The rapid rise of Covid-19 pandemic and the Government of India’s decision to contain the disease outbreak through a 40-day lockdown is also adversely impacting the logistics sector, especially the road transportation sector. The immediate impact of the pandemic on the logistics sector has been a sharp fall in freight availability because of restrictions on production of non-essential goods, and shortage of fleet for movement of essential goods owing to dearth of drivers, thereby resulting in spike in truck rentals.
Says Mr Shamsher Dewan, Vice-President, ICRA Ratings, “With the likelihood of lockdown being lifted gradually and muted recovery in industrial activity, the logistics sector including warehousing sector is likely to witness sharp demand contraction in the near-term. In our view, while the entire value chain in logistics, right from transportation to warehousing, would be adversely impacted, entities with asset-heavy business model will see a greater impact owing to high fixed costs. Further, the immediate-term growth prospects of the sector also remain subdued owing to the outbreak of the Covid-19 pandemic, which has exacerbated the Indian macroeconomic growth scenario. Accordingly, the domestic logistics sector is expected to contract in the current fiscal.”
Within the industry, segments such as fleet owner-cum-operators, warehousing and Container Freight Stations (CFS) segment would see sharp decline in asset utilisation and, in turn, weak financial performance. Furthermore, the small fleet operators would be the most vulnerable owing to limited liquidity and financial flexibility. Overall, while RBI’s forbearance initiative and toll exemptions provide some relief, but limited fleet utilisation in view of low margins would have an overwhelming impact on cash flows of fleet owners in the near-term.
In Q3 FY2020, revenue of ICRA’s sample of 12 large logistics players had declined by 2.6% Y-o-Y as compared to a growth of 18.6% in Q3 FY2019 and 1.9% in Q2 FY2020, in line with the continued moderation in GDP growth, which hit a 27-quarter low of 4.7%, resulting in subdued freight availability. ICRA expects that this trend is likely to continue in Q4 FY2020 and Q1 FY2021 with a greater degree of subdued performance. Muted consumer demand in sectors such as automotive, FMCG, capital goods and retail, coupled with the slowdown in the production of bulk industrial commodities, would adversely impact the growth of the sector.
The pandemic-induced nationwide lockdown has further accelerated the ongoing slowdown in Indian macroeconomic conditions, resulting in subdued freight availability. Consequently, in FY2021 too, the ratings agency expects a contraction of 6-8% Y-o-Y in revenue of its sample of logistics companies.
However, despite the contraction in revenues and negative operating leverage, the operating profitability of the leading logistics players benefitted from operational efficiencies and adoption of cost-rationalisation measures during Q3 FY2020. Accordingly, operating profitability margin (OPM) of the sample improved sequentially to 8.8% in Q3 FY2020 from 8.6% in Q2 FY2020. However, the subdued demand scenario, coupled with increased competitive intensity in sectors like e-commerce logistics and air cargo, constrained the performance of the industry, the release added.
“Over the near-term, ICRA believes the profitability of logistics operators to be impacted on account of the Coronavirus outbreak and lockdown, which has significantly impacted freight availability and fleet utilisation. Further, adverse impact from Covid-19 pandemic poses a downside risk on the credit metrics of ICRA’s sample of logistics companies,” Mr Dewan added.
