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Gati Ltd
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Ladies and gentlemen, welcome to the Q4 FY 2023 Earnings Conference Call of Gati Limited, hosted by Dolat Capital.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 the date of this call. These statements do not guarantee the future performance of the company and it may involve risks and uncertainties that are difficult to predict.[Operator Instructions]I now hand the conference over to Mr. Abhishek Jain from Dolat Capital. Thank you and over to you, sir.
Thank you, Daryll. Good evening, everyone. On behalf of Dolat Capital, I welcome you all to quarter 4 FY '23 earnings conference call of Gati Limited. We thank the management for providing us the opportunity to host the call. From the management side, we have with us, Mr. Phil, CEO; and Mr. Anish Mathew, CFO of Gati limited.Now, I hand over the call to Mr. Phil for opening remarks, followed by the question-and-answer session. Thank you, and over to you, sir.
Thank you, Abhishek. Good evening, and a very warm welcome to everyone on our quarter 4 FY '23 earnings conference call. We have uploaded our results and earning presentation on the stock exchanges and the 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 and our Investor Relations team.I will now share an overview of the economy, industry and business, after which I will hand over the call to Anish to discuss the financial performance of the company for the quarter and the year ended March 2023.We start with the global economy. Global economic growth in 2022 slowed down to 3.2% after recording a 6% growth in '21. The degrowth was marked by high inflation, Russia-Ukraine conflict, disruption in food and energy markets and continued instances of COVID-19 pandemic. In 2022, central banks around the world raised interest rates in quick succession to tame inflation. U.S. Fed effected the largest cumulative rate hike in any year since [indiscernible].On the positive front, supply chain bottlenecks started easing in 2022 due to reduced backlogs and better delivery time. The pressure from these shocks is likely to continue in 2023 with IMF predicting the global growth to slow down to 2.7% in 2023. Though central banks are likely to ease interest rate tightening, while expectations of a soft landing from the base case outlook, but overall uncertainty remains high. In this backdrop, the emerging markets, though not immune to spillover effects, are likely to grow better as developed economies face the direct brunt of a slowdown.Coming to the Indian economy, despite an uncertain economic outlook, Indian economy has exhibited signs of resilience. This is a reflection of strong domestic demand with favorable demographic that acts as a backbone. Strong economic growth in the first quarter of FY '22-'23 helped India overcome the U.K. to become the fifth largest economy after it recovered from COVID-19 pandemic shock. Currently available forecast of India's real GDP growth for '23-'24, including those of the RBI, broadly settle between 6% and 6.5%. This contrasts with the global GDP growth projection of just about 3%. India has emerged as the fastest-growing major economy in the world and is expected to be one of the Top 3 economic powers in the world over the next 10 to 15 years.The government announced Foreign Trade Policy 2023 in March. It aims at reducing transaction costs and encouraged ease of doing business through process re-engineering and automation. Overall aggregate demand conditions remain resilient for the country. Government's thrust on the infrastructure and revival of corporate investments in select sectors augur well for the economy.Investment activity in India is exhibiting buoyancy on the back of strong composite purchasing managers' [ advices reading ]. Merchandise exports have risen by 6% in FY '23 to an all-time high of USD447.5 billion. And services exports remain strong. Overall, merchandise imports also reached an all-time high of USD714.2 billion in FY '23, increasing by 16.5% year-on-year. E-way bill volumes and toll collections remained strong, reaching new highs in March 2023. RBIs monetary policy measures have resulted in headline CPI inflation declining from 7.8% in April '22 to 5.7% in March '23, with further easing expected during the year.We come to the Indian logistics industry. India is poised to be one of the Top 3 economies and a global manufacturing hub in this decade. Logistics plays a pivotal role in powering the growth in EXIM and domestic trade. India improved its logistics ranking of the World Bank to rank 38, moving up 6 places.In September '22, the Prime Minister launched the National Logistics Policy which acts as a guiding document for states, union territories seeking to formulate logistics policy. The National Logistics Policy