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Warehousing sector: Strong growth momentum in progress

Warehousing sector: Strong growth momentum in progress

by Rabin Bihani, Senior Analyst, India Ratings and Research

Warehousing sector has witnessed a positive growth momentum over the last 4 years. Implementation of GST in 2017 paved the way for development of Grade A warehouses across the major cities of India. Large and efficient warehouses were built on the foundation of ensuring operational efficiency across the business operations while replacing the smaller and technologically deficient warehouses which served primarily as storage unit for the enterprises. The sector has witnessed strong capital flows with institutional investors including the likes of CapitaLand Group, ESR, Indospace, Logos Group, amongst others developing warehouses across the major consumption centres. We believe the sector shall see a strong growth momentum and sustained capital flows from the institutional investors with Covid-19 led disruptions heralding a structural changes in the consumption behaviour of masses coupled with stability of the warehousing assets as an alternate asset class for investments. Besides, increasing outsourcing of logistics and warehousing operations by the retailers, manufacturers to the dedicated 3PL players shall significantly fuel the demand for the warehouses. Chunk of warehouse space today are taken up by e-commerce and 3PL players.

India Ratings and Research rates portfolio of over 17 million sq ft of warehousing assets which are a mix of operational and under-construction. In our rated portfolio, where tenancy agreements have been executed, over 60% of the space has been taken up by e-commerce and 3PL players. Ind-Ra rated portfolio has seen a capital flow of over INR41 billion (included committed) over the span of last 4 years towards their project.

While e-commerce had been gaining traction over the years, outbreak of Covid-19 and resultant lockdown of mall and retail spaces initially and thereafter the fear associated with spread of Covid-19 and the need for the social distancing has led people moving from offline to online and accelerated the adoption of the e-commerce mode of transaction among consumers for it ensured contact less delivery. We believe the online buying behaviour trend shall continue to gain positive momentum backed by convenience of shopping and faster availability which will fuel the demand for modern warehouses going forward. Besides, increasing use of smartphones, internet penetration along with growing consumer awareness towards convenience of e-commerce and digital payment adoption is likely to fuel demand from tier ii and tier iii cities which shall necessitate the development of the warehouses beyond the major cities and closure to consumption centres so as to ensure faster deliveries.

Increasing e-commerce volumes and shrinking timeliness for deliveries with e-commerce players now looking for deliveries in a span of hours, technology shall be of paramount importance ,in addition to warehouses being closer to the consumption centres. The sector needs to upgrade its technological abilities. From higher automation including retrieval and movement of large volumes goods across the warehouses thereby reducing human involvement and increasing efficiency to use of advanced analytics for interpreting the consumer buying pattern for inventory management so that the players don’t run out of stock, technology shall remain a centrally important element for the modern warehouses to ensure faster deliveries and ensuring growth of its business.

With companies preferring to outsource the logistics and warehousing operations , dedicated 3PL players have been gaining prominence. Besides, warehousing and transportation, 3PL players also value-added services ensuring cost efficiencies for the companies. Even as retailers and manufacturers expands their operations and reaches out to vast number of consumers, 3PL players manages the supply chain and ensures efficiency in operations. Emergence of omni-channel retailing shall also provide a fillip to the 3PL players. With changing business dynamics and enterprises looking at various channels to sell the products, fulfilment centres across networks shall ensure quick and efficient delivery. Omni-channel retailing necessitates deep technological requirement and players are likely avail the services of 3PL companies.

To summarise, we believe Covid-19 induced changes in the consumption behaviour with consumers moving from offline to online shall continue to witness positive momentum backed by convenience of shopping, faster availability, growing consumer awareness in tier II and tier III cities coupled with increasing adoption of digital mode for carrying the transaction. This is likely to propel the strong growth in the warehousing sector. Besides, increasing prominence of 3PL players shall also lead to growth in the warehousing sector.

 




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