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Gati Ltd
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Ladies and gentlemen, good day, and welcome to the Q1 FY '23 Earnings Conference Call of Gati Limited, hosted by PhillipCapital India Private Limited.
This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Mr. Vikram Suryavanshi from PhillipCapital Inda Private Limited. Thank you, and over to you, sir.
Thank you, Rithika. Good afternoon, and very warm welcome to everyone. On behalf of PhillipCapital, I welcome you all to 1Q FY '23 earnings conference call of Gati Limited. We are pleased to have with the management team represented by Mr. Pirojshaw 'Phil' Sarkari, CEO; and Mr. Anish Mathew, CFO for Gati Limited.
We'll have opening comments from the management, followed by question-and-answer session. Thank you, and over to you, Phil, Sir.
Thank you, Vikram. Good afternoon, and a very warm welcome to everyone on our quarter 1 FY '23 earnings conference call. We have uploaded our results presentation on the stock exchanges and company's website, and I hope everyone had an opportunity to go through the same. As mentioned, along with me, I have Mr. Anish Mathew, the Chief Financial Officer of Gati Limited, as well as our Investor Relations team.
We started the new financial year on a good note with our revenues of our core Express business increasing by 46% year-on-year and 13% quarter-on-quarter basis, and we have also seen improvement in our margins and profitability. The continuous efforts of infrastructure augmentation, integration of technology for efficient operations, realigning our systems and processes as per the requirements of the business, and moreover, focus on customer delight have been the key pillars to this performance. With this upbeat performance, we expect to further gather momentum entering 2023 with an agenda of outpacing the industry growth rate.
On the industry front, we believe that in India, organized express logistics industry would be the fastest-growing subsegment in the overall logistics sector due to the following reasons: increased demand for shorter transit times, specialized handling of cargo, very few capable national players who could manage such hub-and-spoke network, and increasing e-commerce penetration. There are different numbers baked to the industry. However, our estimation suggests that the Surface Express industry would be in the range of INR 14,000 crores to INR 15,000 crores. And then there is another large PTL and organized trucking industry where Express offerings are gaining traction, thereby providing the growth momentum.
We have been witnessing the shift from unorganized players to the organized players in the last couple of years. The increasing trend in e-waybill, which are currently at its highest monthly run rate of INR 7.5 crores, 63% of which is intrastate and balance is interstate, are strong leading indicators of this shift. There has been constant need of more and more integration of technology aimed at providing ease of doing business and gaining customer delight. We believe our GATI 2.0 is on track with the right strategies and customized services which enabled us deeper penetration among the existing customers and addition of new customers.
At Gati, we have been speaking of accelerating and enhancing our existing infrastructure to manage higher loads in the most efficient manner with hub modernization and increased automation. We have seen increased volumes and higher throughput at our mega hub at Farukh Nagar, with more efficient and [ marine ] operations. Similarly, we are going to go live with our Mumbai hub in the current quarter, and we believe that this will add up to the volumes for the coming years. We are also planning similar mega hubs across the country and is planned to go live some in FY '23 and some in first half FY '24. Post this infrastructure amplification, we will be able to cater to our customers with industry-leading turnaround times with improved service levels to manage their logistical requirements in an efficient manner with higher OTIF delivery.
We have been also speaking of the technological upgradation with GEMS 2.0, which will create a digital bridge between the back-end and front-end operations. We are happy to report that the project is going in full swing and is expected to be completed in the next 12 months to 18 months. However, we will be implementing the same and various modules for which some have been implemented and some are in trial and pilot phases and will be implemented from a time to time basis. This digital transition will help us to improve our efficiencies in front-end platforms like sales acceleration, digital payments, data science and customer service with enhanced integration with back end for better lean and efficient operations in terms of network decision support, hub optimization, etc. As these modules get implemented, we have now access to real-time data whereby our IT team are able to add analytics with regards to route planning, optimal load planning, improved turnaround times and reduced cooling period, thereby increasing our ability to accelerate margins.
