Feasibility Study

On
Warehousing in India

January 2008
Report by ISB Students ELP Team
Manisha Gudka, Neha Iyengar, Aseem Agrawal, Vijay
Bhaskar and Arihant Kothari
Feasibility Study On Industrial Warehousing in India

ACKNOWLEDGEMENT

ISB Students’ ELP Team is pleased to have associated with SUN-Apollo Real Estate Fund in
the Feasibility Study on Warehousing in India, a project of significance to both, SUN-Apollo
and ISB Students ELP Team.

We take this opportunity to thank Mr. Chetan Dave, MD & CEO, SUN-Apollo for giving us
the opportunity to work on this project and also thank Mr. Mayank Chowdhary, SUN-Apollo
for his guidance as project guide. We are deeply grateful to Professor V Chandrasekar, Indian
School of Business for providing insightful and rich mentoring support for this project.

The results of this study reflect the thoughtful input of all participants including the views of
the eminent professionals in the logistics and real estate industry, solicited during the course
of the interviews we had with them. Thank you to all who gave time to make this study
useful.

It was a most rewarding experience to work on such a challenging project. We believe that
the results of this study would be helpful to SUN-Apollo in making investments in the
warehousing space.

Sincerely,

ISB Students ELP Team

MANISHA GUDKA
NEHA IYENGAR
ASEEM AGARWAL
VIJAY BHASKAR
ARIHANT KOTHARI

Class of 2008

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Feasibility Study On Industrial Warehousing in India

1. EXECUTIVE SUMMARY

The scope of the project was demand analysis and survey of the existing infrastructure in
the sector, identification of growth potential, find out the key players in the market and
identification of the role of government regulations and taxation applicable to
warehousing. Methodology adopted for this was to study the research reports available on
logistics sector, conduct industry interviews to get opinions of current and potential
intermediaries and understand the dynamics of the sector. After thorough analysis of the
primary and secondary data collected, we came up with a framework for evaluation of an
investment proposal in the warehousing sector, suggested entry and exit strategies for
investments including potential sites and strategic partners for investment.

Warehousing is a part of the logistics sector and there is very limited information
available on warehouse development related metrics in any published literature. We
therefore, studied the logistics sector and extrapolated the data to predict demand for
warehouse development. As per our study the size of market is in the range of $ 4 – 6
billion in additional warehousing space of about 275 million square feet over 2007-2012.
We estimate demand for warehousing space development based on GDP estimates, based
on logistics industry reports and based on industry expectations discovered through
interviews.

During the course of the study we have made certain assumptions for developing these
models for calculating demand at a national level. However, micro factors like presence
of other warehouses in the sites we have recommend and the capacity utilization at those
locations need to be examined on a case by case basis before making an investment
decision.

The key players in the warehousing space are Container Corporation of India
(CONCOR), Central Warehousing Corporation (CWC), Gati, Indo Arya Logistics,
AllCargo Global Logistics Ltd., Sical Logistics, Gazeley, Reliance Logistics, Transport
Corporation of India, Railways, Food Corporation of India, National Bulk Handling
Corporation and Future Group. They have announced planned investments in
development of warehousing space and logistics parks.

Demand drivers for warehouse development are increased foreign trade and the resulting
planned investment in ports for upgrading container traffic handling capacity, increased
use of containerization for inland transport, investment in manufacturing activity in
Special Economic Zones (SEZs), planned investments in Free Trade Warehousing Zones
(FTWZ), development of Dedicated Freight Corridor, change in government regulations
relating to State Sales Tax, emergence of organized retail and its need for efficient supply
chain management and growing trend of outsourcing logistics function to Third Party
Logistics (3PL) Service providers to reduce costs and increase efficiency.

Factors affecting location of a warehouse are proximity to Container Freight Stations

(CFSs) and Inland Container Depots (ICDs), nodal point connectivity with rail – road –
ports, part of logistics parks development, proximity to manufacturing hubs, SEZs &

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Feasibility Study On Industrial Warehousing in India

markets, strategically located to serve as ‘hub’ for a hub-and-spoke model for supply
chains.

Government regulations are favourable for development of bonded warehouses in CFS

and near the ports as there are no excise, customs or sales taxes payable for goods stored
in bonded warehouses and moving from one bonded location to another in a sealed
condition. SEZ rules provide for certain minimum and maximum area requirements for
processing zones and warehousing zones in SEZs.

Sales Taxes payable on inter-state sale of goods currently make it convenient for
companies to have state level small warehouses where goods are transported as branch
transfers to avoid taxes. This makes supply chain to function below optimal efficiency.
With the applicability of Value Added Tax (VAT) to all the states from 2009 onwards,
the concept of state level small warehouses will vanish. There will be emergence of ‘hub-
and-spoke’ model of supply chain management as is prevalent in many of the developed
economies so that the costs can be lowered by efficient supply chain management.

All these factors fuel the demand for warehouse development and are conducive to
development of huge warehousing complexes. The challenges, however, are the limited
availability of contiguous land parcels of optimal size and under-developed rail-road and
other infrastructure facilities.

