'Higher Diesel Prices to Shave off Transporters' Profitability Despite Improvement in Freight Rates'

Higher diesel prices will shave off the overall profitability of transporters despite an improvement in freight rates since last month following the withdrawal of the monsoons, consumption recovery and higher infrastructure activity, according to a report.

Rating agency Crisil in the report said that even at the new level since October, the freight rates are still below the levels seen in the closing quarter of the last fiscal even the freight rate recovery has been broad-based with most route commodity combinations seeing an increase in freight rates.

Last month, 80-85 per cent of the combinations saw an improvement in freight rates over August, while 15-20 per cent were unable to pass on the diesel price hikes due to demand-supply considerations, according the report released on Monday.

Over the past two-three years, the domestic road freight transportation industry ran into many speed-breakers. While the new axle load norms caused a discernible drop in fleet utilisation levels in fiscal 2019, the BS-VI norms led to a 10-15 per cent spike in prices of new trucks in FY20. And then came the COVID-19 pandemic and the sharp economic contraction.

quarter of FY21, freight rates for cement steel and auto carriers had materially improved. The first two segments benefited from the infra push. Freight rates for haulage of industrial goods like cement have been relatively firm, and so is the movement of consumption-related goods and agri products. But, those for textiles, especially readymades, have been struggling as demand may take another few months to revive to the pre-pandemic levels, said the report based on 32 different routes and 11 different commodity types.

During the first quarter of FY21, fleet utilisation rates plunged with most consumption and demand centres under lockdowns, and a sequential recovery was visible with a gradual reopening of the economy over the next three quarters. Amid all this, freight demand recovery was sporadic across segments with FMCG recovering faster than discretionaries such as readymade garments/textiles, and other consumer durables. Also, even within states, recovery was varied based on the pandemic caseload and unlocking levels.

The agency has been tracking freight rates and operator cash flows across 32 key routes on a bi-monthly basis since October 2020 and will now deliver the data signals every month. Many large fleet operators (35 plus tonne GVW) have shifted focus from bulk commodities to lighter items in the past two years.

Again, the industry is showing signs of improvement in terms of the freight index and free cash flow serviceability across route-commodity combinations despite the higher diesel prices, because freight rates rose relatively higher compared to the spike in fuel prices over June-October. Despite improvement in the index in October to 122 (similar to February 2021 levels), the rates still continues to be at a level (17 per cent) comparable with October 2020, said the report.

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