Logistics outlook revised to negative

Given the prevailing circumstances and its near impact on the industry metrics, ICRA has revised the outlook on the logistics sector from ‘stable’ to ‘negative’. CARGOTALK reaches out to industry players to take their opinion on where is the logistics sector to be seen by the end of this financial year.

Kalpana Lohumi

With intermittent lockdowns still in place in several pockets across the nation and muted recovery anticipated in the industrial activity, the logistic sector including warehousing sector is likely to witness sharp demand contraction in the near-term. Consequently, in FY2021, ICRA expects a contraction of 18-20 per cent Y-o-Y in aggregate revenues of its sample of logistics companies.

Additionally, the near-term profitability metrics are anticipated to remain under pressure given the subdued fleet utilisation levels in light of muted freight availability, and continued high fixed costs such as driver salaries, truck EMIs and maintenance costs. Accordingly, the outlook on the sector has been revised to ‘negative’ from ‘stable’.

The implementation of the 40-day nationwide lockdown aggravated the prevailing softness in the Indian economic activity, resulting in a decline in freight availability during Q4 FY2020, which further contracted sharply in Q1 FY2020. According to Shamsher Dewan, Vice President, ICRA Ratings, “The implementation of nationwide lockdown to contain the COVID-19 spread resulted in disruption in supply chains across sectors, restrictions on cross-border movement and dearth of availability of drivers and thereby led to contraction in revenue of the logistics sector in Q4 FY2020; and subsequently in Q1 FY2021. Further, the near-term growth prospects of the sector also remain subdued owing to the evolving COVID-19 situation, which has exacerbated the Indian macroeconomic growth scenario. Accordingly, the domestic logistics sector is expected to contract sharply in the current fiscal.”

“Under the current circumstances ICRA’s revised outlook for logistics sector from stable to negative seems perfectly reasonable,” believes Surendra Jeet Singh, Managing Director, Pinkcity Logistics, in adding, “To state the fact, the movement of EXIM containers which is also a part of the transportation sector has taken a huge hit. The import movement has seen a sharp decline due to the effect on import and the same effect has now snowballed into the export sector where there is a slowdown in movement in numbers due to non-availability of containers. The price point in export has firmed due to demand but due to lack of equipment the movement is still subdued and the same has a roll-on effect on the transportation sector.”

The logistics sector will take at least the next three quarters to revive as the price and payment of this sector is last priority for the manufacturers. The manufacturers shall see an upside by next two quarters in terms of volume and then only the volume in transportation shall start seeing the effect. Moreover, no incentive has been given to the transportation sector or fleet owners to revive. The only way government could have incentivised the sector was by waiving taxes and permit fees which was already exorbitant. While government has announced that the fees, insurance & permit fees and taxes could be deferred but the penalties that have been levied has offset any benefit which could have transpired because of allowance of delay in payment.

The transportation companies have been burdened with high fuel rate which exists despite such low rates of crude in international market. The effect or benefit of falling crude in international market has not percolated to this sector at all while all the benefit is being passed on to state-owned refining companies. According to Singh, it is not a great business decision on part of the government. He adds, “In times of pandemic, the state should subsidise the sectors of industries which are stressed and the government could have helped the sector by assisting on fuel prices and helping with the direct state taxes form the major part of overhead and operational cost. No benefit has been provided by the government to help a fleet owner to maintain the staff during the pandemic. Logistics sector, particularly road, if not provided with these benefits can take more than next three quarters to see an upside.”

On the other hand, Ravi Jakhar, Chief Strategy Officer, Allcargo Logistics, says, “Although the COVID-19 has disrupted the economy and affected the cargo movement during the lockdown phase, the overall impact of the pandemic situation on the logistics sector will only remain in the short-term. The sector has, in fact, shown tremendous resilience to weather the storm. As the economy is showing signs of revival and the manufacturing sectors are coming back to normal, the logistics sector should regain its pre-COVID momentum soon. Unorganised logistics players with limited ability to navigate through the crisis may however get impacted.”

Vikash Khatri, Founder, Aviral Consulting is of the opinion that by the end of FY 21 the logistics industry will be on a normal growth trajectory with a lag of one year. Explaining how, he continues, “We are approaching towards mid of FY 21 and the situation is still not normal. Although most of the economic activities have started inspite of the growth in COVID-19 cases but a normal situation is still far-off. Our estimate about transportation sector is aligned with ICRA’s estimate of contraction by 18-20 per cent. If we break down volume trends in month over month, we find that April was a completely washed out month, while transportation activities in May were about 45-50 per cent normal. Since June there is continuous improvement in month over month volumes and it is currently hovering around 80 per cent of normal volume. In last five months, decline in EXIM has also directly impacted hinterland transportation volumes. Once we extrapolate these volumes for FY 2021 with continued improvement in subsequent months, we see overall contraction in road transportation to the tune of 20 per cent.”

It is the only sector which has not stopped working in this pandemic since day one. Explaining the factors that made the outlook of the logistics sector negative, Singh says, “The transportation and logistics sector was working non-stop while catering to the essential services. However, logistics and transportation is dependent on other sectors as well. The manufacturing sector in itself is contracting by more than 0.5 per cent every quarter for last five quarters before the pandemic has now a domino effect.
Just to see the effect of the same, few major inland Container Depots/Ports were closed by government during the second month of the pandemic; now the transport companies operating in these inland ports have unutilised capacity which will now add more trucks to places which are still operating. This kind of unutilised capacity burden will ultimately drive the logistics cost down and will affect the sector even more.”

Develop logistics infrastructure
While explicating what is required to bring stability in the industry, Jakhar says, “Resilient supply chains can provide a significant advantage to the economy at large and therefore stability in the logistics industry can have a far-reaching impact. This can be achieved through better use of technology and developing logistics infrastructure. The introduction of the National Logistics Policy will further create an enabling environment in the industry by facilitating the seamless movement of cargo and reduction in the logistics cost. Continued e-commerce boom will further ensure business continuity and growth.”

According to Khatri, “Growth of logistics will be ultimately depending on restoration of economic activities and demand. But from supply side, interim initiatives will be required to support the industry for sustenance. There is a need for financial relief to truck owners, transporters, distributors, and the agent community to help them in managing their working capital and recover from the loss of business due to the lockdown. Government has already taken various initiatives specially to support road transportation by way of moratorium on EMI, extending the validity of vehicle documents and loans to SME. Push to boost manufacturing on Indian shore will also support the sector.”