The road logistics sector anticipates good demand in FY24, driven by solid domestic consumption and 6-9% revenue growth

According to the Investment Information and Credit Rating Agency (ICRA), the road logistics sector anticipates good demand conditions in FY24, helped by stable domestic consumption and investment demand. On a higher basis than in FY23, industry revenue growth is predicted to be 6-9% in FY24. This growth will be primarily driven by demand from a variety of markets, including e-commerce, Fast Moving Consumer Goods (FMCG), retail, chemicals, pharmaceuticals, and industrial goods, as well as the industry's paradigm shift towards organised logistics players following the implementation of the GST and the e-way bill.

The forecasts are nevertheless subject to downside risks from any appreciable tapering of demand brought on by high inflation, interest rates, and supply-demand adjustments that have an influence on the Indian economy globally.

According to the report, due to inflationary input cost pressures, primarily elevated crude oil prices and debt-financed capital expenditures for vehicle replacement that was necessary before the introduction of the scrappage policy, as well as a high-interest rate regime, the industry's debt coverage metrics are expected to slightly improve in FY24 compared to FY23 levels.

According to Mr. Suprio Banerjee, Vice President and Sector Head, Corporate Ratings, ICRA Limited, due to the gradual demand recovery on the back of supportive macro-economic factors, the report sample set witnessed revenue growth of 16% in FY23 on a year-on-year (Y-o-Y) basis among a low base in FY22. The operational profit margin, however, decreased to 12.4% in FY23 from 14.0% in FY22 because of changes in the cost of fuel purchases. ICRA anticipates that due to increased input costs, as seen in the first quarter of FY24, the sector's overall operating profit margins will somewhat decline in FY24 to a range of 10.5–12.5% from 12.4% in FY23. In the face of fierce competition, the operators' capacity to implement additional price increases to offset input price rises remains a critical credit measure.

ICRA reported that since March 2023, e-way monthly volumes have mostly stayed consistent at above 80 million, with August 2023 reporting all-time high volumes, indicating sustained domestic commerce and transportation operations. The monthly FASTag volumes have also changed in step with the e-way bills; they ranged from 285 to 320 million in the fourth quarter of fiscal year 2023 and the first quarter of fiscal year 2024, with an all-time high of 335 million in May 2023, demonstrating a booming vehicle movement.

The operating margins of the logistics players were impacted due to the lag in price hikes, despite the decline in crude oil prices in the first quarter of FY24. The subsequent sharp rise in prices in the second quarter of FY24 raised concerns over the ability of the logistics players to pass on the cost to their customers.

Mr. Suprio Banerjee further mentioned that players in road logistics are nevertheless subject to social and environmental problems. Investments in alternative fuel vehicles or improvements to the current fleet are necessary due to stricter pollution control regulations. They may face financial repercussions and reputational damage due to litigation and penalties brought about by problems with hazardous emissions and waste. The social risk encompasses the lack of drivers, their health and safety, and the quality of their work-life balance.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.