Build a Competitive Warehouse
Sub-sector
–
An India Perspective
Case study of Mumbai
Presented by Dr. Samantak Das
What are the Investment Avenues?
Investment Avenues Real Estate
Currency
Equity Bonds
Where to Invest in Real Estate?
Real Estate Investment
Residential Land Industrial Retail Hotel
Pre-leased & Occupied
Under-construction Office
Agenda
India Logistics & Warehousing
Logistics & Warehousing in India
Policy Analysis
Business model dynamics
Infrastructure
Emerging Trends
Mumbai Warehousing Market
Bhiwandi
OVERVIEW
Evolution of Logistics in India
Greater external integration Bundling of
services with the help of 3PL players Companies focus
on core
competencies and outsource logistics requirements to 3PL Players World class
warehouses , higher automation
Strategic focus on reducing cost redundancies and customers
Supply chain management Global operations Single operator
managing the supply chain in multiple
geographies Move towards
4PL’s and 7PL’s Processes like
purchasing, warehousing, packaging and inventory management handled separately Not much
coordination between functions
Early Consolidation Mature
Internal integration within the company Better coordination between functions Individual
contracts given for transporting, storage,
forwarding etc. Shift from
Comparison with USA & China
• The USA logistics sector has a value of almost 10 times that of the Indian logistics sector.
Comparison with USA & China
India USA China
Total containers handled at ports (mn.TEU) 9.9 42.9 139.7
Containers handled by busiest port (mn. TEU)
4.3 (43% share) 7.9 (18% share) 31.7 (23% share) J.N.P.T. Los Angeles Shanghai
Road Network 4.8 mn. km 6.5 mn. km 4 mn. km
Weight of Goods moved annually per km of road 1,173 1,727 7,018
Rail Network 64,000 km 228,513 km 66,239 km
Weight of goods moved annually per km of rail line 14,750 8,293 59,331
The busiest port in India handles more than
43%
of the country’s total traffic as opposed to the busiest ports in the USA and China that handle 18% and 23% respectivelyDemand Drivers of Logistics Sector
Demand drivers of logistics sector
Manufacturing
Major industries such as Auto, Cement, FMCG, Metal and Textile
among others Based on
industry-wise spending on logistics
Consumption
Major consumption centres such as
Mumbai, NCR, Bengaluru and Chennai among
others Based on modern
retail space
Exim
Manufacturing Led Demand
Industry Characteristics Logistics cost as
a % of revenues
Automotive and Auto Components
Highly logistics sensitive
Timely supply of individual components is of utmost importance
Inventory carrying cost is high
Highly dependent on skilled labor
2% - 3%
FMCG
High amount of inventory holding
Emphasis on last mile connectivity
Focus on product packaging
6% - 8%
Textile
Complex supply chain
Extensive distribution network
Requires containerised cargo
Sensitive to timely movement of raw materials
Contributes to exports as well
4% - 5%
Cement
High volume, low value commodity
Logistic cost comes very close to the manufacturing cost
High dependency on good transport infrastructure
18% - 20%
Pharmaceutical
Requires specialized cargo, temperature sensitive
Highly time sensitive
Huge inventory
Drugs need to reach the market in time
Consumption Led Demand
• Large consumption markets like the NCR, Mumbai, Bengaluru, Chennai and Kolkata among others require massive amount of investment in logistics in order to ensure an uninterrupted supply of goods
• This has created demand for logistic services like warehousing, last-mile connectivity and inventory management
Major consumption markets
EXIM Led Demand
• Export-import market constitutes the largest demand driver for the logistics sector in India
• India’s containerised traffic in TEUs has grown at an annual average growth rate of 11% in
Warehousing Space Demand
• The total warehousing space demand in India is expected to grow at 13% CAGR over the next 5 years
• Manufacturing led demand is expected to lead with a 15% CAGR
• A total of 235 mn.sq.ft. of incremental warehousing space will be required by the end of 2018 or 47 mn.sq.ft. in each of the coming five years
2013 2018E CAGR Incremental Demand
Incremental Average Annual Demand
Manufacturing 29 57 15% 28 6 Consumption 52 84 10% 32 6 Exim 211 386 13% 174 35
Total Warehousing 291 526 13% 235 47
STRUCTURE & BUSINESS
MODEL
Types of Warehousing Services
Type of warehouse Type of products handled Location
ICD/CFS Containerised cargo Near ports & major industrial/railway hubs
Rail side warehouse Break bulk cargo such as Cement, Fertilizer Major consumption centres & port
Bonded warehouse Imported goods Near ports & major industrial areas
Retail distribution centre Retail & consumer products such as FMCG
goods, apparels, consumer durables Major consumption centres
Service parts distribution centre
Spare parts & consumables of heavy capital
equipment/machinery Major industrial centres
Industrial warehouse Industrial goods which are used as inputs in
other manufacturing industries Major industrial centres
3PL warehouse Multiple products Major industrial & consumption centres
Godown Multiple products Major industrial & consumption centres
Cold storage warehouse Frozen foods, milk products, pharm products Major consumption centres & port
Foodgrain warehouse Foodgrains such as rice, wheat, sugar Major agricultural hubs
Construction Cost of Warehouse
Cost component PEB RCC
Structure 350 - 450 400 - 500 Plinth/flooring 300 - 400 300 - 400 Infrastructure (Sewage, roads, boundary wall, etc.) 150 - 350 150 - 350
Total 800 - 1200 850 - 1250
Cost components for construction of a warehouse (Rs./sq.ft.)
