Allcargo Logistics Ltd (ALLCARGO) Q2 FY22 Earnings Concall Transcript

Allcargo Logistics Ltd (NSE:ALLCARGO) Q2 FY22 Earnings Concall dated Nov. 10, 2022

Corporate Participants:

Ravi Jakhar — Chief Strategy Office

Deepal Shah — Deputy Group Chief Financial Officer

Analysts:

Sailesh Raja — Batliwala and Karani Securities India Private Limited — Analyst

Chintan Sheth — Sameeksha Capital — Analyst

Chetan Shah — Jeet Capital — Analyst

Rushabh Shah — Anubhuti Advisors — Analyst

Radha Agarwalla — B&K Securities — Analyst

Abhijit Mitra — ICICI Securities — Analyst

Anil Sarin — Centrum Wealth — Analyst

Ronak Vora — AUM Advisors — Analyst

Drishti Jain — Concept Investwell Private Limited — Analyst

Udhayaprakash — Value Research India Private Limited — Analyst

Karthi Keyan — Suyash Advisors — Analyst

Ravi Mehta — Deep Financial — Analyst

Vignesh Iyer — Sequent Investments — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, and welcome to the Allcargo Logistics Limited Q2 FY ’23 Earnings Conference Call. [Operator Instructions]

I now hand the conference over to Mr. Sailesh Raja from Batlivala and Karani Securities India Private Limited. Thank you, and over to you, sir.

Sailesh Raja — Batliwala and Karani Securities India Private Limited — Analyst

Yes, thank you, and good afternoon to all. On behalf of B&K Securities, I would like to welcome you to the Allcargo Logistics Q2 FY23 earnings call. From the management side, we will be hearing from Mr. Ravi Jakhar, Chief Strategy Officer; and Mr. Deepal Shah, Group CFO.

So without taking time — much time, I hand over the call to Mr. Ravi for the initial remarks and post which we will open up the floor for Q&A. Over to you, Mr. Ravi.

Ravi Jakhar — Chief Strategy Office

Thanks, Sailesh. Good afternoon everyone, I am Ravi Jakhar, Group Chief Strategy Officer for Allcargo Logistics Limited, I am joined by my colleague, our Deputy Group CFO Mr. Deepal Shah, and my colleagues from the Investor Relations team. We have uploaded our financial results and investor presentation for quarter two FY ’23, which has further been with a minor correction uploaded again. I hope you’ve had a chance to go through the same or would recommend that you can go through the same to get a more comprehensive insight on the quarterly performance as well as on the plan ahead. This was a very impactful quarter in many ways. We demonstrated our highest ever for the second quarter. We also demonstrated our highest ever EBITDA for the second quarter and also the highest-ever EBITDA margin for any quarter. Strong performance is particularly delighting since it comes against a backdrop of economic uncertainty leading to challenges on the global supply chain diminishing.

Therefore, the company’s digitization and transformation initiatives that we have undertaken in the last few years have clearly come handy in building the resilience in –We have now reached a stage wherein the platform has been created, and we can continue to scale up from here without any significant investments. On the international supply chain business, the global ocean freight saw a year-on-year decline. However, leveraging our market leadership position and the key capabilities we managed to grow our volumes and significantly in the margins, thereby achieving a much higher EBITDA growth rate on a year-on-year basis. To take some examples, we have situations like in Asia, Vietnam, which has emerged as a major manufacturing hub alternative to China, did not have –. The core volumes were down 30%, but our business remained stable. In UK, where the LCL consolidation business went down by about 25%, we managed our volumes. Going to Americas, in the United States, the export volumes for LCL in this particular quarter saw a double-digit decline on the industry, but we have managed to grow our numbers.

So this is a demonization of our capabilities in terms of resilience and our ability to grow.

Operator

Sir, I need to reconnect you to the conference. Sir, we’re experiencing some challenges with your line. I’ll reconnect you in just a moment. Thank you. Ladies and gentlemen, please wait for the moment while we reconnect the management.

Thank you. Ladies and gentlemen, the line for the management is reconnected. Sir, please proceed.

Ravi Jakhar — Chief Strategy Office

Yes. Thank you. And looks like we need to digitize our investor call engagements as well, and we’ll certainly look at the options that helps. Coming back to business, like I mentioned, in fact in supply chain, we witnessed headwinds in different markets and it is fine that we managed to grow the business, which speaks about the resilience that we have built in our business. As an outcome, we achieved the highest ever EBITDA for quarter two, witnessing a strong growth year-on-year and even witnessing a growth quarter-on-quarter. On the Express and Contract Logistics business, we continue to perform well. The express logistics business under GATI saw an almost a tripling of the first half EBITDA in the first half of this year. Contract logistics business continues to invest in capabilities to scale up the business.

The business is being demerged under Allcargo Terminals, which is the CFS operations has also continued to maintain robust performance and on the assets, we have been progressing well as well. Another significant update, I would like to highlight and share that in the Board meeting held yesterday, the Allcargo Board approved acquiring shares from KWE in operating NCLT, GKEPL. This is a reinforcement of our belief in management and the growth opportunity the express logistics industry offers and having transformed the business operations over the last couple of years as a continuation of our strategy, we are now well placed to further increase our investments into the business.

On the real estate business, there is a major condition precedent, which has been recently accomplished. And therefore, now with procedural compliances remaining, we estimate that the share purchase agreement would be signed with the Blackstone entities within the next four weeks, which would have a significant impact on our debt, which is already down to a significantly low number with the net debt standing at about INR543 crores and Blackstone Transaction combination by way of an SPA would have a further impact of INR400 crores. With this, we are looking at a situation wherein we would be near zero net debt and on that account, I would now request my colleague Deepal to take you through the highlights of the financial performance of various businesses.

