Allcargo Logistics Ltd
NSE:ALLCARGO
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Allcargo Logistics Ltd
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Ladies and gentlemen, good day, and welcome to Allcargo Logistics Limited Q1 FY '23 Results Conference Call, hosted by Batlivala & Karani Securities India Pvt. Ltd. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Mr. Sailesh Raja from Batlivala & Karani Securities India Pvt. Ltd.
Thank you, Jon. Good morning to all. On behalf of B&K Securities, I would like to welcome you to the Allcargo Logistics 1Q FY '23 Earnings Call.
From the management side, we'll be hearing from Mr. Ravi Jakhar, Chief Strategy Officer; and Mr. Deepal Shah, CFO.
Without taking much time, I hand over the call to Mr. Ravi for the initial remarks and post which we'll open up for -- the floor for Q&A. Over to you, Mr. Ravi.
Yes. Thanks, Sailesh. Good afternoon, everyone. I'm Ravi Jakhar, Group Chief Strategy Officer for Allcargo Logistics Limited. I'm joined by my colleague, our Deputy Group CFO, Mr. Deepal Shah. I'm glad that you all have joined us on this call, setting aside other priorities heading into the Independence Day weekend.
This is a momentous occasion for us as a country to look behind on our journey over last 75 years and set course for future. It is not much different for us at Allcargo as we are in the phase of introspection and transformation, and I'm quite confident that we have already created a new base for a bright future ahead of us.
As a country, our progress depends on how well we uphold our constitutional values. Likewise, as a company, a lot of our achievements can be attributed to our core values that represent the ethos and philosophy of our founder. Our focus on customer centricity has helped us earn the trust of customers, particularly during the challenging times of pandemic that we witnessed in the last couple of years. We experienced resilience in our service offerings, and that has helped us expand market share across businesses.
As we started this new financial year faced with challenges of Ukraine war, lockdowns in China and a unique combination of inflationary and recessionary risks, against all adversities and headwinds, we increased our volumes substantially year-on-year as well as quarter-on-quarter in our mainstay international supply chain business, which contributes to nearly 90% of our revenues.
Allcargo was a company that effectively created the CFS business and the LCL consolidation business in the country, while Gati created the new segment of express logistics business in India. What I'm trying to highlight is that innovation and execution has been another core value. And today, we are leading the digitization of international supply chains in the LCL consolidation where we are global market leader as well as pioneering the digital revolution with our ECU 360 platform and a host of other digital initiatives.
With these core values and other initiatives, I am confident that we are on our path to continue our successful journey in serving customer needs and creating stakeholder value.
Coming to this year and the first quarter, we have had a stellar performance in the first quarter with highest ever volumes in the international supply chain business, and also the best of our performance in the express logistics business under Gati.
To take you through more details of our financial performance, I will now hand over the line to Mr. Deepal Shah. Over to you, Deepal.
Thank you, Ravi. I will now discuss the Q1 FY '23 performance. I'm happy to share that we have carried the momentum from the FY '22 into our current quarter. And for FY '21 -- Q1 FY '23, Allcargo Logistics has reported a consolidated revenue of INR 5,675 crores up 65% Y-o-Y basis. EBITDA stood at INR 434 crores, depicting a growth of almost 100% Y-o-Y basis. PAT stood at INR 280 crores, up 165% as compared to the previous year. I would like to highlight that we have been further able to improve our debt position, and the net debt-to-equity ratio now stands at 0.23x for Q1 FY '23.
Now I would like to discuss the performance of each business segment in detail for the quarter, starting with, first, our main segment which is the MTO segment, the international supply chain business. Business which is the MTO segment operating under the ECU Worldwide umbrella demonstrated robust performance. Ocean freight rates have witnessed declining trend over the last 3, 4 months. However, the company has managed to grow revenues on back of strong volumes, and profits remained steady with focus on digitization and yield management. Some initiatives like sales acceleration initiatives has helped fuel growth for the segment, which can be witnessed through volume growth, both for LCL and FCL.
LCL grew at a faster pace with 70% Y-o-Y growth while FCL grew by 10% Y-o-Y. I would like to highlight here that FCL has showcased a 47% CAGR volume growth since its launch in 2013.
Interacting supply chain segment reported revenue of almost INR 5,001 crores, crores, up 70% Y-o-Y. EBITDA stood at INR 358 crores, growth of almost 117% compared to INR 165 crores same quarter last year. Robust performance led ROCE improvements, which stood at almost 56% on an annualized basis.
Coming to the CFS and the ICD segment. The CFS and ICD segment has demonstrated significant growth in volume over last year. Volumes ended for the quarter stood at 138,300 TEUs as against 82,500 TEUs handled in Q1 last year. With sharper focus on customer analytics, the business has been able to maintain robust EBITDA margins of 26%, along with delivering strong ROCE of over 30%.
