Out of the box

With the Indian economy being the 4th largest in the world by purchasing power parity and purchasing power parity per capita being <g data-gr-id="112">approximately</g> $5,449.82, India’s output rates are projected at 6.3 <g data-gr-id="95">per cent</g> for 2016. India’s services sector remains the major driver of economic growth, contributing 72.4 <g data-gr-id="96">per cent</g> of GDP growth in 2015. Service sector growth has increased from 8.0 <g data-gr-id="97">per cent</g> in 2013 to 9.1 <g data-gr-id="98">per cent</g> in 2014 and further to 10.6 per cent in <g data-gr-id="111">financial year</g> 2015. Growth in infrastructure – based on <g data-gr-id="110">a index</g> of eight core industries – had improved marginally to 4.4 per cent <g data-gr-id="99">upto</g> December 2014, as compared to 4.1 <g data-gr-id="100">per cent</g> in the same period in 2013.

Container freight stations (CFS) and inland container depots (ICDs) are common user facilities with public authority status equipped with fixed installations, which offer a wide range of services including customs clearance, handling and temporary storage of import or export laden and empty containers. CFSs and ICDs comprise of a custom bonded area, warehousing space and container yard area and are equipped with information technology infrastructure and adequate equipment. 

It provides an integrated platform for activities such as <g data-gr-id="120">custom</g> clearance, handling, transporting, loading and unloading and stuffing and de-stuffing of containers. CFSs and ICDs also provide services such as less-than-container-load (LCL) consolidation, reefer services and hub and spoke services, among others. The CFS and ICD industry forms a link between multi-modal transport operators (MTOs) and shipping lines in the logistics value chain.

A CFS is located near the gateway port (off-dock facility located near service ports) whereas an ICD (also known as a dry port) is located in the hinterland. In the financial year 2014, the size of the CFS and ICD industry in India was approximately Rs 45 billion. The CFS segment accounted for approximately Rs 30 billion and the ICD segment accounted for approximately Rs 15 billion. The two major revenue sources for the industry are handling and transportation and ground rent. Handling and transportation of exports and imports form the major part of revenues, contributing over 75 per cent to the overall industry. Handling and transportation <g data-gr-id="132">includes</g> the loading and unloading of a container between the port and the CFS or ICD. Ground rent primarily comprises of storage charges, especially for imports that are stored for customs clearance.

Growth of the CFS and ICD industry primarily depends on container traffic and global economic conditions. Over the last two years, container traffic growth has been modest, growing at a CAGR of three <g data-gr-id="88">per cent</g>. Growth in the market size of the CFS and ICD industry has been slow for the same period.

Of the total container traffic, approximately 45 <g data-gr-id="103">per cent</g> is handled by CFS, 28 <g data-gr-id="104">per cent</g> by ICDs and the rest directly at ports. For the financial year 2014, of the total container traffic handled by major ports, imports accounted for approximately 50 <g data-gr-id="105">per cent</g> and exports constituted the balance. With regard to imports, approximately 55 <g data-gr-id="106">per cent</g> was handled by CFSs, 29 <g data-gr-id="107">per cent</g> by ICDs and the remaining 16 <g data-gr-id="108">per cent</g> was direct traffic flowing from the ports to the factory or importer’s destination. Under the Accredited Clients Programme introduced by the Central Board of Excise and Customs, Government of India, only certain importers are allowed to get their imports <g data-gr-id="109">customs cleared</g> at the ports and need not use the services of CFSs. As a <g data-gr-id="113">result ,</g> the majority of imports are handled through CFSs.

The share of export traffic handled by CFSs of total container traffic was comparatively less at 35 <g data-gr-id="122">per cent</g> because <g data-gr-id="162">custom</g> regulations are more facilitative for exporters. Exporters typically stuff the containers at the factory. Then the containers are cleared by the custom and excise authorities at the plant and are directly transported to the port without employing the services of a CFS. ICDs handled approximately 28 <g data-gr-id="123">per cent</g> of the total export traffic. Of the total container traffic handled, major ports (government-owned) accounted for approximately 75 <g data-gr-id="124">per cent</g>. The remainder was handled by non-major ports (private ports) such as Mundra and Pipavav. Further, approximately 80 <g data-gr-id="125">per cent</g> of the total container traffic was handled by four ports, Jawaharlal Nehru Port (JN Port), Chennai Port, Mundra Port and Pipavav Port. From <g data-gr-id="154">financial year</g> 2009 to 2014, container traffic at Indian Ports grew at a CAGR of eight per cent led by a recovery in the global economy. In the financial year 2014, container traffic at Indian ports increased by approximately five <g data-gr-id="126">per cent</g> due to slow growth in export-import trade. However, container traffic handled at major ports decreased by approximately three <g data-gr-id="127">per cent</g> to 7,457 thousand TEUs during the year. 