Thank you, and over to you, Deepal.

Deepal Shah — Deputy Group Chief Financial Officer

Thank you, Ravi. I will now discuss the performance for the second quarter of FY ’23. I’m happy to share that we have been able to maintain our performance despite the muted global economic scenario. Despite marginal increase in revenues, we were able to grow the EBITDA and the margin thereof substantially. Allcargo Logistics has reported a consolidated revenue of INR5,300 crores, up 6.5% on a Y-o-Y basis. It is noteworthy that our EBITDA has also grown by 24.2% to INR450 crores on a Y-o-Y basis. Reported PAT is impacted because of exceptional items. However, adjusted PAT stood at INR226 crores, which has grown by 2% Y-o-Y. Now I would like to discuss the performance of each of the business segments in detail for the quarter. To begin with the largest segment, which is the international supply chain business, it has shown growth in terms of revenue on a Y-o-Y basis despite decreasing trend in the ocean freight over the last six months.

International supply chain reported a revenue of INR4,660 crores as compared to INR4,384 crores in Q2 of FY ’22, a growth of 6%. Volumes for LCL and FCL have witnessed marginal improvement on a Y-o-Y basis, both LCL and FCL volumes grew by 2% for FY ’23 on a Y-o-Y basis. EBITDA for the international supply chain business stood at INR384 crores for the quarter of FY ’23 — quarter two of FY ’23 as compared to INR307 for quarter two FY ’22, a stellar growth of — We have been able to provide EBITDA faster than the revenues on the back of focused digitalization and yield management. Going over to the next business, our Express business. Our excess business revenues, which falls under the flagship brand of GATI has reported a revenue growth of 10.8% on a Y-o-Y basis and stands at INR720 crores for quarter 2 of FY ’23. The EBITDA for the same period stood at INR27 crores as compared to INR7 crores — INR17 crores for quarter 2 of FY ’22.

We are addressing operational leverage to play out in our expense business and with the increase in revenue, along with cost optimization programs, we are optimistic of margin enhancement in our Express business. Moving over to the CFS business and the ICD business, the CFS and ICD segment has demonstrated significant growth in volumes over the last year. Volumes handled for the quarter stood at 139,000 TEUs as compared to almost 80,000 TEUs handled in quarter 2 of last year. The ICD acquisition boosted the volume, it has also improved the export and import mix within the volumes with larger focus on customer and analytics tools — The business has been able to maintain robust EBITDA margins of 24.2%, also along with delivering a very strong ROCE of 21% — of over 21%. Moving lastly to our equipment hiring segment, the third quarter remains easily challenged which usually also is our lower volumes.

However, as we stand — as you see, our utilization stands near to 90% levels. In this segment, we remain committed to non-core low-yield assets and optimize capital allocation. Also to highlight majority of these assets are largely depreciated on the books as we applied accelerated depreciation for most of these assets. On the balance sheet, the gross debt highlight stood at INR300-odd crores, and the net debt stands at approximately INR543 crores. The strong performance has led the net debt to increase the levels at the lowest level of 0.13x — the lowest point over the last two to 2.5 years. We have been discussing our demerger plans in our previous communications and the same is on track and is working as per timelines. We recently market updated with any new development in the due course of time. We have been consistently providing other key competitive financial performance indicators in our investor presentation. One can refer that for more details.

Thank you. We will open to the floor for questions.

Questions and Answers:

Operator

Thank you very much, sir. [Operator Instructions] Our first question is from the line of Mr. Sheth your line is not clear. Sir, may we request you to reconnect to the call, and we’ll take your question next. Yes, I can hear you now. Please proceed.

Chintan Sheth — Sameeksha Capital — Analyst

Hello.

Operator

Yes, I can hear you now. Please proceed.

Chintan Sheth — Sameeksha Capital — Analyst

Yes. Sorry. Sorry for the audio issue. So my question is pertaining to the transaction with KWE. So I just wanted to clarify that this is — this deal is a Allcargo owing 30% in GATI KWE and 70% will rest with GATI Limited, the holding company, right?

Ravi Jakhar — Chief Strategy Office

Yes, that is right. This is, in a way, complteting the GATI acquisition that Allcargo started, starting with the acquisition of erstwhile promoter shares and followed by an open offer, and we have had discussions in the past to engage at a future date with certain terms and conditions. And now we have engaged in those discussions and the outcome has been a mutual agreement to buy the shares. And therefore, Allcargo logistics would be buying the 30% shares from the KWE Group, and they own those shares into different entities.

Chintan Sheth — Sameeksha Capital — Analyst

So — but if you can help us to understand why this transition is through Allcargo rather than GATI, if you can? And given that the transaction is happening at an equity value of INR1,350-odd crores, while GATI primarily is — GATI KWE is primarily the operating business currently for GATI Limited, which is quoting at around INR2,050 odd crores market as of today. How should GATI shareholders look at this transaction?

Ravi Jakhar — Chief Strategy Office

Yes. So like I said, this is a combination of Allcargo’s acquisition of GATI and at the very outset, we had engaged with the erstwhile promoter as well as the joint venture partners and at least to engage in future on certain ways and now this is a transaction between KWE and Allcargo in the operating entity. And therefore, it is the corrugative of the two parties to decide on what the fair price for this operating business should be in line with the various terms agreed beforehand. Now given the confidentiality of the agreement signed, it would be impossible to share all these but what I can say is that from a GATI shareholder perspective and I would also like to highlight that Allcargo logistics earnings call.

I would also reference — and we can take it up in GATI call as well. But from a GATI shareholder perspective, this now should facilitate the process of restructuring in GATI — and that should basically help expedite the growth path on which the company is going forward. From a valuation perspective, I would say that this is a private transaction between two parties and therefore, may not have — may have a limited context is what I can say about that.

