Ind-Ra Maintains Stable Outlook on Logistics Sector

India Ratings and Research (Ind-Ra) has maintained its stable outlook for the logistics industry for FY16. This segment continues to remain one of the most robust sectors of the economy, driven in part by the low leverage exhibited by most of its sub-sectors within the logistics industry. Low leverage endows corporates with the financial flexibility to withstand cyclical downturns. Further flexibility exists in several sub-sectors given their asset-light businesses which can adapt their scale of operations to the level of demand. Due to this operating strategy, debt levels are usually low.

Ind-Ra expects the sector to exhibit moderate growth in FY16 given the muted industrial and consumer demand. Due to this the financial profiles of most companies are also unlikely to display significant improvement.

 

The agency believes that in FY16 companies offering value-added road freight services would grow at a higher rate (5%-10%) than those offering basic road freight services (0%-5%). Segments entailing high value-added services such as temperature-controlled logistics, time-definite deliveries and cash management services are likely to clock strong growth rates. While temperature-controlled logistics would benefit from the strong growth in organised retail and quick service restaurants, those offering time-definite deliveries could post strong growth due to tie-ups with large e-tailers.

Third-party logistics (3PL) providers could also display significant revenue growth rates in FY16 (possibly at low double-digits) given the increasing trend of large corporates outsourcing their logistics requirements to just one vendor. The increasing participation by private players in port operations has also provided a fillip for segmental growth. Moreover as bundled 3PL services can be offered by coordinating with logistics companies offering complementary services and without investment in additional assets, this strategy is increasingly being followed by logistics companies.

Asset-heavy segments dependent on international trade volumes such as the container freight station (CFS) /inland container depot (ICD) and container train operator (CTO) segments might display modest growth of 3%-6% in FY16 given the limited likelihood of an improvement in international trade volumes in FY16. This sub-sector has the highest leverage within the logistics space, the survival of companies in these segments is dependent on high throughput of containers.

The credit profiles of CFSs located near Jawaharlal Nehru Port Trust were adversely impacted due to not only low volumes in FY14 and FY15, but also the distribution of a lower volume base over several CFSs in the vicinity. The increasing preference of shipping companies for Gujarat ports is another factor adversely impacting their credit profiles. CTOs have been negatively impacted due to stiff competition from the government-owned Container Corporation of India Ltd, which has rendered their operations unviable in several instances. Ind-Ra believes that their profitability and overall profile would continue to be weak in FY16.

OUTLOOK SENSITIVITIES

Further Economic 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 FY14 levels could considerably weaken the credit metrics of industry players.

Faster Pace of Recovery: In FY16 the revival of manufacturing and mining activities could boost the logistics sector; however, the possible decline in agricultural output due to deficient rainfall could pose a drag. A stronger-than-expected economic recovery translating into a significant improvement in the financial profiles of industry players could cause the outlook to be revised to positive.

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