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29 September 2008

LOGISTICS : AN UNSUNG HERO

Ever been to South Delhi's INA Market? If not, I recommend a trip. Besides the wonderous malayalee food in ramshackle 10'x10' restaurants, it boasts a magnificent display of fruit, fish and other culinary ingredients. Pears from New Zealand, australian apples, fish whose names I cannot pronounce and with shapes which can be described as exotic, to say the least.

That got me thinking - how could a small, apparently disorganised place like the INA Market come up with such wonders. I have a one word answer - LOGISTICS.

SECTOR OVERVIEW
The logistics sector like all other organised businesses has a heirarchy as shown by the graphic below.


Axiomatically, it also has a heirarchy of 'returns'.

Vertically it may be divided into :-

Services to include freight forwarders, shipping, labelling and packing, logistics park, fleet operators, warehousing, ports and terminals.

Hardware to include forklift, stacker, racking system and dock leveler.

Technology to include telematics, auto data capture, barcoding and ERP.

There are four means available for implementation of logistics :-

Shipping
95% of all indian exports are by shipping and that accts for 1 % and 5% of the world and asian cargos respectively. Cargos are of two types bulk and containerised and they are growing at 6% and 19% respectively.

Aviation
This segment caters essentially for the low volume, time sensitive sectors like Telecom, IT/ITES/BPO, electronics and fashion. It is more sensitive to the price of oil as fuel forms a larger component of the overall cost. Air Cargo movement is increasing at 14.7% per annum. The basic model followed is the hub and spoke model. Blue Dart a major player in this sector has 6 -Air Hubs.

Trucking
70 % of all transportation in India is by trucks and it accounts for 60% of all logistics costs.

Railways
The Indian Railways is a near monopoly with 2 Million Tonnes of freight transport every day which accounts for 70% of its revenues and almost all of the profits. Though it is moving towards containerisation, it still earns most of the revenue from blk transport. A recent wave of privatisation has resulted in private companies like Gateway Distriparks and ConCor being permitted to run their own container trains. Also a 11000 KM long dedicated freight corridor linking major cities is also on the anvil.

A NOTE ABOUT CONTAINERISATION

Containers are of standard sizes - 10, 20 30, 40 and 45 feet. Twenty and Forty feet are the benchmark sizes used in the industry with Twenty Feet Equivalent Units(TEUs) as the favoured size.Containerised cargo accounts for 30% of indian export-import and 70 % of all world trade. Though we are growing at 15 % per annum, we have a lot of catching up to do.

India has 12 major and 185 minor ports but JNPT and Nava Sheva together handle 58% of indian container traffic i.e. 4 Million TEUs. Chennai Port handles about 1 Mn TEUs.
Shipping Containers are berthed at Container Freight Stations(CFS) located at the Ports from where they are carried by freight forwarders (either rail or truck) to Inland Container Depots(ICDs).

23 September 2008

PROOF OF THE PUDDING............

Some time ago we discussed a veritable banquet of investment delight- Pantaloon Retail (You may like to check my posts for the month of june). I received scathing criticism from Talespinner for not giving a clear recommendation. I promised him I'd do it after the annual results. So here goes.

The company has come out with its annual results and it is heartening to note that the core operating business i.e. retailing, is doing very well. The Profit Before Tax has jumped 116 %. This is after accounting for a 126% increase in depreciation and a doubling of interest costs.Its total income rose by 52 per cent to Rs 5052.67 crore in FY 2007-08 as compared to Rs 3328.77 crore during the last fiscal. The Board has also recommended a 25 % dividend.

Well now, Ladies and Gentlemen, "Dinner is Served". Please help yourself to a generous helping of Pantaloon Retail. Cover charges are only Rs 285 per plate. With God and Kishore Biyani willing, in a years time, look for a price target of Rs 500.

Talespinner, now howz that for a recommendation!

..........IS IN THE EATING

21 September 2008

NOT A ONE ACT PLAY

ACT 1 Scene 1
In the post ICE 2000 meltdown United States of Alan Greenspan, the interest rates were loosened and money flooded the market. Average Joe Smith had a well paying job in the highest tax bracket so the thought of tax breaks available via mortgage on purchase of a flat(condo) was induced in his mind by the friendly neighbourhood banker, who incidentally happenned to have lots of loose cash lying about.So the first leverage of the system was born. 

ACT1 Scene 2
The next came in when Mr Bright Spark Investment Banker at L Bro collected lots of Joe Smiths together into a CDO(Collaterised Debt Obligation), asked his friend Ms Unscruplous at a rating agency to mark it as the next best thing to a US Treasury Bond and then sold it(on leverage of course) to Mr KnowNothing a deep pocketed investor. Mr Bright Spark earns the commission on the sale and management fee for the life time of the CDO ie till the time cash flows from Joe's pocket to the lender bank as an instalment. 

ACT1 Scene 3
The last level of leverage came in when Mr KnowNothing bought the CDO with money he didnt have, paid for by the bank at a handsome rate of interest.

ACT 2 Scene 1
Oh there is so much happiness in the world! Everyone is a born financial wizard. All you have to do is buy an 'asset' wait for a few blinks and you have a multiple on the 'asset'

ACT 2 Scene 2
Everyone in this three act play was happy till Joe paid up on time or till the price of Joe's flat/condo kept going up and Joe II bought it from Joe, restarting the process. But now the music has stopped. Joe IX is struck holding the parcel. He also does not have the bright job that Joe has and so ...........Sub Prime! Default!!No cash flows!!!Losses and bankruptcies.

Hey but what about Mr KnowNothing? Well that act of the drama is yet to unfold. Watch this space for more on ACT 3.

20 September 2008

THE CHICKEN HAVE COME HOME TO ROOST

Like all good sons, me and my brother used to have our regular disagreements with Father about how he never understood the 'new ways' of investing, how leveraging was the way to go and leveraging to pay for the new car was a done thing - he freshly armed with an MBA from the US and me with the street saviness of a financial rookie. We gave examples of how the US economy was the richest country in the world and was fully leveraged - from credit card debt to mortgage backed securities. Father patiently explained the concept of-'jitni chadar utne pare' - spread your legs according to the size of the covers.He also stuck to his guns and we bought the new car cash down.

Dad how true it was! Wish Alan Greenspan had listened to my Dad. Then we wouldnt have the spectacle of the richest country in the world scrounging around for money to keep its decades old institutions afloat.

This is also a lesson our own stock markets and individual investors would do well to understand - leveraging by itself is bad. Leveraging to buy an asset is good. And an asset by definition is something that brings positive cash flows , not one that merely gives a tax break and a notional high.

Mr Greenspan, your chicken have come home to roost.

DISCLAIMER

This blog should not be construed as investment advice, either on behalf of particular stocks or in regard to overall investment strategies. It is a site aimed at understanding competitive advantages and valuing businesses. The information provided here comes from publicly accessible sources, but errors in these sources and in transcription may occur. Any investment decisions you make should be based solely on your evaluation of your financial circumstances, investment objectives, risk tolerance, and liquidity needs.