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Going forward, a 25-28 per cent growth is envisaged in the cold storage industry. Even so, it will be a while before prices are arrested, exports of cold storage commodities take off, and indeed, before a heady rush of private participation is a reality, say the industry’s practitioners and best experts.
What are the major implications of the accordance of the infrastructure status on the cold storage industry?
M Agarwal The change to infrastructure status immediately implies that it is identified as a high priority sector, critical to the growth and development of the nation. It also implies long-term commitment towards this industry by the government.
Considering that it is capital-intensive activity with lead time of at least six to eight months depending on size of the area being built, not many private investors have been ready to jump in to cold storage. Now, with the announcement of tax incentives and viability gap funding (VGF), financial pressures are well cushioned and will hence result in building of various facilities. To aid in reaching break even, the VGF will allow a window to develop new business to reach capacity utilisation so that the investor need not worry about the immediate returns on commencement of operations.
Moreover, since the demand for space is much more than the supply, it is a good catalyst for new infrastructure to do well in this space.
The major implication in accordance of the infrastructure status on the cold storage activity is the provision for tax holidays on new infrastructure setup for 10 consecutive out of 15 years. We know that the economic value multiplier is very high in horticulture produce and investments in cold storage will impact the economy in a positive way.
V AgarwalThe inadequate support infrastructure which is the biggest bottleneck in expanding the food processing sector includes long and fragmented supply chain, inadequate cold storage and warehousing facilities, road, rail and port infrastructure, lack of modern logistics infrastructure such as logistics parks, integrated cold chain solutions, last mile connectivity, dependence on road over rail, customised transportation, technology adoption (barcoding, RFIDs) and government support by incentivising private public partnerships. The recent announcements will go a long way in bringing down operational costs in managing cold storage units.
AroraOne of the benefits is that the price of cold storage manufacturing material has gone down. That will have an impact on the capex for cold storage. It will be marginal, not really substantial or significant. But it will be a cushion for existing brands or people who are planning to enter this market. They will have a better internal rate of return (IRR) or better return to their investments.
The real trigger of it being classified as infrastructure is still being explored by the CFOs and the CAs—what will be the fiscal benefit of taxation, or deferment of taxation, etc.
Kannan While there has been a lot of excitement about the concessions given to cold chain, industry watchers should be aware that a majority of these concessions are focused on the fruit and vegetable sector where wastages have been phenomenal. This has been more due to lack of a good cold chain infrastructure at the farm gate. The government has time and again come up with measures in the form of tax concessions, incentives, setting up food parks, and so on. However, due to the high cost of investment required, the concessions have never translated into results in the form of new storage facilities or transportation capacities. Banks have found this sector unattractive and hence been hesitant to lend. The Ministry has acknowledged these challenges. According infrastructure status would now encourage more fund flows into this segment.
VaziraniThe current cost of the supply chains in India is almost 13 per cent higher than that in developed nations. This is the first step in reducing this cost, and consequently controlling inflation in food prices. The capital investment required to create large, modern storage capacity such as silos will now be eligible for VGF. Further, cold storage conveyor belts and refrigeration panels have been exempted from excise duty. The government will now be able to encourage the private sector to set up cold storage units in close proximity with the farmers’ production areas. This in turn will accelerate the growth of cold storage warehouses in urban areas. What however, remains to be seen is how rapidly the government will invite PPP models for cold chain and warehousing industries.
What are the major implications on the cold storage financing activity?
ChoudharyOne of the primary factors of our underdeveloped processing industry is the lack of supporting infrastructure like cold chains and cold storages. We know that the economic value multiplier is high in horticulture produce and investments in cold storage will only further impact the economy in a positive way. The cold storage industry will benefit from low-cost finance and tax rebates, similar to the grain storage industry. The proposed establishment of 30 mega food parks will provide opportunities for further development of cold chain infrastructure around them.
M AgarwalApplicability of 80-IA of the income tax act immediately makes this industry attractive for financing as well as ensuring long-term focus on driving profitability. Banks and investors are looking forward to participate in such projects. A good example is a recent development between an existing player who has gone in for a substantial private equity (PE) dilution. Others will eventually follow suit and see it as a value addition to the logistics supply chain.
KuttyWith the advent of organised retailing, which calls for centralised purchasing, development of cold supply chain has become an absolute necessity in the 3PL sector. Financing for cold storage facility thus becomes an important factor in bridging the capital requirement for the development of cold chain in third party logistics (3PL) sector. VGF may help develop large infrastructure for cold storage facilities in organised retail.
KannanWith the move to increase foreign indirect investments (FIIs) in infrastructure bonds, the credit pool available to this industry goes up substantially and we see this translate to faster credit at lower rates. We also foresee a reduction in borrowing costs due to funding from external commercial borrowings (ECBs) as well as lower rates of interest even locally.
