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After a subdued beginning to the year due to the second wave of Covid-19, the road logistics sector has shown a strong recovery with most players reporting healthy growth in freight volumes, ratings agency Icra said on Tuesday. Based on the performance over the last two quarters, Icra has maintained stable outlook for the sector.

Demand recovery and improved business activities from Q2 FY2022 onwards have led to better asset utilisation, which, along with cost-rationalisation measures, supported operating margins in FY2022, the ratings agency said in its report.

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 industry paradigm shift towards organised logistics players, post the GST and e-way bill implementation, it added.

The sector is also expected to witness some consolidation on account of the stress led by the pandemic. However, the threat of a new variant has the potential to derail the momentum of recovery, if it becomes a source of fresh round of lockdowns/restrictions in the near term, Icra said.

“Industry revenues reached multi-year high levels in Q2 FY2022 with strong recovery in industrial activities and favourable outlook for several sectors. Monthly FASTag volumes ramped up to its highest level since the pandemic in Oct-2021, with declining Covid infections and the situation moving towards normalcy. With an accelerated pace of vaccine roll-outs, pent up demand and firm freight rates, driven by high fuel prices, the sector is likely to grow at 13%-16% in FY2022 over FY2021," said Suprio Banerjee, vice president & Sector-Head, Icra Ratings.

“Nevertheless, the propagation of the new Omicron variant is a key monitorable, given the sector’s vulnerability to economic activity on an aggregate basis. We expect industry volumes to remain stable in FY2023 as well, with expectation of steady business activities and formalisation of the sector."

Overall, the aggregate revenues of Icra’s sample of road logistics companies increased on a quarter-on-quarter basis in Q2 FY2022 by 28.0% over Q1 FY2022. On a sequential basis, monthly FASTag volumes increased by 11% in October and remained flat in November and e-way bill volumes grew by 8% in October. The volumes slowed down post the festive season by 17% in November.

Growth over the medium term would continue to be driven by demand from the varied segments like e-commerce, FMCG, retail, chemicals, pharmaceuticals and industrial goods, coupled with industry paradigm shift towards organised logistics players, post the GST and E-way bill implementation. 

Furthermore, multi-modal offerings are likely to gain increased acceptance and traction going forward, given that players offering such 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, “added Banerjee.

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