We have been working on focusing on reducing cost per kg, more engagement with customers for wallet share addition, customer retention and new customer acquisition, efficiently planning our infrastructure and hubs to manage flex and peak capacity, thus increasing throughput and achieve scale. Lastly, we have also been focusing on a few other ongoing initiatives like pilot run for pickup and last mile delivery using electric vehicles, ease of doing business with Gati for customers from booking till delivery, and also embarked upon CSR activities for our contribution towards the society.
With this, I would like to hand over the call to Mr. Anish Mathew, our CFO, for financial and operational highlights for quarter 1 FY '23. Over to you, Anish.
Thank you, Phil. Good afternoon, everyone, and a very warm welcome to our FY '23 earnings call. I'll take you through the highlights of financial results for the first quarter of FY '23. On the revenue trend, our consolidated revenue from operations for Q1 FY '23 stood at INR 431 crores as compared to INR 299 crores in Q1 FY '22, a growth of 44% year-on-year. Our Surface Express business revenue increased from INR 229 crores to INR 337 crores in Q1 FY '23, up by 47% on a year-on-year basis. The tonnage for the segment grew by 55% year-on-year. Post our revised focus on Air Express business, our revenues stood at INR 18 crores, 2.2x higher than last year's same quarter. The growth was largely driven by tonnage growth.
The SCM business declined by 10% year-on-year at INR 10 crores. Revenue share from MSME and retail accounts stood at 42 percentage in Q1 FY '23, in line with our strategy to increase the share of revenue from this category closer to 50 percentage levels. Our total volumes in GKEPL stood at [ 2,78,590 ] metric tonnes for Q1 FY '23, up by 55% on a year-on-year basis, and 8% on a quarter-on-quarter basis. We have been witnessing a steady increase in the ability to handle higher volumes post our commencement of our mega hub and are optimistic of enhanced handling capacities and gear up to manage additional volumes post safe commencement of infrastructure pipeline.
On gross profit, consolidated gross profit for Q1 FY '23 stood at INR 103 crores as compared to INR 70 crores in Q1 FY '22, a growth of 47% percentage on a year-on-year basis. Gross profit of our core GKEPL business for Q1 FY '23 stood at growth of 22% quarter-on-quarter, thereby posting a sequential improvement of 170 basis points in gross margin to 27.7 percentage. We have been minutely focusing on our costs and realigning our operations to best suit the business processes, which in turn will bring in efficiencies. We envisage higher operating leverage play out in the coming years and aim to improve gross margin to targeted levels of 32%, 32%.
EBITDA, out consolidated EBITDA, including other income for Q1 FY '23 stood at INR 25 crores, up 12x year-on-year. EBITDA margin for Q1 FY '23 was up by 500 basis points. With all our efforts dedicated towards increasing scale and efficiencies, we believe we'll be able to increase the margins going forward. In fact, we have been able to turn the company PAT positive with Q1 FY '23, profit at INR 7 crores as compared to a loss of INR 25 crores in Q1 FY '22. As there has been accelerated momentum in disposal of noncore assets, the current quarter was impacted with an exceptional gain of INR 4 crores. We have been consistently providing other key comparative financial performance indicators in our investor presentation. One can refer that for more details.
With this, I would like to open the floor for question and answers.
[Operator Instructions] The first question is from the line of Ankita Shah from Elara Capital.
Congratulations on your good performance. Sir, I wanted to check on the client mix, I mean that continues to remain the same around 58% still being contributed by key enterprise accounts. So what are the efforts that we are taking on this side to change the mix? And what is the progress on the same.