Chintan Sheth — Sameeksha Capital — Analyst

But if we look at the restructuring, the easiest way would have been that the GATI KWE, which is the core operating business, if GATI would have been owned 100%, that part of the business, it would be easier to integrate the entire GATI limited restructure. That’s my understanding. But I’m just trying to understand how should we look forward once the structure will be like 70-30 between GATI Limited and Allcargo.

Ravi Jakhar — Chief Strategy Office

So this is the most simple way of executing the transaction with Allcargo logistics having the cash available from the internal approvals and GATI initiatives we have — the company has seen significant progress but still has constraints on the cash flow perspective. Overall, there are multiple considerations which go into and like I said, it’s the culmination of an agreement which started in the discussion between Allcargo Group and KWE Group, which share a strong business relationship and therefore, the structure has been –. But now with Allcargo, owning the 30% stake in GATI Private Limited, this will help expedite the decision-making on the restructuring and help facilitate the restructuring as we decide on the EBIT structure going forward.

Chetan Shah — Jeet Capital — Analyst

Okay. And by when we expect this restructuring to certify, how should we — what will be the end restructured entity at GATI?

Ravi Jakhar — Chief Strategy Office

This would have to be taken up at the GATI board in the next couple of months. The first step was to conclude because there were certain obligations and considerations between Allcargo Group and KWE Group and which have now been settled through this sale of shares. And now in the next couple of months, broadly speaking, GATI board would consider various options and then finally take a decision. And as the decision is taken, the decision will be shared with all.

Chintan Sheth — Sameeksha Capital — Analyst

Sure. I’ll jump back into the que. Thank you.

Ravi Jakhar — Chief Strategy Office

Thanks.

Operator

Our next question is from the line of Rushabh Shah from Anubhuti Advisors. Please go ahead.

Rushabh Shah — Anubhuti Advisors — Analyst

Sir, first question on LCL. So your commentary suggesting that the business is overall down in the US, UK markets. But despite our revenue remaining resilient so have our market share been improving in those geographies?

Ravi Jakhar — Chief Strategy Office

Yes, absolutely. And there was a point which I was making that business has been resilient, while the market has been down. The business has not been down referring to our own performance. And against all adversities, we have managed to sustain our volumes and which naturally means that we have grown market share in several challenging situations.q

Rushabh Shah — Anubhuti Advisors — Analyst

Okay. Okay. So any guidance on the second half, how we can expect this to go forward?

Ravi Jakhar — Chief Strategy Office

So I would say that from a volume standpoint, we do not see a significant growth revival in the global trade. We see that for the next couple of quarters, the global trade performance may remain muted. And from there on, it might start to grow. However, having seen this last quarter, which perhaps had the maximum headwinds, the headwinds will only repeat because a lot of one-time impact which also come in when there’s a sudden release of inventory and decongestion, all of those have been factored in and despite all of those aspects, you see the performance. So from here on, the headwind should reduce and the business should be able to sustain and grow volumes. And then on volumes, like we have mentioned, the ocean freight rates would continue to remain low where they have reached, but that does not impact our performance, which we’ve been speaking about for quite some time. And now the performance in the numbers also provides good clarity on that.

Rushabh Shah — Anubhuti Advisors — Analyst

Perfect. Perfect. Sir, secondly, on the Express distribution, right now in your opening remarks, you mentioned that it was on an EBITDA positive. But when we see the actual public segmental results, I think there we have a negative segmental result in the Express distribution parts. So can you give any highlight on this part?

Ravi Jakhar — Chief Strategy Office

Yes, I leave Deepal to comment on that.

Deepal Shah — Deputy Group Chief Financial Officer

Yes, sure. So at GATI level, at the business level it is positive. But when we pick up the segment at Allcargo we have to allocate what is known as the charge-off for the intangibles. So while acquiring there were some intangibles which were created, which we are charging off. And that charge-off has brought it to a minor negative amount.

Rushabh Shah — Anubhuti Advisors — Analyst

Okay. So is this more of a one-off? Or.

Ravi Jakhar — Chief Strategy Office

So basically, when you acquire, you create intangible assets because the value that you’re paying is more than the book value. So in form of goodwill and brand value these are in the acquirers book are actually kind of charged off over a period of time, over a longer period of time. And that — it’s more of an accounting thing, and that’s what it is being charged off, and that’s the reason you’re seeing and it’s being charged since last year itself since point of acquisition.

Rushabh Shah — Anubhuti Advisors — Analyst

Okay. Understood. Understood. Sir, last two bookkeeping questions. So tax rate was significantly higher this time around — roughly 35%. So any run-offs? Or should we assume this to continue going forward?

Ravi Jakhar — Chief Strategy Office

No. So there are a couple of things. One is that we received a significant amount of dividend. So there is a tax related to the dividend, and it will also depend on whether how much dividend we will give going forward. So that once we factor in probably we’ll take a reduction on the — At that time, we will probably reduce the tax rate accordingly. So that is one. Secondly, on the MAT utilization. So we are also — sometimes the amount of available and the possibilities of utilization of the amount ability to use on MAT will determine the ETR, effective tax rate. So there are multiple points how this tax rate is calculated. And the short answer to this is that, yes, this is not — this is one-off and tax rate will change based on some of these parameters.

Rushabh Shah — Anubhuti Advisors — Analyst

Okay. But we can expect this to revert to again 25%, 27%.

Ravi Jakhar — Chief Strategy Office

In the long run, yes, this is — the ETR is in the range of 25%, 27% what you can expect.

Rushabh Shah — Anubhuti Advisors — Analyst

Okay. And sir, just final question from my part. So the finance cost was a bit higher sequentially this time around, despite we have reduced our overall debt levels. So any amount relating to ForEx or was it some one-off finance costs coming up?