VaziraniGranting cold storage infrastructure status will not only mean that lower interest rates can be secured on borrowings to invest here, but the case-by-case clearance by the Centre can now be skirted. Investment will be through normal routes and there will be no need to approach the FIPB for clearance.
What kind of growth do you see in the agri-warehousing and cold storage industry this year?
ChoudharyThe current dominance of public sector units will gradually reduce. As per various announcements, there will be a development of over 16 million tonne (mt) storage space created only though PPP initiatives. The Warehousing Development and Regulation Authority (WDRA) will gain more relevance now and bring about a paradigm shift in the way warehousing is being looked at as an economic activity or the way banks look at post-harvest credit.
The current focus is entirely on creation of new capacities, but it is also important that upgradation of existing infrastructure and integration of information technology should also be considered to make systems more agile and proficient. The current investment potential is about Rs 13,500 crore if the warehousing and handling infrastructure demand-supply gap is to be addressed.
VaziraniThe industry is actually waiting for the budget proposals to be notified and gazetted so that the fine print and the concrete plans of the government is better understood. What however is likely to happen is that international players will start looking at the cold chain industry far more seriously.
M AgarwalWith multiple players in the logistics industry trying for captive business from their existing clients, the central government incentives, financial institutions coming forward, the market is heating up not just for service providers, but also users. New projects and financing activity is expected to commence to avail of the benefits announced. Sanctioning of 15 new Mega Food Parks at a cost of Rs 750 crore will lead to increased future demand for cold logistics and trucking. Customs and excise rebates would lead to lower capital cost for new infrastructure.
KuttyOrganised retail in India is expected to grow 10 times from 2010 to 2020 (from around Rs 14,000 crore in 2010 to Rs 130,000 crore in 2020); this equates to an annual growth in the organised retail of around 28 per cent pa. This growth has direct impact on the growth of cold logistics facility. It is safe to assume an annual growth of 20 per cent for the cold storage warehousing sector.
PatelWe would estimate a growth of approximately 10-15 per cent in the warehousing segment of the cold chain and about 15-20 per cent in the reefer transportation in India. This may be impacted as the players are waiting for the GST era to take decisions on the warehouse location front to derive efficiency for the customer.
KannanA 25 per cent growth in this sector during the current year is a reality. The growth would be much higher on the lower end of the chain which caters to the farm sector. The government could have helped the industry more by extending the concessions offered to the farm sector to other allied industries like poultry, marine, meat processing and food processing too.
How will the new announcement influence transportation?
V AgarwalConferring infrastructure status for the cold chains will drive massive investments in this segment of Indian logistics industry and thereby lead to development of sustainable cold chain logistics infrastructure in the country. The gap for stationary cold storage infrastructure is over 60 per cent and a whopping 80 per cent in mobile cold storage facilities like refrigerated trucks and rail wagons. With this announcement and economical availability of funding, it will lead to rapid growth of the sector.
RamanujamThere is a crying need for investment in refrigerated trucks. The players who have invested in cold storages are stuck for want of refrigerated trucks. The issue is both the timely availability and price. If the infrastructure status is given for refrigerated transportation, we can see substantial investment flow into this important sector.
M AgarwalThere will be ever increasing demand for an integrated cold supply chain. As a result the cold chain industry will become less commoditised and more driven by operational excellence. Transportation is the only connect between source and the market, but given the inherent requirement of product care within the cold chain, only those who can provide a single chain of custody across various activities of transit—transport, storage and distribution—will be the preferred cold supply chain partners.
KannanThe customs duty exemptions given on reefer equipment used in trucks will have a bearing on the pricing of reefer transportation. Although some of the benefits accrued in the last budget itself, the terms are clearer this time. However, this will largely benefit only companies that plan a big expansion in this segment and are direct importers. We do not foresee a major impact on pricing due to the budget announcements. The challenge in this segment has largely been posed by the unorganised players who have been able to slash prices by compromising on quality standards. Unless measures like the food bill become a reality and the consumers become more quality conscious, this sector will continue to remain unattractive to the players in the organised segment.
AroraThere are two different dynamics involved: one is the farm to storage, and the other is storage to shelf. So the farm to storage part will get a boost with this kind of activity—fiscal benefits, etc. People will be motivated to have huge modern warehouses, grain producing belts, silos, etc, because they will all attract infrastructure benefits and the loss in grain and commodity will be lesser.
JawaReefer transport is a bottleneck today as the vehicles are not available, even though I learn from the reefer vehicle owners that they are all adding substantially to their fleet. The government is also encouraging complete cold chain solutions and that includes reefer vehicles.
How will the new announcement influence pricing of produce?
