Domestic logistics sector to grow at 8-10 per cent over the medium-term

ICRA Research has forecast the domestic logistics sector to grow at 8-10 per cent over the medium term with the outlook remaining largely stable. The key drivers for demand pick-up would be the festive season as well as the anticipated revival in infrastructure spending post monsoons and improvement in receivable cycle of contractors. The ensuing demand momentum will lead to higher freight volumes in the H2 FY2020 despite weak macro-economic scenario.

Industry capex towards capacity augmentation (fleet, warehousing, cold storage, terminals etc.) and investments in technology to improve service offerings is estimated at ₹9-11 billion annually (which translates into 2-3 per cent of operating income). The credit metrics of ICRA’s sample of logistics companies are anticipated to remain comfortable with Debt/OPBITDA ranging between 1-2x and interest cover between 7-8x, in line with previous fiscal given the focus on asset-light strategy. On the flip side however, ICRA’s analysis of sample of 12 large logistics players in Q1 FY2020, has indicated a slow down to 7 per cent as compared to 11 per cent in Q4 FY2019 and 10 per cent in Q1 FY2019. The economic slowdown resulted in subdued freight availability, which coupled with flat freight rates moderated the revenue growth momentum of the logistics sector. Certain industry demand segments like automobile, FMCG and retail displayed the slow growth that primarily impacted the unorganised players’ over-dependent to these sectors. The organized and integrated players with diversified presence continued to grow their market-share in the post GST and E-way bill era, albeit at a slower pace.

The economy-wide slowdown also impacted the growth of rail and seaways freight traffic that primarily comprises of bulk commodities like coal, cement and fertilisers. However, the decline was partly offset by benign diesel prices and cost-rationalisation measures undertaken by the players. However, profitability continues to remain constrained due to increased competitive intensity in sectors like E-commerce logistics and Air Cargo, thereby limiting the profitability of players with high exposure to these segments.

“Going forward,” concludes Mr. Shamsher Dewan, Vice President, ICRA Ratings, “ICRA expects the Indian logistics industry to continue evolving/being shaped in the medium term as reflected by the on-going trends. This includes trends like shift towards organised players post GST and E-way bill implementation; focus on multi-modal offerings, increasing interest by private equity and foreign players in the space, emergence of e-commerce logistics requirements, focus on warehousing and cold chain services, and increased adoption of technology.”