has outlined the ambition and road map for the Indian logistics sector. The policy is centered around upgradation and digitization of logistics infrastructure and services. Further, with focus on bringing efficiencies and services through processes, digital systems, regulatory frameworks and human resources, the policy puts marked emphasis on streamlining processes for seamless coordination and reduction in the overall logistics cost besides incentivizing employment generation and filling up the workforce.NLP also lays emphasis on the shift towards more energy-efficient modes of transportation and greener fuels to reduce the carbon footprint. Government's thrust on achieving best-in-class logistics costs and improving trade flows is led by flagship programs like Make in India, Prime Minister Gati Shakti, dedicated freight corridors and production-linked incentive plans. Additionally, the emergence of e-commerce provides a strong growth outlook for the sector. Industry preferences are shifting towards integrated supply chain services and other sophisticated solutions such as inventory optimization and data analytics from isolated offerings such as transportation or warehousing. The logistics outlook remain robust with government-led reforms, changing industry preferences and newer business segments.For the financial year March '23, the Express business has recorded a revenue of INR1,469 crores, witnessing a growth of 18% as compared to the last year. This was accompanied by gross margin expansion by 126 basis points and EBITDA margins expanding by 176 basis points. This performance is a testament of the company's focus on volume growth and operational efficiency.With this, I would now like to share updates on initiatives undertaken under each of our pillars of growth. Sales acceleration. Despite a tough economic scenario, our sales team has been able to deliver a robust performance. This reflects our focus on service levels and customer-centricity. There is continuous effort on increasing our wallet share by farming our existing pool of customers. Apart from focus on increasing wallet share, new business development is also of importance. During the year, we signed 1,669 NPDs, that is new business.We have also put in place a cost standardization and governance mechanism at product level. We have initiated sales training workshops and customer connect program. Other growth levers for us will be the synergies between the contract logistics arm of Allcargo and cross-selling across ECU customer base. There is a strong focus on increasing sales from retail and MSME clients for improving our yield.Infrastructure. At Gati, we are developing robust physical infrastructure at strategic locations to enhance operational efficiencies like quicker transit time, less handling and capability of processing higher loads. In an endeavor to decrease first and last mile turnaround time and cost, while simultaneously increasing booking loads, we have developed 40 new franchisees pan India. During the year, Gati also launched hubs at Guwahati, Nagpur and Mumbai. The Mumbai hub is spread over 1.15 lakh square feet with 61 bays and dock levelers. To enhance brand visibility, we have also branded 1,000-plus first and last mile vehicles. In the next phase of infrastructure development, we'll be setting up 4 surface transshipment hubs at Bengaluru, Hyderabad, Indore and Kolkata.We have also mandated GPS in all linehaul and feeder vehicles to enhance visibility, improve performance and optimize productivity via continuous monitoring. In order to ensure cost optimization, we have optimized vehicles and routes. We also identified areas of higher turnaround time and made necessary corrections in order to reduce the same. During the financial year, we have successfully implemented RFQ for our entire linehaul loops.Coming to technology, after successful and smooth deployment of e-dockets in the retail business, we have started our pilot on our credit vertical. We have initiated transformation project to modernize Gati enterprise management system to state-of-the-art technology to enable business to gain market leadership. Gati, with its wide reach and network, is focusing on improving service quality by optimizing vehicles and routing loads to ensure cost optimization.We also remain committed to our ESG journey and aim to convert the entire delivery fleet to electric stroke alternate fuels by 2025. During the year, we achieved the milestone of plying more than 100-plus electric vehicle across India for our first and last mile. We also signed an MoU with Gentari Mobility, a Petronas Group company, for 500 electric vehicles under Vehicle-as-a-Service model.With this, I would now like to hand over the call to Mr. Anish Mathew, our CFO, for financial highlights for quarter four financial year '23. Over to you, Anish.
