Commentaries of large fleet owners hint at some tonnage growth, which implies gains from smaller fragmented truck owners.
For truckers, ‘core rental’ (nominal freight rate less fuel costs) has recently fallen to the lowest level since demonetisation (November 2016).
While markets track nominal freight rates closely, we believe core rentals are a much better parameter for ascertaining pricing power and cyclical medium-term trends in trucking profitability.
We highlight: (i) core rentals have slid 15–20% y-o-y as nominal freight rates have fallen more than fuel costs; (ii) a capacity-demand mismatch built over the past three years is causing this pain; (iii) net cash flow post all expenses has now turned negative for truckers since March 2019, hurting small truckers more than large fleets; and (iv) 3PLs’ and aggregators’ margins could contract in FY20 as they may not be able to squeeze contracted truckers anymore.
Core rentals for trucking operations have touched their lowest since demonetisation. Post massive downward reset when demonetisation happened, the core rentals have been virtually flat since. These rentals have come off recently and are now at the same level as December 2016 – down 15–20% y-o-y in September 2019 and 30% off pre-DeMo levels.
Simply put, in our view, it is the demand-supply mismatch that has built up over past three years. We have been highlighting this pressure on trucking profitability in our past notes and it seems that things have turned worse. Trucking capacity additions have been 7–9% annually since FY16 while demand growth has been 5% or below.
As profitability has worsened, small truckers have borne the brunt of a fall-off in utilisation and losses. Commentaries of large fleet owners hint at some tonnage growth, which implies gains from smaller fragmented truck owners. However, as seen in case of VRL Logistics (VRL ‘Hold’), margins should continue to be under pressure even as tonnage growth provides some downside protection (at best).
For aggregators such as Rivigo, Blackbuck, etc, and 3PL transporters such as Mahindra Logistics (MLL), we expect margin contraction in FY20. As these players suffer on sales volumes this year, it will be tough for them to renegotiate freight rates any lower. The 3PL players had logged margin gains after DeMo.
An opposite situation may play out this year. In our coverage, MLL is exposed to this risk, and we factor this in our estimates, which are lower than Street. But we find MLL as one of the best-run 3PL players in India and view it as a structural story beyond current pain. Retain ‘Buy’ on MLL.