Lancer Containers Lines Ltd Management Discussions

Global Economy Overview

The global economic recovery that began in 2021 has faced increasing challenges in 2022, leading to a gloomier outlook. Several negative developments have impacted the world economy, which was already weakened by the pandemic. Notable factors include a contraction in global output in the second quarter, primarily due to downturns in China and Russia, as well as lower- than-expected consumer spending in the United States. Additionally, higher-than-anticipated inflation worldwide, particularly in the United States and major European economies, has led to tighter financial conditions. The situation has been further exacerbated by a slowdown in China, driven by COVID-19 outbreaks and lockdowns, and negative spillovers from the war in Ukraine.

As a result, the baseline forecast predicts a slowdown in global growth from 6.1 percent in the previous year to 3.2 percent in 2022, a 0.4 percentage point decrease from the April 2022 World Economic Outlook. The United States has experienced a downward revision of 1.4 percentage points in growth, attributed to lower growth earlier in the year, reduced household purchasing power, and tighter monetary policy. Chinas growth has been revised down by 1.1 percentage points due to further lockdowns and a deepening real estate crisis, with significant global spillovers. Europe has also witnessed downgrades in growth due to spillovers from the war in Ukraine and tighter monetary policy. Global inflation has been revised upward, driven by food and energy prices, as well as supply-demand imbalances. It is anticipated to reach 6.6 percent in advanced economies and 9.5 percent in emerging market and developing economies this year, reflecting upward revisions of 0.9 and 0.8 percentage points, respectively. In 2023, disinflationary monetary policy is expected to further slow global output to just 2.9 percent.

Given the ongoing pressure on living standards due to increasing prices, policymakers should prioritize the taming of inflation. While tighter monetary policy will have real economic costs, delaying action will only exacerbate them. Targeted fiscal support can help mitigate the impact on the most vulnerable, but since government budgets are strained by the pandemic and there is a need for an overall disinflationary macroeconomic policy stance, such measures will have to be balanced by increased taxes or reduced government spending. Tighter monetary conditions will also impact financial stability, necessitating the judicious use of macro prudential tools and reforms to debt resolution frameworks. Policies addressing the specific impacts of energy and food prices should focus on those most affected without distorting market prices. Furthermore, increasing vaccination rates remains crucial in guarding against future variants as the pandemic persists. Finally, urgent multilateral action is required to address climate change, limiting emissions, and accelerating investments in the green transition.

Indian Economy Overview

The Indian economy has achieved a full recovery to pre-pandemic levels, as indicated by the provisional estimates of GDP released on May 31, 2022. The real GDP growth for FY 2021-22 stands at 8.7%, surpassing the real GDP of FY 2019-20 by 1.5%. These figures highlight a stronger growth momentum, signaling an increase in economic demand. Notably, the investment rate in the fourth quarter reached its highest level in the past nine quarters, while capacity utilization in the manufacturing sector rose, indicating a rise in demand and aligning with the growth objectives of the Indian economy.

Future capital spending in the Indian economy is expected to receive support from various factors such as tax buoyancy, a streamlined tax system, comprehensive assessment, rationalization of tariff structures, and digitization of tax filing. Medium- term plans include increased capital spending on infrastructure and asset-building projects, which are anticipated to enhance growth multipliers. Additionally, the revival of the monsoon and successful Kharif sowing have contributed to the agriculture sector gaining momentum. By July 11, 2022, the South-West monsoon had covered the entire country, resulting in 7% higher rainfall than the normal level.

India has emerged as the fastest-growing major economy globally and is projected to become one of the top three economic powers in the next 10-15 years. This growth is underpinned by Indias robust democracy and strong partnerships.

Global Logistics Industry -

The logistics industry plays a crucial role in facilitating trade and entrepreneurial activities by transporting, storing, and delivering goods through various supply chain networks, including B2B, B2C, and C2C. Logistics companies adapt to evolving economic patterns and digitization, offering cargo transportation services by land, air, and water. With a global trade value exceeding 5.7 trillion euros, the logistics industry serves as a backbone for international trade. In 2020, the Asia-Pacific region emerged as the leading logistics market.

