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Truck operators in India bear the brunt of slowing economy

A lorry operator’s profitability is a function of freight rates and operating costs. Truck freight rates are in turn governed by demand for transport, the number of freight trips and capacity utilization. When demand is weak, part of the fleet is grounded and fewer freight trips are made every month. In such cases, freight rates fall as operators try to avoid keeping trucks idle. Photo: HTPremium
A lorry operator’s profitability is a function of freight rates and operating costs. Truck freight rates are in turn governed by demand for transport, the number of freight trips and capacity utilization. When demand is weak, part of the fleet is grounded and fewer freight trips are made every month. In such cases, freight rates fall as operators try to avoid keeping trucks idle. Photo: HT

Sluggish industrial output, higher borrowing costs and rise in diesel prices have hit margins of truck operators

Mumbai: Ludhiana-based Tarlochan Singh owns 20 trucks. He may sell them and exit a business he has been running for three decades.

N.L. Gupta, proprietor of Caravan Roadways has sold 30 to 35 trucks from the 300-odd he had a year ago.

Anil Bamb, owner of Axis Carrier and Logistics, which ferries goods for the automobile sector, is worried that the equated monthly payments for his 350 trucks could stretch to as long as 5.5 years from three because of interest rate increases.

There are many such stories that reflect the predicament of those engaged in the road transport industry as the Indian economy battles to recover from its slowest pace of growth in a decade—5% in the year ended 31 March. It expanded only 4.4% in August.

Sluggish industrial output has meant fewer goods to haul and stagnant freight rates. Higher borrowing costs and a 24% increase in the price of diesel in the past 12 months is hurting the margins of truck operators, especially small fleet owners (with six to 20 trucks), who make up 75% of the market and are the worst hit in the supply chain.

Higher fuel prices have dealt a big blow to road transporters because fuel accounts for 55% of a transporter’s operating costs, according to a 2012 study by Transport Corp. of India Ltd and Indian Institute of Management, Calcutta.

A revival in the transport business isn’t likely anytime soon so their finances will likely get stretched further, said Surjeet Singh Arora, an analyst at brokerage Prabhudas Lilladher Pvt. Ltd. “The slowdown coincided with months when there is a lull due to rains," said Arora. He maintained a negative view on the trucking industry for the next 4-6 months.

About half the goods transported in India are carried by trucks.

A lorry operator’s profitability is a function of freight rates and operating costs. Truck freight rates are in turn governed by demand for transport, the number of freight trips and capacity utilization. When demand is weak, part of the fleet is grounded and fewer freight trips are made every month. In such cases, freight rates fall as operators try to avoid keeping trucks idle.

Truck makers have been hit too because of a drop in demand for new vehicles.

Truck sales in India have been declining for 20 months in a row, according to the Society of Indian Automobile Manufacturers (Siam), an industry lobby group.

The impact is most pronounced in the heavy duty trucks that are deployed for long-distance haulage.

Sales of such vehicles fell sharply by 29% to 95,000 units from 133,489 unitsin the seven months to October compared with a year ago, Siam says.

Truck manufacturers, who have been operating at 40% of installed capacity, don’t see any hope of recovery just as yet.

“Even if the macroeconomic activity improves, I think it will take some time for existing trucking capacity utilization to improve before there is any significant or perceived impact on new vehicle demand," C. Ramakrishnan, chief financial officer, Tata Motors Ltd, told analysts in a earnings call on 8 November. “So I think we will continue to see a challenging period for some time now."

Tata Motors, which sells one in every two trucks bought in India, saw overall commercial vehicles sales drop 22% to 1,98,266 units in the first seven months to October compared with a year ago, according to Siam.

“Industry’s volumes are less than half of what it was 2 years ago," Pawan Goenka, executive director and president automotive and farm and equipment sectors at Mahindra and Mahindra Ltd told reporters on 14 November.

Truckers have a litany of woes to narrate. According to Tarlochan Singh, in the last two years, while toll charges from Ludhiana to Mumbai (the key route on which his trucks ply) have more than doubled from 7,000 to 15,000, the cost of new tyres have increased from 22,000- 27,000 to 34,000- 47,000 (10 wheels). Freight rates on the route have remained unchanged at 270 per quintal.

“I am incurring heavy losses," he said. “As there is no business, I am considering selling the trucks and winding up the business."

Exiting from the trade is not easy either.

“I have yet to find a buyer for the trucks and also have a loan to repay," he said.

Bamb of Axis Carrier said there are times the trucks have to wait at a location for days together for freight to carry. “You can’t have an empty truck travel from one city to the other," said Bamb.

His firm works only for the auto sector, one of the reasons it has been hit harder. Auto sales in the country have been going through the longest streak of declining sales. Car sales declined for nine straight months in July before showing a small uptick in August and September.

Because of shrinking business and high operating costs, transporters are finding it difficult to service loans taken to buy vehicles, hurting those engaged in the financing of commercial vehicles. More than 90% of the trucks and buses in India are bought on credit.

In a report on Indian financial sector outlook last month, analysts Aashish Agarwal, Prakhar Sharma and Akshat Agarwal from brokerage CLSA wrote even as lenders remain strict about recoveries, non-performing loan ratio can double over the next 12-18 months. They attributed it to severe stress on cash profits of truck operators. According to them, truck operator’s income has fallen sharply to 2,000 per truck per month from 15,000.

As the economic outlook continues to remain subdued and trend in some of other indicators such as inflation, interest rates and capex cycle remain unsupportive, Icra’s forecast for domestic commercial vehicle sales for 2013-14 stands at 690,000 units, reflecting a shrinkage of 13% over the prior year, according to Icra’s quarterly update study released on 13 November.

Umesh Revankar, managing director, at Shriram Transport Finance Co., the country’s largest financier of used trucks, said his firm’s bad loans rose only marginally in the June quarter. The company’s net profit for the September quarter fell 3% as its gross bad loans increased to 3.27% for the quarter from 3.09% a year ago. Provisions and write-offs were also up by 25% from the year-ago period.

To be sure, trucks have been idling not only because of the freight volumes shrinking, but also due to a shortage of drivers, said Bal Malkit Singh, president of the All Indian Motor Transport Congress, the transporters’ lobby group.

“No one wants to be a truck driver any more," said Singh, citing perceived harassment by the police en route and difficulty in getting a license as key reasons for dissuading young men from the vocation.

A well-meaning government notification has complicated matters by raising the educational bar for truck drivers.

To ensure road safety, in 2007, the roads ministry made it mandatory for drivers transporting hazardous materials such as chemicals, kerosene and diesel to at least pass the class X examination; those who carry regular cargo need to have studied at least until class VIII.

The slowdown has not spared large fleet operators either. According to Jasjit Sethi, chief executive, TCI Supply Chain Solutions, the company’s cash flow has remained positive, but operating costs has been going up. The company’s operating margins shrunk to 4.46% in the September quarter from 5.15% a year ago.

Even festivals, which typically buoys demand, didn’t help. “The situation on the ground continues to be bad," said Axis’ Bamb, adding the freight rates have remained unchanged for the past three years

Bal Malkit Singh is pinning his hopes on India’s long-term consumption story. “With the country having a robust domestic consumption, the road transport sector will also find favour and those engaged in it would also benefit," he said.

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