Considering all of the above, we suggest locations for port and foreign trade related
warehouses to be at following places:

Mumbai Pipavav
Mundra Kandla
Delhi (NCR) Ludhiana
Haldia Paradip
Vishakhapatnam Machalipatnam
Hyderabad Chennai
Karaikudi Tuticorin
Kochin Karwar
Goa

Suggested locations for development of supply chain warehouses that would serve as
storage space for retail and manufacturing sectors are:

Mumbai Baroda
Jaipur Delhi NCR
Garhi Harsaru (Punjab) Itarsi (near Bhopal in MP)
Nagpur Hyderabad
Bangalore Chennai
Sriperumbudur

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Feasibility Study On Industrial Warehousing in India

For entry into the sector, partner with logistics companies, warehouse developers,
infrastructure companies for CFS/ logistics park development, partner with warehouse
developers, tie up with 2-3 key accounts for ensuring break-even occupancy for each
warehouse and tie up with manufacturing houses & retail chains to develop warehouses
for them.

Exit mechanisms available to private equity investors are IPO of Special Purpose Vehicle
(SPV), sale of stake to strategic and/ or financial investor, promoter / developer /
specialised operator, REIT and recapitalization.

Value creation is envisaged from use of financial leverage, achieving multiple expansion
and operational efficiency. The sector is quite fragmented and populated by unorganized
small players; there is scope for value creation through inorganic growth.

Future trends point towards emergence of specialized warehouse operators who can
achieve very high level of efficiency in warehouse operations and management. India is
poised to see development of multistoried warehouses with customizable facilities but
such development will follow only after there is other basic infrastructure development.

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Feasibility Study On Industrial Warehousing in India

TABLE OF CONTENTS

1 EXECUTIVE SUMMARY........................................................................................3
2 INTRODUCTION......................................................................................................7
3 SIZE OF THE MARKET FOR WAREHOUSE DEVELOPMENT..........................8
4 KEY PLAYERS AND THEIR PLANNED INVESTMENTS...................................9
5 DEMAND DRIVERS FOR INVESTMENT IN WAREHOUSING........................15
6 FACTORS AFFECTING LOCATION....................................................................19
7 SUGGESTED LOCATIONS....................................................................................22
8 SUGGESTED ENTRY STRATEGY.......................................................................24
9 EXIT MECHANISMS..............................................................................................26
10 SOURCES OF VALUE............................................................................................27

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Feasibility Study On Industrial Warehousing in India

2. INTRODUCTION

With the rise in foreign trade, increase in FDI in manufacturing and Real Estate sectors
and emergence of organized retail, India will witness high growth rates in its GDP. It
would require sizable investments in Infrastructure and logistics so that the economic
activities get accelerated and growth rates can be sustained. India spends about 13% of its
GDP in logistics costs which is higher than world average of about 11%. Compared to the
development of logistics and supply chain in the developed countries, India’s logistics
and supply chain development has far more to achieve to reach the global standards.
Therefore, logistics as a sector is expected to grow at a very high rate in India.

Growth drivers in the logistics sector are increased foreign trade, increased FDI in
manufacturing and therefore the growth in GDP, increase in size of organized retail
market, rise in 3PL (Third Party Logistics Providers) and increasing trend of outsourcing
of logistics by corporates to 3PL. A major factor that gives boost to the demand for
logistics growth is change in sales taxes and introduction of VAT which paves way for
efficient supply chain management and government investment in nationwide
infrastructure development to facilitate increased logistics development.

Key reasons cited by companies for outsourcing logistics are cost-reduction in logistics
activity, focus on core competencies and therefore higher return on assets, increased
customer services and efficient inventory management.

Warehousing is a part of logistics sector and provides an essential ancillary service to the
foreign trade and manufacturing and retail sectors. So we expect warehousing also to
grow at a very high rate over the next three to five years i.e. over the period ending 2012.
In order to facilitate easier analysis and model building to predict demand for
warehousing, we have classified warehouses based on their function and association and
named them as follows:

1. Exim warehouses: these warehouses are associated with foreign trade and are
located near a sea port or air port and are a part of Container Freight Station
(CFS) or an Inland Container Depot (ICD) or located near CFS and / or ICD.

2. R&M Warehouses: these warehouses are associated with inland supply chains
for manufacturing and retail sectors and also provide critical storage space for
efficient supply chain management.

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Feasibility Study On Industrial Warehousing in India

3. SIZE OF THE MARKET FOR WAREHOUSE DEVELOPMENT

We estimate the size of the warehouse development market to be in the range of $ 4 – 6

billion using three models.

1.Based on GDP estimates:

As per the report by Centre for Monitoring Indian Economy (CMIE), Indian GDP in
2006 was $ 805 bn and logistics is estimated to be 13% of GDP. Warehousing is
estimated to be 7% of logistics. Assuming that GDP grows @ 8% a year and the share
of warehousing and logistics in the GDP remain the same, an additional investment of
$ 6 bn will be required in the warehousing sector over the period 2007-2012.

