Stable Outlook for Logistics Sector on Margin Cushion from Value-added Services - India Ratings

Mumbai, February 24, 2014: India Ratings & Research (Ind-Ra) has assigned a stable outlook to the logistics sector for FY15. This is based on the strong likelihood of the sector continuing to display overall moderate growth rate despite a continued economic slowdown. Most segments of the industry have low leverage, except the container freight station/ inland container depot (CFS/ICD) segment, giving industry players a degree of financial flexibility to weather the slowdown. In addition, the value-added offerings of large players help support margins, thereby cushioning their credit profiles.

Most of the Ind-Ra rated logistics companies are also on a Stable rating Outlook.

The agency believes that revenue for companies offering value-added road freight services would grow at a higher rate of 12%-15% in FY15 than those offering basic road freight services (8%-10%). Companies in the CFS / ICD segments could display a high single-digit growth rate on the back of a revival in international trade volumes. Third-party logistics (3PL) providers could also grow at a low double-digit rate in FY15, given increasing private port operations and integrated logistics offerings.  

Ind-Ra expects that large companies in the road transportation segment to continue to be resilient to the slowdown, given their high operating efficiency and presence in profitable sub-segments such as time-definite delivery services and specialised offerings. Conversely, small companies would continue to be adversely impacted due to low demand for road freight during the slowdown. This is because they contribute over 90% to truck ownership in the country and are unable to revise freight rates in tandem with hikes in diesel prices.

On the basis of Ind-Ra’s study, CFS/ICD operators could be most impacted from the slowdown in India’s international trade volumes, considering the large debt-funded infrastructure investments made. Moreover, inadequate cash flows may force few companies to opt for corporate debt restructuring.

Ind-Ra believes that 3PL providers, particularly those that employ asset-light business models, will fare better than small companies as well as those that are asset heavy. This is because small companies offer a limited range of services or have invested heavily in infrastructure but are unable to generate the freight volumes necessary to make their operations viable. A wide range of service offerings not only makes clients more dependent on service providers but also increases the negotiating power as well as profitability of service providers.

Specialty segments, where service offerings are linked to non-discretionary spending by corporates and driven by favourable legislation, would continue to display strong revenue growth and stable margins, for example ATM replenishment and cash management services. Alternately, services such as air charters could see a decline in demand due to the curtailment of expenses by corporates.

Attractive business opportunities are arising from increasing demand for specialised logistics services related to the recent explosion in the online retailing business. However, certain key regulations that were likely to provide a fillip to the industry have not been implemented. The implementation of the Goods and Service Tax seems unlikely before 2016 with the dissolution of the Lok Sabha in 2014, due to the upcoming elections. Additionally, the implementation of foreign direct investment (FDI) in the Indian retail sector has failed to be extremely positive for the organised 3PL segment. This has been due to lack of political consensus and complex government requirements involving restructuring of businesses by corporates before receiving investments.

WHAT CAN CHANGE THE OUTLOOK

Further Slowdown: India’s persistent weak industrial activity and low international trade volumes impacting multiple segments of the industry could cause the outlook to be revised to negative. A reduction in EBITDA margins significantly below FY13 levels could considerable weaken the credit profiles of industry players.  

Favourable Legislation: Ind-Ra does not envisage any significant regulatory or market changes in 2015 which would affect the rating outlook. However, over the medium term, implementation of GST along with the resolution of complexities regarding FDI inflows in retail could be positive for the Outlook of large players in the industry. They would be able to generate higher margins on the back of operational changes to take advantage of the positive change in regulations.

(Source: Manager – Corporate Communications and Investor Relations, India Ratings & Research -A Fitch Group Company.)//mumbai local news, mumbai news headlines, mumbai news live, mumbai news today, mumbai news update, mumbai news, mumbai current news, mumbai news headlines, mumbai news latest news, india news, world news,

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