With focus on digitization in customer journey and data-based decision-making, the CFS business is poised for opportunities ahead. For Q1 FY '23, CFS vertical reported a revenue of INR 169 crores registering a Y-o-Y growth of 38% as against INR 142 crores in the corresponding quarter. EBITDA for the quarter stood at INR 44 crores compared to INR 39 crores in Q1 FY '22.
Moving on to the next segment, which is the express logistics operating under the Gati umbrella brand. The express logistics business under Gati subsidiary, GKEPL, reported its highest ever volume and best quarterly revenue at INR 365 crores for the quarter. The company continues to scale up quality infrastructure to drive the next phase of growth. The company continues to focus on sales acceleration, operational efficiency, digitization, talent acquisition and infrastructure by creating additional capacity.
For Q1 FY '23, the revenue stood at INR 365 crores as compared to INR 237 crores for last year, registering growth of 54%. EBITDA stood at INR 25 crores compared to a loss of INR 1 crore last year. The turnaround in business is shaping well, and the performance remains on track to attain profitable growth under Gati 2.0.
Going on to the next segment, which is the contract logistics, rentals and others. The contract logistic business also continues to grow across all verticals. The equipment business of the company has rationalized reducing capital employed, and utilization is currently at about 80% level despite the monsoons. Our JV associated business operating under ACCI witnessed growth of 15% on revenue on a quarter-on-quarter basis, which stood at INR 157 crores in Q1 FY '23 as compared to INR 137 crores in Q4 FY '22.
As highlighted in notes to accounts, the contract logistics business will get transferred to Avvashya Supply Chain Pvt. Ltd., a wholly owned subsidiary of the company on an ongoing basis with mirror shareholding. The requisite approvals are awaited from NCLT, and we keep the shareholders updated of the same.
We have been consistently providing other key competitive financial performance indicators and detailing on each of the corporate announcements in our investor presentation. One can refer that for more detail.
Now I would request the moderator to open the line for Q&A. Thank you.
[Operator Instructions] We have the first question from the line of [ Riya ] from Equitas Investments.
My first question would be in regards to the MTO segment. What kind of volume growth do we see in the coming future and from what [indiscernible] growth?
So we have consistently maintained the guidance that we continue to increase our market share, which means that whatever the market growth is we will be having a delta on top of that. We do not give specific guidance on the volume growth, but to give a perspective on the industry growth, one could look at the GDP growth forecast, which is commonly spoken about. Usually, the trade grows at a delta above that.
Within the trade LCL, which is our mainstay business within the international supply chain, it's the fastest-growing segment on the back of global SMB trade and e-commerce trade. So usually, LCL is a faster-growing global segment. And within this segment across the world, we would be gaining market share and therefore be growing faster than that. So whatever -- assuming that the similar growth trends continue in the underlying market, you should see similar growth trends continuing in our business as well.
Okay. That's really great. And with the recent acquisition of Nordicon and the JV, which we have done in this segment, what kind of revenue are we seeing from that space and how has it panned out? And what kind of synergies are we looking at?
So both Nordicon and the joint venture in Korea have been extremely successful for us. we have been able to not only integrate and retain the entire volumes handled by those businesses, but also as those volumes have now come into our network, it means incremental volumes being handled on the other side in the network, incremental profits.
And also the integration with ECU Worldwide network has allowed these companies to perform better, increasing their lead optimization. And therefore, I would say that on a ballpark basis, the profits have nearly doubled from where they were prior to the acquisition for these -- for Nordicon entity.
Okay. So are we seeing any further improvement in these segments in terms of volumes? Like what -- because since we knew that the market share gains would be higher. So if you could just give us a sense what kind are we seeing double-digit growth there?
So we would continue to witness strong growth on the back of organic growth initiatives, which I alluded to. On top of that, we do continue to evaluate strategic acquisition opportunities, which could help us gain significant traction in specific countries or specific geographies. So that is something, which we continue to look at. And through the history of the company, we have done multiple acquisitions, and fortunately, with strategic focus, they have all been successful. And we believe that such opportunities will continue to emerge in the times to come, and we will continue to look at such strategic acquisitions.
Okay. My next question would be in regards to the logistics segment. So basically what is the status of current deal with Blackstone? Like what amount have we received? And if you could just explain me more.
Yes. So in terms of the cash flow, the large part or amount has already been received. However, the consummation of the transaction had been pending for some time. There were some processes, which were not time-defined, but they have been concluded now and it should be any moment. I would say it should most likely happen within this month. Week or two here or there, but most likely this should happen any moment.