Thank you, Phil. Good evening, everyone and a very warm welcome to our Q4 FY 2023 earnings call. I'll take you through the highlights of financial results for the fourth quarter of FY 2023.I would like to start with the highlights of our Express business. The quarter gone by saw weakness in initial months, followed by a strong March. The overall weakness in consumer durables and automobile sector, notwithstanding the unseasonal rains, dampened the sentiment a bit. Total tonnage handled for Q4 FY '23 stood at 2,84,602 metric tonnes as compared to 2,56,906 metric tonnes for Q4 FY '22, reporting a year-on-year growth of 11 percentage. Revenue from Express business stood at INR356 crores in Q4 FY '23 as compared to INR [ 328 ] crores in Q4 FY '22, registering a growth of 11 percentage.Gross margin for Q4 FY '23 stood at 27.1 percentage as compared to 26.2 percentage for Q4 FY '22. EBITDA for the quarter stood at INR12 crores, registering a growth of 199 percentage over Q4 FY '22. I would like to highlight here that depreciation on RoU assets for financial year 2023 was INR45 crores and interest expenditure on lease obligation was INR17 crores. I would like -- I'd also like to mention here that we have added 530 new customers during the quarter ended March 2023, including 419 MSME accounts.For the full year, Express business volumes stood at 11,33,034 metric tonnes, registering a growth of 17 percentage over FY '22 volumes. Revenue for the full year stood at INR1,469 crores as compared to INR1,242 crores in FY 2022. Express business gross margin stood at 28 percentage for financial year 2023 as compared to 26.6 percentage for financial year 2022. EBITDA stood at INR72 crores as compared to INR36 crores in financial year 2022. EBITDA growth has come on the backdrop of gross profit expansion, volume uptick and operational efficiency.Tonnage handled by Surface Express business for FY '23 stood at 11,23,121 metric tonnes as compared to 9,58,711 metric tonnes for FY '22, registering a growth of 17 percentage. Tonnage handled by Air Express business stood at 9,903 metric tonnes for FY '23, registering a growth of 40 percentage as compared to FY '22. Our client mix for KEA, SME and retail stood at 61 percentage, 21 and 18 percentage, respectively, for the year ended March 2023.On a consolidated basis, Gati reported revenue of INR1,723 crores in FY '23 as against INR1,490 crores in FY '22, delivering a growth of 16 percentage. Reported EBITDA stood at INR74 crores for the year ended March 2023 as against INR34 crores for the previous year, registering a growth of over 100 percentage. Pre-exceptional PBT stood at INR4 crores as compared to a loss during the financial year 2022.I'm pleased to state that for FY '23, the business generated operating cash flow after working capital changes on Ind AS [ 20 ] of INR23 crores as against negative cash flow of INR23 crores in FY '22. And the total debt, net of cash and cash equivalents on a consolidated basis, has come down from INR [ 152 ] crores as of March 2022 to INR72 crores as of March 2023.We remain confident on the growth of Gati and are dedicated to improving efficiencies across the value chain. 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 questions and answers.
[Operator Instructions] The first question is from the line of Amit Dixit from ICICI Securities.
I have a couple of questions. The first one is on the realization. So if I look at the Surface Express realization, there has been a fall Q-o-Q while volume has gone up. In the last quarter, you mentioned that the letters have been sent to the customers for a possible increase in April. Now how do we look at it? Is it because of our endeavor to increase volume or there is increased competitive intensity? Also, if you could highlight the market acceptance of the increase that you have discussed in the letter, that would be great.
Okay. So I said the letters that were sent out were basically for the new financial year starting from April, which is April '23. To answer your question, of course, in an endeavor to grow the business, the top line and also look at the mix, these numbers will keep changing, but the whole strategy is to grow the business. As our retail or SME mix improves, the yield will also improve. Key accounts, basically the increases that we send out via letters only happen as and when the contracts come up for renewal.
So sir, on the whole, what kind of on-an-average uptick in realization we can expect in this year? I'm not asking for a quarter or so, I'm asking for the whole year FY '24.
So that is very difficult to predict at this point of time because it all depends on what kind of customers and what kind of volume we attract. So the mix of that will kind of look at the yield.
Okay. The second question is on the EBITDA margin. Now on the last call, we indicated that we should look at that number of 9% by end of -- by actually end of Q4 FY '23 -- sorry, by Q2 FY '24. In light of the performance in this quarter and the outlook that we see, would you like to push it ahead further?
So I will speak to what we had said at the beginning, which is, we are focused on this company becoming a INR3,000 crore organization by 2026 with an EBITDA of 10%-plus. And we will work towards that quarter-on-quarter and make sure that we deliver that number.
But in more near term, let us say, in FY '24, what kind of margin should we work with because the margin has been quite volatile through FY '23?
So all I can say is the whole focus is now on growing the top line. We spent 1.5 years since I have come into this organization on making sure that our service stands up with competition, which I can tell you that in the last 4 months, we have now brought our service to a level. Now it is for us to grow the top line. And as previously stated by us, [Technical Difficulty] grow the top line, we are going to leverage our fixed costs, both of [indiscernible]. So basically, that is the whole leverage game that we will have to play to get the margins [ up an go ].
We have the next question from the line of Alok Deora from Motilal Oswal Financial Services.
