ICRA has revised the outlook on the Indian logistics sector from ‘Stable’ to ‘Negative’ given the prevailing circumstances and the impact on industry metrics. The COVID-19 pandemic and subsequent restrictive measures implemented by the Centre and state governments to contain the disease have adversely impacted the prospects of the sector, especially road freight transportation movement. The implementation of the 40-day nationwide lockdown aggravated the prevailing softness in Indian economic activity, resulting in a decline in freight availability during Q4 FY2020, which further contracted sharply in Q1 FY2020.According to Shamsher Dewan, Vice President, ICRA Ratings, “The implementation of the nationwide lockdown to contain the COVID-19 spread resulted in disruption in supply chains across sectors, restrictions on cross-border movement and dearth of availability of drivers, thereby leading to contraction in revenue of the logistics sector in Q4 FY2020 and subsequently in Q1 FY2021. Further, the near-term growth prospects of the sector also remain subdued owing to the evolving COVID-19 situation, which has exacerbated the Indian macroeconomic growth scenario. Accordingly, the domestic logistics sector is expected to contract sharply in the current fiscal.”ICRA notes that freight movement during the period was impacted by restrictions in cross-border movement, shortage in availability of drivers and manpower owing to large-scale migration and lack of availability of return load. This was also visible in E-way bill generation data, which contracted by 52.7 per cent YoY in Q1 FY2021 but has been improving sequentially. In addition to the impact on the road logistics sector, the macroeconomic slowdown and evolving COVID-19 situation also had a bearing on rail and seaways freight traffic with rail and seaways freight volumes contracting by 21.3 per cent and 19.7 per cent YoY, respectively, during Q1 FY2021. The decline in freight volumes for the entire modal mix was more pronounced in the month of April 2020, owing to complete lockdown measures the entire month. However, with gradual easing of lockdown limitations, E-way bill generation has revived to around 70 per cent, while railways and seaways freight volumes have revived to 85-90 per cent of pre-COVID levels in June 2020.With intermittent lockdowns still in place in several pockets across the nation and muted recovery anticipated in industrial activity, the logistics sector, including warehousing, is likely to witness sharp demand contraction in the near-term. Consequently, in FY2021, ICRA expects a contraction of 18-20 per cent YoY in aggregate revenues of its sample of logistics companies. Additionally, near-term profitability metrics are anticipated to remain under pressure given subdued fleet utilisation levels in light of muted freight availability and continued high fixed costs, such as driver salaries, truck EMIs and maintenance costs. Accordingly, the outlook on the sector has been revised to ‘Negative’ from ‘Stable’.“Credit metrics of logistics companies are expected to moderate over the near term,” adds Dewan. “However, deferment of near-term debt funded capex and investment plans by major logistics players would help cushion the impact to some extent. Overall, ICRA expects the debt/OPBITDA of its sample of logistics companies to weaken to ~4.1x and interest coverage to moderate to 2.6x over the medium term, compared to 2.5x and 4.9x, respectively, in FY2020.”