Once that happens, there won't be an incremental cash flow, but there will be a reduction in debt on account of 2 things. Some of these assets are held in SPVs, which would go off our balance sheet as we sell the stake to Blackstone and those SPVs. And secondly, there is some other fund, which is sitting on our books as a convertible amount. Yes. And my colleague, Deepal, can confirm on the ballpark amount, which we would see in terms of debt reduction once this Blackstone agreement consummates in the coming weeks. Deepal, would you like to share the amount?
Yes. So Ravi, approximately INR 3 crores -- INR 300 crores of debt will go off our balance sheet once this transaction is consummated.
And I think there was an agreement of INR 16 crores in interest would be levied if the deal does not get consummated. So are we paying any part of it?
No. It's a deal -- I mean, the deal is going to happen, right? So there's no provision for that at this point in time. We don't think we'll be required to pay that.
And actually both parties are eager to consummate the transaction, it should happen any time.
Okay. Got it. And in terms of CFS business, are we seeing decrease in realization there because of the DPD rules and all?
There was a trend in the past. But if you look at the recent performance, we have been improving margins on the CFS business.
Yes. So what is triggering that? Actually I just wanted to know what developments have happened.
This has largely been on account of using technology to our advantage, both in terms of customer touch points as well as a lot of analytics now that goes in; in terms of managing customer decisions, which has helped us to marginally improve the profitability by bringing in efficiency and managing profitability through various digital tools.
That's been the key driver for improvement in the performance on the margin side. Overall from an environment perspective, DPD and others, they played a role historically, but now that has already reached a mature, steady state. And there's not much impact on account of that.
So for a matter of fact, our volumes and EBIT per TEU for CFS would remain -- would be sustainable, right?
Yes. Absolutely. That is what it should do there.
Or are we seeing any further decline in volumes in the CFS business?
No. So we believe that driven by India's export, we should continue to see strong growth in the CFS business and also on the consumption side, country is likely to witness strong growth. And CFS is an important extension to the port infrastructure. So on the volume side, we should continue to see strong momentum.
And the beauty of this business is that as we handle more volumes and if there's a marginal dip in the dwell time, it may lead to a marginal reduction in the revenue per TEU, but that also means that with the same yard, we can now handle more containers.
So on an overall basis, it only bodes well for the business. So from hereon, we believe that the business should continue to grow in terms of volumes as well as in terms of profits.
Okay. So we're expecting, as you say, lower single growth in volume, right?
We would not be able to give a specific guidance on the numbers. But here, again, we will be maintaining or growing our market share.
[Operator Instructions] The next question is from the line of Deepak Poddar from Sapphire Capital.
So I just wanted to understand [indiscernible]
Excuse me, Mr. Poddar, we are not able to hear you clearly.
I think he's asking an update on demerger, if that's the question?
Yes. That's correct.
Yes. I would request Deepal to respond on that, please.
Yes. So we have submitted the application for demerger to the NCLT, and we are awaiting progress on that. So we are well in line in terms of the time line that we have provided. That will take close to 12 to 15 months for the entire demerger process to be completed. So all the requirements from our side have been fulfilled at this point in time. And we're awaiting the regulatory approvals in this matter.
Okay. So ideally by second quarter of FY '24 as well, we might be looking to kind of get through with the demerger?
We cannot comment timelines. But yes, I mean, we expect it to happen much earlier than that.
Much earlier than -- okay, okay. Fair enough. Understood. And sir, my second query is regarding your EBITDA margin -- sustainable EBITDA. Given a lot of changes, the volume has seen a sharp growth. But I guess the freight rates are declining. So how do you see sustainable margins going [indiscernible]?
So basically, to give you a business perspective on the business, a large part of our business is LCL consolidation wherein our unique capabilities lie in operating the network across the world where ocean freight rates are more like a pass-through cost in some sense. While we take care of various services, including consolidation and deconsolidation of cargo in the origin destination, et cetera. So the ocean freight underlying becomes more of a pass-through cost.
On the FCL business, there is some impact of the ocean freight environment on the margins per TEU. However, that is generally more than negated by the volume expansion and which is what has also can be seen from the results of this quarter wherein the ocean freight rate was declining. However, we have continued to maintain the profits.
And also the EBITDA margins also depend on the operating leverage, which means that by use of technology, we are not required to increase the SG&A cost in the same proportion in which we grow the business. So these sectors aid us in the sustenance of the margins.
Correct, correct, correct. So ideally, I mean this 8% kind of EBITDA margin, 7.5% to 8%, is that a level one should look at? I mean given the changes in the macro environment?