Ankita, thank you for your question. So our mix stands at 58% and 42% right now, 58% key accounts and major accounts and 42% SME and retail. There are initiatives that we have already started to increase the SME and retail mix, one of them being that we have now engaged a consultant who has come in and is going to help us redesign our franchise model, which is existing today and increase the penetration into the Tier 2, Tier 3 cities, mainly where the retail business comes from and have more franchisees that can get us this business. As you know, at one point of time, a few years back, Gati was the leader in the retail business. Over the years, we have lost our leadership there, but we want to regain that leadership.
On the SME side, we have engaged ourselves with the SME chamber of commerce in India. In fact, we were the lead sponsors of their seminar that was held in Bombay just last month. And we are engaging with them as knowledge partners to the SMEs. We strongly believe that this engagement will help us penetrate the SME segment in a big way.
Okay. And on the margin side, what has helped the improvement in margins, I mean, other expenses I seen have gone down. So anything that you want to highlight here?
So as you know, gross margins in our business is a combination of yield, weight as well as reduction of direct costs. And I think as far as we are concerned, for this quarter, there was a very, very strong focus on yield and, of course, optimization of the network. And a combination of these 2 have got us our gross margin and we continue to focus on both these.
Okay. And we remain on the target of 9% to 10% for this year's margins?
So yes, as we increase our gross margins and top line, we will leverage the cost. As I had said, we believe that we have reached a cost level that was below the gross margin, which will be now static for the next growth that we envisage in Gati.
Okay. And on the infrastructure launches, it seems that we've delayed Mumbai, Bangalore, Indore and Hyderabad launches by a quarter, what has led to this delay?
So the Bombay launch should be in September this year. The delay of course, as you know, is twofold. One is monsoons that have really hit Bombay and we got delayed in the construction part, but more so it also is a very unorganized sector in Bhiwandi, so some surprises keep coming up. However, we are now on track, and I'm sure we will start our third quarter operations from the superhub. Also, Bangalore, we are -- we had some issues with the landowners because as you know, we are leasing the land over there. But all that is settled, I'm sure that 1st January we should be able to start our operations in Bangalore. Having said that, some of them, we have preponed to, so for example, we were lucky. In Nagpur, we found a ready facility. So we will be starting our Nagpur new hub again by September, and we also did a similar thing in Guwahati, where we were lucky to find a new hub, which we will be starting in -- sometime in August and September. So we keep looking out simultaneously. If there is something that we find, which is ready to use, of course, it will never be in our superhubs, our superhubs will always be built out. But in the other cities, we keep an eye on something that is ready to use and we go in and move in there.
And lastly, if any update on the reorganization, if at all there is any updated announcement on that?
So the reorganization, as far as Gati is concerned is complete. And when we say reorganization, I mean the reorganization of the organizational people, right? So I think we have completed the reorganization. We are now well structured both on the sales and operations side, including the top management of the organization. So I would claim that we are -- we have completed the reorganization.
No, or maybe I meant restructuring that is something that you were saying last time that you were exploring along with our partner KWE and along with the parent, something on that side?
So that basically is -- right now the status is the same that we had given to the stock exchange the last time stating that we are kind of considering some restructuring, but there's nothing that I can talk about right now.
The next question is from the line of Alok Deora from Motilal Oswal.
Congratulations on decent numbers. Sir, I just wanted to understand the -- in this quarter we have seen nearly a 50% plus growth in volumes and our revenues also growing by a similar kind of a number. So there has been no realization growth. Is that primly because of some change in the mix of shipments handled? Any color on that.
So thank you for the question. I just responded to the earlier question stating that it is a combination of the yield tonnage that has brought about the growth on the revenue. And of course, this combination coupled with optimization and cost has brought about the growth in the gross margins also. As far as the mix is concerned, if you are talking about the vertical mix, we haven't yet seen success on the mix change because we are growing our KEA faster. However, the focus is definitely to grow the SME and retail. Having said that, I think our sales team has done a phenomenal job in increasing the KEA yield for us.
Sure. And also just wanted to get a sense on the -- how the volumes have shaped up specifically in June and July because some indicators are suggesting that while April and May were pretty strong, June and July was slightly slow. Any views on that?