Sir, just a question on related to the previous questions. So sir, I just wanted to understand how do we see these margins moving now? Because initially, a few quarters back, we had a 9% sort of a margin guidance for end of this year. And now in the last, I think, call we had mentioned about that being shifted by 2 quarters. But right now, whatever margin performance we see, I mean, what's the realistic guidance we have for a 10% sort of margins because -- and some road map on that because since many quarters, we are in this kind of a range? Just some update on that if you can provide?
So I just answered this question -- exactly the same question by your predecessor. Do you want me to repeat the answer or you heard my answer?
The line for the current participant in the queue seems to have disconnected, sir. Would you like to proceed with answering the question or should we move on to the next participant?
No, I answered the same question the first time around.
We will proceed with the next question, which will be from the line of Aman Vij from Astute Investment Management.
My question is on the industry growth. So in terms of volumes, how do you see this year panning out for the industry, FY '24? And as for us also, what kind of volume growth are we targeting for this year?
So we are basically looking at the logistics industry growing at 9% this year. And express logistics generally grows at about 1.5x the logistics industry growth. So I would say anywhere between 13% to 14% should be the express logistics [Technical Difficulty] for 2, 3 years, our growth should be greater than that.
Sure, sir. Sir, this number you're talking about is volume or value?
I'm talking in terms of both volume and value.
Okay. My second question is, sir, for, say, April month, E-way bill had grown at, say, 15%-plus. And the [indiscernible] was -- our growth was mostly flattish. So any reason, was it an aberration? Or is E-way bill the right way to look at the growth of the industry and our company as well? If you can talk about the same.
So I haven't really looked at the April month, but March month E-way bill really went up and so did our top line for the month of March after a slowdown in the months of January and February. In fact, the industry -- express industry itself for this April was down, and we were with the industry. But with the E-way bill, I haven't compared it for April.
Okay, okay. Because E-way bills were up by almost 12% to 15% year-on-year, April versus April, while our press release had talked about flattish. So I just wanted your take. So has the things improved or is it still a little tough in May as well?
May month has been far better than April.
[Operator Instructions] The next question is from the line of Viraj Mehta from Equirus PMS. We will proceed with the next question, which will be from the line of Abhijit Mitra from Aionios Alpha Investment Management.
So I was just trying to make out 2 numbers. First of all, what are the reasons, Top 3 business as per your gross margin and EBITDA margin, to decline significantly in this quarter? That's point #1 -- question #1. Second question is that over the last 3, 4 quarters, we also have been sort of making a point on your depreciation staying flat, but the depreciation keeps moving up. So even this quarter also it has moved up by almost 20% Q-o-Q. So what used to be a INR10 crore run rate quarterly is almost a INR18 crore run rate quarterly. So if you can also sort of suggest any expectations of depreciation moving ahead, that would be great.
Anish, you would like to take this call?
Yes. On the depreciation part, actually, so for this quarter, there is a one-off charge to the tune of around INR3 crore on account of change in estimate with respect to some commercial vehicles which we were having. So we used to have commercial vehicles, so we decided not to kind of own the commercial vehicle. So we terminated that lease agreement with the financier. So that resulted in kind of accelerated depreciation of around INR3 crore for this quarter. So this is the one-off. So going forward, we won't be having this charge.
So INR15 crore is the more stable run rate on a quarterly basis?
Yes, right. Yes.
Got it. Got it. And my first question is to sort of just list out the factors which led to this drop in margins.
As far as we are concerned, the margin of quarter 4 FY '23 has increased over quarter 4 of FY '22. Your question was more to do quarter-over-quarter, right?
Yes, yes.
So like I always said, the margin gets leveraged because of volume. And our volumes fell in the Jan and Feb months tremendously, although in March, there was a big recovery. But when, for a period, if the volumes fall, the margins tend to also fall along with that.
Okay. So just conceptually, just to understand the point a bit better, so sequentially, the drop in volumes is only 1%, but because of the timing of that volume drop, you are saying that cost incidence is higher. I mean, is this the way one should look at the business going forward as well? As in, there would be months where volumes might be flat and that would create such a huge incidence on your overall margins that the margins drop, in a way, [indiscernible] even if volumes in the subsequent months pick up. How to sort of conceptually understand this?
Yes. So there is a certain fixed cost to any business. So if the volume drops below the average fixed cost that we need to leverage through our top line, then, of course, the margin will drop.
Got it. So your March margin should be significantly higher than your Jan and Feb margin. Is that the way to look at it?