So assuming that there could be further softness in the ocean freight rates, one could see the margins being sustained or could even marginally improve because as we hold on to the margins against a decline in revenue, it could potentially also mean a slight improvement in the margins in percentage terms.
So Ravi, just to add to that. So basically, large amount of freight is approximate -- is a pass-through. And if the freight rates drop, it also improves your working capital, which also adds to your bottom line. So in a way, a declining freight rate environment could probably help us a little better as well.
Yes. Understood. Yes, that's quite fair actually, yes. Quite interesting. My final query, do you expect ocean freight to further go down from here? Or are you expecting to be raised on going forward in the short term?
So we believe that there could be a little more softness on the ocean freight rates. However, we do not see any sharp movements. And also, we believe that there could be some continued volatility in the rates given that there have been unprecedented situations, be it the lockdown or the war-related sanctions and now with the festive season coming up. So there could be some positive and negative demand drivers in the market, which could be more sporadic. So therefore, it is important to remember that there would be some volatilities. But if you ask for a directional trend, there's likely to be a more softness in the freight rates.
[Operator Instructions] The next question is from the line of Sameer Deshpande from Fair Deal Investments.
Congratulations for the good performance, and we have attained a trajectory of around INR 5,500 crores to INR 6,000 crores quarter. It's quite a commendable achievement and as you exude the confidence, think that continue to grow with the same level because India is expected to grow at around 7%-plus is a good thing. Now I would like to know what is actually the gross debt and cash and net debt of the company?
Yes. Deepal, if you could take that up?
Yes. So we are having approximately gross debt of INR 1,600 crores, and we have close to almost INR 800 crores of cash with us at the moment.
So overall, the consolidated net debt is around INR 800 crores only.
Yes, yes. So net debt is around INR 858 crores.
INR 858 crores. So it is quite enough. [ See ] also, there has been a turnaround this time after a long time. So the structuring deal, which was expected, how soon is it likely to happen?
So there are 2 points that you mentioned, turnaround in restructuring. So turnaround is something which I would say has been largely contributed, but now the outcome being displayed with the growth in business and improving margins on Gati. On the restructuring, the past one, which is the work in progress, which is a demerger, my colleague, Deepal, already shared detail that it's already with NCLT and we expect it to be concluded by April, May next year.
And there have been -- the Board also has recommended to look at options to restructure the express and contract logistics business, as we have disclosed in the recent past along with engaging with our joint venture partners, KWE. However, those are at preliminary stages right now. Perhaps in the coming 2 to 3 months we'll be in a position to offer more information on that.
Got you. And now regarding the debt, you mentioned that the net debt now is around INR 858 crores on consolidated level. And out of this, after the Blackstone deal is consummated, the company hopes to clear further INR 300 crores. So after that, the debt should be in the range of INR 550 crores to INR 600 crores?
Yes, that is right.
[Operator Instructions] Next question is from the line of Rushabh Shah from Anubhuti Advisers.
Over the last couple of quarters, we have been exiting a couple of noncore businesses and noncore assets. So has that largely been concluded? Or over the next couple of quarters, do we see further such corporate events to play?
So there are certain assets which are being disposed, which is a longer-term process in Gati. We had given time lines of 18 months or so. So that continues, and we may see monetization of certain land banks, which are not required for business, fuel station business, et cetera, which is under which there will continue to be certain accruals coming from such disposals of assets.
And on the -- among the other businesses, we have already sold the project transportation business, which is also noncore. However, some cash flows are yet to come from that, which would come in. And the equipment business has been downsized, but there could be further work on incremental downsizing or exits from the business.
So this is a continuing process. We continue to manage businesses very well with great performance, but at the same time, we're very focused on the core businesses and we want to continue to move out of small noncore businesses.
Understood. But they would largely be now on Gati [ cargo ]. We don't have any such big business, which we are now looking to exit.
In the overall scheme of things, if you look at the large scale that the international supply chain business contributes to and then the express and contract logistics business, all these decisions are minor points, I would say. They're not going to make very significant impact.
Understood, understood. And second last question from my end would be on the tax rate part. Now I believe our tax rate continues to fluctuate, I think it's on a very big scale. So if you can just guide on what can be the effective average tax rate for this year and the year to come.
Yes. Deepal, would you like to answer that?
Yes. So the tax rate depends on many other things, our ability to utilize MAT and many other things. So there is a little bit of fluctuation in that. But what we are expecting it to be in the range of close to 24-odd percentage in the long run is what we expect our tax rate to be.
Okay. On consolidated basis, correct?
Yes, yes. On a consol basis, it should be 24%, 25%. Yes.
The next question is from the line of [ Raza Agarwal ].
