Indian Road logistics sector

Rating agency ICRA has maintained a stable outlook for the Indian Road logistics sector. Accelerated pace of business activities and lower lockdown-linked restrictions from H2 FY2022 aided faster recovery in revenues for FY2022. The growth momentum is likely to continue with an estimated growth of ~7-9% in FY2023 over FY2022. Demand is likely to remain sensitive to any further waves or new virus variants, given the sector’s significant linkage to economic activity on an aggregate basis.

The ability of the organised players to command pricing premiums on account of the rise in fuel prices, driven by the fallout of the Russia-Ukraine conflict, while maintaining the cost rationalisation measures shall support the industry operating profitability in FY2023. The margin movement shall, however, continue to depend on consumer demand sentiments, trend in diesel prices, and the competitive intensity within the industry. Debt coverage metrics are expected to marginally weaken in FY2023 compared to FY2022 levels, owing to the expected debt-funded capital expenditure for vehicle replacement required prior to introduction of the scrappage policy, along with the rising interest rate regime.

Suprio Banerjee, Vice President & Sector-Head, ICRA Ratings, said, “Quarterly revenues for the logistics sector reported a moderation of 2% in Q4 FY2022 compared to Q3 FY2022, owing to the third wave of Covid. However, it still remains close to multi-year high quarterly revenues, supported by sustained recovery in industrial activities. While there were regional restrictions for a brief period, manufacturing, construction activities and movement of goods were permitted due to which the impact on commercial traffic was limited. This is also reflected by the stability in monthly e-way bill volumes as well as FASTag volumes during Q4 FY2022, which also continues in the current quarter for April-May 2022. Following a 16.5% growth in FY2022 (over pre-Covid levels) on the back of revival in economic activities, firm freight rates and low-base, ICRA expects the logistics sector to grow by 7-9% YoY in FY2023. However, the overhang of any further Covid waves looms on the sector in case the recent rise in Covid infections in certain pockets of the country spreads nationwide. Margins shall also remain sensitive to risks stemming from a continued rise in commodity and fuel prices owing to the fallout of the Russia-Ukraine conflict.”

On a YoY basis, volumes for FASTag grew by 145% and e-way bill volumes grew by 84% in May 2022, given the easing of restrictions and the lower base effect for May 2021, due to the second Covid wave impact. However, industry volumes remain sensitive to economic activity on aggregate. The QoQ operating margins remained largely stable, at 15.3% for Q4 FY2022, given that the companies are now increasingly able to pass on the amplified fuel cost to their customers. ICRA expects the aggregate operating profit margins of the sample to remain in the range of 12-14% in FY2023, compared to 14.2% in FY2022. Nevertheless, a further increase in diesel prices and the operators’ ability to effect further rate hikes, would be the key to protecting their margins, given that there could be some near-term cash flow pressures, especially for the smaller fleet operators.

Demand from varied segments like e-commerce, FMCG, retail, chemicals, pharmaceuticals and industrial goods coupled with the industry’s paradigm shift towards organised logistics players, post GST and E-way bill implementation would continue to drive revenue growth in the medium-term. Furthermore, multimodal offerings are likely to gain increased acceptance and traction going forward, given that players offering multimodal services had more flexibility. Given these factors, and the relatively higher financial flexibility available to large, organised players vis-à-vis their smaller counterparts, there is potential for increased formalisation in the sector going forward.
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