'We Have Created An Entry Barrier With Aviation'
Apart from that, Blue Dart Express took another decision that the bulk of its shareholders wanted, converting its holding in its aviation subsidiary from 75 per cent to 100 per cent.
The promoters had issued themselves 1.6 million warrants at the time of the public issue in 1994. They converted 0.25 million warrants to fill in the gap. The rest of the money is being raised by issuing 2.3 million debentures carrying interest of 2.7 per cent per annum to Newfields at a price of Rs 100. The conversion or redemption will take place on July 31, 1998. The conversion price will depend on the company's 1997-98 results. If the net profit is over Rs 21.95 crore, then the conversion will take place between Rs 115 and Rs 180. If the net profit is over Rs 18.65 crore and equal to or below Rs 21.95 crore, then the conversion will take place at Rs 115. If the net profit is higher than Rs 21.95 crore, the conversion will be the lower of the preceding six-months average of the weekly high and low of the closing share price or at a P/E of 5. If it is not converted on the above terms, the other option is that the two companies may agree to convert the shares at a price lower than the floor price but not
lower than the six-month average of the weekly high and low of the closing share price. The other option in case, conversion does not occur, is to repay the loan at an interest of 15 per cent, net of 2.7 per cent.
Blue Dart Aviation, its wholly owned subsidiary, started operations in June 1996 with two Boeing 737 aircraft. The subsidiary didn't do too well in the first half of 1996-97. Though total income grew 26 per cent to Rs 68.47 crore, over the previous corresponding period, operating profit fell 30 per cent to Rs 4.54 crore and net profit fell to Rs 0.37 crore from Rs 5.26 crore in September 1995. Tushar Jani, chairman, Blue Dart Express, spoke with Niraj Bhatt about his company.
Q: Why was your performance in the first half of 1996-97 unsatisfactory?
A: The numbers may look unsatisfactory. But from our point of view, the result is quite satisfactory. You have to understand that we set up the Rs 50-crore aviation project in June, and by September, we had turned around and showed a profit. Operating profits went down because of heavy start-up and depreciation charges. And the aviation business did not exist in the previous corresponding period. As an entrepreneur and investor, I would have expected the company to make a major loss.
Q: Why did aviation become such a big drain for the company?
A: Our planes fly only for Blue Dart Express. When we started, we did not have the load to carry. For three and a half months (since mid-June), we were building the load.
In aviation, we have three products; airport-to-airport (ATA), door-to-door (DTD) and the courier product. Initially, we were carrying 80 per cent of ATA and 20 per cent were the other two products. ATA is someone else's cargo and has low yield, whereas the other two products have high yields. And our endeavor was to fill up the planes with high yield products, but not let the planes go empty. So, we started with a higher volume of the ATA product but the ratio is reversed today and 60-65 per cent is the high yield products.
Secondly, the results for the second half are much better than the first half for the entire express industry since our season begins in September.
Q: What is your capacity?
A: On paper, we have a total capacity of 128 tonnes a day. But the marketable capacity is only about 70-80 tonnes a day. The aircraft takes the Chennai-Bangalore-Mumbai-Delhi-Calcutta route. Each aircraft is 16 tonnes, so technically, Chennai to Bangalore is 16 tonnes, provided, we get the entire cargo of Chennai and drop it in Bangalore, which we do not get as the distance is just four hours by road. Similarly, Delhi-Calcutta is a low load sector.
Q: How has aviation helped your business?
A: We have grown at around 49 per cent in the third quarter of 1996-97 and this has primarily come up because of aviation.
The all-India per day capacity is 550 tonnes, 350 tonnes by Indian Airlines (IA) and 200 tonnes by private airlines. Of the private airlines, 50 per cent has gone because we have two private airlines less. IA will replace the A-300 at some point as it is a gas-guzzler. Of the 350 tonne capacity of IA, 55 per cent of the capacity comes from Airbus. A-320 and 737s are both bulk loading and do not have containers. They cannot carry off-size load.
The second point is that all these airlines have their departure and arrivals catering to passengers and not to cargo. The third advantage we have now is by the creation of the multi-modal single window system. If someone has to move a computer from Pune to Agartala, we use the road and our aircraft. Our main business is coming from non-metros like Pune, Surat, Jamshedpur, Coimbatore, Faridabad. Aviation is a backward integration project and has made us self-sufficient. We have also created an entry barrier. Our infrastructure also covers our future expansion plans.
Q: Why have you kept the airline as a wholly owned subsidiary? Why did you convert it from 75 per cent to 100 per cent? Will you merge the two in the future?
A: This was more convenient for us. When we went public in 1994, the airline project was not ready.
If we had put it in the prospectus, we would have to set up the airline. However, we were not sure since the aviation policies were changing, so we decided to float a subsidiary, apply and take the license and carry on.We converted it into a wholly owned subsidiary when we realised that the shareholders were not too happy. Even the warrant conversion was for this project only, and since investors were not happy with the conversion of the warrants at that price, we did not convert.them. The question of merger is a financial one and if our management thinks it is necessary, we may do it.
Q: Why does the express industry have a perception problem?
A: The problem is that nobody understands our industry. People still call us courier companies. I do not think that we are that anymore. We are part of the inventory management system of the country.
We are going to change the face of the industry whereby logistics and inventory management is going to be a key business in the future for us. For example, a pharmaceutical company would hold 45-60 days of inventory. If this can be brought down to half, then the cost savings will be phenomenal. We need to convince people that we are not a courier company, and courier is just one of our products. I think that Blue Dart has taken a very big challenge next year by the convertible debenture route and we have a tough target to achieve. This should change the perception of the industry.
Q: Where will the growth of the express industry and Blue Dart come from?
A: The growth of the industry will come from the domestic market where the yields are high, and parcels will grow faster than documents.
Inventory management and logistics will be the name of the game. This is also where we have an advantage. We have pumped in a lot of money in technology. Fifty per cent of our business is pick-up and delivery and 50 per cent is providing information. Capacity is another important factor which we have achieved with the aviation business. Our timings have become convenient and our cut-off time is the best. Our competitors would have a cut-off time of 8:00 PM while our plane lands in Mumbai at 1:30 AM and we can take the consignment till one hour before. Our major growth has come from that segment.
We are now trying to target the industrial belt where our multi-modal system and have set up 19 warehouses across the country. We have 237 branches and we are planning an extensive franchisee programme. We are also looking at alliances with other smaller operators to increase reach an have one such alliance in place in the south.
Q: What is the role of Federal Express in Blue Dart? What are its plans for India?
A: Federal Express and we started international operations together in 1983. We have an excellent relation with FedEx. They helped us in aviation business without any charges. They plan to land a plane in India at least by early next year. Blue Dart will get more capacity by this. However, FedEx does not plan to take any equity at present.
Q: Why did you issue convertible debentures? What will the role of your foreign investors be?
A: Newfields invested money when the market price was Rs 40 (the price is Rs 74 at present). We did not want the conversion price to be below Rs 115. We wanted the price to be close to Rs 150, the amount our original shareholders paid. Schroeders will also have a member on our board. And their international experience will come handy to us.