Allcargo Logistics Ltd
NSE:ALLCARGO
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Allcargo Logistics Ltd
Earnings Call Analysis
Q3-2024 Analysis
Allcargo Logistics Ltd
In the quarter ending December, Allcargo Logistics announced a transformative restructuring scheme to demerge its international supply chain business into Allcargo ECU, creating an uncomplicated operating structure aimed at boosting management efficiency and financial flexibility. This will potentially gear both sides of the business towards more robust growth paths.
The quarter saw dampened global trade linked to inflationary pressures in western economies and elevated interest rates. However, forecasts suggest a brighter outlook for the latter half of 2024. Interest rates may see a downward revision potentially leading to increased trade and reduced inflation, benefiting international supply chain volumes from July to December 2024.
The Red Sea crisis erased a slice of shipping capacity, leading to a moderate increase in freight rates that offered a counterbalance to the reduced market demand. Even as volumes faced slight negative impacts, the overall effect on the company remained mildly positive, a trend expected to persist into the first half of the year.
Allcargo Logistics initiated a cost reduction strategy in August, outsourcing operations from high-cost to low-cost countries, digitization, and other efficiency measures. While initial severance costs may impact the January to March quarter, benefits of these initiatives are predicted to enhance profitability, especially from April onwards.
Domestic economic strengths are furnishing healthy prospects, with a robust pipeline promising solid growth for the Contract Logistics business.
Although Express Logistics has seen volume increases, an unfavorable product mix has led to lower yields, and revenue growth failed to keep pace with volume, impacting the bottom line negatively.
Revenue for Q3 FY24 marginally decreased by 3% to INR 3,212 crores, with EBITDA experiencing a 6% decline to INR 111 crores. The profit after tax remained stable. A robust balance sheet showcased a consolidated net debt of INR 214 crores as of December '23, signifying fiscal health amid challenging times.
The International Supply Chain business registered only a slight revenue decline of 2% to INR 2,721 crores, with EBITDA boosting by 16% to INR 72 crores from Q2 FY24. The Express Logistics recorded an 11% volume growth year-on-year, with Q3 FY24 revenue holding steady at INR 371 crores.
Contract Logistics maintained a stable trajectory with Q3 FY24 revenues at approximately INR 78 crores and a nearly consistent EBITDA figure compared to the previous quarter, indicative of the segment’s resilience in the face of broader economic undulations.
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Ladies and gentlemen, good day, and welcome to the Allcargo Logistics Limited Q3 and 9 Months FY '24 Results Conference Call hosted by Dolat Capital. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Hemesh Desai from Dolat Capital. Thank you, and over to you, sir.
Thank you. Good evening, everyone. On behalf of Dolat Capital, I welcome you all to Q3 and 9-month FY '24 Earnings Conference Call of Allcargo Logistics Limited. We are pleased to have with us the management team represented by Mr. Ravi Jakhar, Group Chief Strategy Officer; Mr. Deepal Shah, Group Chief Financial Officer; and Mr. Sanjay Punjabi, Investor Relations for Allcargo Logistics Limited. We will have the opening remarks from the management followed by a question-and-answer session. Thank you, and over to you, sir.
Yes, thank you. Good afternoon, everyone, and thank you for joining us for the quarterly earnings call. I would take you through some of the business highlights and the macroeconomic environment and then hand over the line to my colleague, Deepal, to take you through the financial highlights.
As you are aware, during the quarter ending December, we also announced the scheme of restructuring, which is currently under implementation, and we've already filed the scheme with the exchanges and the scheme is being pursued.
Just to reiterate, under the scheme, the international supply chain business would get demerged into Allcargo ECU. The remaining business of Express and Contract Logistics, which currently is under multiple step-down subsidiaries, could all consolidate into Allcargo Logistics directly, thereby creating a very simple operating structure which will aid the management efficiency and provide for better financial flexibility, thereby creating platform for better growth across both the businesses.
Coming to the macroeconomic environment on the international supply chain side. On one hand, from a global trade perspective, we have seen continued subdued demand -- it is linked with the inflationary pressures in the western economies. And the expectation is that with the interest rates and the federal rates likely to remain elevated for another couple of months, we see them not going up and perhaps stepping down during the latter half of the calendar year 2024, which would lead to increased demand in combination with reduced inflation.