No, not really. So for us, there has been an increasing trend month after month. We haven't seen any slowdown really happening. Yes, due to certain market conditions in the month of May, there was I would say a increase, which was more than what it would have been under normal circumstances. This had to do with certain competitors, etc., but otherwise we have not seen a change.
Sure, sure. And so is it possible to just quantify that out of our revenues, how much benefit we could have got because of that, which could be more of a onetime or a short-term kind of gain and this -- that number might not sustain in subsequent quarters?
That number was not really so big that it will make a difference in subsequent quarters. We will continue our trajectory in the subsequent quarter.
Sure, sur. So just last question. So are we sticking to our -- the numbers guidance for FY '23 in terms of margins and outlook on the growth?
Yes, very much. So I had given an indication of the EBITDA margins being 9-odd percent, so that we are sticking to that number.
The next question is from the line of Pradyumna Choudhary from JM Financial.
Yes. So first I just wanted to understand what exactly -- like what part of -- what Gati does actually makes a difference in terms of competition not being able to copy it so easily because we are seeing that several other players are taking keen interest in the so said B2B express industry? And second, more on the 3PL side, I know nothing has been announced as of now. But if we plan on entering in the future, I just wanted to understand from your perspective the return profile in the 3PL business versus the return profile in the B2B Express segment?
Sure. So if I were to answer your first question, I think the most important element in a B2B business is the network. That means the reach that a company has, whether it is to pick up the shipments or to deliver the shipments. And I think Gati over the last 30 years takes pride in having developed one of the deepest and largest network in the B2B business in India. And the second, I think, more important, or I would say second most important is the trust that Gati creates with their customers. I think that is very important in an unorganized industry, creating the trust factor that the customer will be told the truth irrespective of the service level, right? So even when you're reaching on time, everything is good. But if you're not reaching on time or if you have damaged some shipments, how upfront and trustworthy are you as a service provider to the end customer is extremely important in today's day and age.
I have said this before and I will continue to say this. I don't know why there is a perception that many players are entering the B2B Express Logistics business. I have not seen a fixed national player beyond the 5 players that has come into the B2B business.
Sir, sorry, now telling entering the business more of like going more, I would say aggressive on that side, like focusing more on growing that. For example, player what has made -- which was majorly an B2B express player is now growing faster in the B2B express surface express business. And similarly, we have a key funded player, which is listed now, and is under a broader group like it has the deeper pocket to actually go aggressive there. So in that sense is what I meant.
No, correct. So that's what I'm saying. There are 5 clear national players in the B2B business and the 2 that you spoke are within those 5. Unless you have a good, deep large network, you're not going to be able to be playing in the B2B business and it takes a lot of time and money to develop a network, which is reliable and dependable in a country like India, especially in the surface network region.
Coming to the second question, if I followed your question correctly, you asked whether Gati is going to be in the contract logistics. Was that your question? What exactly was your question? Sorry, can you repeat it?
Sir, it was more to do with in case Gati enters the contract logistics business in the future. So I just wanted to understand the kind of return profile in the contract logistics business vis-a-vis the current B2B Express business that we are doing?
Okay. So as you know, the contract logistics business basically has 2 elements to it. One is warehousing, the other is distribution. A pure warehousing contract logistics business would give a profile of anywhere between 10% to 15% EBITDA margin. And once they get into distribution, that could go down to somewhere between 8% to 10% from a pure contract logistics business. For Gati, we still have a small portion of contract logistics within us which we call the supply chain business in our parlance. As such, I have been now in Gati for a year and I have been concentrating on making sure that our Express logistics, which is basically the bread and butter for Gati comes back at their service levels that are expected by the customers. Once that happens, we will definitely be looking at getting into contract logistics in Gati because I strongly believe that if you have to be a fulfillment player, you have to store and distribute the finished goods.
