Sunu Mathews, Founder & MD, LEAP explains how the company’s asset-pooling model aims to improve supply-chain efficiency through palletisation and technology. He also highlights the company’s growth, strong margins, and opportunities from increasing automation and palletisation in India.
Sheryll D’Souza: Hello, welcome to this very special edition at the small cap spotlight. I am Sheryll D’Souza and today I have a very special guest and I’m telling you why a special guest because it’s going to be a very recent and it’s a new kid on the block you could say it. I am joined by the management of Leap India and joining me today is Sunu Mathew who is the founder of the company and he’s the person who will tell us each and everything that you want to know about this company that is going to hit the stock market.
Thank you so much Sunu for joining us today. It’s a pleasure to have you on board.
Sunu Mathew: Thank you Sheryll, thank you for calling me to your show.
Sheryll D’Souza: Right, so let’s first understand about your company and let’s create an awareness about what Leap is all about because as far as I know it started in 2013. So I wanted to understand what was thought behind founding such a company. Is this something that you saw was missing in India? There was some sort of you know supply chain ecosystem that required disruption and that’s what made you actually begin with this entire company and founding the company for so be it.
Sunu Mathew: Okay, so thank you Sheryll for calling me and thank you to all the viewers who are watching this. Now it is not that I went through a eureka moment one day and I started this company. See when I completed my MBA then I joined a company called L’Oreal.
It’s into hair colour and cosmetic business. So after working there for 11 and a half years I joined a company called Chep. Chep is a company which is owned by a group called Brambles and Brambles is listed in Australian Stock Exchange.
Their current turnover is around about 6.8 billion dollars and their market cap is somewhere around about 18.7 billion dollars. So I happen to be one of the primary people who started Chep in India and I worked there for six and a half years. In 2013 I left and I started Leap.
Now Chep is also a pallet pooling company so this business is done by only five companies in the world. Leap is the sixth company. Only Chep is listed.
And Chep is listed in Australian Stock Exchange. We will be the second company in the world which will be listed on 14th. All other four companies like PECO, LPR, LPP and LOSCAN they are held by private equities or big business houses since last 40-50 years.
They keep giving dividends to themselves and they do not list it and they do not move out of the company either. So I felt that certain policies and the way they do the business, Chep does the business in India, it was not conducive to the nature of what we actually required in order to make supply chain efficient and to give convenience to the supply chain in the country. So I started Leap.
Now Leap is an acronym to Leading Enterprise in Asset Pooling. Now when I talk about asset pooling, we absolutely are not a logistics company. We don’t do trucking, we don’t do warehousing, we don’t do racking.
These are all wafer-thin margin business and wherein you need not have to put a lot of your brain, you know. So any final product that comes to your hand, it could be the earring you are wearing, it could be bulb, blade, biscuit, battery, the phone, the laptop that we are using, Colgate with which we brush our teeth or we eat, the plates, everything. Any finished product has to move through four pillars of supply chain, supplier, manufacturer, 3PL, then it reaches the retailer.
Retailer could be Reliance Retail, it could be Kamla Vimla Medical, it could be Quick Commerce or e-commerce like Amazon Flipkart. From where you get a final product, you take it, okay. So we give a pallet.
Now this is a miniature of a pallet. This is a timber pallet on which you will keep the products, stack it up, you stretch wrap it and either you can put it on the ground, you can put it on the racking, you can load it into the truck. So this is the fulcrum of supply chain.
If this is not there, there is no supply chain in the world. So if I have to do racking, I have to check the distance between the two beams, I have to take the forklift, I have to check the length of the time. If I have to keep the product, I will have to measure how many boxes will sit into a interlock pattern.
So the base is this. So what we tell people or the customers, we tell them, you don’t put CAPEX on to manage this, you work on OPEX, you focus on your core business, rest everything will be managed by us. I will give you a small example.
I give my pallets to, this is a bottle, before bottle it is a preform, it’s a tube, plastic tube. So there is a plastic tube company which is a supplier, which is based out of Baroda. I give it to Baroda, they prepare preforms, put it on the pallet.
They will take it to Goblage in Gujarat, where there is a cola company. Cola company will put hot air into this, they will make a bottle. Then they will put their cola into it, they will move it to a logistics company, say in Aslali.