Deepal Shah — Deputy Group Chief Financial Officer

No. Very well observed actually. Yes. So we — as you are aware that we completed the warehouses from Blackstone, and we picked up the LRDs; the lease, rent, and discounts. So those kicked in, that added to a little bit of interest, but most of these as a debt itself will get eliminated from our books, as explained by Ravi earlier in the call. So this is a temporary phenomenon.

Rushabh Shah — Anubhuti Advisors — Analyst

Okay. Okay. So more of a one-off thing which played up.

Ravi Jakhar — Chief Strategy Office

And marginally, I think a 50 basis point increase in interest rates, we all know the way everything is going. So the existing loans also are kind of going up by around close to 25 to 50 basis points from where it was earlier. And also, if I may add on to that two points. One, like you mentioned in the coming four weeks, about INR400 crores, that could get reduced on account of the Blackstone entity being signed. Besides that, currently, you would also notice is a huge gap between the gross debt and net debt which is on account of significant cash lying with us. So over the coming couple of quarters, we’ll also rationalize that and that would see a reduction in not just — but also the gross debt and therefore, an impact — a positive impact on the finance costs coming down.

Rushabh Shah — Anubhuti Advisors — Analyst

Okay. But again, with this acquisition of 30%, I think we are acquiring some KWE. Wouldn’t that again keep the debt levels around current levels only?

Ravi Jakhar — Chief Strategy Office

Our cash flows are extremely strong, and we see them being sustained. So, therefore, the amount required for the KWE transaction can very well be serviced from the Allcargo cash flows over the next couple of quarters.

Operator

Thank you very much [Operator Instructions] Our next question is from the line of Chetan Shah from Jeet Capital. Please go ahead.

Chetan Shah — Jeet Capital — Analyst

Yes, hi. Thanks. Ravi Just two quick questions. One can you give us some update on Nordicon and Speedy Multimode integration in our business? One is that and second if you remember in our analyst meet and also in our previous calls, you kind of alluded about some missing part in our MTO business in some routes, and you said that you are kind of looking at how with our existing business itself, how do we feel that and try to integrate and gain more [Technical Issues] and where exactly the business take us in FCL part of the business because LCL will kind of doing reasonably well, but I need update on FCL side of the business. These are the two questions from my side.

Ravi Jakhar — Chief Strategy Office

I didn’t gather the first part of your second question, you referred to the first question on Nordicon and is the second question…

Chetan Shah — Jeet Capital — Analyst

Second question, I wanted to understand that you kind of previously explained us that there are some missing routes in our existing [Technical Issues] — and we are trying to feel that using the existing platform itself. So if you can give us some status on that, that will be very helpful, please.

Ravi Jakhar — Chief Strategy Office

Yes. So the Nordicon acquisition has gone very well for us. We have been able to fully integrate it very successfully in the organization. And therefore, Nordicon’s own performance has improved, and it has also made positive contributions to the overall business, both in terms of volumes to other offices as well as in terms of additional profit margins. And that is one of the contributing factors to the subsidence in our bottom line. On the acquisition as well, it has allowed us to increase the volume significantly, also favorably change the import-export mix, which is in line with the growth trend expected over the next couple of years. So both acquisitions have gone in well for us. Speaking about the missing route for the missing trade link, like we had mentioned, there while we have a global coverage, there could still be certain pockets where we may not be as strong as rest of the world.

So while we are market leaders in several countries and in some countries, we hold as high as 30% or 40% of the LTL market share, there are also countries where we hold single-digit percentages. And that is why the overall global market share is at about 14%. So there continue to be those opportunities wherein organically as well as with some small bolt-on acquisitions, we can fill in those missing lengths. That is a point explaining the analyst meeting. Yes, we continue to look for such opportunities such as the Nordicon one. And naturally, we would make an announcement whenever there’s any such opportunity being executed and any bolt-on acquisition happening. But just to also add, as a follow-up point, these would largely be small geography-specific bolt-on acquisitions, easily manageable through internal approvals. We are not looking at any large acquisitions in that sense, since we’re already are well presented across the group.

Chetan Shah — Jeet Capital — Analyst

Just can you answer about the FCL part of the business? Where are we and how are we doing in that side. So while the global container rate grew at a higher rate, we have managed to maintain a year-on-year growth in that business as well. And that is a business where we have been growing very sharply over a period of about seven to eight years. But still, it’s a very small part of a highly fragmented and a much larger FCL industry globally. And therefore, we do not see challenges in continuing the growth momentum in that. And in that as well, we continue to launch the product in more countries and expand in countries where it is already being marketed. So as I have mentioned in the past as well, I would like to reiterate that we would continue to expand our market share. And therefore, we would hold on to our volumes even in declining trends, while grow faster than market in a positive environment. So that remains the same.

Ravi Jakhar — Chief Strategy Office

So while the global container trade grew at a higher rate, we have managed to maintain a year-on-year growth in that business as well. And that is a business where we have been growing very sharply over a period of about seven to eight years. But still, it’s a very small part of a highly segmented in a much larger FCL industry globally. And therefore, we do not see challenges in continuing the growth momentum in that — and in that as well, we continue to launch the product in more countries and expand in countries where it is already being marketed. So as I have mentioned in the past as well, I would like to reiterate that we would continue to expand our market share. And therefore, we would hold on to our volumes even in declining trends, while grow faster than market in a positive environment. So that remains same.

Chetan Shah — Jeet Capital — Analyst

Wish you all the best.

Operator

Thank you very much. Our next question is from the line of Radha from B&K Securities. Please go ahead.