Basically, that should translate into increased global trade in the second half of 2024. And therefore, we estimate that 2024 second half, which is July to December, we should expect better volumes in the international supply chain business. In the near-term, we have observed that Red Sea crisis has eliminated some bit of capacity on the shipping trade lanes, thereby somewhat balancing the excess capacity, which was on account of lower market demand and as an outcome of that, we have seen an escalation in freight rates. However, given the overall subdued economic environment, there is also being a marginal negative impact on the volumes. And therefore, the overall impact is marginally positive, not much, which we expect to see in the first half of the year as well.
At the company-specific level, we have endeavored to reduce cost and this initiative started with planning around August. And subsequently, we have made certain decisions to bring down cost-efficient -- cost by way of outsourcing some of the operations from high-cost countries to low-cost countries, eliminating certain positions by way of digitization and bringing in other efficiency measures and all these initiatives are bringing in substantial cost improvements.
We believe that a significant part of these costs will start -- benefits to start accruing from January. However, if you look at the quarter from January to March, there would also be a severance cost, as many of these countries, as we dominate employment contracts, depending on the longevity, require significant payouts to be made. So overall, in the Jan to March quarter, we may still see a negative impact of the severance as compared to the cost reduction.
However, with all of that completed, by February and with some -- by March, from April onwards, we believe that on account of cost reduction, the profitability should improve. In terms of the business volumes and the resulting gross profits, we have seen over the last couple of quarters, the profits have bottomed out.
And sequentially, they have remained more or less flat in the international supply chain business. And from April quarter onwards, initially on account of cost reduction and subsequently on account of renewed demand in global trade, we expect the profits to improve going forward.
On the domestic side, economic environment remains strong. And on the Contract Logistics business, we have a healthy pipeline, which gives us visibility that we should continue to see a good growth in the Contract Logistics business.
On the Express Logistics business, while we have increased the volume, the mix of product segments has resulted in lower yield and thereby, revenue has not grown in line with the volume, creating an impact which has been negative on the bottom line with investments on people and expanded warehousing, infrastructure capacities to handle higher volumes, which we have been forecasting and like I mentioned, have also been achieved.
Detail commentary on Gati business has also been shared separately in the Allcargo Gati call, considering the business is separately listed. Therefore, we tend to keep limited commentary on the Gati business in the Allcargo call.
Earlier the broad highlights in terms of how the business is performing. I would request my colleague, Deepal, to take you through financial highlights and subsequent to that, we'll be happy to take your questions. Thank you. Over to you, Deepal.
Thank you, Ravi. Good evening, everyone. I will now discuss the performance for the quarter ended December '23. On the consolidated basis, for Q3 FY '24, our revenue stood at INR 3,212 crores as compared to INR 3,307 crores for the quarter -- for the previous quarter, representing a marginal decline of 3%.
EBITDA for the same period stood at INR 111 crores as compared to INR 118 crores, a 6% decline. And profit after tax more or less was similar to the previous quarter, which is at INR 17 crores as against INR 16 crores for Q2 of FY '24.
The depreciation amount for Q3 is higher as compared to the similar quarter of previous year, that is primarily on account of the acquisition -- the completion of the balance shares acquisition of ASCPL, which is the Contract Logistics business, and this increase on account amortization charge on the intangible record and depreciation on the leased assets.
Exceptional gain during the quarter is on account of reversal of corporate guarantee given by Allcargo Gati subsidiary of Allcargo Logistics on behalf of GI Hydro Private Limited.
Our balance sheet remains healthy. Our net debt stands at INR 214 crores as the consolidated net debt as of December '23.
Now moving on to the segment results. I will start by discussing the performance of the international supply chain segment. The demand scenario looks bleak, like Ravi explained, in the midst of a tough economic and geopolitical environment. However, economics expect a revival in the second half of 2024. LCL volumes for the Q3 stood at 2.2 million cubic meters as compared to 2.3, flattish, one may say, with the previous quarter. FCL, though, has a volume of -- also remained flat at Q3, year-on-year business stood at [ 152,500 ] TEUs.
The International Supply Chain business reported a revenue of INR 2,721 crores as compared to INR 2,795 crores, a marginal 2% decline. The EBITDA for the same period stood at INR 72 crores as compared to INR 62 crores in Q2 FY '24.