Okay. Understood, sir. And like this would also involve considering oil cargos contract. I'm not saying whether it will happen or not, but even we are open to that also, all cargoes, contract logistics business, taking that up?
Yes. That is always explored.
The next question is from the line of [ Nidhi Babaria from Envision Capital ].
Yes. I just wanted to ask on gross margin side, even on a Q-on-Q basis we have increased our gross margins. I know it's a combination of both volume and value. I just wanted to know is there any -- like despite having an extremely higher diesel cost in this quarter, like which was almost INR 100 plus, how were we able to manage in this specific quarter? And going ahead, what would be our target for FY '23 and '24?
Sorry, I did not get your question. What cost you said, INR 100, what?
Diesel prices in this quarter were above INR 100 for the entire quarter, which was the highest ever. Now it has come down. But despite having the highest diesel cost, how were we able to manage these type of -- we were able to improve our gross margins on a Q-on-Q basis?
So I've said this before, a large proportion of our customers are on DPH, which means that they are on a diesel formula. When diesel increases, that portion of the rate goes up and when diesel goes down, that portion of the rate goes down. And I think the sales team has done a fantastic job of making sure that the proportion of DPH that we now have with our customers, which is automatic more than covers our main direct costs, which is the line haul cost, that is the trucking cost that we have because that is where from an expense side the DPH applies to us. So that way, our contracts cover that the DPH for us, and therefore that should not have any negative impact, and neither will it have a positive impact when the fuel goes down. So that has been well covered by our sales.
And what portion would be direct cost to our total revenues? If there is any rough breakup?
So our network cost to our revenues would be about 45%.
Okay. And going ahead, how -- what type of gross margins do we target for '23 and '24?
So a good gross margin for '23, which I've said before, would be in the vicinity of 29%. And moving forward, we increase that to 32%.
The next question is from the line of Depesh from Equirus Securities.
Sir, on your tonnage growth and the Surface Express business, that seems better than the industry and also the competition. So just wanted your thoughts on the same that if you have gained any market share and is it sustainable?
So I think one of the things that I have always said before also is that the good thing about Gati is that every single vertical of ours, we have at least 7 to 8 of the top 10 customers of that vertical as customers for ourselves. Basically, our share of business in those customers was low when I came into Gati. What we have managed to do is we have managed to increase the penetration with the same customers and get a much larger share from them. These are customers who have seen Gati in the heydays also. So they had that confidence in Gati. But over the last few years service had deteriorated and therefore they had pulled out a large share of the business from Gati. We see that confidence coming back and therefore tonnage coming back to us.
Right. Sir, is the share of business that you won was mainly because of the integration issues or one of the mergers that happened? Is it because of that?
I think it was more about giving back the service that they were used to with Gati earlier.
Got it, sir. Sir, secondly, on the employee expense, I think that has increased 27% Y-o-Y and also quarter-on-quarter I see that it has increased by around 9%, 10%. So any one-offs here? And do you think this number is sustainable or this will further increase?
So the quarter-on-quarter increase is basically because of the annual increment that we have to give to our staff, which we do in the month of April. The Y-o-Y, of course, was basically reorganizing and bringing in good talent into the organization, which I have told even in my last quarter that now we have completed the talent acquisition that we had set out to this.
Got it. This is more of a sustainable number that you see for the remaining quarters?
Yes, absolutely.
Okay. And lastly, sir, the asset held for sale on the balance sheet, right, the land and buildings, that have been completely sold off. And also what is the update on the fuel stations?
I will ask Anish to answer that question.
Yes. So the total asset held for sale is approximately around INR 140 crores. So we have a clear visibility for almost like 55% of the total AHS, which is approximately INR 83 crores. We have realized part and part money will come in Q2. So that's why in the P&L account use an exceptional gain in some of the properties that we've got gain in some properties and we have to write it down because realization is much lower than actually what is carrying the value which you're carrying in the books.
