Ind-Ra: E-Way Bills Complement GST-Led Developments, But SRTOs to Face Near-Term Challenges

India Ratings and Research (Ind-Ra) expects small road transport operators (SRTOs) to face near-term teething challenges during the transition period for the implementation of e-way bills. Conversely, larger fleet operators are likely to be broadly unaffected. The agency expects an increase in compliance costs and operational requirements could stress the operating metrics of SRTOs over the near to medium term. However, e-way bills are also expected to ease inter-state trade and commerce, speed-up settlement of input tax credit (ITC) claims, optimise working capital and facilitate formalisation of the transportation industry at large.

Short-Term Challenges for SRTOs: Following the implementation of e-way bills on 1 April 2018, truck operators are required to put in place necessary systems and processes to maintain formal books of accounts and integrate their operations with the e-way bills portal. This is likely to reduce the proportion of informal and cash-based movement of a large portion of goods. Ind-Ra expects small and unorganised players to face challenges in technology adoption and system integration over the near term.

 

Delinquencies in commercial vehicle (CV) loans have increased, owing to muted economic activities along with uncertainties over various operational issues pertaining to GST implementation. While the delinquencies seem to have started easing according to February 2018 data, Ind-Ra believes that the operational disruptions being faced by SRTOs are likely to subdue freight activities over the near to medium term, resulting in a continuation of delinquencies. Additionally, the new CV loan originated in the past 15 months may face challenges prior to those originated earlier. Empirically, CV pool delinquencies peak at a vintage of around 18 months. Such new entrants are likely to be more vulnerable and could face greater headwinds in debt servicing due to a higher proportion of principal outstanding.

Smooth Inter-state Movement of Goods: Over the long run, Ind-Ra expects the introduction of e-way bills to ease the inter-state movement of goods. Various operational inefficiencies are likely to be minimised; wait time at checkpoints is expected to decrease by around 15% and compliance would be less cumbersome. In the medium to long run, streamlined systems could enhance the system-wide capacity by improving fleet efficiency. This may result in an available capacity overhang in relation to freight demand in the absence of a meaningful pick-up in economic activities.

Settlement of ITC Claims, Shorter Transit Time to Reduce Working Capital Needs: Ind-Ra further believes that the implementation of e-way bills would facilitate the timely settlement of ITC claims in inter-state transactions. A substantial portion of ITC claims in inter-state transactions is under dispute or has been declined due to differences in invoice values

The e-way bill will provide a common platform for the reconciliation of ITC claims with the value of goods actually supplied. This would result in easier and timely processing of ITC claims and is likely to aid in the the release of input credit lock-up - previously estimated by Ind-Ra at INR1 trillion.

Additionally, a shorter transit time and realignment of supply chains post normalisation of GST will enable faster reachability and reduce inventory holding requirements. Lower lead times are likely to result in players such as automobile dealers, retailers in FMCG and auto original equipment manufacturers holding a low inventory over the medium to long run. The combined effect of reduced transit time and efficient settlement of ITC claims shall free up a part of the capital employed for such players. Consequently, Ind-Ra expects the cash conversion cycle to improve and lower the interest burden over the long run. Nonetheless, all these developments are likely to improve productivity for manufacturing sectors as a whole, which is conducive to growth of Indian merchandise export.

Catalyst for Consolidation: Ind-Ra expects significant consolidation in the transportation space and thus a reduction in the share of the unorganised freight market, with the development of a uniform market with easy movement of goods and an efficient supply chain. A larger proportion of transporters are expected to move from the unorganised to organised space and various larger players - who are operationally better equipped to comply with the e-way bills related requirements - are likely to acquire the market share of small players over the near to medium term.

Freight rate harmonisation - due to a shift from the supply chains based on tax incentives to those based on proximity to pockets of demand & supply - is likely to pave the way for larger operators to expand their fleet size while small players will be required to upgrade their fleet size, systems and processes.

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