Domestic cold chain biz struggles to keep up volumes to recover investment

Compared to similar geographies, like Thailand, Malaysia and China, Indian players make just about 1-2 per cent PAT as against 10-15 per cent PAT in these countries

The need for sizeable investment coupled with a well-defined strategy to capture volumes has made cold chain business a tough one despite the market thrown open by the Coronavirus (Covid-19) vaccination drive.

Industry officials are of the view that pharma cold chain alone could grow by about 20 per cent compound annual growth rate (CAGR), while the non-pharma segment by 15 per cent CAGR for the next few years. The cold chain industry in India, however, is fragmented and has only a few organized players catering to both pharma and non-pharma segments such as confectionaries, fruits and vegetables among others.

Gati Ltd, an old player in the logistic business, sold off its cold chain business Gati Kauser to a private equity player in May. This came at a time when the business had started to look up. "For the next three-five years, cold chain capacity will fall short of demand for both—pharma and non-pharma segments since in the last four to five years lot of players exited. Private equities want to double money in five years but that is not possible in cold chain,” Sunil Nair, chief executive officer at Snowman Logistics, told Business Standard.

According to Nair, the key to this business lies in its scale which is possible through investment in capacity. "This has to come with a well chalked-out strategy which allows the cost overheads to be optimised over a period of time,” he said.

“Technology requirement is very strong in this segment along with service offerings. It needs a lot of compliance on the ground and a lot of skill is required on ground as well to manage the business,” said Kunal Agarwal, director of Kool-ex, a pharma cold chain logistics service provider.

The company has the largest refrigerated (reefer) truck fleet of 450. Most players, however, have 20-30 reefer trucks keeping the industry parched for more capacity. Coldrush Logistics, Coldman Logistics and RadhaKrishna Foodland are other players in the cold chain market looking to grow in the coming years.  

“Demand for vaccines is not the sole reason for growth in the pharma segment. There is a shift happening in FDA (Food & Drug Administration) norms wherein a lot of drugs, which today are stored and transported in normal dry trucks will have to move to the cold chain. This is leading to strong volume visibility in the pharma cold chain logistics,” said Nair.

Snowman Logistics is looking to invest Rs 425 crore over the next three years, of which Rs 200 crore would be used to increase pharma capacity. The company has 10 per cent of its total revenue coming from the pharma segment, which it plans to take to 18-20 per cent over the next few years.  

As pandemic induced lockdowns lead to consumers stocking up perishable items, this creates more demand for cold chain logistical service.

“Even for confectionery, companies are choosing to use cold chain logistics over dry open truck transportation leading to a shift in volumes in the non-pharma category,” Nair added.

Industry officials also said that changes in FSSAI Act has led to a volume shift from unorganised to organised segment of cold chain and that since 2016 there has been at least 30 per cent capacity addition year-on-year with currently all the installed cold chain capacities utilised fully.

Still, the cold chain business is considered unattractive as it does not yield adequate returns. “If you do not own the refrigerated business you cannot be in the cold chain business because the concept of leasing reefer trucks is not developed in the country. Hence it made sense to exit this business,” said Bala Aghoramurthy, deputy managing director at Gati Ltd.

Compared to similar geographies, like Thailand, Malaysia and China, Indian players are perhaps making just about 1-2 per cent profit adjusted after tax (PAT) as against 10-15 per cent PAT in these countries. This is because the domestic cold chain industry needs serious price revision, said industry officials.

“Manufacturers have shifted from open body trucks to refrigerated trucks. This migration leads to a huge cost difference as cost goes up by 50 -60 per cent," said Nair. Manufacturers want at least to recover this increase in cost over dry transport and warehousing but they get only a 10-15 per cent premium which is not enough. It will take the next 2-3 years to have prices comparable to Thailand, Malaysia or China, said Nair.

Though there are not many new entrants in the domestic cold chain business at present, once the existing players are able to prove their business model based on sizable utilsation and strong financials, more companies could look to enter the industry going ahead.