)’s DHL Supply Chain last week said it would invest 100 million euros ($131 million) to strengthen operations in the country.
“Once overseas investments start coming into retail sector, it’ll help Transport Corp.,” said Rajni Ghildiyal, an analyst with Asit C. Mehta Investment Interrmediates Ltd. “The strategy to place itself as a supply chain solutions provider will help it exploit the potential.”
Transport Corp. rose 0.9 percent to 64.85 rupees in Mumbai today. The stock declined 13 percent in the past year, making it the worst performer on the 29-company Bloomberg Industries Express & Courier Services index after Hanjin Transportation Co.
Sales at Transport Corp.’s supply chain division rose 21 percent to 5.8 billion rupees in the year ended March 31, data compiled by Bloomberg show. The business contributed about 30 percent of total sales, up from 14 percent four years ago.
“There’ll be investments in farmgate infrastructure once foreign supermarkets set up shop,” Agarwal said in New Delhi. “At that point, certain amount of logistics, including cold reefers and dry goods movement, will be required. We’re prepared to handle that.”
Last month, Prime Minister Manmohan Singh’s government allowed overseas retailers such as Wal-Mart and Carrefour SA (CA) to own as much as 51 percent in supermarket ventures. Singh also cut energy subsidies, allowed foreign airlines to own as much as 49 percent in local carriers and permitted overseas investment of up to 49 percent in power exchanges, ending two years of policy gridlock.
Singh’s policy drive prompted ally Trinamool Congress to quit the alliance. Last year Singh put the plan to ease investment rules for overseas retailers on hold after opposition parties as well as Trinamool Congress chief Mamata Banerjee protested.
Wal-Mart may take about 12-18 months to open retail stores in India, Scott Price, its head of Asia operations, said Sept. 21. The world’s biggest retailer has been building a supply chain and logistics network in the country after forming a venture with billionaire Sunil Mittal’s Bharti Enterprises to operate wholesale outlets.
Entry of foreign supermarket chains will spur investments in warehousing, inventory management and computer systems, according to Zenith International Research & Academic Foundation in India. This will help reduce cost for retailers and boost consumer spending, according to Zenith.
The size of logistics industry in the country is about $90 billion to $125 billion, according to a study by Deloitte in India and the Indian Chamber of Commerce. Investments in logistics infrastructure may drive economic growth this decade, according to the study. Logistics accounts for 13 percent of the nation’s gross domestic product.
DHL Supply Chain said Oct. 16 that it will add 5 million square feet of warehousing space in eight cities including Mumbai, Bangalore and Chennai. The company also plans to upgrade its fleet of vehicles, it said in a statement.
Transport Corp.’s profit may rise as much as 15 percent this fiscal year, Agarwal said. That’ll be the slowest pace of growth in four years, according to Bloomberg data.
The company’s operating margin increased to 6.1 percent in the year ended March 31 from 5.8 percent a year earlier, according to data compiled by Bloomberg. Sales in the period expanded at 5.5 percent, slower than the 22 percent expansion in the year earlier period, the data shows.
Transporters have to contend with congested highways in India, where infrastructure is ranked worse than Guatemala’s by the World Economic Forum. Traffic snarls cost Asia’s third- biggest economy $5.5 billion annually, according to the Indian Institute of Management in Kolkata and Transport Corp. Trucks take 65 hours to travel the 1,374 kilometers (854 miles) between Mumbai and New Delhi because of traffic and stoppages at toll plazas and state borders.
Road construction is lagging behind an August 2009 target of 20 kilometers a day as slowing economic growth and high interest rates discourage builders from bidding for projects.
Prime Minister Singh’s government has targeted a spending of $1 trillion on roads, ports and railways in the five years through 2017. Authorities are also planning to award $2.3 billion of state-funded highway contracts this year.
“Whatever we’re doing is not enough,” Agarwal said. “Work on everything from roads, ports to railways is going very slowly.”
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