Fleet operators are likely to continue adding to their fleets this fiscal, steered by higher demand from road-freight-intensive sectors, and despite higher repayment burden stemming from a rise in interest rates on loans. That should lead to ~10-12% revenue growth for them this fiscal.

Though fleet additions would increase debt and leverage, credit profiles will remain stable, an analysis of 45 large fleet operators rated by CRISIL Ratings, representing a fifth of the industry by size, indicates as much.

Broad-based recovery in the economy after the ebbing of the pandemic, and demand from sectors such as steel, cement, and coal (see Table 1 in annexure), propelled fleet utilisation to 88% last fiscal from 75% in fiscal 2021. This fiscal, continuing economic recovery and minimal pandemic disruptions would improve utilisation to ~95%.

Continued demand from freight intensive sectors and higher fleet utilisation have reflected in 3-4% higher freight rates on-year, while swerving global crude oil has led to revisions in domestic retail fuel prices. However, lagged transmission of fuel price changes to freight rates will ensure stable operating margins for fleet operators.

Says Rahul Guha, Director, CRISIL Ratings, “Freight rates are passed on with a lag to consignors because fleet operators try to strike a balance between rate hikes and fleet utilisation. With fleet utilisation seen 7-8% higher, and freight rates mirroring retail fuel prices, revenues for fleet operators will grow 10-12% this fiscal, while operating margins will remain stable at 7.5-8.0% levels.”

Cash accruals are expected to piggyback revenue growth and stable operating margins. That would provide the wherewithal to add capacity. With freight demand strong now, fleet utilisation will ramp up quickly on increased capacities. While interest rates have risen after the Reserve Bank of India hiked the repo rate, underlying demand will ensure fleet operators will go for fleet additions.

Large ones rated by CRISIL Ratings are likely to increase their fleet size by 12-15% this fiscal over last. This will be funded by a mix of external debt and accruals. Though higher debt will reflect in increasing leverage and toning down of debt protection indicators, they will remain adequate.

Says Himank Sharma, Director, CRISIL Ratings, “Curtailed fleet expansion during the past two fiscals had helped operators conserve cash. Spending on fleet expansion now will moderate their debt metrics, yet credit profiles will remain stable because, interest coverage and debt service coverage ratios are expected at well over 3.5 times and 1.6 times, respectively, this fiscal. That compares with 4.6 times and 1.9 times, respectively, last fiscal.”

Any impact on freight demand due to intensified Russia-Ukraine war, or a sharp revision in domestic fuel prices or a new wave of Covid-19 infections, will bear watching.