Moving on to the Express business, operating under the GESCPL subsidy of Gati. This segment recorded in the volume growth around 11% for Q3 FY '24 as compared to last year. This growth has come on the back of improved operational performance and sales acceleration initiatives.
The volumes for Q3 FY '24 stood at 318 kt as compared to 287 kt in Q3 FY '23. The revenue stood at INR 371 crores in Q3 FY '24 as compared to INR 385 crores in Q2 FY '24 and INR 379 crores in Q3 FY '23.
The EBITDA stood at INR 7 crores in Q3 FY '24 as compared to INR 15 crores in the previous quarter and INR 21 crores in last year's similar quarter.
Moving into Contract Logistics business, which sits under the Allcargo Supply Chain Private Limited. Contract Logistics revenue stood at -- Q3 FY '24 stood at around INR 78 crores as compared to INR 76 crores for the previous quarter.
EBITDA for the quarter ended December '23 stood at INR 35 crores as compared to INR 36 crores in the previous quarter. We share additional details on the performance of Contract Logistics segment in the presentation for a better understanding.
With this, I would like to open the floor for questions-and-answers. Thank you.
[Operator Instructions] We have our first question from the line of Radha from B&K Securities.
Sir, I wanted to understand, considering the current freight rates and the severance pay that is expected to come in next quarter. So what is the expected EBIT per TEU for next quarter?
We do not share quarterly or annual forward-looking guidance. And however, as I mentioned, severance costs should be a one-off cost. So I don't think it would be appropriate to look at that in the analysis of EBIT per TEU. Also, like we've spoken in the past, we have 2 segments of business. And over the last 18 months, we have been now 24 months, we have been reporting the LCL and the FCL volume separately. And therefore, for LCL business, it makes sense to look at the [ CV ] as a volume benchmark. And FCL business as a TEU.
And in terms of the EBIT numbers, they are driven by gross profit and SG&A costs. Whereby, as I mentioned, if you look at the FY '25 as the whole year, we estimate the SG&A cost would not go up on account of various cost reduction initiatives that have been taken, and therefore, despite all the investments, inflation increase, et cetera, the overall cost would remain similar or lower. And therefore, the -- as the gross profit comes back on account of improved volumes and improved margins on the back of better utilization, et cetera, we would expect the EBIT margins to expand as well. But I cannot share any specific guidance per se.
Okay, sir. Sir, how much are you expecting the severance cost to be?
I cannot share specific numbers on that. But as we report the numbers, we'll be happy to give a breakdown of what are the one-off costs in the quarter that follows.
Could you -- sir, if I understood correctly, the SG&A cost, we are expecting for FY '25 to be same as FY '24 despite the increase in volumes that we are expecting from 1Q FY '25 onwards?
Yes. So SG&A cost in the normal course of events would have increased on account of inflationary increases, plus new employees added during the year plus investments into some new initiatives. However, because of the cost reduction initiatives, all of that would be offset, and therefore, we do not expect the SG&A cost to rise while we expect the gross profit to rise on account of increased volumes and improved utilization leading to expanded gross profit margins as well.
That is the broad narrative for FY '25. For the immediate quarter, we do not see any significant change. The volumes have remained subdued. There has been some marginal impact of the freight rates, but there has not been very significant because there's a downward volume impact as well. And then this quarter, which is January to March will also have the Chinese New Year linked holiday and the delays on account of transit as well.
So overall, there's not going to be much significant impact in the Q1. But from April onwards, the cost reduction should show up as an impact in the P&L. And in the second half of calendar year 2024, which is July to December, we also expect the volumes to rebound. A combination of all of these things should lead to improved profitability in the international supply chain business.
Sir, just wanted to understand any ballpark number also, if you can give or just an estimate as to how this -- how big this severance cost is expected to be? Or would it be around INR 20 crores to INR 30 crores? Is that correct way to look at it or would it be higher than that?
No, it won't be that higher number, but I cannot share more specific details on that. We're not looking at that higher number.
And sir, secondly, we are saying that volumes are expected to pick up from second half of FY '24. So are we expecting any kind of customer additions?