Congratulations on good set of results. So my question was on the international supply chain side of the business. So just to understand, now that the freight rates are falling and if going forward, for example, considering a hypothetical scenario with the freight rate that if we hit the 1Q FY '22 realizations of 1.3 lakhs in the international supply chain business, wherein the EBIT per TEU was INR 6,000. So going forward, if we hit that kind of realization, what kind of EBITDA per TEU can be obtained?
Yes. So I would reiterate that the ocean freight rates do not impact the core business that we have, which is the LCL consolidation. Our profits rather depend on 3 parameters: one, how much cargo we are able to stuff in a container, which is called the container utilization, which is driven by using customer engagement and data analytics tools.
The second driver is how many 40-feeters do we use as compared to 20-foot boxes, which is driven by economies of scale and growth, which is well placed.
And the third factor is how many direct routes we are able to operate as compared to transshipment, which is an additional cost, where again, we have made great progress by further enhancing our global network.
These 3 underlying factors are what drive the profitability in the mainstay LCL consolidation business, and they continue to be strong. And we do not see any impact of ocean freight rates on any of these sectors that drive profitability for us.
Sir, actually, I'm asking this question primarily because we thought that we have hit the peak EBITDA. And like from this quarter onwards, we believe that the EBITDA would continue to fall because of the freight rate. So now given the freight rate scenarios, can we maintain...
As I mentioned [indiscernible] in the first quarter as well and the results are available to be looked at. So we've already had 1 quarter where the ocean freight rates fell. And in some cases, they fell by a significant 30%, 35% as well. But despite all those ocean freight rates decline, as we have been commenting for the last several quarters, our performance should sustain and that is what is being visible in the first quarter outcome as well.
I see. Sir, in this business, could you tell me what is the average lag time, if any, bearing the container board time we resell them to customers. So what I wanted to understand is for the volumes sold in the international supply chain business in 1Q FY '23, did we book the containers in 1Q itself or in 4Q or even prior to that?
There's a combination of various long-term and short-term contracts. There is spot buying and spot selling as well and there are long-term contracts. We operate like an Uber of shipping when we don't own the vessels, but we operate like a shipping line. Customers book cargo with us for various origin destination payers, and we operate like a non-vessel-owning common carrier. That's the business.
So there are underlying back-to-back contracts for long term as well as there's a lot of -- there's a combination of various things, but there's -- if you're trying to understand there's a lag between the macro environment and that, there isn't any significant lag in that sense because the trends are largely matching on the demand and the supply side.
Having said that, like I highlighted, if you look at this quarter itself, the volumes have gone up but revenue has not gone up, which is primarily indicator of falling ocean freight rates. However, the decline in the ocean freight rates has not had an impact on the bottom line because, as I explained, the bottom line on the mainstay LCL business is largely driven by utilization and the other efficiencies. On the FCL business, there is a minor impact, which gets negated by the volume expansion.
So actually, in volume growth in Europe and U.S. actually [ tended that the net ] have reduced the global container volume. So is it fair to assume that we will grow 2% to 3% going forward? And could you also give us some light on what is the current market share and expected market share gain over the next 2 to 3 years?
Yes. So what you're referring to as 2%, 3% expansion is more of a global ocean freight growth rate. And if you look at the last 4, 5 years of trend, the global ocean freight rates growth rate may not be very different. What we are referring to is within the global ocean, freight, as I mentioned, the LCL trade grew much faster.
And within that, our market share has been expanding, and therefore, we have been witnessing stronger growth in a similar market over the last couple of years as well. So our growth is not only backed on the market expansion in terms of the market growth rate, but also on the market share expansion, which has been the primary contributor to the volume expansion in our case.
Okay. Also coming to the CFS business, so previously, we had discussed that the major growth driver for our CFS business would be volumes. In this quarter, despite a Q-o-Q growth in cargo volumes in the industry, we have seen that from -- in our business, we had witnessed that there is a Q-o-Q degrowth in the CFS volume. So could you just give us some reasons that why is the decline? And going forward, despite the DPD hurdle, what factors will lead to volume growth for the company?
So they could -- there are always certain seasonalities on a Q-on-Q chip is in the CFS business. If you look at the Y-o-Y, there's been a strong growth in the business.
Also, as I mentioned, we have been rationalizing our business to drive profitability, which could also have a certain minor temporary impact on the volumes, but that turns out to be a positive impact on the overall bottom line.
In terms of the DPD, this is already stabilized. However, it is the CFS business, which allows the Indian ports to continue to work without any congestion issues as we saw in Los Angeles or other parts of the world because CFS allows for immediate evacuation of containers from the port and play an important role in the container supply chain. And we believe that they would continue to play a role. In fact, there could be further expansion in the role that they play depending on how the regulatory policies shape up in the coming years.
