Operating margin to improve to 9.0-9.5% on efficiency gains; credit profiles seen healthy
Revenue growth of road transport fleet operators is expected to double to 9-11% this fiscal, riding on better domestic demand, and despite tepid exports. Also, operating margin is seen improving 75-100 basis points on better fleet utilisation and steady fuel costs.
The credit profile of operators should remain strong as well, as they may look to moderate capital expenditure (capex) towards fleet expansion, following strong additions in the past three fiscals, even as new guidelines for air-conditioned driver cabins kick in next fiscal. Providing support is also steady working capital.
An analysis of 45 large fleet operators in the CRISIL Ratings portfolio, accounting for a quarter of the industry's revenues, indicates as much.
Nearly a third of freight demand emanates from export-oriented sectors, which, after decelerating last fiscal, is showing signs of improvement, in line with growth trends in India's key export destinations - the eurozone and the US.
Also, growth in volume this fiscal will be driven by freight-intensive domestic sectors, such as mining, industrial, manufacturing, infrastructure and engineering goods. As a result, fleet utilisation will improve to over 85% this fiscal from 82-83% last fiscal.
Says Himank Sharma, Director, CRISIL Ratings, "This improved utilisation will not only lead to revenue growth but also enhance efficiencies for operators. Additionally, as diesel and fuel, which constitute about 55% of the total cost, are pass-through expenses, any increase in their costs due to international price revisions can be passed on to customers as demand remains strong. With other costs remaining steady, the operating margins of operators will improve to 9.0-9.5% this fiscal."
Fleet operators expanded their fleet size by 60% in the three fiscals through 2024, as demand recovered sharply post the Covid-19 pandemic and returns from fleet additions were immediate.
With focus now on consolidation of operations, fleet additions would moderate to 15% of the existing fleet size this fiscal, on a significantly expanded base. To boot, the Ministry of Road Transport and Highways mandate of air-conditioned cabins for drivers from October 2025 would lead to nominal capex if operators decide to retrofit older vehicles.
Hence, long-term debt addition will be limited while incremental working capital requirements remain nominal amid increasing cash generation.
Says Shalaka Singh, Associate Director, CRISIL Ratings, "Despite large fleet expansions over the past few fiscals, capital structures and debt protection metrics of operators have improved because of higher utilisation piggybacking healthy demand. With minimal debt addition this fiscal and stronger revenues and margins, credit metrics will continue to improve, ensuring healthy credit profiles for operators."
Gearing and interest coverage are expected below 0.5 time and above 7.5 times, respectively, this fiscal.
Any impact on freight demand because of geopolitical uncertainties, changes in interest rates or sharp revision in domestic fuel prices will bear watching, though. |
