Improved economic activities in Q2 FY2022 to spur growth momentum for the road logistics sector in H2 FY2022; outlook continues to remain Stable: ICRA
- The second wave of Covid halted the growth momentum for domestic logistics sector during Q1 FY2022, with consequent impact on revenues and earnings on a Q-o-Q basis. However, relaxation of lockdowns, normalcy of business activities and rising pace of vaccination improved the economic activities and consequently the demand for logistics in Q2 FY2022.
- The sector is likely to grow between ~6-9% in FY2022, in line with our previous estimates, demand, however, shall remain sensitive to any further external shocks like impact of a further wave, given the sector’s vulnerability to economic activity on an aggregate basis
ICRA Ratings reiterated that the outlook for the Indian Road logistics sector continues to remain stable, supported by improved economic recovery in Q2 FY2022, increased pace of vaccination and decline in fresh Covid-19 cases from June’21 onwards. The sector has witnessed moderation in freight volumes sequentially across different segments (road, rail and sea) in Q1 FY2022 as the resurgence of Covid-19 cases by the end of Q4 FY2021 stalled the economic recovery that was visible across most sectors during H2 FY2021. Given the impact of the second wave on most end-user industries and accordingly, freight movement was affected. This apart, the effect of commodity inflation was significant on the earnings profile of logistics players.
Says Mr. Suprio Banerjee, Vice President & Sector-Head, ICRA Ratings, “Stunted demand recovery due to resurgence in Covid-19 cases in Q1 FY2022, led to decline in overall industry revenues by 17.5% Q-o-Q. However, there has been a gradual revival in Q2 FY2022 due to aforementioned factors which is also reflected by steady rise in monthly e-way bill volumes as well as FASTag volumes since May-21. We expect a broad-based recovery across end user sectors in H2 FY2022 and accordingly the higher scale of operations is likely to see improved earnings despite the effect of higher operating costs amidst diesel price inflation. Though business performance remained muted over Q1 FY2022, the sector is likely to grow between ~6-9% in FY2022, in line with our previous estimates. Demand, however, shall remain sensitive to any further external shocks like impact of a further wave, given the sector’s vulnerability to economic activity on an aggregate basis.”
Overall, the aggregate revenues of ICRA’s sample of logistics companies declined on Q-o-Q basis in Q1 FY2022 by 17.5% over Q4 FY2021, the average e-way bill generations too dipped in Apr-May-21 sequentially. However, positive factors have resulted in monthly FASTag volumes ramping up to five-month highs in August 2021, given the absence of stringent lockdown restrictions as witnessed during the first wave. On a sequential basis monthly FASTag volumes increased by 22% and 5% in July 2021 and August 2021 respectively and e-way bill volumes grew by 17% and 3% in in July 2021 and August 2021 respectively. On a Y-o-Y basis, the combined volumes for FASTag for July and August 2021 grew by 115% and e-way bill volumes grew by 34%. Volumes are expected to remain stable over FY2022, given the easing of restrictions with lower incidences of fresh cases. Further, an accelerated pace of vaccine roll-out will also act as a booster to economic revival.
In terms of profitability, as the impact of several cost-control initiatives like employee cost reduction, rental waivers, and reduction in lorry hire charges, which were temporary in nature, subsides in the current fiscal, ICRA does not expect this improvement in profitability witnessed in FY2021 to be sustainable. The problem is compounded by the continued firming up of diesel prices. With drop in revenues in Q1 FY2022, the aggregate OPM of the sample set on a Q-o-Q basis declined by ~320 bps. Accordingly, the ratings agency expects the aggregate operating profit margins of its sample to be in the range of 10.5-11.0% in FY2022, against 12.1% in FY2021. The moderation in operating margin is also likely to be driven by the absence of Covid-19 induced cost-control measures undertaken in FY2021 and rise in fuel costs. The logistic companies’ ability to hike freight rates will be a key determinant to sustain profitability in the near term.
Growth over the medium term would continue to be driven by demand from segments like e-commerce, FMCG, retail, chemicals, pharmaceuticals and industrial goods coupled with the industry paradigm shift towards organised logistics players, post the 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 and hence, were better placed to service their customers during the lockdown phase. Given these factors, and the relatively higher financial flexibility available to large organised players vis-à-vis their smaller counterparts, there is potential for increased formalisation in the sector going forward.