Radha Agarwalla — B&K Securities — Analyst

Hi, thank you for the opportunity and Congratulations on the results. So you mentioned in the opening remarks that one of the reasons for growth in EBITDA was the yield management. So with respect to that, previously, we had — like we have discussed. So currently, I believe you’re using 26 cubic meter of cargo in one container. So with respect to that, my question was how much can one container carry with respect to cargo? And how has it improved for us over the last few years? And what is the average change in EBITDA TEU per cubic meter of increase in cargo?

Ravi Jakhar — Chief Strategy Office

Yes. So you rightly pointed out that our growth over the last couple of years in bottom line has largely been driven by improved yield, which is on account of higher utilization. We do not share the exact number in terms of cubic meters per TEU. But I can give you the direction stating that over the last couple of years, we have made significant progress, and now we have reached a high level where we do not see any significant progress on the CBM for TU going up significantly from here. And that number also varies based on the based on the commodity being carried, the way and then which is being carried, etc..

But to put it short, we have always been stating that the growth in the bottom line has been driven by the improved yield and not on account of any ocean-freight rate pass-through costs and now that gets demonstrated as the ocean freight rates have come down and the yield has continued to remain constant. The improvement in the EBITDA margin therefore is also a bit of an operating leverage wherein revenues coming down as the yields being held steady, you see an upward trend in that direction. That is something which we see will continue. We will continue to hold on to the EE largely while ocean freight rates may see some decline. And therefore, the EBITDA margin should remain constant or marginally improve from here.

Radha Agarwalla — B&K Securities — Analyst

Understood, sir. And secondly, could you tell us what is the difference in EBIT per TEU if you’re using 40-feet container as a when we use 20-feet container?

Ravi Jakhar — Chief Strategy Office

As a ballpark estimate, the cost for the forfeit container is approximately 1.5 to 1.6x while it carries a load of 2x critically or at least 1.9x tactically. So therefore, your cost comes down by about 15%. And therefore, at the EBITDA level, there can be an impact on that. But let me also say that largely the consolidation — optimized towards the 40-feet containers that we use. And over the last couple of years, again, under our lean management initiatives, we have further improved those numbers significantly.

Radha Agarwalla — B&K Securities — Analyst

Understood, sir. And sir, lastly, with respect to freighters like you mentioned that there is a challenge in the global environment and given that 40% of our business comes from U.S., Europe — so could we see an impact in volumes for the next half of the year? And also, given that few factors impact the freight rates, like availability of containers, and we believe that next year also, there will be some inflow. So could you give us some trend with respect to freight rates in the near term?

Ravi Jakhar — Chief Strategy Office

Yes. Ocean freight rates are likely to remain subdued at the current lower level. However, as we have reiterated, they did not benefit us in the higher –. They are largely a pass-through cost, not impacting as a comment in any significant manner. So therefore, the ocean freight rate will remain subdued and will not have any impact on our performance Speaking about the volume, like I mentioned earlier, the volume growth is also likely to be muted. But given the strategic leverage that we have created by way of strong integration with the customers of digitization and when the operating scale and efficiency that we have today, we are in a position to hold on to our volumes in a declining market and grow and gain market share. So therefore, while there are adverse microtome scenarios, we remain confident of continued strong business performance on our part.

Radha Agarwalla — B&K Securities — Analyst

Understood, sir. Thank you and all the best.

Operator

Thank you very much. Our next question is from the line of Abhijit Mitra from ICICI Securities. Please go ahead.

Abhijit Mitra — ICICI Securities — Analyst

Yes, hi. I am Abhijit. So just to understand a bit on the — that has been put forward regarding the deal with TKWE rather KWE. So just to understand that this INR407 crores, will it have some other clauses which makes the valuation a bit lower from an external standpoint? Or is it like one should not read much into it because I think a previous question also tried to address that almost INR2,000 crores of current market cap against that INR1,300 crores of valuation. So how does that reconcile the — [Technical Issues] linked to the acquisition of Gati which happened with Allcargo or how to sort of look at it?

Ravi Jakhar — Chief Strategy Office

Yes, I would like to make two statements in that regards. One, it is an agreement between Allcargo Logistics and KWE Group, which has been driven on the back of various discussions and engagements which are private and confidential in nature, and therefore, details cannot be shared. But this is a transaction in private agreed between two parties. And therefore, the price that is the transaction happens in a matter of decision on part of the seller and buyer. And that would recommend that we don’t read much into that. The second point I would like to clarify to your point, this is a transaction where there are no other assets to it, Allcargo Logistics would acquire 30% shareholding in the operating entity Gati-Kintetsu Express Private Limited from the KWE group companies and the amount mentioned. There are no other numbers or anything else as to that. With pretty take forward transaction privately and mutually agreed between KWE Group and also of Allcargo Logistics.

Abhijit Mitra — ICICI Securities — Analyst

Got it. Got it. And the second thing is that in your projections for ’26, you have put forward — you have continued to put forward estimates since the analyst day for Express Plus contract logistics EBITDA of INR500 crores and revenue of INR2,700 crores, INR3,500 crores. How would you break it up with the contract logistics revenue be similarly — would be similar in scope as it’s now or you see a significant expansion there also? Say if you have to sort of break it up into contract logistics and expense, how should I look at these numbers?

Ravi Jakhar — Chief Strategy Office

Yes. So, we see continued opportunities for expansion in contract logistics business as well. And that is the reason why we have made investments in both management bandwidth at middle level in the contract logistics business and also in taking more capacities, which means that as you would see, the bottom line has been somewhat impacted in this quarter, it’s largely an outcome of capacity risk and the management bandwidth additions leading to reduced operating margins and higher SG&A costs. Now these are naturally steps towards expanding the business significantly, and that is the direction in which the contract logistics business will be heading. And at this point in time, we have fine from providing further breakup within the largest segment of existing contract logistics. But yes, Express Logistics under Gati and the contact logistics under ACCI would continue to grow well. And the guidance provided is for both to put together.

