Logistics sector: Weak demand to hurt logistics cos' margins

Is the key road transport and allied logistics sector grappling with a rather difficult operating environment for the first time after the recent global financial crisis? And that’s because a well-tracked sectoral index, namely the Indian Road Freight Index by TCI, was at 175 levels on February 11 and it has been stagnant at this level since October 10.

This index tracks average road transport freight rates across key routes in the country and it also provides an insight into demand conditions across key regions. This comes at a time, when the road transport and allied sectors have been grappling with rising input costs for the past several months. For instance , retail diesel prices had been increased earlier, coupled with tyre and allied product prices that are on the rise. TCI is a leading player in the transport of goods by trucks and allied vehicles. Analysts say that trucks remain a key mode for movement of cargo in the country.

While the level of this index in February 11 was higher than the level a year earlier, senior officials at TCI also pointed out the sluggish demand conditions that this sector is grappling for several months. And that’s because in key user-industries for the logistics sector, like the industrial sector , there appears to be some slowdown and its potential negative impact.

For instance, the index of industrial production (IIP) grew barely 3.7%year-on-year in January 11 while there was a 2.5% a YoY growth on December 10. This was considerably slower than the growth reported in the IIP at the start of the current financial year. Analysts are concerned that if this trend continues, it could hurt operating margins and sales growth for logistics players, both in road transport and other segments of the sector, going forward. Investor concerns led to the TCI stock that has declined 11.9%over the past three months compared with a 6.9% fall in the Sensex.

In the December 10 quarter, TCI’s operating profit margin was broadly flat on a YoY basis at 7.5%, despite its net sales that rose 16.6% in the quarter. TCI trades at a P/E of 13.7 times on a trailing basis, and we are neutral. Container Corporation trades at a P/E of 18.9 times.