2.Based on Industry estimates:

In order to validate our findings with industry expectations, we conducted series of

interviews with key players in the warehousing and logistics space and tried to
understand their expectations about the logistics and warehousing growth rates. As
per estimates provided by Gati Logistics, the market size for warehousing is expected
to be about $ 4 bn. This is arrived at by applying growth rate of 9% to GDP and
logistics being estimated to be about 15% of GDP and warehousing about 5% of
GDP. GDP in 2006 was $ 805 bn and would become $ 1.35 trillion by 2012.
Assuming the share of logistics and warehousing in GDP remain as per industry
estimates, the potential size of the market amount to about $ 4 bn.

3.Based on research reports:

In order to estimate the demand for warehousing space in terms of square feet of
space, we studied various research reports and collated figures about existing
infrastructure in warehousing. As of 2006, there was 45 mn sq ft of warehousing
space existing in the market and was being utilized. This includes warehouses owned
and managed by public and private players. The expected compounded annual growth
rate in warehousing space was 40% due to increased outsourcing of logistics,
introduction of VAT and the resulting efficiency in supply chain management.
Therefore, an additional 275 mn sq ft of warehousing space will be required to be
added to the market over the period 2007-2012.

Based on above three models, we can safely say that the investment potential in
warehousing is in the range of $ 4 – 6 bn over next 5 years.

In terms of mn sq ft of space to be developed, there is additional demand for about

275 mn sq ft of warehousing space.

In the later sections of the report we give a break up of the demand figures based on
demand drivers for growth in warehousing.

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Feasibility Study On Industrial Warehousing in India

4. KEY PLAYERS AND THEIR PLANNED INVESTMENTS

Having estimated the size of the market, we now give synopsis of planned investments of
some of the key players in the market. We have relied on published and announced
investment plans for the period July 1, 2007 to December 31, 2007.

Future Logistics Solutions to invest Rs 400 cr

Press Trust of India
New Delhi, November 25, 2007

Logistics subsidiary of the Kishore Biyani-led Future Group, Future Logistics Solutions
Limited (FLSL), will invest Rs 400 crore in next three years to operate additional mega
merchandising hubs and warehouses as it aims to touch a topline of Rs 800 crore by
2010.

Within three years, FLSL plans to operate about seven new mega merchandising hubs
ranging from 70,000-100,000 sq feet and 30 smaller warehouses in cities across India,
which would extend service to non-group companies also.

According to sources, FLSL would invest to the tune of Rs 400 crore to operate the new
infrastructure as a part of its strategy to double turnover every year. FLSL expects to
close 2007-08 fiscal with a topline of Rs 200 crore.

When contacted, Future Logistics CEO Anshuman Singh said that the firm has already
started operating in five cities with an area of 25,0000 ft, but declined to comment on the
company's investment plans.

FLSL currently offers its services to the retail divisions of Future Group, but will start
doing business with companies outside the group in the next two months for which it is
talking to leading companies, especially in the apparel segment.

Apollo International Limited into logistics

November 27, 2007

The latest foray of Rs 1,000-crore Apollo International Ltd (AIL) is into logistics. Apollo
Logi-Solutions (ALL) is the sixth diversification of AIL, which is a part of the $1.2-
billion Apollo Group (that has major interests in tyres and healthcare).

ALL has already acquired prime space (60 acres of land) near Jawaharlal Nehru Port
Trust, outside Mumbai. As part of its initiative to offer comprehensive services in
container and freight station, ALL is seeking to tie up with a foreign partner for technical
support, but only to set up its cold storage facility.

It will set up its CFS (container freight stations), warehousing, distribution and re-
distribution services on its own. “We cannot announce any details as negotiations are on;
also, this has been entirely financed by the Apollo Group. ALL is looking at an IPO
(initial public offering) in 2011,” says Raaja Kanwar, MD, AIL.

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Feasibility Study On Industrial Warehousing in India

ALL was set up in August 1994, as a 100 per cent subsidiary of Apollo Tyres, to lead the
diversification forays of Apollo Group into new business opportunities worldwide.

ALL has roped in Capt. Kapil Anand who was formerly with Gateway Distriparks, and
instrumental in setting up its operations. With such ‘IPO-able’ ventures in mind, ALL is
targeting a turnover of Rs 3,000 crore by 2011.

Hindustan Infrastructure bids for all-weather port at Karwar

Nov 12 2007 Live Mint

In an attempt to increase its footprint in the infrastructure space and tap into growing
demand for cargo handling in India’s ports, the Bangalore-based Hindustan Infrastructure
Projects & Engineering Pvt. Ltd, a firm promoted by Rajya Sabha member Rajeev
Chandrasekhar, has submitted initial bids for developing and operating a deep sea port at
Karwar in Karnataka.

Hindustan Infrastructure promoter Rajeev Chandrasekhar. The cost of building the all-
weather port at Karwar, which has one of the best natural harbours in India, is estimated
to be about Rs1,000 crore. Karwar port is one of the 10 ports owned by a state
government.