Operator

Thank you very much. Our next question is from the line of Anil Sarin from Centrum Wealth. Please go ahead.

Anil Sarin — Centrum Wealth — Analyst

I just wanted to understand in this context of a slowing global economy, by taking yield management as well as market share growth into account, how does the erstwhile MTO business look like in terms of revenue growth on a two- to three-year basis I’m not talking about, I’m not talking about ACCI only EQ part.

Ravi Jakhar — Chief Strategy Office

Yes. So first, like I mentioned, the macroeconomic environment has been challenging, but I think the quarter gone by is an exemplary evidence of company’s ability to perform in adverse situations — and speaking of the targets, we have also categorically stated the 2026 management desperation for the International supply chain business, which can be referred to.

Operator

Our next question is from the line of Ronak Vora from AUM Advisors. Yes, sir, please go ahead.

Ronak Vora — AUM Advisors — Analyst

Congrats on a good set of numbers. So what I want to understand is in the last two years, what steps have we taken in the international supply chain business, where our EBIT margin are gone up multifold?

Ravi Jakhar — Chief Strategy Office

Yes. So thanks. And let me state that it would be a very long answer. So I would refrain from commenting upon that. But time off lately, we have done everything to a very holistic transformation program. There is the sales acceleration to expand revenue and — which has been done by expanding market share. On the cost side, we are focused on management, driving — utilization leading to improved operating margins. And we have use technology to integrate better with customers and also to keep a check on the cost, thereby resulting in an overall improvement in our bottom line. So that’s how I would like to put it. But of course, underlying each of these steps, we apart 100 to 150 initiatives, which are part of the comprehensive transformation program, which then over the last couple of years.

Ronak Vora — AUM Advisors — Analyst

Okay. Sir that means even though the freight rates go down, at least our margin would be maintained? — like which is currently at 8% or maybe somewhat higher 9-odd percent as what you are saying like when you said marginally higher?

Ravi Jakhar — Chief Strategy Office

Yes. So I think the freight rate going down is no more future scenario, but we’re talking about past already. Freight rate started going down from April and April, May, June quarter was the first one where we had an impact, and we demonstrated that the ocean freight rate decline did not have any significant negative impact on our performance. And this quarter, which we are speaking about at this point in time has already seen a significant decline in the container spot freight trade rate. So therefore, to a large extent, that is already factored and the numbers showcased the impact of freight rate in our numbers already.

Operator

And gentlemen, [Operator Instructions] The next question is from the line of Drishti Jain from Concept Investwell Private Limited. Please go ahead.

Drishti Jain — Concept Investwell Private Limited — Analyst

I would like to know that what kind of volume growth do we see in the international supply chain segment in the medium term? And also, I would like to know that what kind of volume growth per year would be to achieve the 2026 expirations for international supply chain business?

Ravi Jakhar — Chief Strategy Office

Yes. Thanks, Drishti. So perhaps what we can say is that in our opinion, the next couple of quarters would remain subdued and therefore, from an industry standpoint, we may not see any growth beyond which we believe the growth should come back in. From a medium-term perspective, we expect that the nominal growth rate of 2% to 4% in the ocean freight trade rate leads to a much higher growth rate in the global — industry, which ends up being in the range of about 6% to 8%.

And as we have maintained the guidance and that would continue, we will continue to gain market share over the next two to three years. And therefore, you would see us growing faster than the market growth rates in terms of the percentage growth. We cannot share more specific guidance than that, but I hope that answers your question and gives you an idea. And that’s the kind of volume growth we anticipate, which will take us through the 2026 targets that we have shared in the management balance sheet.

Drishti Jain — Concept Investwell Private Limited — Analyst

Thanks.

Operator

Thank you very much. Our next question is from the line of Udhayaprakash from Value Research India Private Limited. Please go ahead.

Udhayaprakash — Value Research India Private Limited — Analyst

I just have a couple of questions regarding volumes. The first is, can you please tell us what factors affected drop in volumes and equipment hiring segments?

Ravi Jakhar — Chief Strategy Office

Equipment hiring segment is an extremely small part of the business, let me first highlight that. And secondly, it’s the crane rental business, wherein utilization goes down during the monsoon because many types operations. If we speak about as of today, as we speak on this call, the same utilization is near 90%, which is a near all-time high.

Udhayaprakash — Value Research India Private Limited — Analyst

Okay. And the second is can you give us volume guidance for the LCL for FY ’23, can we expect 2% to 4% growth during this year?

Deepal Shah — Deputy Group Chief Financial Officer

As I just explained on the volume side, we would gain market share, and I just shared the estimates on what the market growth could look like.

Ravi Jakhar — Chief Strategy Office

Okay. Another — my final question is regarding the tax rate. Can you please just explain what was the major contributor to this rise in the tax for the current quarter? I know you mentioned the both dividend and — but which affected the most?

Deepal Shah — Deputy Group Chief Financial Officer

Yes. So — the question is that between making the dividend which are fitted the tax take more. Yes, it’s the dividend.

Ravi Jakhar — Chief Strategy Office

Yes, it’s the dividend. Current dividend, which has been received. And — but like Michele mentioned, the tax rate would — there’s no reason for them to significantly change. So in the longer term, they would remain constant that we see number of 25 to 26 Yes. So these are largely one-off. Dividend, whatever is finally given to the ultimate shareholders become the pass-through and you make the benefit of that taxation that will be accounted as many we think of declaring the mines. Any lag between receiving the dividend and paying out the dividend, which creates the fluctuations in the tax rate…

Operator

Thank you. [Operator Instructions] Our next question is from the line of Chetan Shah from Jeet Capital. Please go ahead.

