Why are investors betting big on the warehousing in India?

Warehousing in India, is a lucrative and desirable asset class of late for sure. The government’s granting industry status to Infrastructure and logistics has opened the newer avenues as far as the availability of funds for growth in this sunrise sector is considered. Introduction of GST has galvanized the sector towards an enhanced throughput and industry-wide consolidation.

Towards a newer regime in Delhi, people have given their verdict and have chosen Narendra Modi yet again to lead the country through to 2024 . It’s a reflection on Modi’s performance in the last five years as much as it is an indication of people’s aspiration in the years lying ahead. Their reposed faith in giving a decisive mandate augurs well for a stable government and for sound commerce and economics therein.

An efficient logistics ecosystem will also encourage investments in the country, especially FDI and will in turn positively impact international trade. In the recently concluded budget, the government is committed to investing INR 100 Lakh Crore in infrastructure over the next 5 years. This was much needed and it puts the focus on where the crux lies. The government has proposed to build 125000 km of roads for which investment to the tune of INR 80,250 crores has been allocated.

The Indian warehousing market is highly fragmented as 90% of it is unorganized. Thus, we can safely say that the sector is poised for a transformation towards superior Grade A warehousing. Despite the recognition of logistics being a critical driver of economic development, logistics cost in India at 13-14% of GDP, is very high compared to that of USA (9-10%), Europe (10%), and Japan (11%). An efficient warehouse can bring a 15-20% cost reduction in the entire logistics operations.

The sector-specific commitment towards logistics has grown to $5.5 billion in 2018 from $2.023 billion in 2017. The logistics sector in India is worth USD 160 bn and is expected to grow to USD 215 bn by 2020.

The country’s warehouse leasing market grew by more than 45% in 2018. Demand for warehouse leasing in India is likely to touch almost 60 million sq. ft. by 2020 from 25 million in 2018 with e-commerce being one of the key drivers. At least 22 million sq. ft. of this supply is estimated to be in the grade A warehousing category. The warehouse leasing crossed 25 million sq. ft. mark in 2018, which was more than 45% year-on-year growth. The share of e-commerce in the overall warehousing leasing has risen from 10% in 2017 to 23% in 2018. At the same time, India aims to bring its Logistics Performance Index to ‘25 -20’ down from 44 currently.

What’s driving the demand for Grade A warehousing in India?

The changing consumer behaviour, the onslaught of technical evolution and the continued demand for superior Grade A warehousing space, all of them will together give a fillip to the warehousing in India and logistics sector. We are seeing the transformation of Grade B & Grade C warehouses into superior Grade A warehousing facilities. New technologies such as Artificial Intelligence, Cloud Computing, Blockchain Technology, Internet of Things etc. are being used by the logistics sector to streamline processes and ensure a smoother interface. The burgeoning demand is being met with an agile supply all because the system has been in place to allow efficiency and speed. 

Going forward, we estimate a confluence of favorable factors—GST tailwinds, reducing transit times, warehouse consolidation, infrastructure status and rapid adoption of technology—to drive sector growth to 12-13% p.a. Nearly one-third of India’s logistics costs is transport and storage related inefficiencies. We expect these inefficiencies to reduce in coming years, which will boost logistics spending. As for major opportunities, E-Com is sure to play its role in the medium to long run. Organized retailing is not too far behind either, with retailers going for the Omni Channel experience. Traditional absorbers like Manufacturing, FMCD, FMCG, Auto, Pharmaceuticals are also in the fray.  

With the unprecedented growth in this asset class, rising customers’ expectations and the need for standardization all of it calls for a professional and specialist management of this sunrise sector. The specialist professionals enhance efficiency, increase throughput and bring professionalism which is much needed in the evolution of the organized warehousing. We are poised for sustained growth in the medium to long term and it is upon incumbents now to do their bit in its evolution.

This article has been authored by Sandeep Chadha, Founder and CEO, Warehouster Capital Advisors India Pvt Ltd.

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