Second half of calendar year '24, that is what I said. And this I'm talking about the industry. In terms of as a company, we have already been -- so the volumes, actually, if you see, globally, the market has shrunk for the LCL industry over the last 12 months-or-so. However, our volumes have remained flat. So we have maintained almost flat volumes by launching new trade lanes and by gaining marginal market share as well in some key countries on back of such initiatives. So as we move forward, we are expecting industry headwinds to recede and the market as an overall to see improvement in volumes and that would naturally benefit the company as well. Our growth rates would always be at par or better than market growth rate as we have maintained in the last several years and continue to remain confident about that.
And sir, in that improvement in volume expectations that we have, what are the key user industries wherein we are expecting a good improvement? And if you could give a breakup of the [ user ] industries on a broad basis that we are catering to?
So we carry 15% of the global neutral LCL consolidation trade capturing 2,500 trade lanes across 180 countries. I'm just trying to give a perspective that we truly represent the global trade. So all the commodities which get carried in the LCL, they would have almost homogenous distribution representing global trade. So it's not dependent on any specific sector or even trade lanes per se because we have strong presence on almost all the key trade lanes, whether it is out of Asia, into Europe, into U.S. or intra-Asian, say, we have significant presence in all the key trade lanes across the world. There's no reliance on any specific sectors or segments per se.
And sir, how much is the e-commerce demand?
So e-commerce is one of the contributors to LCL trade. However, from our perspective, we work with forwarders who are our customers and we operate like to put it simply like an Uber of shipping where we [ grew up ] only shipping vessels, but we operate like a shipping line, operating these trade lanes.
And in this asset-light business model, forwarders are our customers and many times these forwarders carry loads for small and medium businesses, which includes cross border e-commerce opportunities as well, wherein there could be shipments moving in from, say, a factory in China to some of these warehouses in North America for the end shipment to e-commerce consumers.
But our participation in that is the B2B part of it, which is pickup and delivery from a warehouse and pickup and delivery -- and pickup from a warehouse and delivery into a warehouse across the border.
But e-commerce and the emergence of small and medium businesses are 2 key drivers of LCL growth, which is why if you look at barring last 12 months, which have been a bit different, in general, LCL trade has been growing at 2x the rate of global container trade growth. So while the container trade growth has been historically about 3% over the last several years, LCL growth globally is about 6%. And e-commerce, like I said, is one of the key drivers to that.
[Operator Instructions] We have a next question from the line of Payal Shah from Billion Securities.
I have questions on FCL. So I just wanted to understand our performance in various sectors we are present in like chemicals or auto or e-commerce, if you could please highlight something on it?
So you're talking about the Contract Logistics business. I would -- yes, so across all these sectors, we have had a stable performance. And in terms of chemical, as you know, that is the biggest segment, which has historically being a much more dominating segment. And therefore, we would see more customers being added in the auto and e-commerce segments. And therefore, the revenue growth would continue to be more on the e-commerce and auto categories and some new categories as well as compared to chemicals, purely on account of chemical, we are already a market leader in a established segment, but the e-commerce, auto and the new segments offers much bigger opportunity. So therefore, you will continue to see the segmental enhancement in these 2 sectors. So that's the broad narrative on growth coming in from various sectors.
Okay. So what are the sustainable margins for this business?
In this business, we have seen steady performance over the last several years, and we believe that the margins should continue to be range bound in the similar range as we see today. We have invested in certain amount of white space for the purpose of planning growth so that we have ready to have space available.
And at the same time, so that means that, that has a negative impact on the margin. We have also invested in people capacity, which also means that there's a negative impact on the margin. So as we grow, the white space as an absolute number, would remain constant. But as a percentage, it will reduce, which means that your white space cost will go down. There should be an operating leverage as well.
So these are the 2 positive factors towards the EBIT margin. However, at the same time, we also need to recognize that historically, chemical was a much higher percentage of our total business and chemical by nature of being a very niche business has higher margins. So as the share of chemical goes down, that would have a negative impact on the EBIT margin, while operating leverage, reduction in white space as a percentage of total revenue would have a positive impact.
So overall, we expect the margins to remain range bound, not much significantly different. And our EBIT margin is currently in the range of about 12% to 14%, would remain broadly in that range in this business and this was [ answering ] EBIT margin.
Yes, EBIT margin is 12% to 14%, yes.
