ICRA Ratings
Estimated Growth in Road Logistics Sector in H2 FY2022
ICRA Ratings reiterated that the outlook for the Indian Road logistics sector continues to remain stable, supported by improved economic recovery in Q2 FY2022, increased pace of vaccination, and decline in fresh Covid-19 cases from June’21 onwards. The sector has witnessed moderation in freight volumes sequentially across different segments (road, rail, and sea) in Q1 FY2022 as the resurgence of Covid-19 cases by the end of Q4 FY2021 stalled the economic recovery that was visible across most sectors during H2 FY2021. Given the impact of the second wave on most end-user industries, freight movement was affected. This apart, the effect of commodity inflation was significant on the earnings profile of logistics players.

Says Suprio Banerjee, Vice President & Sector-Head, ICRA Ratings, “Stunted demand recovery due to resurgence in Covid-19 cases in Q1 FY2022, led to decline in overall industry revenues by 17.5% Q-o-Q. However, there has been a gradual revival in Q2 FY2022 due to the afore-mentioned factors, which is also reflected by a steady rise in monthly e-way bill volumes as well as FASTag volumes since May-21. We expect a broad-based recovery across end-user sectors in H2 FY2022 and, accordingly, the higher scale of operations is likely to see improved earnings, despite the effect of higher operating costs amidst diesel price inflation. Though business performance remained muted over Q1 FY2022, the sector is likely to grow between ~6-9% in FY2022, in line with our previous estimates. Demand, however, shall remain sensitive to any further external shocks like impact of a further wave, given the sector’s vulnerability to economic activity on an aggregate basis.”

Overall, the aggregate revenues of ICRA’s sample of logistics companies declined on Q-o-Q basis in Q1 FY2022 by 17.5% over Q4 FY2021, the average e-way bill generations too dipped in Apr-May-21 sequentially. However, positive factors have resulted in monthly FASTag volumes ramping up to five-month highs in August 2021, given the absence of stringent lockdown restrictions as witnessed during the first wave. On a sequential basis monthly FASTag volumes increased by 22% and 5% in July 2021 and August 2021, respectively, and e-way bill volumes grew by 17% and 3% in in July 2021 and August 2021, respectively. On a Y-o-Y basis, the combined volumes for FASTag for July and August 2021 grew by 115% and e-way bill volumes grew by 34%. Volumes are expected to remain stable over FY2022, given the easing of restrictions with lower incidences of fresh cases. Further, an accelerated pace of vaccine roll-out will also act as a booster to economic revival.

In terms of profitability, as the impact of several cost-control initiatives like employee cost reduction, rental waivers, and reduction in lorry hire charges, which were temporary in nature, subsides in the current fiscal, ICRA does not expect this improvement in profitability witnessed in FY2021 to be sustainable. The problem is compounded by the continued firming up of diesel prices. With drop in revenues in Q1 FY2022, the aggregate OPM of the sample set on a Q-o-Q basis declined by ~320 bps. Accordingly, the ratings agency expects the aggregate operating profit margins of its sample to be in the range of 10.5-11.0% in FY2022, against 12.1% in FY2021. The moderation in operating margin is also likely to be driven by the absence of Covid-19 induced cost-control measures undertaken in FY2021 and rise in fuel costs. The logistic companies’ ability to hike freight rates will be a key determinant to sustain profitability in the near term.

Growth over the medium term would continue to be driven by demand from segments like e-commerce, FMCG, retail, chemicals, pharmaceuticals, and industrial goods, coupled with the industry’s paradigm shift towards organised logistics players, post the GST and e-way bill implementation. Furthermore, multimodal offerings are likely to gain increased acceptance and traction going forward, given that players offering multimodal services had more flexibility and hence, were better placed to service their customers during the lockdown phase. 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.

FY2022 Cargo Volumes Expected to Surpass FY2020
ICRA Ratings expects the overall volumes at Indian ports to continue witnessing improvement, and in FY2022 surpass FY2020 (pre-Covid) volumes. The optimism is based on the performance of the sector in 5m FY2022 wherein all segments (except fertilisers) witnessed healthy y-o-y growth. The overall cargo volumes are largely stable in 5M FY2022 in comparison to the same period in FY2020, driven by healthy growth in containers, iron ore, and other miscellaneous segments.

The growth can also be attributed to the base effect since the same period during FY2021 was severely impacted by the pandemic-related lockdown. The exceptions to volume growth (apart from fertilisers) are POL and coal volumes which have remained subdued. POL and thermal coal segments also remained subdued in FY2021 due to demand contraction and while there has been a y-o-y improvement in 5m FY2022, the volumes remain lower compared to FY2020 levels.

Commented Sai Krishna, Assistant Vice President & Sector Head at ICRA, “Cargo volumes at Indian ports witnessed a sharp contraction of ~14% during H1 FY2021, following the strict lockdown measures, which had resulted in severe economic contraction. However, in H2 FY2021, except for Feb 2021, the volumes witnessed y-o-y growth, driven by easing of containment measures and a pick-up in economic activity with y-o-y growth of ~3% in H2 FY2021. In 5M FY2022, volumes reached almost pre-Covid levels despite the second wave of Covid-19, as economic activity improved. Overall, cargo volumes are expected to grow by 7-10% y-o-y in FY2022 and by 1-4% compared to FY2020, driven by the economic recovery.”

The sector has witnessed consolidation in the last few years, with acquisition of ports and port assets by larger players. The trend is expected to continue as some of the weaker entities or strategic standalone assets get acquired by stronger and larger players.

Ravish Mehta, Senior Analyst, ICRA Ratings, added: “In FY2021, due to the lower cargo movement, the cash flows of some entities which had recently commenced operations or concluded debt-funded capacity expansions had come under pressure despite the liquidity support measures provided by the MoS and the RBI. However, as expected, the SPVs promoted by stronger sponsors have had the financial flexibility to weather the downturn and their debt servicing has not been materially impacted.”

Going forward, the healthy volume growth expected for FY2022 should aid revenue and margin improvement for the port sector in FY2022 as companies benefit from operating leverage.
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