I just had 1 last question, if I may, just one last. So in the result of this, we have stated that the purpose -- could you guys explain what is the purpose of agreement with shareholders of Haryana Orbital Rail Corporation Limited to acquire 7.6% equity stake where in we have spent INR 60 crores or more.
So this is a marquee rail corridor coming around NCR, which would carry both passenger cargo as well as the -- passenger as well as cargo. And this would be a DFC-compliant rail corridor. It is a partnership between various government bodies and Maruti [indiscernible] and Allcargo Logistics. This basically also provides us a seamless connectivity to DFC to our upcoming logistics park in the NCR. And therefore, it is a strategic investment keeping in view our ambition to participate in the ICD business and will link ICD business, which can be seamlessly connected with a dedicated freight corridor.
[Operator Instructions] The next question is from the line of [ Ravi ] from [ One Up ].
Just wanting to take the discussion on MTO profitability a little forward. So you explained the levers you have for protecting the margins in a lower freight environment. Just doing some number that the realization per TEU, the kind of dip we see quarter-on-quarter, the dip in EBIT is much lower, which probably explains the levers you have. Any thumb rule or something which we can factor in, in terms of what could be a proportionate impact of the lower freight rates? Or any way to look at it?
So I would say that typically, about 2/3 to 3/4 of our business is LCL consolidation and about 1/4 to 1/3 is the FCL business. In the LCL consolidation business, the business operates on the gross profit per unit volume -- are then operating on a revenue per unit volume so that is how this business operates and therefore, whatever ocean freight reduction happens leads to an equivalent reduction in both the operating cost and the revenue. And therefore, on the gross profit level, it does not create an impact, as I explained and the fluctuations we have seen over the last couple of years have largely been driven by the other factors.
On the FCL business, as the freight rates come down, it's not to the same extent, but to some marginal extent there is a decline in the profit per TEU. However, in terms of the broad ballpark impact, that is estimated to be below the estimated growth rates. And therefore, to a large extent, any such drop gets negated by the expansion in volume. So that is the broad perspective at which one could analyze the numbers.
Okay, okay.Also another question was the contract logistic business has moved to a subsidiary format from a JV format. I understand, I think that is to do with the restructuring of the business. Any time lines of probably evaluating this business to be merged with Gati's contract logistics business? Or how are you looking at this piece, any time lines? Will you try to do it along with the whole demerger activity that has been going on?
So the currently ongoing demerger would continue to proceed with the current scheme of things. We are evaluating various strategic options on the contract logistics and the express business, and we are in discussions with our JV partner's capability as well to look at buying out their stake. All these discussions should reach some form and shape in the coming 3 months or so to put a broad time line, it can be a little bit here or there, when we will be in a position to share further updates with you.
Ravi, just an addition over here that once it moves to the subsidiary, it continues to be a JV, yes. So we've clarified that we are splitting the current JV into the business and moving it into the supply chain, which is a subsidiary, but the shareholding pattern will reflect the JV at step one. And whatever restructuring will happen at step two.
Yes, of course. So probably we can expect some consolidation of holdings.
Yes, yes, yes.
Of course, of course. Sure, sure. And just a bookkeeping clarification. Probably the net debt at INR 858 crores can come down by INR 300 crores with the Blackstone deal. And further, we did a transaction of selling the project logistics business. So we can expect it further coming down by another INR 100 crores as we receive the cash?
Yes. When the cash flow comes in, yes, it will get reduced accordingly.
Okay, okay. And on the Nordicon acquisition...
Sorry. Unless there are new investments that we make.
Yes, sure. I'm just talking about as is basis as of now.
On the Nordicon side, so we were given some indication that it was hitting an EBITDA of EUR 1 million a month kind of a run rate. So just wanted to know how are things there progressing? And with the combined EBITDA, what you've shared in the presentation that includes Nordicon or...
Yes. So to give a perspective, we had mentioned that we had acquired the company at a run rate of about EUR 4 million annualized, which I mentioned on today's call as well as almost doubled from that run rate, and we have had certain months hitting up to $1 million in the particular month as well.
There has been some temporary disruption to the rail service, which we have highlighted in our published outcome as well, which has somewhat impacted the Nordic on profits in the quarter for which the earnings have been published. Now we are seeing a little bit of reversal in that trend with rail volume also starting again and with alternative routes being found to Russia.
So we believe that there was -- so perhaps in the quarter gone by, the performance was somewhat suppressed, which should get to the normal levels as we move forward. But ballpark, as I said, it's almost like a doubling up from the level at which we acquired.
Sure, okay. That's helpful. Any broad commentaries on the Europe side? So we're hearing a lot about the heat waves and slower moving of cargoes because of low levels. So how about the inquiries with the environment, if you can just talk about broadly?