Okay. That's quite helpful, sir. My last question is following up on my above question. We are talking -- are we talking any new sector as in what are our plans to scale this business and it would be helpful to get some outlook on the business?
Yes. So we are looking at certain segments. For instance, we have been making inroads in consumer durables, IT products, furniture as some of these sectors that we have been looking at. And if you look at the revenue contribution of these segments, you would find that the e-commerce and auto are more than twice of what they used to be, say, about 2 to 3 years ago. And therefore, the similar trend would continue, wherein these sectors will also see a higher percentage allocation.
So Ravi, just to add here. So what we had is a couple of years back, we had a very heavy chemical segment and auto and e-comm was much less. Now if you see all of them are almost equal. So we have diversified into various other segments, and we'll continue to do so to gain better market share and improve our utilization of warehouse space and also to increase the number of square feet under the overall management of Contract Logistics.
Yes. So if you look at chemical, which at some point in time was about 80% have come down to 50%. Today, it contributes about 35% to 40% of our total revenue in the business. And it should perhaps come down to 25% to 30% over the coming couple of years.
[Operator Instructions] We have our next question from the line of Nirav Savai from Abakkus.
My question is on the OpEx on the MTO side of the business. So sequentially, we have seen a decline there almost about INR 40 crores. And you said that the large part of this cost reduction measures, would be benefits in Q1 FY '25 onwards. So what would be the sustainable OpEx going forward?
Yes. I'm not sure which costs you're talking about on the decline...
OpEx for the MTO business?
It is directly related to the freight. So there is a large amount of freight which is passed through. So if your revenue shrinks, your OpEx cost to that extent also shrinks to -- by that amount, similar amount.
Yes. So our commentary on operating cost reduction was not only freight rate, I was talking about the SG&A cost reduction, which was on account of I took some examples as well of how we are outsourcing from high-cost countries to low cost countries, looking at eliminating certain positions by way of automation, et cetera. So these are all savings which will show up in SG&A. Operating expenses, we are already efficient and they are more driven by, one, freight rate environment; and secondly, by utilization, which then should improve on account of improved volumes.
So what is SG&A right now as a percentage of revenue for the quarter and what was it last quarter?
So here, again, as you would notice, and we've maintained in the past as well. The SG&A, again, I would recommend that for the fair analysis, it will be appropriate to look at SG&A as a percentage of GP or a ratio of that because revenue can go up or down dependent upon the freight rates. It is not only a factor of volume.
So as you would notice that freight rates have come down sharply, our revenue has also actually come down without the decline in volume and alongside the operating expenses have also come down because freight rates are a pass-through expense. So -- but at the same time, to answer your question, we can share the number, Deepal, would you mind share the number on the SG&A as the cost of...
Yes, approximately 20%.
Around 20%. But like I said, the revenue is fluctuating, and therefore, that number...
20% of gross profit is what you're saying, right?
Yes, the revenue is the number -- the question which you asked. What I'm saying is that it will be more appropriate from an -- to look at the gross profit to SG&A ratio, which we have been sharing as well. We've been sharing the gross profit in the numbers separately in the presentation. I'm just sharing that's a better way to look at the business. Because revenue and operating costs, both have freight, which is pass-through.
Okay. So when we say the quarterly gross profit is about INR 70 crores of the MTO side of the business, you're saying that SG&A cost is 20% of that?
Yes. On the revenue, right?
No, you were asking about the revenues, so I answered about the revenue.
On the revenue.
So if you're looking at a pure MTO business, approximately -- on the -- yes, it's around 20% of the revenue.
And Deepal, maybe you can answer the GP as well because like I said, it is better to look at the GP because SG&A is...
[indiscernible] INR 2,700 crores so 20% would be INR 540 crores, so is that an SG&A cost?
Yes, 50% of the GP is SG&A cost.
50% of the GP. And what was this last quarter? Just trying to understand the quantum...
[ While it ] for 9 months approximately.
Okay. So what has been the quantum of decline if we see on a Q-o-Q basis on the SG&A side?
So like I was mentioning, we have started the initiative on the month of August, the positions being identified. There is typically a 3 to 6 months' notice period, depending upon the country and tenure in the local laws. And therefore, most of the terminations would happen -- somewhere happened in the month of -- between mid-November and November to December, but most of them would be between January to March.