From there, it will go to a retail store in Ahmedabad. Whenever this product gets freed and all the products have been taken out, this pallet becomes free, I pick it back, give it back to Baroda. So likewise, everything moves on a pallet in the world.
So I give my pallets to somebody who make wrappers in Noida. They put the wrapper, then it will, from Noida, it will go to Tehliwal. In Tehliwal, there is a company which make noodles.
They will put noodles into that wrapper, it may go to, say, Dan Kuni in Calcutta. After which, if they do not have palletisation, I will pick it back from Calcutta, again give it back to them in Noida. So we tell our customer, pay as per your use.
If we are not there and if you are drinking this water, the cycle time from preform to this cap, cap supplier is different, preform supplier is different. So from preform to cap and you drinking the water, if the cycle time is five days, we are wasting 5000 rupees because everybody will buy their own pallet, put the stuff, the moment it goes, they will break it, they will throw it into the landfill, which will take another 20-22 years to decay into the soil. So likewise, there are millions of movements that happen worldwide.
And that is the base, which is this pallet. Now, we have something which is known as crates, which is a plastic crate, which is a collapsable crate, which we got it designed in Tel Aviv and we got the mould done in Spain. And we have a folding large container.
Now, this goes into automotive. Now, automotive is a very heavy engineering kind of a stuff. So say suppose somebody has to move a crankshaft from Chakan, which is in Pune to Chennai to some OEM.
We will first take the crankshaft, we will completely design it on the basis of the software that we have. On the basis of that, then we will create a mould. It could be a hard mould or a soft mould.
On the basis of that, we will be creating an insert. It could be PP board, flute board. And if there is a pipe which is coming out, we will give it a foam cover.
And then we will put that into our FLC, foldable large container. Now, FLC cannot take more than 1050 kgs. So we do the load testing.
And on the basis of that, our entire truck is filled in Chakan with the same kind of packaging. And then it goes to, say, Chennai to the OEM. When the OEM says that there was not even a 50 mm play and all the products were absolutely sound and safe, then I go and start my pricing negotiation with the guy who was sending the crankshaft.
Now, then we sign the contract. So signing of the contract takes 10 days to one and a half years. Then we take the IP for the designs.
So this is a very sticky business. Once we do it, then nobody can shortchange us. And the contract actually runs for three to five years.
And in last 12 years, we have not lost a single customer. Bulb, blade, biscuit, battery moves on our pallet. We give utility boxes to Amazon and Flipkart of the world.
Whatever is coming to your house is actually all rented by us, few of them. We give forklift renting, the forklift to the customers wherein we have introduced a lithium-ion battery forklift. Now, in India, when we were launching it, people said that lead-acid battery is the thing which works because lithium-ion battery will be, say, per month 15,000 cost here.
Now, lead-acid battery is something like you have to run the machine for eight hours. Then you have to take out the battery, put a charged battery. The used battery needs to be charged again for eight to 20 hours.
And then, again, you place it back. So it’s a very cumbersome process. Now, lithium-ion battery forklift that we have introduced is just like a mobile.
The driver has gone to drink tea. 20 minutes, he will charge it. It will get charged for 80% of the time.
It’s like a mobile, no need to change the battery and so on. So having said that, we pool assets between supplier, manufacturer, 3PL, retailer. Hypothetically, if supplier is using it for 10 days and I take 1 rupee, they will pay me 10 rupees.
If it is going to some cola manufacturing, they use it for 100 rupees. 100 days, they will pay me 100 rupees. Likewise, this keeps moving.
Now, we are the champion of circular economy.
If you look in West or in any developed country, it says that if you use a thousand one-way pallet vis-a-vis a thousand pooled pallet, how many hectares of forest you have saved? What is the number of trees that you have saved from being cut? What is the soil erosion that you have saved? And on the basis of that calculation, they will give you a carbon credit. And this carbon credit, you can actually set it off against your VAT.
So I’m also very sure that every company in India, at least multinational and AAA-rated countries, companies will have to actually go for a carbon-neutral kind of a situation. So they will buy carbon credits from us in future. So this is the business that we do.
So we connect supplier, manufacturer, 3PL, retailer. It’s very interesting. And there are so many questions that I want to ask you because you’ve summed up exactly what LEAP is doing at this point in time.
So let’s start one by one. Now, you did show me a pallet of how it looks like.
Sheryll D’Souza: So I want to now understand a bit more about the economics of a pallet.