Logistics encompasses the processes of storing and transporting resources, such as equipment, inventory, food, liquids, and materials, from one location to another. It involves managing the flow of goods from production to consumption, meeting customer requirements, and creating additional value for enterprises. Effective logistics operations help reduce costs, enhance customer experiences, and improve brand reputation. Organizations worldwide are increasingly focusing on strategic logistics management to minimize transport expenses.

The thriving e-commerce industry and the widespread availability of high-speed network connectivity are key factors driving the logistics market. As e-commerce continues to grow, the demand for efficient logistics services increases. Consumer preferences shifting toward online purchasing further propel market growth, with online retail channels offering convenient home delivery services. Manufacturers are also adopting green logistics solutions to minimize environmental impact and improve their businesses sustainability. Integrated logistics monitoring systems leveraging advanced technologies such as block chain, augmented reality (AR), artificial intelligence (AI), and the Internet of Things (IoT) enable real-time tracking and provide predictive alerts for warehouse management, transportation, and product delivery.

Additionally, globalization and increasing trade agreements among countries contribute to the rising demand for logistics services to meet the expanding needs of importers and exporters. The flourishing pharmaceutical, food and beverage (F&B), and e-commerce sectors are significant drivers of market growth.

Indian Logistics Industry -

The global logistics sector boasts a substantial market size of over USD 5.2 trillion, constituting a significant portion, ranging from 8% to 20%, of various countries GDP. In India, however, logistics costs surpass those of developed nations. While the USA spends 9.5% of its GDP on logistics and Germany maintains a competitive edge with an 8% share, India faces higher logistics costs due to inefficient inter-modal and multi-modal traditional systems. This presents a substantial opportunity for development and efficiency improvement. With a population of 1.38 billion, India possesses the second-largest population globally, and its logistics market is estimated to be around $210 billion. The domestic logistics market is growing at a faster pace than the overall economy and is projected to maintain a compound annual growth rate (CAGR) of 8-10% in the coming years. Reports indicate that the logistics sector contributes approximately 13% to the GDP. Over the past decade, the logistics landscape has undergone significant changes, including the implementation of GST, enhanced road infrastructure, and a high degree of automation, resulting in improved logistics efficiency. These reforms are estimated to have led to an overall 200 to 300 basis points improvement in the logistics cost-to-GDP ratio. Moving forward, further reductions in this ratio are anticipated due to the following factors:

• Fast-tracking the western Dedicated Freight Corridor (DFC) and announcing three new DFCs.

• Promoting inland waterway transport through the Sagarmala project.

• Establishing industrial clusters along key logistic routes as part of the Make in India initiative.

• Lowering lead time through scheduled trains.

• Increasing in-house development of software.

• Implementing real-time tracking using RFID technology.

• Implementing tech-based security measures to reduce pilferage.

• Corporates placing greater emphasis on services in addition to time and cost.

The COVID-19 lockdown had a significant impact on the Indian economy and the logistics industry. The transportation sector, in particular, faced severe disruptions during the initial weeks due to strict restrictions on the movement of goods vehicles, which were limited to essential items only. The logistics sector also experienced a labor crisis in the early months of FY21. However, as the lockdown measures were gradually lifted, the logistics industry demonstrated a high degree of resilience, aligning with the overall economic recovery. In FY21, despite the challenging circumstances, the Indian railways total cargo volume experienced a 2% growth in volume and a 3% growth in revenue, amounting to 1232 million tons. After a sharp decline in e-way bill generation in April 2020, there was consistent growth post-lockdown, reaching the highest figure of 71.2 million e-way bills in March FY21. In terms of EXIM, international trade was significantly affected by lockdown measures both in India and worldwide. However, as the global lockdowns were eased, total export shipments grew by 60.2% compared to March 2020, while imports increased by 53.74% to $48.38 billion in March 2021, compared to the same period in the previous year. The Indian logistics market was estimated to be $215 billion in FY2020, according to the economic survey of 2017-2018. Our research suggests that the logistics market is poised to reach $320 billion by 2025. Out of the various components of the logistics sector, transportation accounts for the largest share. In the Indian context, transportation and warehousing contribute a smaller portion to the total logistics cost compared to developed markets like the US. This is mainly due to the lower cost of transportation and a higher contribution of costs associated with wastages and inefficiencies.

