FAVOURABLE BUSINESS ENVIRONMENT NOT LIKELY TO IMPROVE

CREDIT PROFILE OF COURIER COMPANIES

Courier companies for the last eighteen months have been witnessing strong growth in business
levels. In addition to significant growth in traditional courier products like documents, new business
areas like transport of computer hardware, shipment of banking products like credit cards, etc. have
contributed significantly to the growth of large players in the industry. The industry growth has
been particularly high in the domestic segment of the industry. CRISIL expects business levels to
remain buoyant in the medium term as the current demand drivers are expected to witness healthy
growth rates. The favourable business scenario is however not expected to translate into
improvement in the credit ratings of the large courier companies on account of certain key risk
factors. The industry is at present fraught with intense competition and this has restricted any
significant improvement in yields. Profitability has, therefore, remained at low to moderate levels. In
some companies, infrastructure development has been primarily funded out of debt, which has put
pressure on the capital structure of companies. Future investments are also expected to be debt
funded, and hence financial leverage of these companies is expected to remain high.

Industry Backdrop
The express courier service has come a long way since its advent in the early eighties. The concept
provided an alternative to the traditional Indian Postal Service which though offering an inexpensive
service with a highly extensive reach, suffered from delays in shipment, inadequate tracking systems
and lack of accountability for delivery. Courier companies responded to the consumers need for
quicker delivery even though it came at a higher price. Over the years, the industry participants
have divided themselves into regional, national and international players. While small players
concentrate on shipment within a city or a state, national players have a wider reach in terms of
destinations. The international players are involved in cross border shipment of documents and
packages.
The regional segment within the courier industry is extremely fragmented with a large number of
small players vying for a share in the business. These players have a limited product mix and service
is restricted to shipment of documents and packages. The scenario in the national and international
segments is less competitive with a few large players accounting for a majority of the business. The
international segment of the Indian courier business is handled by large national players who have
affiliations with foreign partners. Thus, AFL Ltd. (formerly Air Freight Ltd.) has a tie up with DHL
Worldwide Services, Blue Dart Express Ltd. (Blue Dart) with Federal Express and Elbee Services Ltd.
(Elbee) has arrangements with UPS and TNT. The national and international players offer a large
product mix comprising of documents, packages, durables, and other heavy cargo shipment.

Performance Linked to Level of Economic Activity

The performance of the courier industry has been strongly linked to the level of economic activity in
the country. Business levels have fluctuated in line with the cyclical trends witnessed in most of the
domestic industries. With the onset of liberalization and increase in industrial activity in the early
nineties, large players witnessed growth rates of about 20-25% with increasing number of corporates
using the courier route to deliver their articles. The companies were able to register healthy
profitability and accruals were strong enough to fund capital requirements, be it for asset building or
working capital. The strong growth in exports during that time, helped companies operating in the
international segment achieve healthy growth rates. The favourable business scenario made it
attractive for many small courier companies to jump into the fray and offer similar services. The
economic slowdown towards the later half of the nineties had two major effects on the industry :

With the decline in economic activity, there was tremendous pressure on business levels.

Given the high level of competition, yields came under pressure as many players reduced prices
or offered discounts to protect business levels.

The impact was more evident on companies who, in anticipation of good growth in business, had
made significant investments in upgrading their infrastructure facilities like constructing super hubs,
acquiring aircrafts, setting up franchises, etc. Most of these activities were debt funded as can be seen
in the graph below. Consequently, this increased the fixed cost of the companies as well as skewed
their capital structure. Working capital requirements which are usually high for courier companies,
got further strained as a result of stretched collection periods. All this led to significant pressure on
the liquidity position of most of the companies.