Chetan Shah — Jeet Capital — Analyst

Just one question on any fresh update from Jhajjar ICD, if you could give us some status of that, please?

Ravi Jakhar — Chief Strategy Office

Yes. Thanks. So basically, the Jhajjar ICD would be connecting via the Haryana orbital rail corridor. It will be dedicated freight corridor and therefore, is very strategically located to provide seamless connectivity to the Western ports of Mundra and JNPT. We estimate that the dedicated freight corridor will become fully operational by end of ’23 or early ’24, and we would be planning our construction and development activities to align with that because until the dedicated trade corridor comes up, the opportunities are limited and therefore, we would like to time — — and I would say you should expect the Jhajjar ICD to be commissioned and fully operational in early part of 2024 to mid-2024, around the time line.

Operator

Thank you very much. Our next question is from the line of Karthi Keyan from Suyash Advisors. Please go ahead.

Karthi Keyan — Suyash Advisors — Analyst

A couple of questions. One if you spoke about the drop in volumes overall of the industry. And again, you’ve done well. Just trying to understand if there is an overlap in the, shall I say, circuits on which there have been volume drops in growth? Or is there not too much of an overlap? I’m just trying to understand is there any area that you don’t cover where there’s been a great amount of drop in volumes.

Ravi Jakhar — Chief Strategy Office

So we’re operating about 180 countries in which about 56, which is almost all the largest countries, we have our own offices. So we have a fairly global footprint, if not about the exclusion of trade lanes. Let me take a specific example. There are markets in which the competition saw a decline of 15% in exports. I’m talking about markets, large markets but in the United States of America and wherein we have grown our volumes. We have seen markets like Vietnam, where in the entire port volume in the country went down by 30%, but we held on to our volumes. So there have been multiple examples of key countries across Europe, Asia and Americas, where competition or the overall industry for a significant decline, and we still held on to our volumes. So it’s a clear demonstration of gain in market share and resilience in the business.

Karthi Keyan — Suyash Advisors — Analyst

And what would help you achieve this if you..

Ravi Jakhar — Chief Strategy Office

All the efforts that we’ve put in over the last two, three years in digitizing and transforming the business and all the efforts put in the last 20 years in building the world’s most reliable in the largest — network, which makes us uniquely placed.

Karthi Keyan — Suyash Advisors — Analyst

Sure. And one question, I’m going back again to the Gati KWE acquisition. Just trying to understand this, you speak about the lease factory. So assuming that there is an understanding that the entire Express business will come to Gati, which I assume it is, would the valuation then be different? From the price you acquire from?

Ravi Jakhar — Chief Strategy Office

Today our valuations based on two parties entering into a private agreement and agreeing. Any restructuring and tailing Gati would again be based on valuations to be done by the Tier 1 valuers and following all the processes and guidelines. And the restructuring is yet to be finalized in terms of how we want to do that. But the principle is to bring in simplicity in the structure and make it efficient for the management to drive the business growth. And valuations, which are not within the private parties will always be driven by a process run by valuation firms.

Operator

Thank you very much. Our next question is from the line of Radha. Please go ahead.

Radha Agarwalla — B&K Securities — Analyst

So you mentioned that debt reduction will be one of the prime objective for us. But for the next few years, given the guidance that you have mentioned, we’ll have a lot of internal accruals. So how do we plan to utilize this like what will be the capital allocation policy? And do we have — do we need to do any capex for the next two to three years?

Ravi Jakhar — Chief Strategy Office

I would request my colleague Deepal to take that up. So yes, from a capital allocation perspective, like Ravi mentioned earlier that most of our open we already have participation globally. But one, we will look at acquiring balanced statement some of the smaller ventures wherever we are present. Also — so there’ll be inorganic growth opportunities available, which we will keep monitoring. And if there are opportunities which fit well with our organization, we will definitely invest there.

Our investment in digitization continues will there be a small amount of investment in — and digitizing our businesses that we will go forward. A balanced cash — we will try to make also debt free, which we are very near to. And of course, we look at options of dividend buybacks and many other things over a longer period of time depending upon cash flow availability. So that’s the key overall outlay in terms of the next two to three years that we’re looking at.

Radha Agarwalla — B&K Securities — Analyst

And just one last question. So this is from a broader perspective. So looking at the freight rate for the last 10, 12 years, given that we have seen such historical high freight rates in FY ’21 and ’22. And previously, we had seen such scenario in FY ’12 and ’30. So at that point of time, our EBIT per TEU trajectory was largely in line with freight rates. But this time, like in 2Q call may be — 2Q results as well. We have seen that despite falling freight rates is our EBITDA view has been constantly improving. So from a broader perspective, can you give us what dynamics has changed for the business?

Ravi Jakhar — Chief Strategy Office

Like I just answered, it is the transformation initiatives over the last two years, leading to improved utilization and operating leverage by way of sales acceleration, significant expansion in market share, digitization, all of those initiatives have led to a strong yield management program. And these are the numbers which are an outcome of that. The ocean frieght rates are largely delinked and that is what one could easily see from comparing the performance over the last four quarters wherein the ocean pirate went up and then down and down significantly down in the previous quarter, which we are discussing right now. So I think these four quarters provide enough range of the spot condensated index to analyze and evaluate the impact.

Operator

Thank you very much. Our next question is from the line of Ravi Mehta from Deep Financial. Please go ahead.

Ravi Mehta — Deep Financial — Analyst

Most of the questions are answered. Just one small observation that when I look at sequential volumes in the MTU segment, it’s the mix, I think, shifting towards LCL volumes in the overall? And is that helping the EBIT per TEU improve despite falling realizations in a softer freight environment? So is that observation correct? And any comments like [Foreign Speech]

Ravi Jakhar — Chief Strategy Office

If that observation is very right. LCL business is more profitable given the complexities involved and therefore, a higher share of LCL would mean a higher EBIT per TEU. That’s a good point, right observation.

