Friday, September 14, 2007

Outsourcing driving warehousing market

In September 2006, when Indo Arya Logistics director Yogesh Arya was poring over his plan to build India’s largest warehouse, he was not sure whether this was a step his company was ready for.

In a tightly held private company like his, almost all investments are funded entirely out of internal accruals. A Rs 50-crore warehouse, which would be huge enough to accommodate two Melbourne Cricket Club grounds, seemed more of an ego trip than a business decision.

The risk of not getting enough customers to fill the space was there. Nevertheless, Mr Arya pursued the project, thinking that if the warehouse didn’t bring in sufficient revenues, the premium on the land he bought certainly will.

Today, only three months after the warehouse was made available, Indo Arya has rented every sq ft of space the company possibly can. In fact, enticed by this huge demand, Mr Arya has commissioned work on adding another 2,00,000 sq ft to the existing 5,14,000 sq feet facility.

The fact that the warehousing segment is seeing significant investments is not limited to Indo Arya. By 2008, Third party logistics service providers (3PL), with the likes of TNT, Transport Corporation of India (TCI), Blue Dart, Gati and Safexpress, are looking at creating more than 25 million sq ft of warehousing space in India.

Analysts suggest that the segment alone will see investments of almost Rs 2,000 crore in the next three years. There is a reason for this. “On the demand side, the need for warehousing is entirely outsourcing driven,” says Krishnakant Thakur, analyst at Edelweiss Securities.

Outsourcing wasn’t an option till 2006. “With the phasing out of Central Sales Tax (CST), manufacturers need not manage their own warehouses and can comfortably outsource it to a third party,” Mr Thakur adds.

Earlier, in order to prevent being taxed under CST, manufacturers had to maintain multiple warehouses to show movement of goods from one company warehouse to another. Today, they are more than willing to outsource it to a warehouse management company and concentrate on their core business.

Indo Arya, for instance, is undertaking warehouse management for a clientele base which includes companies such as ITC Foods, Pantaloon, Reliance, Nestle, Coca-Cola and P&G among others.

“It makes sense for the companies to outsource. They save on costs, time and also enjoy the benefits of a lean supply chain,” says Mr Arya. Bolstered by the growth prospects, Indo Arya is also contemplating a 20% equity stake dilution to fund investments. The company has an ambitious plan to set up warehousing capacity of two million sq ft in the next two years.

On the supply front too, 3PL service providers are more than willing to invest in warehouses because of substantially higher margins than any other segment of supply chain management.