Also in the fray to develop the port are the Gujarat-based Adani Group, Sical Logistics
Ltd, IL&FS, Gammon Infrastructure Projects Ltd, ABG Heavy Industries Ltd, Maytas
Infra Ltd and Navyug Engineering Co. Ltd, among others. To strengthen its bid,
Hindustan Infrastructure has teamed up with Westports Malaysia Sdn Bhd, which runs
one of the two container terminals at Port Klang, the world’s 12th biggest container port.
“We will form a joint venture to develop, operate and maintain the port. The details of the
joint venture, including the equity holdings, will be worked out after we win the deal,”
said an executive at Hindustan Infrastructure, who did not wish to be identified.

Maytas Infra, promoted by some of the significant shareholders in Satyam Computer

Services Ltd, has bid for the project with Nagarjuna Construction Co. Ltd, while Sical
Logistics has teamed up with Subhash Projects and Marketing Ltd. IL&FS has three other
partners—Hill Co. Ltd, Punj Lloyd Ltd, and IVRCL Infrastructure and Projects Ltd—
and Chennai’s Anant Transport Ltd has bid for the project in partnership with the Port of
Rotterdam.

IMC Ltd has teamed up with ITD Cementation India Ltd while Future Metals Pvt. Ltd
has submitted its bid along with Jurong Infrastructure India Pvt. Ltd. Others bidders
include JSW Infrastructure & Logistics Ltd, GVPREL, North Canara Seaports Ltd (an
entity floated by Larsen and Toubro’s Kakinada Seaports Ltd, which runs the Kakinada
port in Andhra Pradesh).

Jupiter Capital set up Hindustan Infrastructure to pursue investment opportunities in areas

such as transportation, utilities (such as water), electricity transmission and -aviation.

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Feasibility Study On Industrial Warehousing in India

Hindustan Infrastructure holds a 24% stake in India Infrastructure and Logistics Pvt. Ltd,
a joint venture firm floated by the Singapore government-owned global transportation
and logistics firm, Neptune Orient Lines, to provide rail freight services in India. The
company will also shortly sign an agreement with the Maharashtra government to
develop and operate an all-weather port at Vijaydurg with an investment of about
Rs1,500 crore.

Karwar and Vijaydurg are ports owned by the Karnataka and Maharashtra governments,
respectively. Private firms operating these ports will have the freedom to fix tariffs for
the services provided at the ports. In comparison, tariffs at the 12 main ports in India,
owned by the Union government, are set by the Tariff Authority for Major Ports.

Reliance plans logistics parks in all its SEZs

Mumbai, Sept. 17

Reliance Logistics Ltd (RLL) plans to set up logistics parks within all the upcoming
special economic zones (SEZs) being established by the Reliance Industries group.

The SEZs include the ones coming up in Navi Mumbai, Mumbai, Haryana, Jamnagar and
port-based one at the Rewas in Maharashtra.

Mr. Abhijit Datar, Business Planning Manager-Logistics Parks, Distribution Business of

RLL, told newspersons, “The Reliance logistics parks will cater to the entire range of
logistic requirements of the SEZs.

“They will be governed and administered by a separate entity which will become the lead
logistics infrastructure provider for the whole SEZ. This entity will also provide
opportunities to several third-party logistics operators willing to cater to their customer
needs within the SEZs.”

Currently, RLL caters only to 25 per cent of the entire logistics needs of the Reliance
group of companies; this contributes 65 per cent of the total revenues of the logistics
company.

Revenues
RLL’s revenues for 2006-07 amounted to $400 million, said Mr Datar. Its key customers,
apart from Reliance Industries, are Godrej, ITC Ltd, Indian Petrochemicals Corporation
Ltd, Ispat Industries, Parle, Sterlite, and German major METRO. The company plans to
expand its base by providing logistics support to major Indian auto companies too.

“The support could extend starting from transportation of tyres and assembling of parts to
moving finished products as the need may be,” he said.

19 Dec 2007,

KOLKATA: Reliance Logistics Ltd (RLL) has decided to defer its plan to set up logistic
parks in the eastern region because of political uncertainty. “The political situation in

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Feasibility Study On Industrial Warehousing in India

Bengal and Orissa is not conducive. The scope of setting up logistic parks in the East was
high, but we cannot make any investments at this point of time,” RLL national head
(operations & product development) Harsh Saksena told TOI.

DRS Logistics plans warehouses

Updated: 02-05-2007

DRS Logistics Private Limited, part of the Hyderabad-based DRS group, is planning to
build warehouses across six cities in Delhi, Mumbai, Kolkata, Chennai, Hyderabad and
Bangalore for providing third party logistics (3PL) services to the retail enterprises in the
country.

The company would be raising Rs 150 crore either through an initial public offering or
private equity placement to meet the cost of construction and working capital
requirements. The warehouses, with a total area of 14 lakh square feet, will be ready by
July this year.

DRS is currently providing 3PL services to Hyundai, Bridgestone and Lifestyle. It is on

the threshold of signing an agreement with Pantaloon for which it will maintain an
inventory warehouse and supply material to the latter's showrooms across the country.