If you could tell me, if you buy it once, how many times can you actually monetise it over its life? And how quickly are you able to recover that investment? Because yes, you are helping companies. It’s like an asset pooling that you’re doing. But for you, how do the economics actually work?
Sunu Mathew: OK, so what happens is I take out currently, on the basis of current situation, I take out the entire money in 2.9 years.
Now, the beauty of this business is that as it keeps moving, supplier to manufacturer, supplier pays me a movement charge. Manufacturer to 3PL, manufacturer pays me a movement charge. 3PL to retailer, retailer pays me a movement charge.
So everybody has to pay the moment it moves from one legal entity to another legal entity. And the prices vary humongously. Like a cola company will pay me 54 rupees, a textile company will pay me 850 rupees, a paint industry will pay me 270 rupees, a milk company will pay me 250 rupees, a crankshaft company will pay me 1370 rupees, an engine part company can pay me 2240 rupees per movement.
So it is upon the value and the product which is kept on the pallet, you know, that and the distance that it travels will decide upon the price. Say, suppose I am able to do 3 million movement out of 9 million pallet today. Next year, I will be able to add, say, 600,000, 700,000 pallets more.
So that again will go and sit on my PDR, which is per day rental. So instead of 2.9 years, I will break even in 2.3 years. Then I will be able to break even in 18 months.
Then I will be able to break even in 15 months. So this is how the moment pooling takes place in a country, then this business throws humongous amount of cash.
Sheryll D’Souza: Very interesting.
So that brings me to the next question. Since we are talking so much about money and the fact being that the business and the diversification in your business that you are in is also very capital intensive business, isn’t it? So how much of your operating cash flow needs to continuously go back into buying these assets and what sort of a return do you target on that capital? No doubt you did speak about the economics, but just a little bit more.
Sunu Mathew: Okay. So look, we are a pet profit company since last six years. We are an EBITDA profit company since last 10 years.
Our EBITDA margin ranges between 47% to 56%. So there are hardly very, very, very few companies which can talk about that in the last 8 to 10 years, our EBITDA margin was in the range of 47% to 56%. So last year we did 379 crores of EBITDA and we have done somewhere around about 400 crores of asset deployment.
Now, in the last four years, we are growing at a CAGR of 43%, you know. So every year I put in somewhere around about 700 to 600,000 pallets new into the system. Last year, there was a new kid on the block, Kemper, which is Reliance, they took 210,000 pallets.
So we had to put 1 million pallets. So this is how fast India is growing. So what I want to say is that why this business is not a PE multiple and an EBITDA multiple, because the depreciation is humongous.
Since I have got 1650 crore of net block, the depreciation comes to 200 crores. So that technically subdues my part. But if you look at it, our debt service covering ratio is somewhere more than 2. Once we take 480 crores as primary, we are going to actually repay 360 crores.
That will bring our debt to equity ratio at 0.5, you know. So we are in a very, very comfortable situation that for the next five years, even if we have to continue the same growth, our EBITDA is good enough to actually cater to the growth of the company. Yes, if we have to go and buy a few companies in the future, if it is an acquisition kind of stuff, yes, at that point in time, we will have to go for a loan.
And I believe that this is a 70% debt and 30% equity business. Here, debt is very good, you know. So we take debt at sub 8, which is 7.75 is our rate.
And we generate around 50% of EBITDA. Our cash back is somewhere around 27, 28%. So this is a good business to do unless and until if we are generating, say, 500 crores of EBITDA and we want to spend 1000 crore, then I think it will be a challenge.
But currently, we have a huge line of 1200 crores to 1500 crores. So unnecessarily, I really do not want to dilute myself by borrowing too much of money from the market and retiring the entire debt. In this business, debt is good.
Sheryll D’Souza: So you did speak about EBITDA margin, you did speak about the fact that you are thinking that it is sustainable, right? The fact being and why I am asking you this is because EBITDA margin in upwards of 50% or nearly 50% or upwards of 50% for most of the years is very unheard of, especially in the business that you are in, right? So I’m sure you keep getting this question asked, do you think it is possible for you to structurally maintain it? Do you think that it is going to be possible? And what gives you that confidence it will happen?
Sunu Mathew: Because what happens is that it is very easy, you know. You can see that this business is all about scale. So we have 10,000 touch points.
