Road logistics eyes dedicated freight corridors as diesel becomes dearer

The road logistics segment is increasingly eyeing use of Railways’ Dedicated Freight Corridors (DFCs) for transporting goods — particularly for mid-mile deliveries — as a cheaper, environment-friendly and efficient alternative to diesel.

Roads are still preferred for first and last mile deliveries due to convenience like door-to-door delivery, but rising diesel prices is propelling the shift towards DFCs as fuel accounts for a major share of operating costs of logistics players.

DFCs are gradually changing the mix towards cost-efficient Railways, which is now working on Joint Parcel Product with India Post — the latter covering first-mile and last-mile connectivity, while the former handles intermediate connectivity. The shift could help reduce logistics costs, which is now at 14 per cent of GDP.

Game changer

DFCs will have freight trains of 1,000 m length, and on an average will replace 72 trucks, which will be a game changer in logistics, considering roads carry 60-65 per cent of India's freight with Railways having a 27 per cent share. Besides, trains on DFCs will carry around 6,500 tonnes of weight and will run at around 60 kmph, thereby reducing time and cost.

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“Trucking cost is undoubtedly dependent on diesel price, and as the upward trend in price continues, it is more and more difficult for fleet owners to bear the cost without passing it on to customers. Customers are now exploring alternative options, which are greener and less dependent on diesel, like rail,” Gateway Distriparks, CMD Prem Kishan Gupta, said.

With Western DFC already operational in some segments, and more DFC announced, the option of using rail becomes increasingly available for users, and it helps in reducing the cost of logistics to a great extent. Going ahead, we see this shift taking place at a faster pace than previous years," he noted.

High fuel costs

Diesel prices have gone up by around 10 per cent since March 22 to ₹96.67 a litre in Delhi and ₹104.77 a litre in Mumbai. Generally, fleet operators sign contracts, in which an increase in fuel costs (around 5-8 per cent), can immediately be passed on to customers. Operators are now negotiating with customers on rates. Fuel accounts for anywhere between 45-60 per cent of the operating cost of a truck.

Crisil Research Director, Hemal Thakkar, also points out that increase in diesel prices impacted freight rates in April. Till mid-April, the agency has seen low single digit increase (per centage points) in freight rates and more clarity will come with data for the entire month.

“Considering the implications of inflation and other macro indicators on retail, as well as industrial consumption metrics, quantum of freight demand available will be a key monitorable going ahead, which will continue to define the ability of transporters to pass on any diesel price changes that take place in FY23,” he explained.

Impact on STOs

ICRA’s VP and Sector Head (Corporate Ratings), Suprio Banerjee, said high diesel prices will impact small truck operators. For the goods carrier segment, where transactions are largely B2B in nature, the relationship is generally for longer term with a built-in clause of fuel price adjustments. This is however largely applicable to the organised sector, while for the unorganised sector/ small fleet operators, who have lesser bargaining power, enforcement of such contracts is difficult, and consequently margins remain vulnerable to diesel price movements, he added.