Following a healthy growth in FY2022, the accelerated pace of business activities is expected to continue to support the Indian road logistics sector’s growth momentum for FY2023. ICRA has revised its growth estimates for the sector to ~11-13% for FY2023 against the previous estimate of 7-9%.
The growth is supported by a strong demand environment, coupled with continuation of firm freight rates. It is also supported by the base effect to an extent, given that FY2022 had a weak first quarter due to the second wave of Covid-19. ICRA expects revenue growth at a higher single digit for FY2024 over FY2023 on an elevated base and continuation of a healthy demand scenario.
Downside risks to the estimates, however, remain sensitive to the emergence of any further waves or new variants, as witnessed in a few countries, and its ripple effects on India, given its strong linkage to economic activity on an aggregate basis. The debt coverage metrics are expected to marginally moderate in FY2023 and FY2024 compared to the FY2022 levels owing to expected debt-funded capital expenditure for vehicle replacement required prior to the introduction of the scrappage policy, along with the rising interest rate regime.
Suprio Banerjee, Vice President and Sector Head – Corporate Ratings, ICRA Limited,said,“Quarterly revenues for the logistics sector witnessed a 6.1% growth in Q2 FY2023 compared to Q1 FY2023, owing to healthy 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 in the stability in monthly e-way bill volumes as well as FASTag volumes during Q2 FY2023, which also continued during the Oct-Nov 2022 period. On the other hand, elevated crude oil prices due to the Russia-Ukraine conflict witnessed from Q4 FY2022 also had an impact on the margins of the sector. While the larger players continue to manage rate hikes to a large extent in FY2022, their sustained ability to do the same remains to be seen. Most organised players were able to pass on the increase in fuel cost to their customers, as reflected in the healthy operating margins of 14.0% in FY2022 and 12.5% in H1 FY2023 against 12.1% in FY2021. H1 FY2023 witnessed a moderation in margins over 13.5% in H1 FY2022 on account of increased vehicle hire prices and increased fuel procurement charges for some of the players.”
ICRA expects the aggregate operating profit margins of the sample to moderate to 12%-14% in FY2023, compared to 14.0% in FY2022. The operators’ ability to effect further rate hikes to offset input price increases amid stiff competition remains a key credit monitorable. 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.
Further, multimodal offerings are likely to gain increased acceptance and traction going forward, as players offering multimodal services have more flexibility. In addition to these, timely and effective implementation of the National Logistics Policy and other such initiatives would be key to providing the requisite impetus to the sector.
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