Fleet operators in fast lane

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 arising from higher interest rates on loans. That is expected to lead to a 10-12 percent revenue growth for them this fiscal, says a report released by CRISIL Ratings, Wednesday.

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 have propelled fleet utilisation to 88 percent last fiscal from 75 percent in fiscal 2021. This fiscal, continuing economic recovery and minimal pandemic disruptions would improve utilisation to 95 percent, the report notes. 

Continued demand from freight intensive sectors and higher fleet utilisation have reflected in 3-4 percent 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, it continues.

Rahul Guha, Director, CRISIL Ratings said, “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 percent higher, and freight rates mirroring retail fuel prices, revenues for fleet operators will grow 10-12 percent this fiscal, while operating margins will remain stable at 7.5-8.0 percent levels.”

According to the report, the 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.

Himank Sharma, Director, CRISIL Ratings, “Curtailed fleet expansion during the past two fiscal years 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.”

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