Source:- www.statista.com Roadways

India boasts the second-largest road network globally, spanning an extensive 5.89 million kilometers (kms). This vast road network facilitates the transportation of 64.5% of all goods within the country, while 90% of Indias total passenger traffic relies on roads for commuting. Over the years, road transportation in India has witnessed steady growth, thanks to improved connectivity between cities, towns, and villages nationwide. The sale of automobiles and the movement of freight via roads are experiencing rapid expansion. The Union Minister of State for Road, Transport and Highways has expressed the governments aim to stimulate corporate investment in the roads and shipping sector. The government plans to implement business-friendly strategies that strike a balance between profitability and efficient project execution. According to data released by the Department for Promotion of Industry and Internal Trade Policy (DPIIT), the construction development sector has attracted Foreign Direct Investment (FDI) inflows worth US$26.21 billion between April 2000 and March 2022. In FY22 (until November 2021), the private sector invested Rs. 15,164 crore (US$1.98 billion) in road infrastructure.

Railways

India possesses the worlds fourth-largest rail network, trailing only the United States, China, and Russia. Railways, second to roadways, account for a significant portion of goods transported in terms of volume. Railways contribute to approximately 31% of the total modal movement across the country, as evident from the cargo movement-modal mix. While railways offer a cost-effective option for long-distance transportation of goods, concerns persist regarding timeliness and the safety of goods. Furthermore, there has been a lack of investment in the railways, resulting in a decline in its share of total freight carried over the years, while roadways have experienced an increase. This trend is primarily due to substantial private investments in commercial vehicles, whereas private players in the railways sector are only permitted in container transportation. The Indian railways maintains a monopoly over rail network, operations, and infrastructure. Passenger trains receive priority on railway routes, leading to slower speeds for container trains, typically averaging 25-35 kmph. This is due to freight trains sharing the same railway infrastructure as passenger trains. However, during the COVID-19 lockdown period, the average speed of freight trains notably increased. The introduction of the Dedicated Freight Corridor (DFC) is expected to more than double the average speed of freight trains on the DFC, leading to improved efficiency and reduced transit time. These advancements will contribute to the growth of the rail freight market in the future.

Waterways

Waterways currently contribute only 8% to the overall cargo movement in India. However, water transportation holds a distinct advantage over other modes due to its high carrying capacity and suitability for cost-effective, long-distance transport of bulky goods. With a vast coastline spanning 7,517 kilometers and being surrounded by the sea on three sides, India has abundant potential for cargo movement along its coast. The country is equipped with 11 major and 168 minor/intermediate ports spread across its coastline, offering ample opportunities for maritime transportation. Coastal shipping offers various advantages, including cost savings for shippers, reduction in road traffic, and a decrease in carbon emissions. According to the government, cargo movement on coastal routes witnessed a growth rate of 11.3% from 2015-16 to 2018-19. It is projected that the total cargo movement will reach 250 million tons per annum by 2025. Coastal shipping is particularly well-suited for commodities such as petroleum, oil, lubricants, construction materials, and dry bulk cargo like food grains, fertilizers, steel, coal, and minerals. India also possesses approximately 14,500 kilometers of navigable inland waterways, encompassing rivers, canals, backwaters, and creeks, which offer significant growth potential as a mode of transportation. To develop and regulate these inland waterways for shipping and navigation, the Government of India established the Inland Waterways Authority of India (IWAI) under the Ministry of Shipping in 1986. This initiative aims to harness the potential of inland waterways and facilitate their growth as an efficient transportation network.

Airways

While the focus in India has predominantly been on the air passenger market, the air cargo segment plays a crucial role in the countrys growth trajectory. Currently, airways account for less than 2% of the total modal mix for cargo transportation. Air transport is primarily utilized for time-sensitive items such as pharmaceuticals, healthcare products, electronics, wireless telephony, automotive spares, horticulture, and perishable goods. However, for non-time-sensitive cargo movement, airways

are less preferred due to their higher costs compared to other modes of transportation. Air cargo movement occurs through two main methods: dedicated air cargo services and belly cargo movement (utilizing space in passenger aircraft). The efficiency of air cargo lies in its transit times, which is particularly crucial for many product categories. Despite being considerably more expensive than other modes of transport, air cargo remains indispensable for specific commodities. The international air cargo industry is highly organized, thanks to the regulations imposed by international bodies such as the International Air Transport Association (IATA). Over 75% of the air freight market in India is dominated by organized players.

