Can Raaja Kanwar become the Infosys of logistics?

The elder son of Onkar Singh Kanwar of Apollo Tyres has tied up with global logistics companies but is not enthusiastic about e-commerce

Apollo Fiege, a company owned 60 per cent by Raaja Kanwar's Apollo LogiSolutions and 40 per cent by Fiege Logistics of Germany, recently formed a venture with Ferrari Group of Italy (not the car maker) to provide logistics solutions to luxury goods: precious metals, diamonds and jewellery, accessories like watches, high-tech components and art. While Apollo Fiege will own 60 per cent of the new company, called AF Ferrari, the rest will be owned by Ferrari Group. Some segments of the market, like diamonds and jewellery, are already big, and others like accessories and art too are expanding at a fast clip. Hoping to take on the angarias (homegrown diamond couriers) and leverage Ferrari Group's client base that includes the likes of Swatch, LVMH and Rolex, Kanwar expects the new company to reach a top line of $20 million in its second year of operations and EBITA margin of 30-35 per cent.

Quietly, Kanwar has been trying to put together a logistics business that encompasses freight management, contract logistics and customs brokerage. The latest initiative - with Ferrari Group - is to tap the top end of the market. His closely-held company, Apollo LogiSolutions, operates a dry port each at Panvel and Chennai, has acquired land to set up one at Moradabad in Uttar Pradesh and another one at Kattupalli near Ennore in Tamil Nadu, where Larsen & Toubro is putting up a large shipyard project. In addition, it has partnered with India Glycols to operate a dry port at Kashipur in Uttarakhand. Kanwar is planning one in Gujarat too - it could be at Kandla, Mundra or Hazira. And he has acquired a logistics company called Clarion in the United Arab Emirates that has a presence in 20 countries. "I want to be the Infosys of logistics," Kanwar says.

Tough challenges
It's an ambitious foray. And Kanwar has had at least one setback in business - online lottery. Will he succeed now? Some investment analysts say the logistics business, especially trans-national commodity movement, can be cyclical. But some feel that since not all commodities follow the same cycle, it evens out the odds for a logistics provider like Kanwar. "Grain and steel will not go through lows or highs together," says Feedback Ventures Chairman Vinayak Chatterjee who had helped Kanwar devise his entry strategy into logistics. Still others insist that some parts of the business, like inland freight movement, are extremely competitive with a large number of small players who are ready to drop prices to grab orders. But new opportunities are opening up in logistics - e-commerce, for instance. Kanwar, on his part, is not hot on e-commerce because of the thin profit margins. "The logistics provider has to bear the cost of returns," he says. That's why he doesn't want to chase this segment aggressively - at least, not yet.

Kanwar returned to India from the United States in 1994. He had been working there after completing his studies at Drexel University. India had just opened up its economy, and newer possibilities had begun to emerge. He asked his father to let him handle the export business of Apollo Tyres. He also wanted the company to commit a certain part of its production to the overseas markets. It worked well. Kanwar's Apollo International was soon exporting up to 20 per cent of Apollo Tyres' production in over 120 countries. Some seven or eight years ago, Apollo Tyres, run by his younger brother, Neeraj (he grabbed the headlines last year with his $2.5- billion bid for Cooper Tire, which he subsequently aborted), said that it would like to export on its own. However, instead of terminating the agreement abruptly, Kanwar was given time to switch to other suppliers.

Kanwar's first reaction was to look at acquiring some tyre companies in China. He had shortlisted two for acquisition - each would have cost him $20-40 million - but held back at the last moment. He now calls them "fortunate failed attempts". Instead, he has set up an office in Chengdu and appointed contract manufacturers. In addition, he sources tyres from low-cost producers in Vietnam, Indonesia, Thailand and India (Apollo Tyres). All suppliers are required to produce under his two brands: Exceed (value-for-money) and Ornet (premium). He expects the tyre business to end 2014-15 with a turnover of $120 million and net profit margin of 3-5 per cent. In addition, Kanwar does project exports (annual revenue of $100 million) and has a leather garments and accessories export business ($12 million).

Expansion time
Some years ago, Kanwar decided to expand into infrastructure. A whole range of options was considered: ports, airports, roads, power and logistics. He finally zeroed in on logistics. To give shape to his logistics dreams, Kanwar, along with his father, set up Apollo LogiSolutions. Last year, the royal family of Abu Dhabi bought 10 per cent in the company. The partnership with Fiege happened in 2012, and this helped Kanwar expand into contract logistics, freight forwarding and customs brokerage. Its customers include Samsung, Micromax and Alstom. Kanwar expects his logistics revenue to double from $100 million in 2013-14 to $200 million in 2015-15. The EBITDA margin in the business, according to him, is 15 per cent. Across all businesses, Kanwar could end 2014-15 with net earnings of around $50 million.

Logistics can be capital intensive and require Kanwar to have deep pockets. With EBITDA of $30 million, Apollo LogiSolutions can look for some serious valuation. Companies in the sector enjoy a price-earnings multiple of 15 to 20. This could make Apollo LogiSolutions worth at least $450 million (Rs 2,700 crore). It is a good opportunity for Kanwar to unlock value - he owns 90 per cent of the company along with his father. Yet, he does not seem to be in a hurry. Unless there is a big-ticket acquisition that cannot be funded through internal accruals and debt, Kanwar has no plans to sell shares in the company. The company also has the option to raise debt: Apollo LogiSolutions, according to him, has debt of just $25 million on its books.

In the past, Kanwar has sold shares to bankroll his investments. He brought his stake down to around 14 per cent in UFO Moviez, the digital film distribution company that he brought to India in 2005, by selling shares in tranches to 3i and Providence. He used the proceeds from the sale for his investment in Apollo LogiSoutions. The remaining stake in UFO Moviez too can be monetised to fund his logistics dreams.