And in the quarter ending December, while there could be marginal savings on account of reduced SG&A in December, they've also been offset by the -- some of the severance costs. In January to March, we believe that there could be a negative impact of severance costs.
For the purpose of SG&A on a steady basis, it will be from 1st April that one would see the actual numbers. And for the quarter of January to March, we would provide the time of results what is the actual expenses incurred during the quarter and what are the one-off severance expenses, so it will be a fair comparison of SG&A costs for the October to December quarter and January to March quarter.
Okay. So as per our assumptions, any number, if you can just highlight what would be the kind of SG&A going forward? I mean assuming about 20% or 50% of your gross profit is around about INR 300-odd crores for the current quarter. So how do we see this Q1 FY '25 onwards?
So like I was mentioning before, we would be most certainly able to offset any increase which happens on account of inflationary increases, investment into new people, capabilities, products, et cetera, all of that will be taken care of. So SG&A costs will be similar or lower despite all these increases, and therefore, what it means is that the expansion in GP would straightaway pass-through to the bottom line.
In a normal situation, if there was no cost reduction, you would typically find that remuneration and the admin costs on account of escalations, et cetera, would typically go up every year. Also, you have people who joined during the course of the year, and therefore, the costs go up for the entire year.
So all of those positive -- I mean, the increase in the costs would be offset by the cost reduction initiative, and we expect the cost to be same or lower despite all of that, which means that the entire increase in gross profit would be carried down to the bottom line. That is a broader narrative we can share at this point in time.
So would it be safe to assume that about INR 300-odd crores is what the SG&A cost this quarter is, this will continue to be similar or maybe lower, but would not increase next year?
Yes. So the current ongoing rate -- quarterly rate of SG&A would continue or be marginally lower, while the gross profit is likely to grow in the second half of the year on the back of improved volumes and expectations on improved gross margins as well.
Okay. And initially, we had highlighted that after the China New Year, we'll see some upward trend in the global trade, so demand still continues to be sluggish or you've seen any revival at least in the foreseeable future?
So we have indicated earlier that we expect the second half to be strong on the back of actual consumer demand coming in, which has to be driven by inflation adjustment and the rate cuts, which will lead to inflation adjustments and therefore, disposable income being available with people.
We have continued to remain the -- maintain the same outlook that we expect second half of the calendar year '24 to be better. Currently, the environment remains subdued. The Red Sea crisis has increased the freight rates for several trade lanes, which has led to slightly higher freight rates, but at the same time, slightly negative impact on the volumes as well.
So as the trade-off, it has not had any significant impact. As the Chinese New Year comes to an end there should be some pickup in volume, but we do not see any undercurrent of significant pickup. And therefore, we continue to maintain that the pickup is more likely in the second half of calendar year 2024.
Right, right. And we maintain a guidance which we had for FY '26 or any revision in that?
For FY '26, we would come back with some guidance as we complete the 3-year business plan, et cetera. But at this point in time, there is no outstanding guidance for FY '26.
We have next question from the line of Mr. Jain from Dolat Capital.
So my first question will be, you have a higher market share in the Nordic region and a few European countries. How much of an impact has [ rescue ] prices on that business? And when do you expect the inflated freight rate to stabilize?
Yes. So we have higher market share in several Asian countries, including India and Southeast Asia as well as in Western Europe and Northern Europe. What we have seen is that Western Europe, in particular as well as Northern Europe to some extent has been going through the weakest economic environment globally and the maximum impact on volume has been in that part of the world and that has led to significant capacity being available on the trade lanes from Asia to those countries.
And therefore, it was a double impact of reduced revenues as well as reduced volume. However, the Red Sea crisis has led to an increase in freight rates. However, there has been no impact on the demand per se. So what we have noticed is that there has been a marginal improvement on the revenue side with some degree of impact on the overall profitability as well, but not significant.
The volumes remain subdued in that part of the world. And in fact, that has been one of the key reasons for continuous subdued performance for the company as Europe, in particular, has not been contributing significantly to the profits. So we have not seen any significant impact of the Red Sea crisis on those trades lanes, to answer your question specifically.
Sure, sir. Sir, I have another question. Sir, what are your future CapEx plan? And what specific area or purpose you plan to fund them primarily?