Ravi Mehta — Deep Financial — Analyst

And when you say that the next couple of quarters, you expect the market to be soft. Is this a shift in favor of LCL possible, like from whatever historic experience observations you must have had, just to get some color probably next couple of quarters, can this be a trend?

Ravi Jakhar — Chief Strategy Office

Yes. So typically, what happens is as one could naturally understand, when the demand falls down [Technical Issues] supply chains and ship smaller consignment. So therefore, that should lead to slight improvement in the LCL market share. And that is what we have sometimes defined our businesses, the business resilience comes from digital play as well as from the business model itself. When there’s a contraction in the trade, the LCL is less impacted because the very reason you highlighted where in the LCL sometimes finds growth by way of breakdown of supply chains as well.

And likewise, whenever there’s an economic environment, which is more challenging, you would typically find — so there are inherent hedges built in the business. And as you rightly pointed out, that is indeed correct it when there’s a slowdown. There is a cushion on the LCL side. However, this quarter –, that cushion didn’t really work because a lot of large accounts with their own consolidation, which is a one-time effect, which comes in. So there is a little bit more adverse situation, which is why we saw declining market rents. But like I said, despite all those challenges, we held on to our volume. So now from here on, we should actually be able to see growth in volumes if the markets remain flat.

Ravi Mehta — Deep Financial — Analyst

And do we do entire business at the spot rate, meaning just trying to understand whether the effect of freight is reflecting in Q2 or there can be some lag effect of falling freight?

Ravi Jakhar — Chief Strategy Office

So there is no lag effect per se, but I would request you to go through the investor presentation when we have charted out what the cost per TEU for us is and what the cost per TEU and the spot rates are. Spot rates are much higher and much more volatile. Most of the global trade, whether it’s being carried by EQ worldwide or whether it’s being carried by Maersk or — most of that trade goes on contextual rates, and those rates are lower and do not vary to that extent. And therefore, you would find that our revenue per TEU is much more — much less volatile as compared to the spot rates. Our next question is from the line of — from Sequent Investments.

Operator

Thank you very much. Our next question is from the line of Vignesh Iyer from Sequent Investments. Please go ahead.

Vignesh Iyer — Sequent Investments — Analyst

Congratulation on a good set of numbers. I just wanted to — if I am wrong, please correct me. In my observation, would it be fair to say that the second half of the year is usually better for the company as compared to H1?

Ravi Jakhar — Chief Strategy Office

Yes, from a historic trend perspective, the second half of the year has been better than the first half given the customers festivities in the international markets and even the annual closing and inventory buildups in the domestic market and even internationally. So that is a valid obligation from a past data point of view.

Vignesh Iyer — Sequent Investments — Analyst

Right. So — but on the current crisis in Europe and U.S. to dampen the festive mood in any way. I mean as in — probably if you could tell a ballpark number on it, that it could be 4% or 5% drop in volumes overall because of what is going on?

Ravi Jakhar — Chief Strategy Office

Yes, absolutely. Like I said, currently, there’s a recessionary environment leading to trade rates not seeing the uptick. But as I explained, we had those challenges in the quarter gone by and we dealt well with them, and we hope to deal well by maintaining or growing our volumes despite all –.

Vignesh Iyer — Sequent Investments — Analyst

Sir, if you could — I just want to know — you just stated that Allcargo as in your presentation, you stated that Allcargo has acquired 150,000 shares of GKEPL for total — of INR406 crores. So if you could just give some idea because I have joined the call late, so.

Deepal Shah — Deputy Group Chief Financial Officer

Yes. So basically, Allcargo Group has decided to acquire Gati a couple of years ago, and there was a well laid out strategy and discussions with various stakeholders, including erstwhile promoters and the joint venture partners. We executed the acquisition of erstwhile promoters stake followed by an open offer, and the discussions with the joint venture partner were to engage at a certain time frame and certain terms and conditions, which have been discussed now. And between Allcargo Group and KWE Group, we share a very long history of a strong business relationship. This is a transaction which has been mutually agreed to, it’s a private transaction. And this basically entails Allcargo Logistics largely using our own internal approvals, acquiring 30% stake in the GKEPL. This is basically a reinforcement of our belief in Gati’s growth potential and the management team, and we are confident the business will continue to grow well, and that is why Allcargo Logistics Board approved further investments. So that’s in short about the transaction.

Vignesh Iyer — Sequent Investments — Analyst

Right. So indirectly, there won’t be any change in the shareholding of Gati, — or would there be any? There won’t be any change in the shareholding of Gati, just that the 30% shareholding held by KWE earlier would now be held by Allcargo and the operating subsidiary GKEPL.

Ravi Jakhar — Chief Strategy Office

There won’t be any change in the shareholding of Gati. Just that the 30% shareholding held by KWE earlier would now be held by all cargo in the operating subsidiary KPL.

Vignesh Iyer — Sequent Investments — Analyst

Okay. Okay. In that way, correct…

Ravi Jakhar — Chief Strategy Office

Okay, fine.

Vignesh Iyer — Sequent Investments — Analyst

That’s it…

Operator

Thank you very much. Ladies and gentlemen, that was the last question. I now hand the conference over to Mr. Jakhar for closing comments. Please go ahead, sir.

Ravi Jakhar — Chief Strategy Office

Yes. Thank you, and thank you, everyone, for joining us for this call, and I hope we have been able to answer your queries. And I would request you to go through the investor presentation, which provides various data points and information in a much more detailed and comprehensive way. The same has been uploaded on the actions and also on our website. So you may please refer to the same. Thank you very much. Thank you for joining us.

Operator

[Operator Closing Remarks]