Yes. So I would say in terms of the metric from environment, we get the same feedback as most of us would be aware. There has been some conversation about sluggishness in the demand. And clearly, we also observed that in Europe there's a greater conversation around the sluggishness in demand as compared to, say, yes, we do a reference point. And therefore, there could be some sluggishness in the demand, and therefore, the trade volumes as well.
That's on the [ metrics performing ]side, but that's also a good opportunity for me to explain how our business is very beautifully placed to be automatically hedged against such scenarios. So what happens is whenever there's a slowdown in demand, that usually leads to a temporary spike up in the LCL consolidation business. So therefore, there's a little bit of a 6 to 9 months kind of a -- there's sluggishness in demand that kind of gets compensated with the greater opportunity in the LCL consolidation space.
Likewise, we also noticed that whenever there is an overall global environment where people foresee recessionary risk, et cetera, people also tend to move towards the safer currency such a dollar and we usually find that dollar appreciates.
So while there's a little bit of burden, which the recessionary macro environment brings in terms of the impact on the business, there's also a natural hedge in the dollar appreciation, which benefits our business. So from some of these temporary headwinds, our business is also largely insulated.
The next question is from the line of Abhijit Mitra from ICICI Securities.
Just to understand again on the MTO part, the thing that you mentioned, the 2/3 of the business is LCL, you mean by volumes or by revenues? What exactly do you mean when you said 2/3 is LCL?
I would say largely in context with gross profit contribution, which is the line item that I was describing on how to evaluate the business.
Okay. And on the EBITDA level, it could be similar or it could be higher?
We do not share the detail, but I can...
Sure, sure. No worries, yes, yes. So what I was trying to understand that if you can create a bridge because the [ EBIT per TEU ], which you used to report was around EUR 39, EUR 40 a quarter. Now it has moved up to EUR 150 per quarter. Of course, it moved up much higher. Now it has come off a bit.
So can you create a bridge between EUR 39, EUR 40 to EUR 150? I mean broadly, you mentioned some of the contributing factors for LCL profitability improving like Internet utilizations, like 40-feeters against 20-feeters, direct tools versus transshipments and stuff like that. But if you can create a bridge highlighting the major impact points, which have taken this EUR 40 to EUR 150.
Yes. So one, I would say, going back more than a couple of years behind might also distort the picture given the cargo mix and a difference in the trade lane basket itself. However, on the overall trend, we would not be able to provide, let's say, a piece-wise breakup because it's information which is sensitive from a competition and from a confidentiality perspective.
But like I said, these are the 3 contributing factors, which can be together considered as contributing to almost the entire uplift in the improved margins on the operating level. From gross profit to EBITDA, it is just a function of the SG&A costs, which are dependent upon our investments into expanding management teams on one hand and digitization and therefore a reduction in the operating costs on the other hand. And there's a bit of a trade-off in that.
Just to explain an example. When I say increased utilization, what we're essentially saying is, let's say, if we are carrying 25 cubic meters of cargo in a container, now it's able to carry 26 cubic meter. For the additional 4% cargo, we do not pay any ocean freight because we are still carrying it in the same container. And 4% is literally a pass-through and that becomes very substantial. So 1 cubic meter improvement in the cargo utilization creates a 4% impact on the ocean freight cost, which is a significant cost on our [ underlying element ] that helps us expand the gross profit.
So I would say this is something, which has happened over the last couple of years, but I would say right now we are in a path wherein we have stabilized these largely. So from hereon, we would see that the ease should continue and the growth should be more led by volumes.
Yes, yes. That's helpful. No, I understand the levers. It's just that in future presentations, if you can lay out some bridge, I think that will address a lot of queries because I think now the fear is that a large part of this move has been driven by freight and that fear -- addressing of that fear, probably a bridge would help was my submission.
And secondly, on Gati restructuring. So to sort of, I think, in your post-Board meeting release on 2nd of August, you have mentioned certain factors. So for example, you have mentioned that restructuring business of Gati and contract logistics business division of the company. So -- and you also mentioned that the Board has given approval to undertake discussions with Kintetsu as -- within the provisions as per shareholder's agreement.
So if you can lay out some of the terms of the shareholder agreement, what exactly is the shareholder agreement that you have with Kintetsu. And does beginning of these disruptions trigger any sort of move when you will discuss, you will sort of start with an offer and they'll have to respond to you? What are the contours of these discussions if you can broadly highlight, of course, in keeping with the disclosure norms.
We're bound by the confidentiality agreement. We're not able to disclose it is. But like we have disclosed, we are in the process of considering various restructuring options, including discussions with KWE to buy out their stake. And these are the 2 headline items that you could speak about right now. But as I indicated in coming 3 months, we'll be in a position to have more details being shared with everyone.