CONCOR, Gateway Rail Freight in JV for mega terminal

Decmber 2007; News Source: indiatimes.com

Container Gateway, the joint venture between Container Corporation of India and
Gateway Rail Freight, became operational from December 1. Gateway Rail Freight, a
subsidiary of Gateway Distriparks, holds 51 per cent stake in the venture and remaining
49 per cent by CONCOR.

Container Gateway will expand the existing rail linked terminal into a mega terminal. It
aims at consolidating the cargo volumes of North India for double-stack container train
operation on the diesel route from NCR to JN Port, Mundra and Pipavav. This terminal
will also have connectivity to the proposed Western Dedicated Freight Corridor.

Railways had a plan to build 20 warehouses, logistics parks as part of a development

plan.

India: retail giants set to develop own logistics

Bucking international trends, India’s retail giants like Reliance Retail, Bharti-Wal-Mart
and AV Birla Retail are developing their own logistics. With demand for end-to-end
logistics solutions far outstripping supply, the logistics market for organised retail is
pegged at $50 million and is growing at 16%. It is expected to reach $120-$130 million
by 2010. Organised retail on the other hand is growing at 400% and is expected to reach
around $30 billion by 2010.

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Feasibility Study On Industrial Warehousing in India

Not that the current players are inactive. Even before the US retailer Wal-Mart signs up
with its Indian partner Bharti, its fully-owned logistics arm Gazeley has confirmed its
India foray and Wal-Mart is closely studying various logistics providers like
Radhakrishnan Foods, before it finally closes on its India model. Reliance Logistics Ltd
part of Reliance Industries Ltd, currently handles Reliance Retail’s logistics services.
Similarly, Bharti Enterprises is directly negotiating with the rail authorities instead of
negotiating with a logistics provider.

Globally the logistics cost component of the total retail price is 4%-5%, while in India it
is as high as 7-10%. The higher cost for an industry, which operates on wafer thin
margins of 2-3% globally, makes it imperative for retailers to internalise most operations
and cut costs.

Analysts say logistics will be a domain where even international logistics giants will find
it tough to crack given the peculiarities of the highly fragmented Indian logistics market.

Source: financialexpress.com
Publication date: 6/27/2007

Warehousing: CST out, private players rush in

Commodity Online

In September 2006, when Indo Arya Logistics director Yogesh Arya decided to launch a
Rs 50-crore warehouse, which would be huge enough to accommodate two Melbourne
Cricket Club grounds, he was not sure of the fate of his project. But his thinking was this:
if the warehouse didn’t bring in sufficient revenues, the premium on the land he bought
certainly will.

The risk of not getting enough customers to fill the space was huge. Within three months
after the launch, Arya has rented every inch of space the company possibly can. In fact,
Arya has commissioned work on adding another two lakh sq ft to the existing 5.14 lakh
sq feet facility. The huge warehousing investments are 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
warehousing segment alone will see investments of almost Rs 2,000 crore in the next
three years.

One reason for it is that now warehousing has become entirely outsourcing driven.
Outsourcing wasn’t an option till 2006. With the phasing out of Central Sales Tax (CST),
now manufacturers need not manage their own warehouses and can comfortably
outsource it to a third party.

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

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Feasibility Study On Industrial Warehousing in India

another. They need not to do that now. Indo Arya, for instance, is undertaking warehouse
management for a clientele which includes firms such as ITC Foods, Pantaloon, Reliance,
Nestle, Coca-Cola and P&G among others.

Transportation of goods, across road, rail, air or sea, for instance, has profit margins at
best not more than 20 per cent. That was the core activity being pursued by the logistics
companies till late. Not that it has changed now, but warehouses offer net margins on
EBITDA around 35-40 per cent.

Precisely, that is the lure for 3PL service providers to invest heavily into this segment.
Blue Dart, which has since its inception kept its focus on express movement of goods by
air, has now entered into surface movement of goods with its product offering named
Surface Line. An integral part of this service is the plan to build extensive capacity in the
warehousing segment.

The company intends to add 58 new warehouses in addition to the existing 40 by 2010.
That would mean addition of over 1 million sq ft of warehousing space. The company
also plans to invest Rs 1,000 crore over the short to medium term in ramping up of
ground infrastructure, aircraft and transit hubs. But India has still got to see multi-layer
warehouses, which are the normal nature of warehouses abroad.

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Feasibility Study On Industrial Warehousing in India

5. DEMAND DRIVERS

We have categorized demand drivers based on our classification of warehouses. Apart

from the common logistics demand drivers, there are specific identifiable demand drivers
for investment in warehousing space depending on the type of warehouse.

Driver for investment in EXIM Warehouses: Investment in ports

Foreign trade is expected to grow very rapidly in India. To handle increased cargo
movement at the ports due to increase in foreign trade, the container handling capacity at
major ports is being increased by the government through additional investment in ports.
New ports are coming up at critical locations across the coastline to handle increased
cargo because at certain major ports, the capacity cannot be expanded beyond a certain
point.