• The nature of cargo handled by the occupier determines the choice of structure
• PEB structures offer relatively more vertical storage space and are preferred by occupiers making use of pallets and fork lifts for the purpose of stacking cargo
• High value fragile cargo may not prefer multiple levels of stacking and would prefer an RCC warehouse
Feasible Land cost & Infrastructure
• The variability of the construction cost is marginal across locations. It is the land cost that determines the economic viability of a warehouse
• The ideal land cost for a warehouse project would be around Rs.200/sq.ft. and with ground coverage of 50%, this translates into Rs.400/sq.ft. on a built-up area basis
• Support infrastructure such as sewage treatment plant, adequate internal roads for truck, boundary walls, parking space, security chamber, etc. require open space
• We estimate a minimum of 30 acres or 650,000 sq.ft. built-up area as the ideal size of a warehouse
• Hence, investment of approximately Rs.780-1,072 mn. would make an ideal warehouse project in India
Return Expectation & Rental Yield
• Based on the associated risk, organised/institutional players expect IRR of 14-16% from a warehouse development project
• On the other hand, unorganised players underwrite warehouse development projects for as low as 7-10% IRRs
• The gross rental yield for a warehouse ranges from 10-12% pa
POLICIES & REGULATIONS
WDRA Act: Salient Features
WDRA 2007 Increase investments in warehousing Enhanced employment opportunities Farmers seeking higher prices and accurate weights Banks advances backed by secured and easily liquidated collateral Facilitates borrowing and hedging forFree Trade and Warehousing Zone
Fiscal and regulatory benefits
i) Tax benefits ii) Excise duty
exemptions iii) Duty deferment
benefits
Infrastructure benefits
i) Single product storage facilities ii) Shared warehousing iii) Equipment sharing Administration benefits
i) Delivery time ii) Support facilities
and effective management
Other benefits
i) FDI inflow ii) Export oriented iii) Employment
potential iv) Industries
GST & its Impact
• GST will ensure the abolition of CST thereby making the country a single market which will no longer be divided by state boundaries
• This will enable a reduction in the number of warehouses and allow companies to focus on building fewer and more strategically located warehouses
• Supply chains will become leaner and efficient in terms of warehousing, transport routes, distribution and sourcing wherein the decisions taken will be based on operational efficiency rather than tax avoidance mechanism
Subsumed under Central GST Subsumed under State GST
Central Excise Duty VAT / Sales tax Service Tax Entertainment tax Additional Customs Duty Luxury tax
EMERGING TRENDS
MMLH: The Future of Logistics Sector
Godown
Warehouse
Integrated Logistic Park
Leading Global MMLHs
Multi Modal
Logistic Hub Country Size (Acres) Major services
Alliance Texas USA 17,000
Air cargo airport, rail access, Foreign Trade Zone (FTZ), Inventory tax exemption, Dedicated office and retail space
Plataforma Logistica de Zaragoza
Spain 3,200 Air cargo airport, rail access, Business park, Captive electrical substation
Società Interporto
di Torino Italy 740
Rail access, Supply chain management, Traffic control
cent es, P e‐p oduction & uality cont ol, Office,
Banks, restaurants, Workshop centres Euro Transport
Centre Germany 585
Rail access, customs clearance, Duty-free storage, Just-in-time scheduling, Cross-docking centre, Spare parts logistics centre
GLP Park Beijing
Capital Airport China 100
MMLHs along the DMIC
•
The GOI through the DMICDC has identified four
locations in its initial stage that are to be developed
as MMLHs
•
The proposed MMLHs are located in
Dadri &
Rewari
near the NCR,
Pithampur
in Madhya
Pradesh and
Karla
near Pune in Maharashtra
•
Although these hubs are still at the pre-feasibility stage, the intent of developing
them in the coming years indicates the direction in which the logistic sector of the
MUMBAI
Introduction
•
MMR constituting Mumbai, Thane and Navi Mumbai has the highest density of
population amounting to 23.5 mn.