Yes. So we have currently been looking at pockets of growth in geographies where we have relatively shallow presence. There are opportunities in Latin American market, for an instance, where we expect to consolidate our presence and enhance our volumes.
It includes the market of Brazil, wherein we have made some management changes as well to drive growth. There are similar opportunities in other sections of other countries of Latin America such as Colombia, Ecuador, Peru and Chile.
These are also the countries where we have relatively lower market share. We also lacked penetration on the door, and we also have fewer products in terms of, for an instance, the FCL product is quite weak in this area. And LCL also, we do not have market share like we have in other places.
For an instance, in Brazil, we would currently be #4 not even among the top 3 LCL consolidators and the aspiration is to gain market leadership in the coming years. So Latin America is one key geography where we will be focused on for growth.
Besides that, we also see significant opportunities to go deeper in China. China is a highly fragmented market and while we are currently the second largest in China already, but our market share is still close to 9% to 10%. And we see an opportunity for that to be increased by going deeper into Chinese market.
The third opportunity for us is actually in terms of turnaround of key countries, where on account of various issues. We have been running significant losses. These 2 big countries are U.S. and Germany, which have been making negative contributions to our P&L. And we believe that during the coming months, we should be able to arrest the losses. And as they come to the breakeven on a consolidated basis, there should be a positive impact on the profitability. So these are some of the key drivers as we see for driving growth and profitability in the company in the coming year 2024.
We have our next question from the line of Jiya Shah from Wealth Securities.
Sir, I have 2 questions. One is on the [ ISC ] business. The demand seems muted. So when do you foresee the demand to recover and the trade to come back to normalcy? Or should we see this as the new normal?
So freight rates are normal. I would rather say, because of the recent Red Sea crisis, they are rather shorter and they might become slightly softer again, but that is going to have a limited impact on the consumer demand in the world trade. Like I mentioned before, we expect the demand to be back from second half. It is a function of consumer demand linked to inflation and economic environment, which based on the various forecasts that we see from leading economies on the decisions around interest rates and inflation across the world, we expect the second half of 2024 which is July to December to see recovery in demand.
Okay. Sir, one -- another question that I have is that -- if you can highlight on the region-wise performance or rather have your trade lanes have performed? Are you seeing any recovery from any specific region and something slowdown in some other regions like just some outlook on that?
Yes. So like I mentioned, we have noticed that in the year gone by, there was lesser trade out of China and APAC, and we believe the region would bounce back this year. I was just mentioning about the profitability scenario in U.S. and Germany, which should see a turnaround. And our focus on Latin America will drive growth for us there. Western Europe has remained weak, and we do not see significant improvement in the near future on the Western, Northern Europe, that is likely to remain flat. So that's where we see in terms of specific regions.
We have our next question from the line of Ravi Shah from Opel Securities.
Sir, actually I have 2 questions. The first one would be on the international supply chain. So we have been seeing some volatility in terms of margin as well as realization, so can you share some outlook regarding the same and where the business is headed in terms of profitability as well?
Sorry, I did not understand the first part of your question, clearly, you're asking for an outlook on the...
Supply chain business. Yes, it's seen some volatility recently in terms of margins and realization. So just wanted to know the outlook for the same.
Yes. So like I mentioned, we have seen the decline in margins, which have now bottomed out over the last 2 quarters remaining almost similar on account of the subdued trade demand and we expect the trade demand to bounce back from -- in the second half of the year. But before that, we also expect the cost initiatives to also aid on the profitability in the quarter of April to June. So that's a broad commentary like I mentioned before. That's how we see the performance.
Understood, sir. Sir, my last question would be, we are witnessing some improvement on the [indiscernible] ratio. And in the presentation also, you talked about cost-cutting approach. So can you highlight the measures that we've taken to get to this improved operational efficiency?
So like I was mentioning, the majority of initiatives are focused on PP cost, driven by outsourcing from high-cost countries to low-cost countries, for an example, moving payroll from U.S. to Mexico and by way of eliminating positions through automation and technology and reorganization of the overall management structure, and some of these initiated have helped us identify redundancies and eliminate costs.
We have our next question from the line of Shailly Jain from Dolat Capital.