Yes.
We have the next question from the line of Rajat Setiya from iThought PMS.
Sir, in terms of our volumes, how much of the volumes would be coming in from the new hubs that we have built so far as a percentage of the total tonnage in the surface business?
So Gati works on a zonal structure. And if you look at our zones, the main hubs for North Zone is in Farukh Nagar, Delhi and the main hub for West Zone is in Bombay. I would say that if we look at the volumes running through these 2 hubs itself would be about 20% of our total country's volume. And therefore, including the other 2, which we have completed in the last year, which is Guwahati and Nagpur, there would be about -- anywhere between 22% to 25% volume running through these hubs.
Understood, sir. Sir, second question is about the historic margins that you referred to in the last call. So how exactly is it affecting our company? In terms of gross margins, we are already near the ideal gross margin for surface logistics business, which is around 30%, we're just 2% away from there. However, we are getting hit in the EBITDA. So what exactly -- in what way is it hurting us, the historic target? What exactly was it, if you can elaborate?
So basically, the gross margins, as far as we are concerned at Gati, the ideal gross margin that we would look at would be anywhere between 30% to 32%. And therefore, these deductions have still a direct hit on our gross margins. This was basically a period where we had taken up to clean up the past. I think gradually, we'll be putting that behind us, and we will see this business growing at 29% in the very near future.
Sir, I mean, how is -- I mean, if there was a pricing issue historically, then that would reflect in the gross margins. But we are getting hit below gross margin. So what exactly is that issue? If you can help us understand.
So there are various issues that we have. And when we look at creating what we call ECLM provisions in our books, which is below the gross margin, those get created when the collections do not come in on time and collections do not come in on time when there are discrepancies with the customer. So it's a multiple effect that happens to the P&L.
So what percentage of the cost or the -- as a percentage of revenue, how much cost would you attribute to such historic actions?
So there is no fixed percentage. It moves from month to month. And -- but it was pretty substantial in lieu of the revenue that we are generating on a monthly basis. And therefore, it did affect both gross margin as well as EBITDA.
[ So, I guess, I can kind of add a flavor ]. So actually the total ECL provision, which we have made for this financial year is almost like INR24 crore, that's substantially a very, very high number. And in comparison to this number, last year, it was INR15 crore. So that's basically based on the aging. And if you look at the quarter 4, all the efforts which were kind of putting into collection has kind of started building the reserves. So we have seen substantial reduction in provision for this quarter. However, we also saw a slight increase in that deduction, which is what Phil was kind of talking. And that kind of sits in the top line because while we have made a provision, when you issue credit notes, that would need [ to get assessed ] within the top line. So while we saw a decline in the top line, partly driven by the credit note issued, and we have also seen a softening of the ECL provision, which is coming in EBITDA line. But net-net, if you look at for the year as a whole, INR24 crore is a huge and substantial amount for us to kind of have and provision the books. As we kind of are putting all the efforts, I'm sure, this will come in as a reversal in the coming quarters or maybe in the next financial year.
So this is the only hit, because of the past actions, or there is something else as well?
Can you just repeat? I could not hear you properly.
Is this the only hit that we have taken in the P&L this year because of the legacy problems or if there was something else also?
Right. Yes, yes. We are carrying a good amount of provision in the books as a reserve -- I wouldn't say reserve, I would say these are provision as per Ind AS accounting standards. So as we kind of bring down the DSO, this will kind of -- so bringing down DSO would mean, you got to kind of collect the money, and that will kind of -- itself will unwind the provision which you're carrying on the books.
[Operator Instructions] The next question is from the line of Nemish Shah from Emkay Investment Managers.
So I had a question on the realizations for this quarter. So if I have to just compare sequentially the realization, there was a drop of about 5% to 6%. So can you just throw some light? What was the reason behind this?
So when you say realization, are you meaning the yield?
Yes, yield per tonne.
So yield in our business basically have 2, 3 connotations. One is a mix of the business, which basically means that if your key account business grows faster than your SME or retail business, then your yield will fall. It also depends upon the mix of the [ liens ] in which we get our business. So if the business has longer [ liens ], then the yield is higher. For example, if I'm picking up loads from Bombay to Guwahati, vis-a-vis picking up load from Bombay to Pune, the yield will be higher for that business. So the combination of this kind of moves the yield.
So there were no discounts as such during this quarter?