As and when we keep scaling our business, we add more and more touch points. Then this business is all about you should have A to B the business and also B to A. If you do not have the business from B to A and you have to pick it back and put transportation cost into it, then this is a bad business to do. So as our network improves, say the profitability also, the margins also improve.
Second very important point is what is my expense? My expense is warehouse cost. A warehouse guy who was getting X salary, he was managing 5,000 pallets. Tomorrow he will manage 50,000 pallets.
Then he will manage 5 lakh pallets. But his salary will go up by, say, 8%, 11%, 12%, you know, max. And the business is growing exponentially.
The more you grow this business, the entire, the cost of the supply chain gets lower and lower. So high potential that it will go beyond 50%. Brilliant and really all the best to you and your company for achieving that and making sure you sustain it.
Sheryll D’Souza: Given the fact that you’re going to be a listed entity right now and you are going to be on the burses, it’s a very, very huge feat and also a very tall ask that everybody will have from you and the company, the management as well. So tell me something, what does this fresh capital allow Leap to do differently for the next three to four years?
Sunu Mathew: See, this will actually allow us to come to a 0.5 debt to equity ratio, plus we will have our DSR at around about 2.2 times. So this gives us a leverage that tomorrow if we have to expand outside of India or if we have to buy a few companies, we have a credit line ready with us.
We can do a lot of stuff in the future. For example, tomorrow we may rent robots. You know, already our trials are going on and it’s called an AGV, automated guided vehicle.
So the robot will go pick up the pallet, leave it to the destination, come back, leave it to the destination, come back. Today, it is used by, this work is done by forklift and forklift drivers. So technically, you need not have to have three forklifts and six forklift drivers for a day, you know.
So a few people ask me, why are you cannibalising your own business? You know, I said that, you see, if I have to put that forklift somewhere else, India is a huge country, I will be easily able to deploy. But if I am not thinking ahead, somebody else will think about it and they can come and disrupt the market. So it is better that I only disrupt the market as a market leader.
And that is why we have got Srinivasan. Srini is ex-Reliance. He was there for 25 years.
He was instrumental in creating the entire AI patch and a lot of other stuff which has happened in Reliance. He was my junior in my college, so I called him that it is time for you to come and contribute here. So, you see, we are big with our technology.
We work with SAP S4 HANA. We have our asset audit app. We have our own DMS, WMS.
We have something which is known as MyLeap. So anytime any product moves from one legal entity to another, by default, it is compulsory for all companies to put an entry into our system. If they do not put entry into our system, we do not work with them.
One of the biggest auto component manufacturer told that we will not do the entry. We did not work with them for six and a half years. Now they do good entries and we work with them.
Say, suppose somebody does not want to do a night shift, you know, so we give our own person, but they will have to pay for him. But see, the biggest risk that I see in this business is that if you lose the asset, you can go bankrupt. This is the only risk in this business.
OK, but the thing being, it is in the contract that if you lose the asset, then technically we can charge MPC, missing pallet charge. But that will be a wrong discussion to actually have with the customer. So he will say that, OK, 100,000 pallets you have given me after two years you are coming and saying that 20,000 pallets are lost.
So half of my team is asset managing guy. They will go and count each and every pallet. Say, we go to a whitewood industry in warehouse in Patna and we have, as per the system, given 2000 pallets to them.
If we find one missing, we will charge them MPC. But you see, if it is 1999 counted, the warehouse guy will lose his job because if a pallet can move out, a 10 lakh rupee TV can also move out, you know. So he will say, see, that is broken.
It is kept there. So you write 2000, but one is broken. One pallet is broken.
We repair everything on site. So this brings in humongous amount of control onto the people who are sitting at the head office. One company which is having 78 warehouses, they can, at the click of a button in MyLeap, can see how many pallets are lying where and it is travelling from which distance to what distance.
So this gives, we are a data company, you know. So we have so much of data for every company, what is being moved. Definitely, we do not share it with anybody because we have an NDA.
But technically, you look at it, everything in the supply chain actually routes through us. It’s so brilliant, you know. I’ll tell you why I’m saying this is because I’m having this conversation with you and it is so interesting.
These are the things that you don’t really think about so much. You don’t put your mind so much. You, I’ve seen pallet all my life, but I’ve never thought about it, like what role and how much of a big role it actually plays in the entire supply chain.
