ICRA (formerly Investment Information and Credit Rating Agency of India) stands firm on growth estimates of 7-9% in FY23 over FY22 for domestic road logistics sector.
Additionally, ICRA expects the aggregate operating profit margins of the sample to remain in the range of 12-14% in FY23, compared to 14.0% in FY22. As per the rating agency, the ability of the organised players to command a price premium in light of the fuel price inflation scenario while retaining cost reduction initiatives will support operating profitability in FY2023. However, the margin movement will continue to depend on customer demand attitudes, diesel price fluctuations, and the industry's competitive intensity.
As a result of the anticipated debt-financed capital expenditures for vehicle replacement required prior to the commencement of the scrappage policy and the rising interest rate environment, it is anticipated that debt coverage metrics will marginally weaken in FY23 relative to FY22 levels.
The recently introduced National Logistics Policy (NLP) also augurs well for the road logistics sector, as it shall reduce the overdependence on the road through better integration of different modes of transport and in turn, improve demand identification, thereby enabling better availability of trucks, ICRA stated.
Revenue growth over the medium term would continue to be driven by 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.
Furthermore, multimodal offerings are likely to gain increased acceptance and traction going forward, given that players offering multimodal services had more flexibility.
Suprio Banerjee, Vice President & Sector Head – Corporate Ratings, ICRA, noted that the logistics sector's quarterly revenues increased by 5.8% in Q1FY23 compared to Q4FY22, thanks to solid and sustained demand from the manufacturing sector.
The revenue remains close to multi-year high quarterly revenues, supported by a sustained recovery in industrial activities. This is also reflected by the stability in monthly e-way bill volumes and FASTag volumes during Q1FY23, which also continues in the current quarter for July-Aug 2022.
Following a 16.5% growth in FY22 (over pre-COVID levels) and a 5.8% growth in Q1FY23 on the back of a revival in economic activities and firm freight rates, ICRA expects the logistics sector to grow by 7-9% YoY, he added. On the other hand, elevated crude oil prices due to the Russia-Ukraine conflict witnessed from Q4FY22 also impacted the sector's margins.
While the larger players have managed to hike rates to a large extent in FY22, their sustained ability to do the same rates remains to be seen.
“Most of the organised players were able to pass on the increase in fuel cost to its customers as reflected by healthy operating margins of 14.0% in FY22 and 13.5% in Q1FY23 against 12.1% in FY21,” Banerjee added.
NB: Photo is representational.
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