No, not really because we have -- most of our business, as you know, is coming from key and SME customers who are contracted. So therefore, whatever is contracted is what you get from your customers.
All right. Can you share some data as to how much as a percentage of revenue will be from key customers and overall, how much will be contracted?
So our customer mix is 61% coming from the large key accounts, 18% coming from retail customers and the balance, 21%, 22% coming from SME. So besides the retail, both SME and large key accounts will be contracted.
The next question is from the line of Dhwanil Desai from Turtle Capital.
So my first question is, I think, Anish mentioned about this ECLM provision of INR24 crores this year, and it was INR15 crores last year. So 2 questions on that. One is, is it sitting on the other expenses currently? And going forward, our normalized ECLM, is it around INR15 crores? Or would it be even much lower than that, if you can highlight on that?
Yes. On the first question, it is one part of the other expenditure. And to your second question, it would be much lower. It cannot be INR15 crore, it will be much, much lower. I can't tell a percentage as at this point in time, but I think far, far, far lower than, as you know, what we are trending right now.
So is it safe to assume that as we go to FY '24, most of the things which had to go into ECLM has been accounted for and the deduction and everything largely done, maybe a quarter more? Is that the right way to look at it? Or how do you [ write it ]?
Yes. I would say the quality of the debtors are kind of definitely improved actually. But still, as we try and settle the matters, we might see some impact coming in the top line, and that would kind of have an unwinding effect on your ECL provisions. So I don't expect -- we don't expect to see this much of provisioning coming in the next financial year.
The next question is from the line of [ Devesh from WO Group ].
I just have a basic question. So in the Slide 8 -- sorry, Slide 6, my bad. So this pie chart shows the client mix. So KEA -- MSME, I understand, what is KEA, which is the larger pie?
That's basically our key accounts, which are our large accounts.
Large accounts, okay. And retail? What would you classify as retail?
The retail customers are those which give on cash and carry basis.
Okay. But they'll still be institutional, right? It's not that you don't have a courier business like retail, if I want to send something, I can't -- can I go to Gati and send it?
These are B2C business, but these are basically small time entrepreneurs who will ship maybe once a week or maybe at the most twice-a-week kind of shipments.
Okay. Understood. And the business that you show as Surface Express, this is -- you don't do door-to-door delivery, right, to, let's say, somebody's house, individual customer's house? That is -- this is part truckload express delivery, right? This is not the business that, let's say, a delivery does for Amazon or Flipkart.
This is B2B business, which means that our end delivery will be at either a distributor or a stockist or even a company, not [ retail].
Understood. And for Air Express, you will take the belly cargo of the private air -- of the passenger airlines? Or do you have some arrangements with some other cargo airline as well?
No, no. It's -- all of it is through common carriage, the belly.
Common carriage. Okay. And the credit loss that you booked in other expense, this will be for the MSME accounts, I'm assuming, right, which is 20% of your [Technical Difficulty]?
Sorry, I did not get that question.
So in the other expense, there is some bad debt write-off or something, right, that is higher this quarter, which if you see large accounts, I'm assuming they are paying on time, retail is cash and carry, you mentioned. So the 20% of the business, which is MSME, some of those accounts is where you would have taken a write-off, right?
No. So basically, if you're talking about the ECLM provision, which Anish just spoke about, it would be for any category of customer. If there is, for example, a dispute with even a key account, then the dispute needs to get resolved and while it is resolved, your outstanding moves from one bucket to the other, and that's how an ECLM provision gets created.
The next question is from the line of Rohit Suresh from Samatva Investments.
So my first question was, could you highlight the P&L impact in terms of rent or other operating expenses for the hubs that we have put up?
Anish, do you want to take that?
Okay. Can you just repeat the question? You're talking about the operating expenditure for all the hubs?
Yes, the hubs, yes.
Okay. So when you say operating expenses, you're talking about the rental expenditure plus other running -- yes, so I don't have a data right now ready with me. And I think the major expenditure for any hub operation actually would be the rental which we pay because we don't own any of the warehouses. We kind of take it on lease and the lease cost would be the one which is coming in as a [ main ] item, and that is one part of the other expenditure. And the rental actually would be in the range of around anywhere between INR18 per square feet to INR25 per square feet depending upon the kind of facilities or amenities which we have built in that particular warehouse.
Okay. Sir, and my second question was that based on our target of around reaching INR3,000 crores by FY '26, what kind of volumes are we actually looking at to reach that INR3,000 crores?
