ICRA Ratings expects pressure on logistics sector in near term

Pressure on earnings and credit metrics of logistics entities, especially the smaller, unorganised players, is expected to continue over the near-term, according to ICRA Ratings. However, growth over the medium-term is expected to gain momentum, said a release.

With the impact of several cost-control initiatives like employee salary reduction, rental waivers, reduction in lorry hire charges being temporary in nature, and with the firming up of diesel prices, ICRA believes that margins (of these logistics firms) are likely to moderate from the highs of 9.6 per cent reported in second quarter, in fiscal year 2021.

ICRA expects the aggregate operating profit margins (of its sample) to be in the range of 6-8 per cent in fiscal year 2021, as against 8.8 per cent in FY2020.

According to Shamsher Dewan, Vice President, ICRA Ratings, “Despite the sequential improvement reported in Q2 FY2021, ICRA expects the pressure on earnings and credit metrics of logistics entities, especially the smaller unorganised players, to continue over the near-term, given the challenges of overcapacity prevalent in the system even prior to the pandemic. Accordingly, credit metrics of logistics companies are expected to moderate to some extent during FY2021. Given the expectations of continued pressure on earnings and credit metrics over the near term, the outlook on the sector remains negative, till the macroeconomic recovery proves sustainable enough to alleviate these concerns.”

The release added that, however, growth over the medium-term is expected to gain momentum with anticipated increase in demand from segments like e-commerce, FMCG, retail, chemicals, pharmaceuticals and industrial goods coupled with industry paradigm shift towards organised logistics players post GST and E-way bill implementation.

Additionally, the sector is likely to witness some consolidation trends, given the rising pressure on viability of small fleet operators.

Also, multi-modal offerings are likely to gain increased acceptance and traction going forward, given that players offering multi-modal services had more flexibility and hence, were better placed to service their customers during the lockdown phase.

Given these factors, and the relatively higher financial flexibility available to large organised players vis-à-vis their smaller counterparts, there is potential for increased formalisation in the sector going forward, it said.