Investment strategies for logistics business

 As more and more companies in the manufacturing, automotive, pharmaceutical and retail sectors are opting to outsource their logistics requirements, the logistics sector in India is poised for the next stage of growth.

The logistics business comprises of several activities. You could get into standalone freight forwarding services, storage and warehousing services or distribution services, or a more comprehensive business like a Third Party Logistics Player (3PL player).

How do you assess the investments you need while starting a logistics business?

The level of complexity associated with the logistics activity is different with each kind of business. Thus, the investment needed for each kind of logistics business is different, and is governed by several factors and parameters.

For instance, a single freight forwarding business will need as small an investment as Rs 4 crore to Rs 8 crore, while a non-asset focussed 3PL player will need an investment upwards of Rs 50 crore. A more complicated infrastructure-focused logistics player will need investments which run into a few hundred crores.

Your first step when you start a logistics business would be to identify the area of logistics you would like to get into and then assess the investment requirements. You must also consider factors like your geographic coverage of operations, the extent of automation and technology you would need, the extent of investments you need in assets and the sectors you would like to service.

What are your investment options when you start a logistics business?

The main forms of investments while starting any business are promoter’s own funds and loan from bank. However, both these forms of investments come with their own limitations. Promoter equity is limited in nature and is often insufficient to start such a business. Debt lines from banks for working capital purposes and for project finance are often difficult to obtain, as banks require the entrepreneur to offer collateral security.

In the initial stages when the business is being built, offering collateral security for a huge amount becomes difficult. This leaves entrepreneurs with a third option - raising capital from private investors, either in the form of venture capital or private equity or from high net worth individuals. As the sector is by and large free from FDI restrictions, except for a few areas, this is another avenue where logistics entrepreneurs could hope to raise finance.

An investment by a private equity player comes with several advantages. Apart from the capital itself, the entrepreneur gets benefits of visibility, networking, valuable inputs on various business operations and potential to expand the business to new geographies and customers. However, this also comes with challenges of increased reporting, stake dilution and losing some control over your business.

What should you be prepared for when your logistics business seeks an external investment?

The investor/lender will evaluate the various potential risks and issues while making an investment in the sector.

The first area evaluated by an investor is if your books and business are in order. Hence make sure your internal accounting systems, legal systems and processes are robust and the quality of information you can deliver is sound. It is important you streamline your tax systems as well. Another aspect which is scrutinised is if you have all the regulatory approvals in place for your business, which includes ministry clearances and environmental clearances. Corporate governance is also an important area which will be examined, and you must be prepared to make some drastic changes in your organizational setup to strengthen this.

Raising capital for your logistics business requires prudent estimation of the investment requirement, proper evaluation of options and preparing well in advance. Please share your views on this.