As DPD takes off, CFS operators stare at bleak future

With direct port deliveries (DPD) taking off in India in a big way towards reduction in logistics costs, Container Freight Station (CFS) operators in the country face a grim future.

Being faced with an existential crisis they will have to change their business model to stay afloat, CRISIL Research said in a report.

“Surging share of DPD, especially at the Jawaharlal Nehru Port Trust (JNPT), means growth in the container freight station (CFS) industry in India would be facing an existential crisis sooner than later, starting with flatlining of revenues this fiscal,” CRISIL Research said.

The industry, with ₹4,500 crore revenue in fiscal 2018, had grown at 6-8% annually over the past five years and considering the development, the industry topline will decline gradually, it said.

As of July 2017, India had 169 CFSs and 67 inland container depots (ICDs), both of which are extensions of port infrastructure. In changing times maximum emphasis is being given on DPD for various benefits.

JNPT, which houses the largest CFS cluster in India, saw a 428% on-year surge in DPD volume (545,000 containers) last fiscal, compared with 53% (103,000 containers) in fiscal 2017, the first full fiscal after DPD was allowed in February 2016.

The share of DPD in total containers transported by road rocketed to 39% in March 2018. For fiscal 2018, the share of DPD was 32% compared with 4-6% in fiscal 2017. The number of importers opting for DPD was 1,346 in March 2018 compared with just 11 in February 2016.

However, more than half of the DPD containers are resent to a CFS either because of non-clearance within 48 hours or voluntarily by importers for storage and onward transportation to hinterland, the report said.

“As more importers opt for DPD, the regulatory revenue of CFSs, comprising handling, storage and inspection charges, would dip further this fiscal. To offset this, CFS operators are expected to focus on alternative revenue sources from allied logistics and transportation services,” Prasad Koparkar, Senior Director, CRISIL Research said.

While the government pushes for DPD across major ports starting with JNPT, the use of CFS as a transport and storage solution would remain worthwhile for some importers, the report added.

However, the move by JNPT to provide transportation services to importers across five geographical corridors at pre-decided tariffs starting May 2018 is expected to increase pressure on CFS operators, which were banking on transportation of DPD containers to offset loss in revenue.

“Smaller, non-integrated CFS players in the JNPT cluster are expected to suffer the most as handling and storage rentals are their primary revenue source. Larger integrated players, which offer value-added services such as warehousing, rail transportation, and other logistics related services, are expected to fare marginally better as the industry evolves towards integrated logistics,” Binaifer Jehani, Director, CRISIL Research said.

“As a result, we may see some consolidation in the industry at an overall level,” she added.