The unlocking of the economy is expected to contain the decline in fleet operators' revenue to around 15 per cent on a surge in freight demand, while the profitability may moderate by 240-260 basis points this fiscal, a report said on Friday.
While essential goods were allowed to be transported, industrial and economic activities were minimal during the stringent first phase of the nationwide lockdown between late-March and early-May, according to rating agency Crisil.
The overall freight demand, which has high correlation with industrial and economic activities, nearly halved in the first quarter (April-June period), Crisil said in the report.
"A likely surge in freight demand as economic activities return to normal will contain the fall in fleet operator revenue to around 15 per cent this fiscal. On the other hand, lower fleet utilisation and limited ability to pass on higher fuel cost will moderate operating profitability by 240-260 bps," Crisil said.
The rating agency said its analysis was based on the 48 rated large fleet operators (average revenue of around Rs 300 crore in fiscal 2020) predominantly in trucking operations.
Those with relatively fewer owned trucks in their fleet will fare better on coverage of fixed costs compared with those having a higher costs, it said.
In July, truckers operators' body All India Motor Transport Congress (AIMTC) said that 55 per cent of the total fleet in the country was off the road, owing to low demand, and that the transport sector was "devastated" due to lockdowns.
Crisil Ratings Director Nitin Kansal said, "With the gradual unlocking of industrial and economic activities, fleet utilisation should improve to 80-90 per cent of the pre-pandemic levels during the second quarter." He added that demand for diesel has already rebounded 80 per cent and e-way bills generation rose 90 per cent by July.
Crisil expects recovery to business-as-usual is possible in the third quarter if things keep improving, he added.
Crisil also said that improving fleet utilisation alone will not restore the sector's profitability.
It said fuel constitutes more than 50 per cent of the operating cost. While diesel prices are 12-14 per cent higher year-on-year, freight rates on major metro routes have not yet increased commensurately, the ratings agency said.
"Such limited ability to pass on higher cost and sub-optimal load balancing on key routes would keep the profitability of fleet operators under pressure," it added.
Crisil said it expects the operating margin of the operators' to slip 240-260 bps year-on-year to around 5.3 per cent this fiscal, casting a shadow on their credit metrics.
Crisil Ratings Director Nitesh Jain said, "The credit metrics of fleet operators will moderate this fiscal. We expect interest coverage and debt service coverage ratio - after factoring in the moratorium - to slide to 3 times and 1.2 times, respectively, compared with 4 times and 1.8 times last fiscal." Therefore, cash accruals will be impacted in the first half but the moratorium will lend some cushion, he added.