With respect to the fuel station, yes, there is a progress which is there. So we are just awaiting the approval from the authorities. So once the approval comes in, I think we should be in a position to kind of sell that fuel station. So I think Q2, Q3, we just need to wait and see. And we'd be hopeful we would be able to kind of get the sale, which is like in this financial year at least.
Sure. So just to clarify, you said INR 140 crores was asset held for sale out of which INR 83 crores has been realized and remaining will be still pending, right?
Yes, INR 83 crores we have not realized. We have got a clear visibility where we identified the buyers, we have rendered in the sale agreements, some got disposed of, some in the process of selling up where we have ended in the AOS agreement for sale. So most of the money would get realized in Q2.
The next question is from the line of Pranay Roop Chatterjee from Burman Capital.
Am I audible.
Yes, you are.
So just a couple of questions. There was an interesting slide on your presentation which essentially was talking about, which is Slide 18, old hub versus the new hub in Farukh Nagar, and then you have mentioned a whole lot of features that you have introduced. So I just wanted to understand when you have replaced these 3 warehouses, right, which are 84,000 square feet into 1 warehouse of about 1.13 lakhs, can you share any metrics or any quantitative guidance on what are the improvements? Because qualitatively we understand from channel checks and industry that service quality has improved in North India. But could you provide any metrics like TAT percentage, turnaround or any specific lines, how much revenue growth have you seen? It will help us understand in the future hub expansions, what kind of gains we can expect?
So to give direct attribution of revenue growth for 1 hub becomes extremely difficult because it's the network business. What does really tend to happen is that customers who were giving us a lesser share for North India have definitely started giving us more share of their business for North India because they now believe that our service has improved in North India because of the super hub. What has really helped us is the 89 docks that we have in Farukh Nagar, right? So -- when we had 3 different hubs, basically those 3 hubs put together had about 40-odd docks. And we could only load, unload trucks and that too partially from 1 hub to the other hub till we got that. So the time for loading and unloading was exponentially higher than what it is now. So for our own business partners who are our trucking partners, they all love it when their trucks are rolling on the road with goods rather than sitting at the hub to get loaded or unloaded because they can then earn more out of it. And if they earn more, we also -- our cost optimization takes place.
So I don't know how to give you an absolute number by 1 hub, but definitely the turnaround time of the truck has reduced and it has reduced substantially for us. Also, the efficiency of being able to load and not miss out something because it was lying in 3 different places earlier, now all in one systemized hub is far more better than what it was earlier. So that's all I can say right now.
Got it. And most of my number-related questions have been answered, so I'll just shoot again a broad question, which might appear vague, but I'll go for it anyway. On a scale of 1 to 10, right, one of the most important factors of your transformation journey is essentially improving customer delivery quality, right? If on a sale 1 to 10, 10 being what GKEPL was in its heydays, right, in the early part of the decade, where do you think we have reached on that scale today compared to where we were 1 year back?
So if you were to ask me where we were 1 year back, I would have said we are now 5 on 10. Today, we would be on 7, 7.5.
Got it. And largely, the large part of the improvement would have happened in North India, and we would expect more improvement in the rest of the India has also come up. Is that a fair statement?
No, that's not a fair statement. The improvement has happened all over India. It is not just that you increase or consolidate a hub and your entire India service improves. There are a lot of elements that went into service improvement all over the country.
The next question is from the line of Dhwanil Desai from Turtle Capital.
Phil, my question, so in our interactions, you had mentioned that there were some constraint in terms of handling peak volumes at some of the locations and the new hub in North will have remove the constraints. So if we were to grow at double-digit volume from the current quarter stage, do you see any constraints? Or is it contingent upon new hub coming in? Or we think that we can grow in double-digit volume even from this quarter base without entire hub, all the hubs being rolled out?