•
The region is host to two major sea ports namely the JNPT and the Mumbai Port
•
Hence, the warehousing activities in the city are either
consumption driven or
EXIM driven
Bhiwandi Warehousing Hub
Types of Warehouses and Industries
Serviced
Retail distribution centre
Location
Bhiwandi
Warehousing
Hub
Delhi-Mumbai
Highway (NH-8) Highway (NH-3)Mumbai-Nashik
Navi-Mumbai, JNPT &
Mumbai-Pune Highway Thane & Mumbai
City
NORTH-WEST NORTH-EAST
Connectivity
The Bhiwandi warehouse cluster is located in close proximity to the densely
populated (23.5mn.) consumption markets of Mumbai, Thane and Navi Mumbai
Location Approx. Distance (Km) Approx. Transit time
(Hours)
Mumbai city (Dadar) 35 1-1.5
Thane city 10 0.5-1.0
Navi Mumbai (Vashi) 25 1-1.5
JNPT Port 50 1.5-2
Mumbai Port 45 1.5-2
Rent and Quality of Warehouses
Warehouses on Old Agra Road
• Most warehouses are old developments with G+1 RCC structures which provide for just 12-14ft. of vertical space for storage
• Primarily dominated by occupiers from textiles, pharmaceutical, consumer durables
• The rental here is Rs.9-12/sq.ft./month for ground floor and Rs.4-6/sq.ft. for the first floor
Indicator Unit Range
Land rate INR/acre 15,000,000 - 40,000,000
Land rate INR/sq.mt. 3,700 - 9,900
Rent INR/sq.ft./month 9 - 15
Rent and Quality of Warehouses
Warehouses on Mumbai-Nashik Highway (NH-3)
• Warehouses along the NH-3 can be categorised as modern warehouse complexes with sizes in excess of 1 mn.sq.ft
• Warehouse parks of PEB structures with supporting internal infrastructure can be found along this 20 km stretch from Mankoli to Padgha Toll Naka
• The rent here is on the higher side and ranges between Rs.10-15/sq.ft./month because of
better quality of construction and supporting infrastructure such as sewage treatment plant, adequate internal roads for truck and trailer movement, fire fighting equipment,
Infrastructure
•
The Bhiwandi warehouse cluster came up as an
unplanned development
with
projects being developed in village areas between Thane and Bhiwandi
•
As a result, the infrastructure development in terms of roads, water, sewerage
and power was lagging
•
This has improved in the last few years with the development of Old Agra Road
into
four-lane with divider and privatisation of power supply
(Torrent Power)
Competitive Advantage
•
Proximity to the
densely populated consumption hub
of Mumbai, Thane and
Navi Mumbai
•
Lower rentals in comparison to competing warehousing hubs like Panvel
•
Abundant supply of skilled, semi skilled as well as unskilled workers from MMR
Challenges
•
Identifying land parcels with
clear land title
•
Tiny and scattered land holdings with multiple owners from nearby villages
•
Land use gradually changing in favour of residential development
•
Warai charges
paid to the local labour union increases the total cost by 5%-20%
•
Presence of a large number of unorganised players with
return expectations as
low as 7-10%
makes it difficult for institutional players to operate in this market
Outlook
•
Small standalone godowns will be shunned in favour of large warehouse parks
with support infrastructure and utilities
•
With residential development emerging as the most remunerative option for land
development, new warehouse development will shift towards the 15 km. stretch
extending from Rajnoli (junction of NH-3 and Bhiwandi Kalyan Road) to Padgha
until the toll point
Feasible Land Cost
•
The market price of land in this hub is upwards of INR 15 mn./acre
•
Institutional players with a return expectation of 16% have no business case
for operating in Bhiwandi
12% 14% 16%
2% 10 8 7
3% 13 11 9
4% 15 13 11
5% 18 16 13
Investor Return