Rs. million

Funding Pattern of Assets

4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
1995-96

1996-97

1997-98

Gross Block

1998-99

1999-00

Total Debt

Note: Figures are for AFL, Blue Dart and Elbee

The Revival Story

The last eighteen months have seen a revival in the performance of the courier industry with strong
growth of about 16% in the domestic segment and around 8-9% in the international courier segment.
The high growth in the domestic segment has been partly on account of improvement in industrial
activity in 1999-00. The strong growth in revenues, particularly for the larger players, has been
sustained in the current year even though there has been an economic slowdown. This implies that
although the performance of the industry is inherently dependent on the level of economic activity,
the cyclicality is mitigated to a large extent by the growth in newer areas. These players have got a
strong foothold in new business areas like shipment of computer hardware, banking products like
credit cards, shipment of advertisement material, etc. In line with the various needs of the
consumers, the courier companies too have enhanced their product mix to transport material of
various sizes, values and uses. These players have also developed innovative packaging to tap
exporters who need to send samples and parcels to their overseas buyers.

Rating Issues
CRISILs portfolio of courier companies comprises of the three large players in the courier industry
Blue Dart (CRISIL Rating: A+/P1), AFL (CRISIL Rating: P1) and Elbee (CRISIL Rating: D). While
Blue Dart and Elbee mainly focus on the domestic segment, AFL concentrates primarily on the
international segment. Both Blue Dart and Elbee have a presence in the international segment also
through their tie-ups with Federal Express and TNT respectively.
All the three players have a strong business profile with superior infrastructure facilities and large
geographic reach. While Blue Dart is the market leader in the domestic segment with a 40% market
share, AFL dominates the international segment with a 60% market share. The business profile,
particularly for companies operating in the domestic segment, takes strength from the strong
revenue growth that these players are experiencing. For instance, Blue Dart witnessed a growth rate
of about 25% in 1999-00 and the current year has seen revenues growing at a similar rate on an
annualised basis. Similarly, Elbee has shown healthy improvement in revenues. This has however
not translated into improvement in the credit profile of these companies. Both these companies are
saddled with a capital structure skewed towards debt, used to finance aircrafts and setting up of
service hubs. This has restricted any significant improvement in interest and debt service coverage
levels.
The international segment has been witnessing increasing competition over the last few years on
account of the entry of large international players in the country like TNT, UPS and Federal Express.
Federal Express today has its own marketing set up for the business although it uses Blue Darts
facilities for collection and distribution. It also now has its planes coming to India to pick up cargo.
This is expected to provide competition to AFL, which on account of its tie up with DHL, has been
dominating the international segment of the industry. The competitive environment has restricted
any meaningful improvement in AFLs yields, leading to low cash accruals from business.

The short term credit profile of these companies is constrained on account of the large repayment
pressure for debt taken on their books. Although these companies have been able to control their
working capital requirements by maintaining strict control over their credit period, improvement in
the liquidity position has been restricted on account of fairly high short-term liabilities.

Rating Outlook
The outlook on the courier business, particularly the domestic business is favourable. In line with the
growth of the information technology business in the country, shipment of computer hardware is
expected to maintain healthy growth rates. The credit card business in the country is expanding and
delivery of the credit card business is a strongly growing business in the country. This augurs well
for courier companies, particularly for large players, as they are expected to get a major share of the
business. In line with international trends, some companies have begun to exploit their
competencies in logistics for providing customized business solutions to corporates like providing
warehousing and distribution solutions. With a large number of corporates wanting to outsource
most of their needs and concentrate only on their core competencies, this kind of support provided
by courier companies is expected to become successful. In addition, e-commerce business is also
expected to contribute to the growth of the industry.
CRISIL however does not expect ratings on courier companies to improve in the medium term as
few companies are likely to regain the high profitability levels which they enjoyed till the mid
nineties. In addition, the extent of financial leveraging is not expected to come down, as companies
will have to continuously invest in technology and systems for tracking and distribution. Further,
some of the players are in the process of expanding and upgrading their facilities. Since this would
require considerable investment, companies might have to depend on debt to fund these
investments, as share price and reluctance to dilute promoter holding may restrict raising of fresh
equity capital. Considering the cyclical trends of the industry as well as high fixed cost nature of
operations, reduction in leveraging would be crucial to improvement in the credit profile of
companies.