Even as the government announced some relief during the lockdown, inland logistics companies’ volumes are likely to fall 10-15 per cent in the financial year 2020-21 as the consumption demand could take a longer time for recovery, according to India Ratings.

The first quarter of the year is likely to see a 40-60 per cent fall as the lockdown has been extended till May 3.

According to the agency, the volume decline will be asymmetric across the value chain, with standalone truck operators showing the highest stress, followed by inland logistics players, ports and warehouses.

“Operational recovery for logistics players will be gradual and prolonged over 2020-21, as against a sharp V-shaped recovery,” the agency said.

It added that even if the government announces some relief during the lockdown, India’s export-import trade may remain subdued in the current financial year “as consumption demand could take even longer to recover, while exports volumes remain muted amid a weak global growth outlook.”

Also, the impact on profitability and cash flows is uncertain due to lack of clarity over realisations, cost reduction initiatives taken by players, and government support, it said.

The agency further noted that the disruption caused by the COVID-19 outbreak will certainly necessitate meaningful revisions to India Rating’s base case assumptions for 2020-21.

For 2021-22, Ind-Ra expects almost the entire value chain to recover above the pre-COVID-19 levels, except standalone freight operators, who will continue to struggle amid low volumes and high debt.

“Despite logistics being categorised as essential services, we expect volumes to decline, given the first-mile (cargo evacuation from port) and the last-mile (supply-chain between inland container depots to company warehouses) challenges. Severe shortage of labour and drivers along with health safety environment (HSE) checks at ports for foreign vessels may lead to congestion at ports/depots, which may impact their efficiencies,” it said.

While the arrivals of vessels were normal in March 2020, the agency expects port volumes to reduce materially between May and June 2020 as global trade volumes shrink.

“China and the US have a market share of 18-22 percent together in India”s total trade volumes, thereby putting India”s overall port volumes at risk. We expect almost the entire value chain to recover to the pre-COVID levels in FY22. However, standalone freight operators may continue to struggle amid possible higher delinquencies resulting from high debt levels and poor capacity utilisations,” the agency said.

The agency pointed out that during 2016-17 and 2018-19, the logistics space in India experienced a large amount of consolidation and the share of integrated logistics players increased substantially, which has led to a rise in leverage levels across the sector.

It further said invocation of force majeure clause may increase contingent liability risk.

In an economic downturn, logistics players not only face a lower demand for their services but also are exposed to the risk of a fall in market tariffs/rentals. Even in cases where revenues are backed by medium- to long-term contracts, unprecedented events such as a global pandemic, often allows the counterparty to invoke force majeure provisions.

“The likelihood of such an event and its impact varies significantly across issuers depending on the credit profile of their counterparty, performance of the industry and the nature of services provided by them,” Ind-Ra added.

As the overall level of economic activity remains subdued, the rating agency expects continued muted freight rates over the next 6-9 months.

Additionally, the overall demand for freight transportation services is expected to contract in 2020-21.


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