India Ratings and Research (Ind-Ra) expects the inflation adjusted revenue of logistics service providers to grow 8%-9% yoy in FY19 as against the estimated real gross domestic product growth of 7.4%. Ind-Ra expects a recovery in global trade volumes in FY19, coupled with a higher demand for automobile, retail and FMCG, construction material, coal and metals, to support volume growth across the logistics space.

The agency believes that the logistics space would undergo substantial consolidation over the medium to long term. Integration of goods and services markets through GST may help create a hub and spoke model for logistics players. This is likely to be accompanied with a realignment of supply chains from the one based on tax incentives to those based on proximity to pockets of demand & supply. The operational efficiency arising out of such realignment in supply chain designs is likely to translate into 15%-20% lower logistics expenses for major FMCG and white goods players over the next two to three years.

The agency, however, expects the synergies from such consolidation to only be realised FY20 onwards. Also, the introduction of E-way bills is likely to enhance the speed of freight transportation and thus would support asset turnover for transport operators, albeit some near-term challenges exist for smaller players.

Ind-Ra believes aggregate profitability margins across the logistics industry would be supported by an increased wallet share of value-added logistics and third-party logistics service providers. The share of value-added logistics service providers could exceed 20% by FY21 (FY17: 5%). Consolidation in the logistics space is likely to catalyse growth of such players over the medium-to-long term. Integrated operations and a higher level of value addition would result in aggregate EBITDA margin growing significantly by FY20-FY21.

The agency opines that capex across the logistics industry is likely to continue through FY19. Asset turnover is likely to have remained below 1x in FY18 and would continue to be so in FY19. While most of the capex is likely to fund the development of integrated logistics hubs, logistic parks etc., the benefits are expected to accrue mainly in the form of lower costs and higher margins FY20 onwards. With logistics being awarded an infrastructure status, Ind-Ra opines that the financial flexibility of logistics players would improve further. Though some increase in the leverage metrics is likely, the credit profile of logistic industry players would remain comfortable.