GST is likely to bring down total cost as a percentage of sales by 1-1.5%

India’s Logistics Performance Index (LPI) rank improved 19 places as per the LPI 2016 World Bank report and is set to improve further as the Goods and Service Tax (GST) bill is implemented. Vidhyasagar L, Asst General Manager, Corporate Ratings, Credit Analysis & Research (CARE Ratings), gives highlights of the impact of GST on the pharmaceutical industry and the interest of PE players in India’s overall logistics sector, to Viveka Roychowdhury

As per the CARE report, ‘Indian Logistics Industry gaining the traction’, India’s logistic performance index (LPI) rank has improved by 19 places to 35th position from 54th position as per LPI 2016 report by World Bank. What have been the factors behind this increase?

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Vidhyasagar L

A country’s competitiveness is measured by the ease of doing business. India stands at 35th (improved from 54th position as per LPI 2014 report by World Bank) position in the Logistics Performance Index (LPI) amongst 160 countries around the world, with Germany on the top, Singapore, China and US in 5th, 9th, and 10th positions, respectively, as per the World Bank report 2016.

India’s logistics performance has seen a rise in all the six key performance indicators used to compute international LPI. The factors which led to growth in improvement of LPI includes increase in infrastructure (especially road, railways and ports) spending along with their successful commissioning, growth in investments and participation of international logistics players in Indian firms which attracted better technology along with rise in international shipments coupled with leveraging the established network of the investor and implementation of effective IT systems used for tracking and tracing of goods.

Has there been a corresponding improvement in pharma logistics like cold chain facilities, warehousing, etc?

Instead of using ‘cold chain’, it would be more appropriate to use ‘temperature-controlled logistics’ which covers more broader segments. The industry pertaining to temperature-controlled logistics is estimated to be about Rs 1,50, 000 crore and is expected to grow at a CAGR of about 20 per cent during next three to five years as per industry experts. The major contributors for the growth in the aforesaid logistic segment would be larger use of goods falling under the categories such as pharmaceutical and perishable goods. The Indian pharma industry during FY12~FY16 has shown a significant change in the trend of operations by paying more attention to introduction of quality products in the market and part of that initiative is increase in preference towards temperature-controlled logistics. Thus, in an overall sense, the prospects of temperature-controlled logistics segment has been favourable and expected to improve going forward.

The implementation of Goods and Service Tax (GST) bill is expected to trim the logistic costs upto 20 per cent from the current levels. What will be the impact of the roll out of GST on pharma logistics?

The implementation of GST, in the longer run,  is likely to bring down total cost as a percentage of sales somewhere between 1 to 1.5 per cent, depending on the company’s total logistics cost, which is determined by the product portfolio. However, there is a market expectation that the pharma industry would pass on the partial benefit to the downstream, which remains to be seen.

As per the CARE report, the Indian logistics industry is projected to grow at a CAGR of 15-20 per cent during FY16~FY20. What percentage of the sector could be attributed to pharma/ life sciences logistics?

The Indian pharma industry has shown consistent growth during the past decade and has marked its presence having ranked third globally in terms of volume and 13th in terms of value. As per CARE estimates, the pharma industry attributes to about 15 per cent towards the entire Indian logistics industry.

India’s logistics sector has seen interest from PE players during FY15 and FY16, with two PE players, Mandela Capital and Asia Climate Partners investing into cold chain logistics (Rs 120 crore in GATI and Rs 250 crore in Cold Ex respectively) But India still is fairly low, at 35th position, in the LPI. What are the government’s initiatives to improve this ranking?

During the last five years, the Government of India has been taking various initiatives in order to develop road infrastructure. The net road projects awarded by National Highways Authority of India (NHAI) during FY16 have increased to 4368 km in comparison with 3250 km level of FY12. NHAI plans to increase both awards and execution of road projects in FY17 by four times over FY16 levels, i.e., with target execution of 8000 km (@21.92 km/ day) and target awards at 15,000 km. Furthermore, on account of various government initiatives, focus on hybrid annuity as well as engineering, procurement and construction (EPC) contract  and structural changes in the concession agreement, CARE expects substantial increase in pace of award and execution of road projects during FY17 over FY16.

As per the Railway Budget for the year 2016-17, the capital plan has been pegged at Rs 1.21 lakh crore. The railway ministry has given emphasis on rapid expansion of freight business to take up freight corridors: North-South connecting Delhi to Chennai, East-West connecting Kharagpur to Mumbai and East Coast connecting Kharagpur to Vijayawada. Apart from above, various initiatives such as setting up the broad gauge lines, capacity building plans and to improve the customer interface through IT systems to provide better quality of services have been taken up.

As a part of reviving the existing ports of the country, the Indian government has developed 10 coastal economic regions, which led to improvement in the capacity of all the major ports to 892.92 MMT as on January 31, 2016 (871.52 MMT as on March 31, 2015). Furthermore, the government is taking up various initiatives such as investing Rs 70,000 crore under ‘Sagarmala project’ in 12 major ports in the next five years, allowing upto 100 per cent FDI under automatic route for port development projects and providing income tax incentives.

India, although gearing towards (being0 logistic friendly on its performance index, has been facing inhibitions that primarily include higher logistic costs and complex tax structure. The implementation of GST Bill is expected to trim the logistic costs upto 20 per cent from the current levels, however, the persisting high logistic costs could only be resolved by development of logistics infrastructure. Transportation alone holds 60 per cent share of the logistic industry and rest 40 per cent is contributed by warehousing, freight forwarding, value-added logistics, etc.

Thus, the growth in logistics sector to a large extent depends upon successful implementation of the aforesaid initiatives taken by the government.

Any specific measures that will impact/ improve life sciences logistics?

It would be difficult to specifically pin down the impact of the measures taken by the government to improve the selective segment of life sciences logistics, however, there are other initiatives apart from the aforementioned which would help the industry grow. Indian pharma companies already have 100 per cent FDI under automatic route for greenfield projects, however, the same has not encouraged many investors in the past. Therefore the government in order to benefit the pharma industry has raised the FDI for brownfield projects to 74 per cent under automatic route. This initiative by the government is expected to enthuse the global pharma players to invest in domestic companies leading to JVs, mergers or acquisitions, which in turn would benefit the entire stratum of pharma industry.

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