JawaIf both the cold store and reefer transport facilities come up as planned, the produce quality at the time of sale should improve. Customers would not mind paying more for the quality. Since it would reduce wastage, the prices should remain stable in the long run even though consumption would be higher.
VaziraniHighly perishable non-cereal foods such as fruits and vegetables and milk products will now be able to absorb inflationary rise in prices. It might not happen immediately, but as more cold warehouses are set up near the producing areas and as cold transportation witnesses a concomitant growth. The mid-level infrastructure costs that can add 60-80 per cent costs from farm to fork will now be substantially reduced by many direct and indirect opportunity savings.
On the cards are plans to provide the self-assessment option in customs for exporters and importers. This will result in huge time savings in clearance of international trade cargo, and relief from bureaucratic interference to a large extent. The option to file declarations in EDI (Electronic Data Interchange) system with conditions, offers great agility to international trade.
ChoudharyWith investments in warehousing infrastructure, we are witnessing an improvement in supply-chain efficiencies as well as a reduction in wastages and losses. With policy initiatives like amendments in state APMC Acts, the mid to long term will witness a shorter supply chain resulting in provision of larger share in consumer rupee to farmers and low prices to end consumers. This will be a win-win situation for producers as well as consumers. Coupled with financing products like warehouse receipt financing, these initiatives will bring significant changes and perhaps will also address one of the major woes of the Indian farmer—that of getting liquidity against his produce giving him an option and opportunity to time his sale and realise better prices.
KannanCreation of food parks should bring down investment costs which can be passed on to the end consumers.
PatelWe do not see much of an influence in pricing as the impact of the benefits is very minimal in the costing. However once the government accords the status to the industry, we may see a change since that will impact pricing of energy charges, etc, which contribute heavily to operational costs.
RamanujamIn the short run, there will not be much change. But in three to four years, we will see improvement in both quality and price of the high value horticulture products.
AroraWe often tend to forget the value additions middlemen provide—expansion of market, advances (advances are something that no corporation or institution has been able to do for a farmer, but a middleman does it and bears the risk), etc. Another plus is that various mandi boards are modernising themselves by putting out tenders for grading lines, cold storage, etc. If every farmer has access to a mandi board cold store or a mandi board grading facility, the charges he will pay will be subsidised. Empowering the mandi boards or the cooperatives with these kind of benefits will have a much bigger impact than giving an open out subsidy or an infrastructure status. You can empower them by pumping in more investments through the mandi boards.
What are your plans in cold storage infrastructure?
RamanujamAdani Agrifresh has made one of the largest investment in cold chain projects, namely controlled atmosphere storage in Himachal Pradesh. Our company is focused on controlled atmosphere storage for apples. We are evaluating opportunities for further investment.
AroraOur primary functions are storing of refrigerated products and managing retail back-end items—cross dock items, temperature controlled items. Going forward we are closely observing the bulk agricultural cold storage model of peas, because as soon as it becomes a commodity, then too many people will get involved. Again for value additions or some kind of specialised investments you get rated the same as off-the-road investments and the pricing game starts. So we are taking a little cautious note there.
M AgarwalGati will be setting up 10 cold storage plants across the country with an investment of about Rs 200 crore in the next four years. We had already announced our plans prior to the budget but now we intend to hasten our plans to build at least three cold store warehouses in India, by the end of this year. End to end supply chain services, technology transfers, knowledge partners and service partnerships are envisaged for all of this. This will further increase demand for quality professionals in this domain.
KuttyWe already have a cold storage facility of 50,000 sq m, and have expansion plans in this sector in the next three years.
KannanOur company has chalked out an expansion plan spread over the next three years. We are currently located in 16 cities and in the coming years plan to move into at least 10 more cities, thereby making our presence in all major tier one and tier two cities. Our capacities are slated to increase from the current 16,000 tonne to at least 60,000 tonne of refrigerated warehousing in the next three years. To support the growth in the warehousing space, we would also be investing in additional refrigerated transportation capacities. Ground work on identifying land, equipment, etc is already complete and we are quite bullish about the potential of this industry.
VaziraniWe have already invested a substantial outlay on expanding the current cold chain warehouses. As market expands, and requirement grows, we will continue investing in dry and cold chain warehouses.
Anil Arora, MD, MJ LogisticsAnil K Choudhary, MD and CEO, NBHCMahendra Agarwal, MD and CEO, Gati M Kutty, MD, Falcon Infrastructures Naresh K Jawa, CEO, Fresh & Healthy Enterprise (division of Concor) Purvin Patel, COO, Radhakrishna Foodland Ravi Kannan, CEO, Snowman Rhea Vazirani, MD, Robinsons Global Logistics Srinivasa Ramanujam, Business Head, Adani Agrifresh Vineet Agarwal, Executive Director, TCI