So if I were to answer this question in 2 ways. One is if I remain status co, I cannot grow double digit. The second answer is if I wait for the hubs to come, I will miss out on opportunity. So what we have done especially now because we know that we are approaching season time. As you know, season starts end of August and goes up to November, especially in our business. What we have done is we have enhanced capacity by temporarily leasing excess space wherever we found that we had choked up last Diwali. This will make sure that we don't choke up and our service level remains the same. So we have already done that or are in the process of doing that as we speak right now. We enhanced capacity temporarily for the season. We don't need to do that once the new hub in Bombay comes up, once the new hub in Nagpur comes up, and once the new hub in Guwahati comes up in those places. But in the rest of India we will have to continue to have temporary space still the new infrastructure gets built. And that was one of the issues that Gati was facing earlier, but now we have learned through our experience and we have already put that in place.
Okay. Okay. So second question, Phil, is on gross margin. I think if I remember earlier calls and conversations, we have told that we kind of sacrificed some gross margin in order to improve the customer responsiveness and service level, and I think we are aiming to go to 29%, 30% margin by end of the year. So are we -- I mean, what are the levers to moving from 23% to 29%? Is it a higher capacity utilization in your hubs or something more?
So first of all, when you talk about gross margin, you must talk about my core business gross margin, which is the Express Logistics business in which we are at 27.7% gross margin. We are -- when you see the consolidated gross margin, that is because of our fuel pumps business that comes in there. So we are looking at from 27.7% to take it to 29%, right? So it's not from the other figure that you spoke about. Having said that, of course, there are many levers that make us increase our gross margin and we'll continue to build on all the 3 levers of yield, cost optimization and increase in volume, and we strongly believe that we are on track to hit that gross margin.
Okay. And last question is on the franchisee part. I think we have retail and SME segment that we want to tap. I think franchise is an important part of the tapping that segment. So can you help us understand what is the current strength of franchisee for us and how do we want to increase in the next 2 years?
So today, as we sit here, and the number may not be exact, but we have around 250-odd franchisees or maybe even slightly more. But what we are looking at doing is a twofold exercise. One is to revamp the franchisee process itself. And the second is we are looking at increasing 100 more franchisees in the next 12 months.
The next question is from the line of Dhaval Shah from Girik Capital.
Am I audible?
Absolutely.
So great set of numbers, congratulations for that. Sir, just one clarity I wanted to understand. So you mentioned in terms of increasing the EBITDA margin and EBITDA absolute from here. Is my understanding correct that any incremental revenue adjusted for variable cost straight goes to EBITDA? Are we now -- the fixed costs are in place or -- and then incrementally all goes to the bottom line, is my understanding correct?
I would say almost correct. As we build out new hubs, there will be some incremental lease costs that will come in. But otherwise, yes, you are correct.
Okay, okay. And secondly, sir, you mentioned about winning back the business from your old customers. So this -- so the loss of business would be for those organized players and large by organized players or it would be from the unorganized side?
I don't understand loss of business from organized players.
Sorry, so I mean -- so you -- the business which you won back from the customer, so your competitor would have lost that business. So...
Yes, yes, I got it now. No, definitely it is from the organized players because those are customers who would work only with organized players. The unorganized players are all the new businesses that we are winning.
Okay. Okay. Okay. And sir, where do you see the best visibility in terms of growth, in terms of the end industry?
So this is always a catch 22, the key accounts basically have a lot of volume, right? So when I win even 10% of our key accounts volume, I have to win at least 10 SME customers and 100 retail customers to get that kind of volume, right? So while our focus definitely is to increase the SME and retail faster, but there is no such directive in the organization to say stop adding key accounts. So key accounts is a separate team, SME is a separate team, and retail is a third team. We have 3 different sales teams. And while we haven't said to our key accounts team please stop or reduce the business because that's not the intent. We as an organization are focusing our efforts on how we can hasten or fasten the effort on increasing SME and retail business through various modules as I responded to one of the earlier gentlemen in the question.
Yes, yes. In terms of profitability, would there be a large variation between the retail, the SME and the key accounts?