The additional investment in ports is in the form of building Container Freight Stations
(CFS) and other infrastructure required to handle containerized cargo. Based on
observation of numbers, we found that there is direct correlation between the container
handling capacity and available warehousing space at the ports / CFS. Our finding were
validated by Gati’s CFS records, which they shared with us during the course of our
interviews. Container handling capacity is 5.5 times the warehousing space. Built up area
of the warehouse is used for storing the cargo but there is paved area around the
warehouse which varies between 2-5 times the built up area. This is typically used to park
containers.

Applying 15% CAGR to the current container handling capacity, TEU (TEUs stand for
Twenty-Foot Equivalent Units or intermodal shipping container) capacity is estimated to
increase by 7.53 million TEUs over 5 years. By 2012 Indian ports will handle annual
traffic of 13.3 million TEUs.

We took the total increase in container capacity and divided it by 5.5 to get the additional
space in warehousing over the next 5 years. (7.53 million / 5.5 = 1.37 million sq m or
14.67 million sq ft. Further, we assumed required paved area to be 4 times the built-up
warehouse area; so additional paved area of 58.65 million sq ft will be required. Adding
the total required warehouse area and paved area gives us a approx figure of 73 million sq
ft. of space at the ports.

We estimated the investment potential by applying the above formula to the installed
capacity at the various ports and assumed paved area around warehouse to be 4 times the
built up area.

The existing capacity at some of these ports is not fully utilised and therefore the forecast
investment needs to be adjusted for actual capacity utilisation numbers for these locations
on a case to case basis.

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Feasibility Study On Industrial Warehousing in India

The investment potential based in through-put figures at the various ports is distributed
region-wise as follows:

Upper West ($ million) Upper East ($ million)

Kandla 81 Kolkata/Haldia 176.4
Mundra 172 Paradip 1.1
Pipavav 49.6 Vishakapatnam 25.9
Greater Mumbai Lower East
Mumbai 88.2 Chennai 391
JN Port 1472 Tuticorin 177
Mormugao 5.5 Total 2746.6
Lower West
Cochin 102
New Mangalore 4.96

Driver for investment in R & M Warehouses: Growth in SEZs, organised retail and
manufacturing activities

Since R&M Warehouses are generally connected to the production houses and / or are
located in proximity to the markets, the increase in non-IT/ITES SEZs and increase in
organized retail are the major demand drivers for investment in R&M Warehouses.

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Feasibility Study On Industrial Warehousing in India

The SEZ rules require certain minimum space to be dedicated to manufacturing and
processing activities. Within these dedicated processing areas in SEZs, there are rules
about warehousing space development. These rules are summarized in the following
table:

We considered the Non-IT/ITES warehouses and collated the space and the distribution
of SEZs state-wise. Then we applied the above mentioned rules for minimum processing
area and assumed that the warehouse development in SEZs would happen to the
maximum extent possible. So we get the following:

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Feasibility Study On Industrial Warehousing in India

States (# of SEZs) Max Warehouse Area(mn sq ft) $ million

Andhra Pradesh 15 44.19 994.31
Gujarat 11 53.02 1192.87
Maharashtra 10 17.27 388.48
Karnataka 5 5.43 122.36
Tamilnadu 5 4.74 106.78
Kerala 4 3.18 71.69
Goa 2 1.07 24.22
Haryana 2 1.65 37.11
Chandigarh 1 0.23 5.31
Jharkhand 1 0.27 6.14
Punjab 1 0.24 5.46
UP 1 0.09 2.01
Total 131.4 2956.73

The above investment is in respect of the Notified SEZs. More SEZ activity is happening
in the South and Western India as is evident in the pie chart below.

Share of Formally Approved SEZ

Others

South India

Western India

South India Western India Others

Apart from the above, there are exclusive warehousing Zones coming up at Kandla,
Noida, Haldia, Ennore, Mumbai and Kochi. These are SEZs dedicated to only
Warehousing and hence are called Free Trade and Warehousing Zones (FTWZs).

As per govt. regulations, minimum area should be 40 hectares of which minimum built
up area dedicated to warehousing should be 100000 sq m. We have assumed maximum
area for warehouse to be twice of min. area. We therefore get a total investment potential
of 12.85 mn sq ft of space with a $ investment range of $ 240 – 480 mn.

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Feasibility Study On Industrial Warehousing in India

6. FACTORS AFFECTING LOCATION

Factors affecting location of warehouses are as follows:

Exim Warehouses:
‰ Proximity to sea-ports
‰ Part of logistics parks built around/near ports
‰ Nodal point of sea ports, rail and road
‰ Proximity to ICDs
R&M warehouses
‰ Proximity to manufacturing hubs / SEZs, markets
‰ Connectivity with rail and road
‰ Centrally located to serve as distribution hub
‰ Tax laws and other government regulations
‰ Trade-offs between cost of land and transportation costs

Role of Government Regulations:

A. Incentives to S E Z Enterprises : incentive to set up warehouses within SEZs

o Zero Custom Duty

o Zero Excise Duty
o Exemption from Central Sales Tax
o Exemption from Service Tax
o Exemption from Income Tax
o 100% for the first 5 years
o 50% for the next 5 years
o Re-investment allowance to the extent of profits ploughed back
o 100% Foreign Direct Investment in manufacturing permitted
o Offshore Banking Units permitted
o State Govt. Exemptions – Sales Tax, Stamp Duty & other local levies

B. Introduction of VAT: paves way for efficient supply chain warehouses

Warehousing is the new focus area for logistics companies moving up the value chain
from plain vanilla trucking or freight forwarding. With the supply chain approach
gaining more acceptance in India Inc., the warehousing space is fast becoming part of
a premium value package. Customers are demanding services that include freight and
warehousing from the same vendor with a view to streamline processes and cut costs.
Consequently, several players have started ramping up their space and service
offerings around metros and larger cities across India.

