Pandemic, lockdown to impact profitability of domestic logistics operators

The rapid rise of Covid-19 pandemic and the Centre's decision to contain the disease outbreak in India through a 40-day lockdown is adversely affecting the domestic logistics sector, especially road transportation, ratings agency Icra said in its report today.

The immediate impact of the pandemic on the logistic sector has been a sharp fall in freight availability due to restrictions on production of non-essential goods, and shortage of fleet for movement of goods owing to dearth of drivers and consequent spike in truck rentals.

“With the likelihood of lockdown being lifted gradually and muted recovery in industrial activity, the logistic sector, including warehousing, is likely to witness sharp demand contraction in the near-term. In our view, while the entire value chain in logistics right from transportation to warehousing would be adversely affected, entities with asset-heavy business model will see a greater impact owing to high fixed costs," the report quoted Shamsher Dewan, vice president as saying.  

It added that the immediate term growth prospects of the sector also remain subdued owing to the outbreak of the Covid-19 pandemic, which has exacerbated the Indian macroeconomic growth scenario. Accordingly, the domestic logistics sector is expected to contract in the current fiscal.

Within the industry, segments such as fleet owner-cum-operators, warehousing and Container Freight Stations (CFS) segment would see sharp decline in asset utilization and in return weak financial performance.

Furthermore, the small fleet operators would be the most vulnerable owing to limited liquidity and financial flexibility.

Overall, while RBI’s forbearance initiative and toll exemptions provide some relief but limited fleet utilization in view of low margins would have an overwhelming impact on cash flows of fleet owners in the near-term.  

In Q3 FY2020, revenue of ’s sample of 12 large logistics players had declined by 2.6 percent year-on-year as compared to a growth of 18.6 percent in Q3 FY2019 and 1.9 percent in Q2 FY2020, in line with the continued moderation in GDP growth, which hit a 27-quarter low of 4.7 percent, resulting in subdued freight availability.

Muted consumer demand in sectors such as automotive, FMCG, capital goods and retail coupled with the slowdown in the production of bulk industrial commodities would adversely impact the growth of the sector.

The pandemic induced nationwide lockdown has further accelerated the ongoing slowdown in the Indian macroeconomic conditions resulting in subdued freight availability.

Consequently, in FY2021 too, the ratings agency expects a contraction of 6-8 percent year-on-year in revenue of its sample of logistics companies.

“Over the near-term,  believes the profitability of logistics operators to be impacted on account of the coronavirus outbreak and lockdown, which has significantly impacted freight availability and fleet utilisation. Further, adverse impact from Covid-19 pandemic poses a downside risk on the credit metrics of ’s sample of logistics companies,” Dewan added.

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