Warehousing

The warehousing market in India has experienced significant growth and is estimated to have reached a value of $12 billion USD in 2020. This market is expanding at a rapid pace, attracting over $6.5 billion in investments since 2017, with expectations of further investments in the coming five years. In terms of land availability for development, the warehousing sector holds a potential floor space index (FSI) of 500 million square feet across the major eight cities in India, while the existing stock in these cities amounts to 307 million square feet. Several factors contribute to the growth of the warehousing market. These include the increasing presence of Indian businesses in international markets, the growing demand for enhanced storage facilities, the rise of e-commerce businesses, and the implementation of the Goods and Services Tax (GST). Following the GST implementation, companies that previously relied on a network of small warehouses for tax efficiency purposes are now shifting their focus towards larger warehouses in strategically advantageous locations. The demand for warehousing space is driven by the growth of various sectors such as manufacturing, retail, fast-moving consumer goods (FMCG), e-commerce, and logistics.

Container Market Outlook

The Indian container market is projected to grow at a CAGR of 7.5% from 2022 to 2027. Factors driving this growth include increasing demand for imported goods, urbanization, and the expanding e-commerce sector. The market is segmented by container type, transportation mode, and end-user. Dry containers are the most commonly used, accounting for over 90% of the market share, while refrigerated containers transport perishable goods. Sea transport dominates with over 90% market share, complemented by road and rail transportation for inland connectivity. Manufacturing holds the largest share of container usage in India, followed by retail and other sectors. Major players like Adani Logistics, DP World, and JSW Infrastructure dominate the market with their extensive network of ports, terminals, and warehouses. Key trends shaping the Indian container market in 2023 include the growth of the e-commerce sector, the rise of inland container depots (ICDs), and the adoption of new technologies such as block chain, artificial intelligence, and robotics. Overall, the Indian container market is dynamic and expected to grow due to rising demand for imported goods, urbanization, and the flourishing e-commerce sector.

Strengths and Opportunities -

1. The increasing focus of large corporations on their core business activities has led to the outsourcing of supply chain distribution to intermediaries. Consequently, there is a growing demand for highly cost-effective freight forwarders.

2. The E-commerce market is witnessing a swift expansion, accompanied by a significant volume of returns that need to be handled efficiently by E-commerce partners. In this context, technology plays a vital role in seamlessly integrating the inventory management system with E-commerce platforms. The efficient management of returns/recycle logistics will be crucial for all industries to comply with ESG norms and ensure smooth operations.

3. The diverse consumer base of various industries such as retail, automobile, telecom, pharmaceuticals, heavy industries, and more, acts as a magnet for investments in the logistics industry.

4. Lancer is dedicated to maintaining its position as a prominent player by actively acquiring and fostering customer loyalty, all while exploring new markets. The companys strategic approach centers around sector-specific focus, tapping into emerging markets, and catering to the needs of MSMEs (Micro, Small, and Medium Enterprises).

5. Lancer Container Lines Ltd has entered into a Memorandum of Understanding (MoU) with the African and Peace Security Union. This collaboration aims to support the company in its development initiatives across African nations by facilitating and promoting activities in various projects and aiding the implementation of free trade agreements.

6. The Company has incorporated a subsidiary Lancia Shipping LLC. to cater to the strong demand in the MENA region

Risks and Threats -

1. Continued port congestion can have a major impact on the flow of ships, containers, and other transportation assets, such as chassis. This can lead to reduced capacity, longer transit times, and increased shipping rates.

2. Following the privatization of major ports, operating costs have significantly risen without any corresponding improvements in services or differentiating factors. The challenges of inadequate container parking bays, truck docking stations, limited terminal space, and delays in clearance processes persist, further impacting operating costs.

3. Fluctuations in the functional currency of the companys operations against major foreign currencies can potentially affect the companys international revenue. If the functional currency weakens, it may impact the cost of imports and consequently affect the companys profit or loss.

Financial Snapshot:-

During the year under review the revenue from operations is increased to Rs. 837 crore From Rs. 641 crore by showing a growth of 31% as compared to FY 21-22, EBITDA increased by 79.16% from Rs. 50 crore in FY 21-22 to Rs. 89 crore in FY 22-23. Margins increased by 290 bps from 7.80% in FY 22 to 10.70% in FY 23 led by increase in scale of operations and focus on strategic cost