ICRA retains negative outlook for the Road Transport Sector going forward


The restrictions on cross-border movement, paucity of drivers and manpower due to large-scale migration and lack of availability of return load due to the outbreak of the COVID pandemic has left the Indian road freight transportation bleeding.

The extended nationwide lockdown for the major part of Q1 FY2021  paralysed economic activity and therefore, the freight availability also moderated significantly.

“The aggregate revenues of ICRA’s sample of logistics companies contracted sharply by 35% during the quarter. The impact was more visible on players operating on an asset-heavy model, due to high fixed costs for owned assets, while asset-light players fared relatively better. This decline was also corroborated by the generation of E-way bills, which contracted by 49% during the quarter. In addition to the impact on the road logistics sector, the macroeconomic slowdown and lockdown also had a bearing on the rail and seaways freight traffic that primarily comprises of bulk commodities like coal, cement, iron ore and crude oil with volumes contracting by 21.3% and 19.7% Y-o-Y, respectively.”

~Shamsher Dewan, Vice President, ICRA Ratings

It is informed that the financial performance of ICRA’s sample of ten leading logistics companies was also adversely impacted in Q1 FY2021 as aggregate revenues of players declined by 35% on a Y-o-Y basis, in line with the sharp moderation in GDP growth, which hit historic lows of -23.9%, resulting in subdued freight availability.

There was also a sharp contraction on OPM . It contracted 600 bps on a sequential basis and nearly 900 bps on a Y-o-Y basis to 0.5%,on account of the gross under-utilisation of assets during the lockdown phase, despite the implementation of cost-saving initiatives by several companies.

The impact was severe for players operating on an asset-heavy model with owned fleet and warehousing space, while those operating on an asset-light business model, fared relatively better due to lower quantum of fixed costs.

As per reports, with gradual opening up of the economy, a relief in freight activity has also been witnessed.

The latest E-way bill and FASTag data indicates that freight volumes have recovered sequentially and improved to 87% of pre-covid levels (for E-way bills) and 95% of pre-covid levels (for FASTag) by August 2020.

This also has potential to increase further going forward as the country gears up for the upcoming festive season.

According to ICRA, growth over the near term is expected to be driven by specific segments like e-commerce, as the trend in online purchases and deliveries have picked up substantially post the lockdown.

Similarly, the automotive sector has also been picking up, especially sectors like entry-level cars, motorcycles, tractors etc. which augurs well for specific logistics segments like auto carriers. The rural uptick has also augured well for movement of agricultural and allied produce. However, other segments like capital goods continue to remain subdued though.

While the revenues and profitability in Q2 FY2021 appears to be moving towards recovery as compared to Q1 FY2021, the ongoing lockdowns in various parts of the country along with rapid spread of the pandemic are constraining the pace of recovery in industrial activity.

It is believed that the logistics sector (including warehousing segment) is also likely to see a gradual roadmap to recovery.

For the full year, FY2021, ICRA expects the revenue of its sample to decline by 18-20% Y-o-Y, in the backdrop of 11.0% contraction in GDP.

“While the situation has eased to some extent in Q2 FY2021, the pressure on cash flows of fleet operators is expected to continue, given under-utilisation of assets, rising diesel costs and continued fixed costs like driver salaries. Furthermore, while RBI’s forbearance initiative provided some relief in the initial days of the lockdown, expiry of the moratorium period and consequent re-commencement of EMI payments from September 2020 would also exert pressure on their cash flows going forward, despite some earnings improvement expected as the year progresses’ expressed Mr Dewan.

Overall, credit metrics of logistics companies is likely to moderate over the near term with Debt/OPBITDA to average at ~4.1x and interest coverage to average at ~2.6x in FY2021, as compared to 2.5x and 4.9x respectively in FY2020.

However, deferment of near-term debt-funded capex/acquisition plans by major logistics players would help cushion the impact to some extent.

Nevertheless, ICRA maintains a ‘Negative’ outlook on the Indian road logistics industry given the expectations of continued pressures on the credit profile.

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