News Detail

• Fitch Ratings has come out with its outlook on Indian logistics industry. As per the rating agency the logistics industry is expected to grow at 15-20% a year to reach around USD350bn by 2015 from its current size of around USD80bn.Fitch Ratings believes third party logistic companies providing transportation and warehousing will show a slight increase in revenues, with operating profit margins remaining stable at current levels of 5-10% for transportation companies and 20-25% for warehousing companies.
• No Changes Near Term: The industry is not expected to see any significant changes in the short term, with a number of small unorganised players continuing to provide stiff competition to the organised sector. However, the larger companies with a pan-India reach could benefit over the medium term as companies gear up for potential regulation changes from 2013 onwards.Growth Momentum: The Indian logistics industry is expected to sustain its growth momentum despite the recent slowdown in the Indian economy. Slower GDP growth for the quarter ended September 2011 to below 7% prompted the government to revise its fiscal 2012 (to end-March 2012) economic growth forecast to 7.0% from the previous target of 8.5%. Fitch forecasts growth of 7.5% for FY12. However, the impact of this slowdown is likely to be offset by the rise in outsourced logistics.
• Rise in Outsourced Logistics: Companies are expected to continue to concentrate on their core competencies, leading to outsourcing their logistical requirements. Furthermore, if the government's plan to allow foreign direct investment (FDI) in multi-brand retail and/or introduce the goods and services tax (GST) is implemented, corporates are likely to tie up with logistics experts to improve efficiency, leading to a further rise in outsourced logistics.Margins to Remain Stable: The cost of diesel, which is the major fuel expense for surface transport companies, is not expected to increase significantly as a percentage of revenues, as diesel prices are expected to remain subsidised by the government. Increases in other operating expenses like insurance, toll, vehicle interest rates and lease expenses are expected to be passed on as most long-term contracts have built-in escalation clauses.
• GST Delays: The GST, which was first proposed in the budget speech in 2006-07 was expected to be implemented from April 2012, but is likely to be delayed.Problems with Rail Freight: Railways' market share in freight is not expected to increase as Indian Railways will continue to subsidise passengers' fares with freight hikes. The inability of the railways to provide door to door service and lack of sufficient infrastructure continue to restrict its market share. Road freight transport could see an increase in market share at the expense of rail freight.
• What Could Change the Outlook
• Regulatory Changes: Fitch does not envisage any regulatory or market changes in 2012 which would affect the rating outlook. Implementation of the GST, deregulation of diesel prices or formal notification to allow 51% FDI in multi- brand retail would be positive for the outlook of the larger players in the industry. These would be able to absorb the reduction in margins that may be seen initially, as they would make investments to alter their operations to take advantage of the changes.
• Growth in the Logistics Sector
• Fitch believes that growth the logistics industry in 2012 coupled the fact that operating expenses are not likely to increase significantly would be positive for the credit metrics of companies. Despite the recent economic slowdown in the quarter ending September 2011, Fitch believes the Indian logistics industry will sustain its growth momentum in the coming years, particularly on the back of retail, automotive and food processing industries. The Indian government's decision to allow 51% FDI in multi-brand retail once formally made operational, would boost growth in this business as well. Industry estimates suggest that the logistics industry is expected to grow at 15-20% a year to reach around USD350bn by 2015 from its current size of around USD80bn.

Source