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Logistics activity near pre-COVID levels; outlook bright

Logistics activity has picked up significantly in recent months, driven by a pickup in economic activity and lifting of COVID-related restrictions. Inventory pile-up ahead of the upcoming festive season remains strong, and all indications point towards elevated demand for Logistics over the next several months. In this backdrop, we hosted a ‘Logistics Day’ to interact with various stakeholders (fleet operators, e-commerce players, members of the trucking association, and large transporters) to check on the ground realities. A summary of the key takeaways is provided below, followed by a detailed analysis.

Volumes pick-up in the last few months

* Volumes have risen in the last few months due to pent up demand and the onset of the festive season. The demand momentum is expected to continue in 3Q, but may taper down slightly by 4QFY22. Utilizations are near 85% levels, with strong cargo available even for return loads.

* The e-commerce driven Express Logistics space is expected to grow faster than conventional FTL Logistics. With demand picking up from Tier II and III cities, larger players are moving to regional hubs.

Robust demand pushes up freight rates, latter to stay firm in the near term

* Freight rates have risen by 25-30% over Jun-Sep’21, due to a strong pickup in demand and rise in diesel prices.

* Over the last several quarters, even as diesel prices were increasing, freight rates did not rise in the same proportion due to low volumes. Given the recent freight hikes and no major diesel price change, the gap has significantly narrowed.

* Freight rates are expected to be firm till the festive season, after which it may marginally fall in 4QFY22 as demand settles down.

* Sea freight rates have gone through the roof due to container shortages and the logjam at global ports. The situation is unlikely to normalize in the next one year.

Logistics operators selectively add to their fleet

* Vehicles running on the new BS-VI emission norms, which came in from Apr’20, are 20-25% more costly than the BS-IV vehicles, which is impacting margin.

* Operators are skeptical on new vehicle additions on fears of a third COVID wave and await clear visibility on future demand.

* They are adding vehicles to replace their older fleet with higher capacity trucks.

* The scrappage policy would not majorly impact CV sales as: a) larger transporters do not operate vehicles older than 12 years, and b) older vehicles, due for scrapping, are of low tonnage and used in regional operations.

DFC to reduce turnaround time; Railways to gain market share

* Commissioning of the DFC will usher efficiency and reduce costs for the industry. Roads are a preferred mode of transportation for shorter distances and for first and last mile connectivity.

* Benefits are already visible in sections already commissioned under DFC.

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