Expected rental growth per annum
Feasible land cost matrix for warehousing in Bhiwandi (INR mn./acre)
Panvel Warehousing Hub
Types of Warehouses and Industries
Serviced
Industrial Warehouse Chemicals BASF, Dow, Dupont, Monsanto Consumer Durable Dell, Godrej, HCL, Hitachi, HP, LG, NokiaLocation
Panvel
Warehousing
Hub
NH-8, NH-3 and NH-222
Mumbai-Pune Highway (NH-4) Panvel-Goa
Highway (NH-17) JNPT Road WEST
SOUTH-EAST NORTH
Rent and quality of warehouses
Warehouses on Kalamboli-Taloja region
• Most warehouses are G+1 RCC structures or PEB structures with basic infrastructure
• These warehouses cater to low value products from the pharmaceutical, consumer durables, metals and textile industry
Rent and quality of warehouses
Warehouses close to Palaspe Phata
• Logistics parks with integrated solutions
• State of the art construction quality with high ceilings (30-35 ft.), climate control, sewage treatment plants, adequate security and internal roads
• The rent here is on the higher side and ranges between Rs.16-26/sq.ft./month depending on the distance from the JNPT port
Indicator Unit Range
Land Rate INR/acre 15,000,000 - 65,000,000
Land Rate INR/sq.mtr. 3,700 – 11,120
Infrastructure
•
All the major national highways are in excellent condition
•
However,
internal roads are in poor condition
and are difficult to negotiate
•
Absence of dividers on majority of the two-lane internal roads cause
frequent
traffic jams and delays
Competitive Advantage
•
Proximity to
India’s busiest container port
•
Easy access to a number of national highways
•
A large portion of the area falls under CIDCO which has aided in building
sustainable infrastructure
•
Abundant availability of skilled and unskilled labour in Navi Mumbai and the
Challenges
•
Paucity of contiguous land and inaccurate land records pose challenges in
identifying viable land as well as authentic land titles
•
Announcement of the
Navi Mumbai airport
has led to Panvel and its
surrounding locations being touted as the next big residential hub
•
Prices in residential projects within a 3 km. radius of Palaspe Phata have already
crossed INR. 5,000/
sq.ft.
Outlook
•
Increase in capacity of JNPT
from 3.8 mn. TEUs to 10 mn. TEUs by 2016 will
lead to a surge in warehousing activities in the Panvel cluster
•
With residential development emerging as the most remunerative option for land
development, new warehouse development will move further south on the NH-4
and NH-17
•
Locations like Patalganga and Khalapur on the Sawale Apta road, Nadhal
Khalapur stretch on the NH-4 and the Khopoli-Pen Road will witness maximum
Feasible Land Cost
Market Congruence case (The output from the feasible land cost matrix that matches with the prevailing market price of land)
12% 14% 16%
2% 21 18 16
3% 24 21 18
4% 27 23 20
5% 30 26 23
Feasible land cost matrix for warehousing in Rasayani-Patalganga (INR mn./acre) Investor Return Expected rental growth per annum 12% 14% 16% 2% 16 13 11
3% 18 16 13
4% 22 18 16
5% 25 21 18
Feasible land cost matrix for warehousing on the Nadhal-Khalapur stretch and Pen-Khopoli Road on
NH-4 (INR mn./acre)
Investor Return
Key Takeaways
• India logistics sector is in a ‘growth’ phase –
strongly moving towards the
‘consolidation’ and ‘mature’ stage through a holistic approach
•
Efforts are being taken to reduce transportation and warehousing costs and
better utilization of port to make the logistics sector more efficient
•
Warehousing sector is expected to witness a substantial improvement backed by
policy & regulations, fiscal incentives and planned industrial & dedicated freight
corridors
•
GOI has already identified four locations to be developed as MMLHs