Sheryll D’Souza: So it’s kudos to you and your team and what you’re doing and given the fact that it’s a very niche business, at least in a country like us. And correct me if I’m wrong, you have about 900 plus customers, is it? Is that what it is? 1100, now it has become 1100. It’s 1100 customers, wow.
So tell me something, 2013 is when your company came into existence. From 2013 till now, about 13 years or so, 1100 customers is what you have. So tell me, when does the next doubling of a leap coming? And tell me, what will actually help you double? Is it going to be deeper penetration with your existing customers, new categories, new customers, acquisitions? What is going to drive that growth for you?
Sunu Mathew: Okay, so I believe that what is actually pulling us back is the truck sizes in India.
So everybody, we have 2000 different type of trucks and such sizes, you know, they give the chassis and they will go to Punjab body and they will make anything. So there is no basic standardisation. We are just working with the government.
And yes, this is a fantastic government. They listen to us, listen to the private guys who wants to contribute something to the country. And we have given say 10-15 sizes that you should restrict it to this much so that palletisation becomes possible.
So I think that is one aspect which will take it over the roof. Second, very important aspect is that worldwide it is said one human being is equal to one pallet or one tonne load is equal to one pallet. In both the anecdotes, we are not there, you know, anywhere.
So there is a huge scope which can move forward. And we are a young country. We will eat more, drink more, bathe more.
Howsoever, we are a consuming nation. The tonnage increases like that, the per tonnage increase in the country is somewhere around about 10.6 to 13%. So we will grow that way.
And all grade B and C warehouses will get converted to vertical warehouses. Now, horizontal space is less in India. So if you have 100,000 square feet, you can put in technically six to four zero pallets in that.
The moment you go G4, ground plus four racking, you are able to put 28,000 pallets. So it’s a no-brainer that everybody has to go vertical. If you have to go vertical, palletisation is going to get used.
Now, worldwide it is said that the cost of the labour, if it moves above $7 per day, any country will have to go into automization. Now, what has happened is now the labour is only not available. I thought that it will happen somewhere in 2030 or 2032, but good that BJP won everywhere and they are doing so much of introduction of so many things in their own state that now labour is only not available.
Orissa, Jharkhand, Bihar, Bengal, Assam. So these places, nobody will now travel from Silchar to Gandhidham to work for 25,000 rupees. They are finding work there only.
So if you ask anybody who is a man from the field, not he’s sitting in AC, man from the field will say, sir, merko 500 labour chahiye, he’s getting only 100 labour today. So they are left with no choice but to automate. Now, Sheryl, I’ll give you a very nice anecdote that in Harvard, there is a saying that no country has moved from being a developing country to a developed country without palletisation.
Koi bhi vikashil desh vikasit nahi ho sakta jab tak ho palletisation nahi kare. So all developed countries, the palletisation is to the tune of 95%. It is only India that we are like 15 to 17% developing country, but we are fast catching up, you know, we are fast catching up.
So we will have to catch up on palletisation also. And what is the arbitrage? Why they explain it so mathematically? All the economic problem, they actually link it to palletisation. See, our supply chain cost to GDP is 14%.
All the developed nations are at 4 to 6%. So if I take this product which I am making and going to the market, already I’m starting not from zero, I’m starting from minus 10. You know, so I am not viable to sell my product because it is already so costly because of the supply chain cost.
Now, the moment you do palletisation, you can load a truck in 15 minutes, you can unload a truck in 15 minutes. If you handball everything into the truck, you will take 8 labours and 10 hours to load a truck and 10 hours to unload a truck. So the arbitrage is 30 minutes to 20 hours.
You know, so see, suppose I am Satnam Singh and I am a truck owner and I take my truck from Bombay to Delhi and there is no scientific way. I have put the cost as 56,000 rupees and that is the basic cost. In season, I may charge 62,000.
In non-season, I can charge 48,000, average 56,000. But I know that I have to pay to the driver, diesel, repair and maintenance and my EMI. So I have fixed up a cost.
I know that I can do only six trips because I have to wait for one day, one day travelling, six trips in a day, in a month. The day you start doing palletisation, the guy will be able to do 14 trips, 16 trips in a month or 12 trips in a month. So this 56,000 rupees, the cost will come down to 25,000 rupees.
So out of this 14%, 70% is transportation cost, which comes to somewhere around 9.8%. Out of this 9.8%, you can cut the cost by 50%.