India's road logistics eyes bright FY24, spurred by domestic demand
13 Oct 23 3 min read
Insights
- India's road logistics sector is poised for growth in FY24, driven by domestic consumption and diverse sector demands, as per ICRA.
- While the outlook is stable, challenges like high inflation and interest rates loom.
- Monthly e-way volumes highlight robust trade activities, but rising crude oil prices in Q2 FY24 put pressure on logistics margins.
This growth trajectory is predominantly fuelled by demands emerging from diverse sectors, including e-commerce, retail, chemicals, and industrial goods. Further bolstering this momentum is the industry's transformation towards more organised logistics entities, a shift credited to the introduction of the Goods and Services Tax (GST) and the e-way bill, as per ICRA.
However, the outlook, which ICRA terms as ‘stable’, isn't devoid of potential challenges. Downside risks include the prospect of weakened demand caused by high inflation and interest rates or global supply-demand realignments affecting the Indian economy. Moreover, the sector's debt coverage metrics might experience a slight relief in FY24 compared to FY23, albeit with potential contractions in operating margins. Such reductions can be attributed to rising input costs, chiefly driven by high crude oil prices, and debt-acquired capital expenditure for vehicle replacements. These replacements are anticipated before the roll-out of the much-discussed Scrappage Policy, all set against a backdrop of a high interest rate environment.
Highlighting the industry's robustness, e-way monthly volumes have consistently maintained a level above 80 million since March 2023, with record-breaking volumes witnessed in August 2023. This pattern underscores the resilience and vibrancy of domestic trade and transportation activities. The monthly FASTag volumes mirrored this trend, fluctuating between 285 to 320 million in the periods of the fourth quarter (Q4) of FY23 and Q1 FY24. A noteworthy peak of 335 million was reported in May 2023, indicating an active vehicular movement.
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Despite Q1 FY24 seeing a drop in crude oil prices, logistics entities faced margin pressures, mainly because of delayed price hikes. The subsequent price surge in Q2 FY24 has raised eyebrows, prompting questions about the logistics sector's capacity to transfer these cost burdens onto their clientele.
“With gradual demand recovery on the back of supportive macro-economic factors, ICRA’s sample set witnessed revenue growth of 16 per cent in FY23 on a YoY basis, amid a low base of FY22. The operating profit margin, however, contracted to 12.4 per cent in FY23 compared to 14 per cent in FY2022 on account of fluctuations in fuel procurement cost. As witnessed in Q1 FY24, ICRA expects the aggregate operating profit margins for the sector to marginally moderate to a range of 10.5-12.5 per cent in FY24, from 12.4 per cent in FY23 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,” said Suprio Banerjee, vice president and sector head – corporate ratings, ICRA.
Fibre2Fashion News Desk (DP)
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