As of June 2014, there were approximately 192 functional CFSs and ICDs in India. Approximately 60 <g data-gr-id="150">per cent</g> of CFSs and ICDs are operated in the states of Tamil Nadu, Maharashtra and Gujarat. While more CFS clusters exist in the southern and western regions of India, the EXIM container handling terminals in the Indian hinterland are more concentrated in the central and northern regions. 

Over 70 <g data-gr-id="151">per cent</g> of container traffic is handled along the western coast of India and correspondingly the capacity utilisations of operators in the region are higher as compared to the eastern coast.  

With the CFS and ICD industry being a volume-driven business, only the major players with locational and infrastructural advantage – which allows them to provide a wider array of services, such as rail evacuation, reefers and hazardous cargo handling services – are able to attract customers and sustain cargo volumes. There are approximately 31 CFS in the JN Port region with a total capacity of approximately 2.8 million TEUs. In the financial year 2014, JN Port handled 4.1 million TEUs out of which between 45 per cent and 55 per cent was converted into CFS traffic. Due to increase in <g data-gr-id="153">number</g> of CFS operators in the past three years and slow growth in traffic, utilisation rates decreased as compared to previous years. However, utilisation rates are relatively higher than those on the eastern coast. In the financial year 2014, the average utilisation rate of the region was between 50 per cent to 60 per cent, which allowed higher operating margins between 30 per cent and 40 per cent for most large companies. 

In terms of infrastructure, JN Port faces issues such as traffic congestion – as it is the largest container handling port in India – and operates at very high utilisation rates. This adds to the turnaround time which is higher in contrast to other ports in the region. The road infrastructure mainly consists of two-lane roads to connect the CFS zones with the ports and lead to road traffic and long waiting periods for clearance from the port to the CFS and vice versa. Nevertheless, due to the road congestion around the JN Port region, CFS operators who are strategically located around the JN Port region with rail evacuation facilities gain an operational advantage over other CFS operators in the region. Volume growth is expected to be major revenue driver:  During 2015 and 2017, container traffic is expected to increase between seven per cent and nine per cent, led by a recovery in the domestic and global economic environment. The anticipated changes in the profile of traded goods (from intermediate to finished goods, including textiles, auto parts, pharmaceuticals and good products) will increase the opportunities for containerisation.

The container industry is a volume-driven industry as the intense competition makes price differentiation difficult. Over the next three years, the Indian container industry is expected to grow at a CAGR between seven per cent and nine per cent in volume terms. As there is already overcapacity, the industry will benefit from growth in traffic without incurring additional capital expenditure. 

North-western region to continue attracting higher volumes: In 2015, the additional container handling capacity at JN Port of approximately 0.8 million TEUs is expected to become operational and the development of a fourth container terminal at the JN Port is also under implementation. This will enable the container industry in the region to increase utilisation levels, thereby resulting in better <g data-gr-id="129">realizations</g>. In the long term, the container traffic at JN Port is expected to increase due to upcoming infrastructure projects such as the Dedicated Freight  Corridor and the <g data-gr-id="101">Delhi Mumbai</g> Industrial Corridor. However, until these projects become operational, non-major ports will continue to attract incremental traffic, albeit at a slower pace. In 2016, an additional container handling capacity of 1.3 million TEUs is expected to become operational at Mundra.

In the Chennai region, due to <g data-gr-id="102">the large number</g> of companies, utilisation is expected to remain under pressure. However, with increased container handling capacities expected at Krishnapatnam, <g data-gr-id="92">Dhamra</g> and Ennore Ports, the container industry in the region is expected to improve utilisation rates in the next two to four years. 

A container terminal with a handling capacity of 1.4 million TEUs per annum is being developed and is expected to commence operations at the Ennore port in the financial year 2016.

Increase in volumes to improve capacity utilisations: The container industry is <g data-gr-id="78">highly-fragmented</g> with several small regional unorganised companies. There are over 190 CFS and ICD companies and approximately 55 <g data-gr-id="79">per cent</g> are operated by private companies. Pressure on realisations to ease gradually:  Slow growth in container volumes and a decrease in dwell times as well as increased competition led to growth of three per cent in CFS and ICD revenues in the financial year 2014. 

Additionally, because of surplus capacity, there was pressure on volumes and margins. In order to remain competitive and maintain market shares in the CFS and ICD industry, companies resorted to reducing traffic by offering discounts and increasing free days to clients, thereby affecting realisations. Container traffic growth in specific regions <g data-gr-id="116">are</g> affected by industrial development in the hinterlands, such as the development of special economic zones, free trade and warehousing zones, dedicated freight corridors and economic regions.