The DPD model entails efficient customs clearance of imports at the port itself, thereby obviating the need to divert containerised cargo to CFS, where typically they used to be stored for a couple of days before being cleared by customs and then forwarded by rail or road to the importer's premises. Under the DPD model, the cargo is directly moved from the container terminal at the port to the delivery destination. Delivery of DPD containers at JNPT terminals is on 24x7 basis, which is not possible in custom bounded warehouses. The objective of DPD is to facilitate ease of doing business for domestic companies through the reduction of 'dwell time' at the port. The targeted dwell time under DPD is 24 hours vis-vis average of 1.6 days currently and 7-9 days in the JNPT eco-system (time between landing at port terminal to receipt of container from customs bonded warehouses).
The customs department has targeted the biggest importers over the past year for implementation of the DPD model and around 778 agencies (companies engaged in imports or their representatives) have registered with the customs department for DPD clearance of containers as against 11 agencies as of 9 February 2016 (as per information on JNPT website). While initially at the time of launch (February 2007) there was a minimum volume criteria to avail DPD, this was removed in February 2016 to facilitate higher volumes under this scheme.
Importers Benefit From Increased Transparency: The customs clearance of containers which were moved to CFSs was typically handled by customs house agents (CHAs), who would issue a consolidated bill (including a mark-up) to the importer. In addition, to attract container volumes, CFSs would offer financial incentives typically amounting to INR4000-6000 per twenty foot equivalent units (TEU) to shipping lines, which would be recovered from the importer in terms of higher container storage, handling and processing charges. Direct billing by the customs department to the importer has resulted in price discovery for the latter, who earlier had to deal with an opaque pricing system adopted by intermediaries. By not having to deal with CFSs, the importer can now also avoid certain costs charged to it by CFSs over which especially the smaller importers had limited bargaining power.
Change in Strategy for Shipping Companies: Due to intense competition in the shipping industry, several shipping lines used to charge negligible freight to importers; however the incentives charged to CFS would contribute significantly to their revenues and offset the loss due to low freight rates. In a recent trend observed during FY17 and this year, container lines have been forced to revise their sea freight charges upwards to make up for the loss of revenue from incentives. Shipping lines can no longer decide which CFS their container volumes will be moved to. It is the importer or its DPD registered representative (typically a CHA) who decides this. The rental charges that shipping companies pay to CFS for storage of empty containers could see a substantial increase in instances where the shipping company is unable to offer significant import volumes to a particular CFS but is dependent on that CFS for storage of empty containers.
Import Dependent CFS More Impacted: While all CFSs would be impacted to some extent due to the reduction in the average 'dwell' time. Those whose revenue model is heavily dependent on imports are likely to be impacted more by the reliance on the DPD model by the customs department. On the other hand those reliant on export volumes for the major portion of their revenues will not be affected significantly. CFS aligned to certain shipping lines for bulk of revenues could also face a decline in revenues if the importers clear their cargo at JNPT itself under DPD. In addition, non-integrated logistics companies operating CFSs near JNPT will be vulnerable to decline in TEU volumes. There are also several small CFS located within JNPT itself, which will also be face decline in volumes due to the lack of alternate revenue sources due to space constraints.
High Margin Era Pass In Search of Alternate Revenues: Considering the intense competition already prevailing among the 33 CFSs around JNPT for TEU volumes, the reduction in TEUs moved to CFSs due to DPD has led to a couple of CFSs reducing their rates for container handling and storage during the last few months. Ind-Ra believes companies in its rated portfolio namely Gateway Distriparks Limited (GDL, 'IND AA-'/Stable) and Continental Warehousing (Nhava Sheva) Private Limited ('IND A-'/Negative) will also be impacted to some extent due to some moderation in import volumes in the next few quarters. To stem the decline in volumes, companies such as GDL are negotiating directly with importers for business by offering discounts to them (rather than incentives to shipping companies) so that the importers insist on shifting their containers to those CFSs in particular. This strategy is being deployed in case volumes are large and the importer will want to take delivery of containers in smaller lots. Additionally those CFSs that are highly leveraged due to large outstanding term loans availed for building the facility, could see a further deterioration in their credit profiles in the near term due to shrinking cash flows. The agency does not rule out the likelihood of consolidation in the JNPT linked CFS industry due to these developments.
Ind-Ra believes that the era of high EBITDA margins (typically over 45% for most CFS) is over and that margins will rationalise to 30%-35%. Offering integrated logistics solutions will be the norm to sustain profitable operations. The agency opines that some CFS faced with consistent declining volumes will opt for tie ups with international shipping lines for storage of their empty containers. However this is a service that any CFS with a large container yard outside of the customs bonded area, will be able to provide. Some companies could convert their facilities into logistics parks or warehouse facilities if the CFS revenue model continues to remain unsustainable.
Capacity Increase at JNPT to Improve Volumes for CFS Over Mid to Long Term: With the first phase of the fourth container terminal (designed for handling 4.8 million TEU likely to come on-stream by December 2017, the overall container volumes handled at the port will rise sharply over the next two to three years from around 4 million TEUs, according to the agency. Consequently, although the share of pie of the container handling business is expected to steadily change in favour of the port due to DPD, the CFSs in around JNPT will benefit by an increase in absolute volumes from the reduced levels of 2017.
No Impact on ICDs: Inland Container Depots (ICD) will not be impacted given that even historically; the importer or consignee would decide which ICD the containers will have to be moved to, after despatch from the port.
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