Home / News / India /  Favourable demand supports growth momentum for road logistics: Icra

With economic activity picking pace in the country, the domestic road logistics sector is expected to continue its growth momentum in FY2023 after a healthy growth in last fiscal, ratings agency Icra said on Thursday.

The ratings agency has maintained its growth estimates of 7-9% in FY2023 for the sector based on the rising ability of the organised players to command a price premium even in light of the fuel price inflation scenario, while retaining cost reduction initiatives.

However, Icra said that the margin movement of players in the sector will continue to depend on customer demand attitudes, diesel price fluctuations, and the industry’s competitive intensity. As a result of the anticipated debt-financed capital expenditures for vehicle replacement required prior to the commencement of the scrappage policy and the rising interest rate environment, the agency said it is anticipated that debt coverage metrics will marginally weaken in FY2023 relative to FY2022 levels.

The introduction of the National Logistics Policy (NLP) aimed at promoting the seamless movement of goods, overcome transport-related challenges, encouraging digitization along with the significant reduction in time and cost, is targeted to reduce the logistics costs from 13-14% of GDP to single digits. This augurs well for the road logistics sector, as it shall reduce the overdependence on road through better integration of different modes of transport and in turn improve demand identification, thereby enabling better availability of trucks. The implementation, however, remains the key, given the coordination of multiple agencies, stakeholders, and physical entities involved.

Suprio Banerjee, Vice President & Sector Head – Corporate Ratings, ICRA Limited, said, “The logistics sector’s quarterly revenues increased by 5.8% in Q1 FY2023 compared to Q4 FY2022, thanks to solid and sustained demand from the manufacturing sector. The revenue remains close to multi-year high quarterly revenues, supported by sustained recovery in industrial activities. This is also reflected by the stability in monthly e-way bill volumes as well as FASTag volumes during Q1 FY2023, which also continues in the current quarter for Jul-Aug 2022. Following a 16.5% growth in FY2022 (over pre-Covid levels) and a 5.8% growth in Q1 FY2023 on the back of a revival in economic activities and firm freight rates, ICRA expects the logistics sector to grow by 7-9% YoY. 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 have managed to hike rates to a large extent in FY2022, their sustained ability to do the same rates remains to be seen. Most of the organised players were able to pass on the increase in fuel cost to its customers as reflected by healthy operating margins of 14.0% in FY2022 and 13.5% in Q1 FY2023 against 12.1% in FY2021."

Icra expects the aggregate operating profit margins of the sample to remain in the range of 12-14% in FY2023, compared to 14.0% in FY2022. 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. Furthermore, multimodal offerings are likely to gain increased acceptance and traction going forward, given that players offering multimodal services had more flexibility. Given these factors, and the relatively higher financial flexibility available at large, organised players vis-à-vis their smaller counterparts, there is potential for increased formalisation in the sector going forward, the agency said.

In addition to these, timely and effective implementation of the National Logistics Policy would be key to providing a requisite impetus to the sector.

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