The present structure of state taxes and laws (especially the incidence of Central Sales
Tax forces corporates to have multiple warehouses in a state so as to show movement
of goods and services within the company. This results in huge inefficiencies and
benefits of scale of economies do not transfer to corporate bottom lines.

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Feasibility Study On Industrial Warehousing in India

Current Scenario Post VAT Implementation – Hub & Spoke Model

After VAT, there could be just one warehouse in a state serving a host of smaller, transit
warehouses in over four-five other neighbouring states, boosting the creation of hubs and
spokes, the most efficient model of logistics. Post implementation of VAT and gradual
phase out of the Central State Tax (CST), transportation of goods will be easy, which will
boost cargo transportation. Also, since VAT is levied at every billing point, most of the
manufacturing companies are likely to outsource the entire VAT procedure to 3PL
service providers, thus giving a fillip to the domestic logistics industry.

LOCATION RELATED CHALLENGES IN WAREHOUSE DEVELOPMENT:

Availability of contiguous land parcel of optimal size:

Lot of the key players’ plans mentioned in the foregoing sections are yet to take off
because even if they have the necessary finances to invest and there is enough demand
for services of a warehouse, they still are not able to buy that kind of land parcel of
optimal size on which they can build warehouses.

Land ownership is either too fragmented and/or the land is available at a very high rate
which makes the economics of warehouse development and operations non-profitable. So
the ideal route for SUN-Apollo would be to look for owners of land banks in the
suggested locations and then jointly plan investment in warehouses.

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Feasibility Study On Industrial Warehousing in India

Rail-road connectivity and other infrastructure development

Demand for warehousing is maximum where a node is formed due to intersection of

railways, roads and sea-ports and at the node of rail-road-airport. Infrastructure required
to facilitate quick, easy and economic transportation of goods is yet to be developed in
India. Government investment in infrastructure including that in railways, roadways,
ports and airport development has been announced so as to facilitate growth of GDP
overall. However, as things stand today, challenge is connectivity of locations with rail
and road.

Air cargo movement in India is very limited. Therefore, warehouse development around
node of airport and rail-road connectivity is not a viable option. Warehouses can be
developed where a node is formed by intersection of seaport, rail and roadways.
However, limited rail-road development is a challenge.

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Feasibility Study On Industrial Warehousing in India

7. SUGGESTED LOCATIONS

Dedicated Freight Corridor (11500 km long) is being set up by Railways to connect the
four metros by way of dedicated railway line for cargo movement. There will be 7 feeder
routes along the Western Corridor and 17 along the Eastern Corridor. Western Freight
Corridor (1469 km) will connect Dadri (Delhi) to JNPT through Vadodara, Palampur,
Rewadi, Jaipur, and Ahmedabad. Eastern Freight Corridor (1232 km) will go through
Ludhiana, Delhi, and Kolkata.

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Feasibility Study On Industrial Warehousing in India

Logistics parks will be set up at interval of 400 km along the freight corridor. Around
40 projects are in pipeline costing Rs.100 billion by private players to set up container
terminals on BOT basis. Container terminals will be around major ports: Mumbai,
Nhavasheva, Kandla, Ennore, Chennai, Tuticorin.

SUGGESTED LOCATIONS: R&M WAREHOUSES

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Feasibility Study On Industrial Warehousing in India

8. ENTRY SRATEGY

¾ Partner with Logistics companies and Real Estate Developers to invest in

logistics parks development. Eg: Gateway Distriparks Ltd.
¾ Build container freight stations – partner with infrastructure and logistics
companies. Eg: Adani, GMR

As per the current state of warehousing sector, there is little scope for value creation by
investing in standalone warehouses. Since warehousing is a part of the larger logistics
sector, there is larger scope for value creation if warehouses are set up as part of logistics
parks and as part of ICDs and CFSs. Most of the warehousing service providers related to
facilities for containerized cargo also provide integrated logistics solutions including
freight forwarding, container handling, warehousing and transportation. Therefore,
investment in CFS and logistics parks is recommended. However, the mandate of the real
estate fund may not permit such investment because it forms part of investment in
infrastructure and logistics sector companies rather than pure real estate investments.

We suggest that SUN-Apollo pick up stakes in logistics companies intending to build

logistics parks and container freight stations. For eg: Gateway Distriparks is a listed
company providing integrated logistics solutions to its clients, has developed CFS and
also plans to ramp up warehousing capacity. Companies like Adani and GMR are
specialized developers of infrastructure – ports and airports. They have a good mix of
listed and unlisted infrastructure assets and have plans to develop more of similar assets.

