ICRA Projects Indian Road Logistics Industry to Grow at 3-6% in FY2025

ICRA Forecasts Modest Growth for the Road Logistics Sector

ICRA’s analysis suggests a measured pace of expansion for the Indian road logistics industry. The report acknowledges several factors influencing this growth trajectory. One key aspect is the limited ability of logistics players to raise freight rates. Additionally, the upcoming elections in India are expected to lead to a softening in government capital expenditure due to the Model Code of Conduct. Furthermore, high inflation and interest rates are likely to dampen consumer demand, impacting the overall logistics industry.

Despite these headwinds, ICRA’s report maintains a stable outlook for the sector. This optimism is fueled by sustained economic activity, the increasing traction of organized trade, and continued support from various segments like e-commerce, FMCG, retail, pharmaceuticals, and industrial goods.

Industry Navigates Challenges While Maintaining Profitability

ICRA’s sample set of logistics companies witnessed a modest revenue growth of 2.3% in the first nine months (9M) of FY2024 compared to the same period in the previous year. This subdued growth reflects tapering demand due to factors like high inflation, uneven monsoon patterns, a high-interest-rate environment, and a relatively muted festive season. Consequently, ICRA estimates a low single-digit growth of 2-5% for FY2024 on the elevated base of FY2023. The projected growth for FY2025 is slightly higher, ranging between 3-6%, but is still impacted by the aforementioned challenges, particularly high inflation, and cautious consumer sentiment.

The report also highlights the pressure on industry operating profit margins. Margins contracted to 11.2% in 9M FY2024, a decrease of around 150 basis points year-on-year. This decline is attributed to rising operating costs (excluding fuel) due to inflation and limitations on raising freight rates in response to sticky retail diesel prices. ICRA expects margins to remain range-bound between 10.5-12.5% in FY2024 and FY2025 compared to 12.4% in FY2023. While efficiency gains from increasing digitalization and value-added services may offer some relief, inflationary headwinds are likely to continue exerting pressure.

Debt Management and Investment Considerations

The report examines key debt metrics for the industry. The total debt to operating profitability before interest, depreciation, and tax ratio is expected to have moderated slightly to a range of 1.5x-1.7x in FY2024 from 1.4x in FY2023. This increase is primarily due to rising operating costs (excluding fuel) and debt-funded capital expenditure for new vehicles. Additionally, expanding branch networks and technology investments are anticipated to lead to a rise in lease liabilities.

Indicators Point Towards Resilient Domestic Trade Activity

Despite the projected moderate growth, data suggests continued activity within the Indian road logistics sector. E-way bill volumes, a key indicator of domestic trade movement, have remained largely stable in the last four months, consistently exceeding 85 million. This follows an all-time high of 100 million recorded in October 2023. Similarly, monthly FASTag volumes, signifying toll collection on highways, have also exhibited stability, ranging from 295 to 350 million in the current fiscal year, with a peak of 348 million in December 2023. This sustained activity reflects the resilience of domestic trade and transportation.

Environmental and Social Risks Remain on the Horizon

The report also acknowledges environmental and social risks faced by the road logistics industry. Tightening emission control norms necessitate investments in alternative fuel vehicles or upgrades to existing fleets to comply with regulations. Failure to adhere to these norms could lead to litigation, penalties, and reputational damage for logistics companies. Additionally, the industry grapples with driver shortages, highlighting the need to address driver health, safety, and work-life balance for a sustainable workforce.

Conclusion
ICRA’s report offers a cautiously optimistic outlook for the Indian road logistics industry in FY2025, projecting a growth range of 3-6%. While challenges like inflation and limited freight rate increases may impede immediate expansion, the sector benefits from sustained economic activity and demand from key segments such as e-commerce and FMCG. Government initiatives supporting digitalization and infrastructure development further bolster growth prospects. To succeed in this environment, logistics firms must address cost pressures, adopt technology for efficiency, and comply with stricter emission norms. Additionally, prioritizing driver welfare is crucial. By navigating challenges and leveraging India’s economic strengths, road logistics companies can position themselves for sustainable growth in the coming years.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. The information is based on various secondary sources on the internet and is subject to change. Please consult with a financial expert before making investment decisions.