Outlook to remain stable for Indian road logistics: ICRA

The road logistics sector will do well in the year 2024, supported by stable domestic consumption and investment demand. According to rating agency ICRA, the industry’s revenue growth is estimated to be in the range of 6-9% in FY2024, building on an elevated base of FY2023. This growth is primarily driven by demand from varied segments, including e-commerce, FMCG, retail, chemicals, pharmaceuticals, and industrial goods, coupled with the industry’s paradigm shift towards organized logistics players, post-GST and e-way bill implementation. ICRA expects the outlook for the sector to remain stable.

Downside risks to the estimates remain from any material tapering of demand due to elevated inflation and interest rates and global supply-demand shifts impacting the Indian economic scenario. According to ICRA, the industry debt coverage metrics are expected to ease marginally in FY2024, compared to the FY2023 levels with a likely contraction in operating margins because of inflationary input cost pressures, primarily elevated crude oil prices and debt-funded capital expenditure for vehicle replacement, required prior to the introduction of the Scrappage Policy along with a high interest rate regime.

Suprio Banerjee, Vice President & Sector Head – Corporate Ratings, ICRA Limited, says, “With gradual demand recovery on the back of supportive macro-economic factors, ICRA’s sample set1 witnessed revenue growth of 16% in FY2023 on a YoY basis, amid a low base of FY2022. The operating profit margin, however, contracted to 12.4% in FY2023 compared to 14.0% in FY2022 on account of fluctuations in fuel procurement cost. As witnessed in Q1 FY2024, ICRA expects the aggregate operating profit margins for the sector to marginally moderate to a range of 10.5-12.5% in FY2024, from 12.4% in FY2023 owing to elevated input costs. The operators’ ability to effect further price hikes to offset input price increases, amid stiff competition, remains a key credit monitorable.”

E-way monthly volumes remained largely stable at above 80 million since March 2023, reporting all-time high volumes in August 2023, signifying resilient domestic trade and transportation activities. The monthly FASTag volumes have also moved in tandem with the e-way bills, ranging from 285 to 320 million in Q4 FY2023 and Q1 FY2024, with an all-time peak of 335 million in May 2023, reflecting buoyancy in the movement of vehicles.

Despite the decline in crude oil prices in Q1 FY2024, the operating margins of the logistics players were impacted due to the lag in price hikes. The subsequent sharp rise in prices in Q2 FY2024, raised concerns over the ability of the logistics players to pass on the cost to their customers.

Road logistics players also remain exposed to environmental and social risks. Tightening emission control norms necessitate alternative fuel vehicle investments or investments in the current fleet. They are also exposed to litigation/penalties arising from issues related to harmful emissions and waste, which may lead to financial implications and impact reputation. The social risk includes driver shortage, health, safety, and quality of work-life balance for drivers.