On the Contract Logistics business, the share of e-commerce is increasing, which in turn has led to margin improvement. So what would be the idle margin levels going on forward and are these sustainable?
No, let me reiterate the margins are highest in chemical, which is the most niche specialized contract logistics. And the overall blended margins are in the range of 12% to 14%, which have remained in the same range.
Chemicals segment has much higher margins. However, Chemical segment, which used to be 80% of the business at some point in time, is now already dying to about 30% of the business, about 35% of the business. And we believe that this 35%, 40% might come down to about 25% in the coming couple of years. And therefore, e-commerce and auto and other segments would grow. So therefore, the margin would remain broadly [ range about ] in the 12% to 14%.
Okay. And what is the distribution of your revenue share among LCL and FCL?
So on the LCL and FCL like we mentioned, we, as a company, operate more in the gross profit because revenue has an ocean freight cost, which is more pass-through. On the gross profit, which is a number to look at from a top line perspective, approximately 70% -- 65%, 70% comes from LCL and around 30% comes from FCL.
We have a follow-up question from the line of Nirav from Abakkus.
My question is regarding this U.S. and German markets. Now you said they have been contributing negatively. So what would be the quantum if you were to see in terms of volume which comes from this market or in terms of gross margin, what would be -- will it be contributing?
So volumes are obviously positive and gross margins are also positive. The impact is on the SG&A cost, which put together has led to a negative number because these are both high cost operating countries, and we expect the business to rebound in these 2 countries. And also, there have been -- so when I was talking about the SG&A cost reduction, there would be -- there are more sharper focus on these 2 countries. And therefore, they should see coming back to being profitable or breakeven in the coming months, and therefore, that would have a positive impact.
I was just trying to understand how much does it contribute to overall volumes? And then gross margin side, what is the contribution from these 2 geographies?
We would not be able to share country-specific details on that.
Okay. And in Western Europe, you expect it will continue to be challenging. You don't see a revival there?
In the next 3 to 6 months, we don't see any changes. However, the expectation what read into the economic forecast is that the interest rates are not likely to rise and perhaps in the coming 2, 3 months, they may start coming down, which might revive the consumer demand. So therefore, second half of '24, we believe should be good globally in terms of the consumer demand. And of course, then Western, Northern Europe should also bounce back. But it has been most severely impacted amongst all geographies.
So U.S. and Germany, you feel will turn positive, but this would rather take some more time to contribute positively at EBITDA level?
Yes, that is right.
We have our next question from the line of Rajvi Shah from Bright Securities.
I just had few questions on Gati front. Can you share some broad outlook on the future of this entity?
Yes. So we can share the broad outlook. In Gati, we have been focused on 3 or 4 key initiatives. First has been improving operational capabilities, and we have seen significant improvement in the operational parameters. We've also been investing in the infrastructure upgrade in terms of building new hubs and improving the capacity.
And all these improvements in operational capacity should allow us to expand the market share. We have seen good growth in the volumes. However, the product mix has changed with large accounts being the first ones to come on the back of improved service, and therefore, the [indiscernible] which is revenue [ per kg ] has dropped in that business, we expect the mix to improve, and that should lead to improvement in terms of the overall profitability.
I would say that -- and I would reference from getting to too many -- too much of details, like I said, it's a separately listed entity. However, broadly speaking, we should see continued expansion in volumes, which should now be backed by revenue growth as well. And we have already invested in all the key hubs that were required and the personnel cost as well. So therefore, there should be an improvement in profitability in the business.
Okay. Like I had just 1 more question. How do you see the Express Logistics performing?
So Gati is the Express Logistics business, which operates under the Gati Express supply chain. There's no other business in Gati. And Contract Logistics business is an Allcargo supply chain. So I was commenting on Gati's performance with the Express Logistics.
Ladies and gentlemen, that was the last question for today. And I would now like to hand the conference over to management for closing comments.
Yes. Thank you all for joining in for the conference call. Please feel free to reach out to our Investor Relations team for any further questions or information that you may have. We intend to improve our communication from time to time. And when we see certain questions coming on a repeated basis, we try to include the responses to that in the upcoming quarterly presentations, and our endeavor is to provide as much detailed information as we could. So please continue to engage with our Investor Relations team. Thank you for joining me today.
Thank you.
On behalf of Dolat Capital, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.