So if you look at our number as of 31 March '23, if we were to reach the INR3,000 crore run rate by '26, we would need a CAGR of about 18% to 20%.
Got it. Sir, and my last question was on the Farukh Nagar hub being the first hub that we put up around 1.5 years back, so in terms of volumes, how has it been like in the past 1.5 years, how has it grown? If you could give some -- your views or some numbers, that will be very helpful.
So we have given that in our investor presentation slide, I can read out from there, if you want.
The next question is from the line of Siddhant Sanjay Shah from KBS.
I think the communication to investors has been to focus on the SME segment over the next couple of years, and that has been identified as the growth engine to really drive us to that path to profitability, but we haven't really seen any meaningful change in mix between KEA, SME and retail. And I believe in a recent article that I read in a newspaper, we plan on doubling the SME mix. So can you throw some light on some strategic initiatives we're taking on increasing this number without really increasing the KEA accounts?
So first of all, you have to understand that if I'm growing my KEA business, I have to grow my SME business manifold to even retain the percentage today. Right? So if I am at 61%-22%, if I'm growing my KEA, and to retain 22%, I have to grow my SME manifold. So I just want that one point to be appreciated. [Technical Difficulty], the SME percentage will actually degrow. The second thing is how we are doing this is 2, 3 different ways. One is we want to grow our franchisees. We have grown around 40 franchisees in the last year, and we are looking at another 100 franchisees this year. Franchisees generally are located closer to the SME customer. They speak their language and they know where these businesses are and enable us to get the business. Secondly, we are also partnering with the India SME chamber of commerce to become their logistics knowledge partners, and we are attending a lot of conferences and seminars that they set up where a lot of the SMEs get represented and they understand what benefit we can give them by way of our network. So these are some of the initiatives that we are taking besides digital marketing that we do direct to the SME clusters in various parts of India.
The next question is from the line of Vignesh Iyer from Sequent Investments.
Sir, if I'm not wrong, in one of your earlier calls, you had guided for some price hike that would be taken from April 1. I just wanted to know if it has come through.
Sorry, I could not hear you properly.
Yes, sir, if I'm not wrong, you had, I mean, guided in one of the earlier calls that there will be some price -- some hike that would be taken from April 1. I just wanted to know if the hike has come through.
So it is a continuous process. We do send out letters to all our customers. And then, of course, the customers want to basically meet up and talk to us. The process is on, and I'm sure we'll get some benefit out of it.
Okay. More or less, if I'm not wrong, you had said like 8% price hike in quarter 3 call. So just -- that's why I'm...
That's the percentage letters that we sent out to the customers.
Okay. Fair enough. Yes, my second question is on the gross margin side. So if I'm not wrong, we have ended the year with 28% gross margins. I mean with the new hubs kicking in, I mean, with all -- would we see some improvement coming in FY '24, I mean, somewhere near 30%, 31%?
So it's continuous endeavor to increase the gross margin. Also keep in mind that the gross margin that we've ended the year with is in spite of all the deductions that we have taken. So basically, gross margin does get affected when you have deduction because your cost remains the same, but your top line reduces. So definitely, it's a continuous effort for us to increase the gross margin.
The next question is from the line of Abhijit Mitra from Aionios Alpha Investment Management.
Just to sort of follow up on first 2 questions. I think initially, the ability or the confidence to price for certain margins in '24 and not being able to do that now, is it because of some delay in negotiations with the legacy contracts that you see that you're probably hoping to sort of resolve in the next couple of quarters, but they're dragging along for a bit longer than what you had initially expected? Is that the reason to be not able to lay out a road map towards the 10% margins right now? Is that the way to look at it?
No, there is no single reason. I still stick to my INR3,000 [ crores in '26 ] [Technical Difficulty] with a [Technical Difficulty] margin number. It is just that as we have taken over an organization that has been [ sold out ] for various reasons and you kind of try to put it back again and bring it back to where it was, a lot of things come up. And so we are working through all of them, and we are showing continuous improvement, and that will continue.
Ladies and gentlemen, due to time constraints, that would be our last question for today. I would now like to hand the conference over to the management for the closing comments. Over to you, sir.
So thank you for being on the call. If you have any further questions, you could always refer them to our Investor Relations team at Allcargo Group. Thank you once again for attending the call.
Thank you. On behalf of Dolat Capital, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.