● Partner with warehouse developers – foreign and domestic for warehouse

development. Eg: Prologis, Gazeley

With the implementation of VAT and investment in railways and roadways by the
government, there will be emergence of national level supply chains for efficient supply
chain and inventory management. This would pave way for R&M Warehouse
development at critical locations in the country.

The current technology and sophistication in warehouse development and operation in

the country is yet to achieve a lot more to meet with global standards. In order to have
access to state-of-the-art technology in warehouse development and management, we
suggest that SUN-Apollo should partner with international warehouse developers like
Gazeley and ProLogis.

● Tie up with manufacturing houses & retail chains to develop R&M

warehouses eg: Walmart, Birla group.

Mahindra World City – Karla (Pune District) is an integrated business city with a multi-
product SEZ with separate zones for IT/ITES, Manufacturing, Warehousing and
Logistics. It is located off the Mumbai-Pune Expressway, around 2 hours from Mumbai,
and has good connectivity to Mumbai and Pune airports and the two international
seaports, JNPT and Mumbai seaports. Mahindra Group also has manufacturing units at

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Raigarh and Nashik. SUN-Apollo can tie up with such manufacturing houses for
developing warehousing complex for them so that such warehouse complex serves as a
hub for their multi-location production facilities.

● Tie up with 2-3 key accounts for ensuring break-even occupancy for each
warehouse. Eg: Phillips,HMT, Mahindra

In order to ensure that the warehouse operations achieve a break-even point sooner, it is
suggested that the warehousing venture ties up with 2-3 key accounts who would use the
warehousing facilities all through the year so that minimum occupancy is guaranteed.
Key customers like Phillips, HMT, Mahindra and Goodyear India Ltd. Currently use the
services of warehousing companies like Indo Arya. There is lot more demand for
warehousing space as the existing warehouses have near 100% capacity utilization in
select key locations.

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9. EXIT MECHANISMS

SUN-Apollo would have certain limited investment horizon. For exit from such
investments in warehousing, the following routes will be available:

● IPO of SPV
● Sale to strategic investor
● Sale to financial investor
● Recapitalisation
● Sale to developer/ specialised operator
● Sale to REIT

Of the above modes of exit, IPO of SPV and sale to strategic investor and developer are
commonly used in India as of date. SEBI has recently notified draft regulations for REITs
in India and hence we see emergence of that mode of exit in about 2-3 years.

Since the warehousing sector is on the threshold of experiencing high growth, we

anticipate steady growth rate in cash flows; hence increasing the scope for leveraged
recapitalization and sale to other financial investors.

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10. SOURCES OF VALUE

Possible sources of value creation are:

● Multiple expansion due to accelerated growth:

The warehouse market is expected to expand due to increased economic activity &
foreign trade, growth in multi-modal transportation and increased FDI with improved
quality of management. Organised companies are expected to gain from consolidation
of the transportation and logistics industry which is fragmented as of now. All these
factors would result in better quality of management and higher projections for
growth in future. This would earn higher exit multiples compared to entry multiples.
With more FDI waiting to be invested in logistics sector, the available investment
opportunities are expected to fetch higher valuation.

● Achieving operating efficiency

Focus of the companies involved in manufacturing and marketing activities is

expected remain on their core activities and on achieving efficient supply chain
management. This would result in increased outsourcing of logistics activities which
includes warehousing. With the emergence of hub-and-spoke model in warehousing,
there would be optimal capacity utilization at different warehouses. Thus operating
efficiency would result in higher margins and therefore good exit valuation.

● Use of financial leverage

Use of debt in financing warehouse development will ensure higher returns on equity.
The overall quality of management would improve because of increased financial
discipline.

Potential future trends

● Specialisation in warehouse management:

Warehouse development and management in developed countries is technologically

advanced compared to that in India. With FDI in logistics and supply chain
management, we see emergence of specialized warehouse operators and service
providers as is prevalent in the developed countries. However, this is more likely after
a period of about 5-7 years when the infrastructure development in India would be
able to support an optimal level of trade-off between transportation costs and cost of
warehousing.

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Feasibility Study On Industrial Warehousing in India

● Inorganic growth in a fragmented sector

The warehousing facilities currently are provided by transport operators, Clearing &
Forwarding Agents and logistics companies. A lot of production houses have captive
warehousing facilities to satisfy their warehousing needs. A large part of the sector is
fragmented with limited capacity available for storage. There will be consolidation in
the industry after about 5-7 years when the fragmented unorganized service providers
will be acquired by more organized and specialized companies providing integrated
logistics including warehousing solutions.

References:
1. Edelweiss Research
2. SSKI Research
3. ENAM Research
4. EMKAY Research
5. Drewry Shipping Consultants Research
6. Jones Lang LaSalle Meghraj Research
7. Gati Container Freight Station Records
8. Central Warehousing Corporation Records
9. Industry interviews

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