Weaker fleet utilisation and a decline in freight rates after the implementation of the new axle-load norms in times of weak freight demand are expected to beat down operating margins of road freight transporters significantly this financial year, a CRISIL estimate shows.
This will particularly hurt the small and medium enterprises (SMEs), which make up the bulk of the industry.
The new axle-load norms rolled out in August 2018 increased the average rated payload of trucks by about 20 per cent. The impact had become all too conspicuous in January 2019, as more and more transporters re-registered their trucks with the Regional Transport Office for higher payloads.
The resultant increase in freight capacity has led to an oversupply of trucks in the freight transportation industry, where road freight already has a two-thirds modal share.
To make matters worse, freight demand has weakened due to muted industrial output and rural demand, and is not adequate to offset an increase in freight capacity.
As a result, both fleet utilisation and freight rates have dropped. In fact, spot freight rates fell about six per cent between January and May 2019, despite an increase of about three per cent in diesel prices.
Consequently, transporters’ margins are expected to average 8.5 per cent in 2019-20, down about 50 bps year-on-year.
The overcapacity is expected to further lower business for small fleet operators (those who own one to five trucks), as fewer hired fleets will be needed.