Right. And each of these moves, we see involvement of multiple parties, including NCLTs and -- for example, if...
[indiscernible] yes, So whatever is required, we have to go through that process.
Yes. But that sort of extends the time line, right? I mean it can easily stretch beyond 2 years given the current pace at which things are moving. So do you see a risk of that or you feel...
Well, our experience has been, I would say, reasonably good. We did some small demerger. There's a Jhajjar logistics path where we did a small demerger. We have been in the process of concluding a demerger of our ACCI business and the scheme of demerger for Allcargo also. And we have been quite satisfied with the response from the NCLT. And as I mentioned, we had indicated a time line of about 15 months at the beginning of taking the initial Board approval and from thereon, we are on track.
So we believe that we should be able to conclude things in a time-bound manner. We do not see much risk of running beyond those time lines. Having said that, we have to comply with the laws of the land, by the regulations.
The next question is from the line of Keshav Garg from CCIPL.
Sir, sorry to be repetitive, but sir, we can see that in the MTO division since the past 3 quarters are even though our top line is flattish, but our is EBITDA decreasing from INR 389 crores to INR 361 crores to INR 318 crores. So now this INR 318 crores that we did last quarter, can we hold on to this or is this -- will this see further decline in the quarters to come?
So usually, in this business, October to December quarter is the strongest quarter. And that cannot be compared with the following quarters, which usually have a declining demand situation. And as far as the first quarter is concerned, there again there was also contribution from some specific incentives, which are also seasonal.
So I would say in this business it's largely driven by seasonalities and patents in which business operates. So a fair comparison would be Y-on-Y rather than a Q-on-Q. A Christmas quarter is very different from the quarter just before that.
Great, sir. Sir, so basically -- sir, but still like the previous speaker was mentioning that our stock price is reflecting the fear of the market that our earnings might be temporarily bumped up. So if this is not the case, sir, if you see our stock price and our price-to-earning ratio today is at its lows of 2009, 2013 and March 2020 lows, all these are crisis periods. But if our earnings are sustainable, so then the company should go for a share buyback because we are trading at 7x earnings so -- which is the lowest ever, I mean, for the pricing period. So if that's...
Just 2 quick comments on that. While the demerger scheme is going on, the share buyback is not possible as the demerger still is going on. So that option is not there on the table, just to share the factual aspect on that.
And secondly, as a business, our control is on delivering performance and providing comfort and clarifications to all our shareholders, investors and analysts. And I'm sure that the coming quarters would see changing trends like this one has and people should be in a position to analyze the company's performance and correlated with the natural [indiscernible] changes.
So in that context, while previous quarters were slightly different, I think this was an interesting quarter wherein we had all the headwinds possible from the war, inflation and lockdowns and declining oceans freight on top of that. And the performance has continued to be strong.
Sure, sir. Much appreciated. And sir, lastly, so this Haryana Orbital Rail cooperation, so what is our total stake? And also is there further investment from our side that is acquired in future?
Our shareholding is 7.6%, and Deepal, if you could provide details on our commitment in there.
Yes. So we have a total commitment of INR 114 crores. We have already invested INR 60 crores. So the balance amount will be invested in the coming years.
The next question is from the line of [ Shivangi Mehta ], an individual investor.
Sir, I had one question regarding the restructuring of KWE. I don't know if you can comment on this, but can this lead to some sort of a debt pileup on Gati's balance sheet? Like when you buy out the stake, how will that be funded?
So there is something which, unfortunately, at this point in time, I would not be able to share much details. But as we explore various options, we'll come back with details.
But I can share with you that if you look at our approach in business, we have kept leverage in check and that is what you see in today's overall debt numbers as well. And wherever we have raised debt across any company, we have usually raised the debt with a clear horizon on the repayment. And so therefore, as a company, philosophically we would never be in a situation wherein we will be in a situation where the leverage or the debt could be a concern. We're quite clear on that.
In terms of how exactly the transaction will consummate and how it will be funded, et cetera, at this point in time, it's a little premature. We'll come back to you when we have more clarity on that.
Ladies and gentlemen, that was the last question. I now hand the conference over to Mr. Sailesh Raja, for closing comments.
Yes, thank you all for attending this session. We especially thank the Allcargo Logistics team for their time.
Mr. Ravi, any closing comments you would like to make?
So just on behalf of myself and people, I would like to thank everyone for joining us. And that's it. Thank you.
Thank you very much.
Thank you. On behalf of Batlivala & Karani Securities India Pvt. Ltd., that concludes this conference. Thank you for joining us. You may now disconnect your lines.