In terms of yield, definitely there would be a large variation. Profitability again depends from customer to customer. Some customers give us dense load, some customers give us volumetric load and each of these combinations determine the end profitability for us. But from a simple yield perspective, definitely a very large difference.
Understood. And sir, last question will be in our journey of growth over the next 3- to 5-year period, how vital is Air Express as a division for you?
Air Express becomes extremely vital, and I explained this to my own internal team many a times that for every single shipment that we pick up in Air Express, it gives us almost 6x the yield of our Surface Express shipment. So we should not go by sheer tonnage of Air Express that we carry because I would multiply that by 6 and say we are so large in the entire Express business. Yes, to answer your question, it is extremely important for us. Our first benchmark is to hit the INR 10 crore mark per month in Air Express. As you have seen, we have consistently now hit the INR 6 crore mark and we will definitely be increasing that quarter after quarter.
So sir -- So do you see any difficulty in getting the -- in getting the space at the [ belly ] cargo at the time which you want, like the time slot? Because the way we understand the morning slots are very expensive and then as the day passes the rates are different. So in your -- so how would you look at it in terms of managing profitability given we'll be using the belly cargo?
There are various combinations available to us because different airlines have different capacities, different rates and different service levels. It's literally an algorithm that one has to run to determine if I have this cargo today, which airline should I put it on and at what time I should put it on to get the best service and the best profitability. There is also a devil over here called the cold order. And sometimes when you don't have adequate tonnage, you also use the cold order. Combination of these gets to your service as well as profitable.
Yes. And sir, in the quarter reported, in the June quarter, we would have seen some impact of a steep increase in ATF prices on your EBITDA. So do you think that would normalize going forward now the prices start -- have started a bit correcting?
So one of the good things in the air business, all air customers are 100% linked to fuel, okay? Unlike the surface business where I cannot say all are linked to fuel. And therefore, for us, as the fuel price increases, our revenue increases in the same proportion and if it reduces, so does the revenue in the same proportion. The volatility in air turbine fuel prices is far more than in...
In these areas...
And basically, one cannot even predict although you and I read the same economic times every day. I think it is very difficult for us to predict what's going to happen with some maybe going to Taiwan and some gentleman going to Russia, right?
Next question is from the line of Ronald Siyoni from Sharekhan.
Congratulations on a good set of results. Sir, I wanted to understand this gross margins a little bit because as you said that we have been winning customers back and mostly key accounts, So -- but the mix hasn't changed versus, say last year or sequentially. Also, if you are winning those accounts also, the yields would be a little bit lower, so maybe margin is a bit lower. So both things are not adding up with respect to the increase in gross margins you are having, unless and until you have shut down some routes for those accounts and restructured or replaced with another route.
So maybe I'm repeating myself, but gross margin is a combination of both yield, volume and the cost optimization. What we have done over the last 1 year, as we have first concentrated on increasing and bettering the service levels for our customers. Whenever the customer comes up for renewal, we have been successful in increasing our yields even if it is a key account, which we are now confident because our service has gone up, and therefore we have been able to increase the yield in our key accounts also. At the same time, there is huge optimization of network costs and pickup and delivery costs. That is a continuous process and that has happened and continues to happen, and therefore the gross margin percentage has gone up to 27.7%. This will continue. Yes, you are right. In spite of the mix remaining almost the same, we have been able to increase our gross margins and we are very sure that as we focus on the SME and Retail segment more and more, this mix will also change.
Ladies and gentlemen, this was the last question for today. I now hand the conference over to the management for closing comments.
So I'll take this opportunity to thank everyone of you for joining the call. We will keep updating the investor community on a regular basis for incremental updates on your company. I hope we have been able to address all your queries. For any further information, kindly get in touch with us or Strategic Growth Advisors, our Investor Relations advisers. Thank you once again, and stay safe. Thank you.
Thank you. On behalf of PhillipCapital India Private Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.