Domestic Freight Transportation

1
• Industry Overview :3
• Road Traffic
• Key Players :8
• Fleet Operators : 19
• Demand Trends : 28
• Railway Traffic
• Overview : 34
• Reform Initiatives : 40
• Expected Improvements : 45
• Waterways : 63
• Logistics Performance Index : 69
• GST Impact : 74
• Growth Outlook : 82
2
 Industry Overview

3
Industry structure

4
Share of various modes

Source: Crisil research

5
Industry structure

• Given their ability to deliver goods to a point of convenience due to higher

accessibility, roads enjoy a distinct advantage over other modes.
• The road freight transport segment is also deregulated and highly fragmented, with
small operators having a 65-70% share.
• High fragmentation intensifies competition, offering customers better bargaining
power.

6
 Road Traffic

7
 Road Traffic – Key
Players

8
KEY PLAYERS

Fleet Booking Consignors or

Brokers
Operators Agents Users

9
Key participants
• Transport operators- These are truck owners, whosolicit freight and transport it from one
location to another.
• Transport operators can be classified into small fleet operators (SFOs) - owning 1-5 trucks,;
medium fleet operators (MFOs) with a fleet of 6-20 trucks and large fleet operators (LFOs),
who own over 20 trucks.
• Besides transportation, some LFOs offer other value-added services such as warehousing,
supply chain management and containerisation.

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Freight services offered by road transport operator

11
• Brokers- They act as an intermediary between the transportation company and the truck
owner.
• SFOs are highly dependent on brokers for orders and brokers typically represent the small
operators to ensure supply of trucks to the booking agent/transportation company.
• Brokers are also responsible for ensuring reliability of truck operators.
• LFOs depend on these brokers for moving a certain volume of traffic over and above what
their own fleet would permit.

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13
• Booking agents/transportation companies- Booking agents accept and store goods and
arrange for their delivery through operators.
• In some cases, the agent itself owns trucks and acts as the operator.
• A transportation company is the entity who signs a freight settlement with the consignor.

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Role of booking agents

15
• Users/consignors- The user/consignor is the entity that needs specialized or general
vehicles to transport goods.
• Users come from a wide range of market segments like manufacturers, distributors,
retailers and the general public.

16
Role of user/consignor

17
Role of intermediaries indispensable for transport transactions over
medium term
• Brokers and booking agents are key intermediaries in the value chain of the road freight
transportation industry.
• These intermediaries play an important role in arranging for the required number of trucks
for the transport company, in return for a commission.
• At the same time, they also ensure business for the smaller transporters who may have
otherwise not had access to steady revenues.
• However, this reduces the profitability of transporters.
• Hence, elimination of middlemen is a long term necessity to boost profitability.

18
 Fleet Operators

19
Multiple SFOs keep road transport segment fragmented

• Transport operators are classified according to their fleet sizes as small, medium and large.
• The industry comprises a large number of small operators, which has resulted in high
fragmentation, and led to the road freight transportation industry being unorganised in
nature.

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Small fleet operators

• A transporter operator with 1-5 trucks is termed a small fleet operator (SFO).

21
Large fleet operators
• Transporters with a fleet of more than 20 trucks are termed large fleet operators (LFOs).
• Large organized players who provide value-added services such as supply chain
management, cold storage, express cargo etc.
• enjoy better pricing flexibility; attached fleet model also reduces business risk.
• Large organised players have much wider growth potential post GST implementation, given
their capability to offer supply chain solutions, larger warehouses and multimodal services.

22
LFOs gain share, but small operators still dominate

Source: Crisil research

23
LFOs' Business Model

24
• LFOs also tend to work under long term contracts giving consignors certainty in delivery
• aiding their bargaining power, LFOs who provide warehousing and allied services which
also help them command higher freight rates.
• In 2016-17 diesel prices are estimated to have increased 8% y-o-y.
• However an almost equal rise in freight rates nullified the impact of rise in diesel prices on
margins.
• Fleet utilisation- Utilization is affected by: freight demand-supply, goods transported and
the routes covered.
• LFOs with larger attached fleet utilize their fleet better as they limit hiring from the spot
market at times of weak demand.
• Moreover they utilizes their fleet better since they have annual contracts and can plan their
fleet requirements well in advance.

25
• SFOs, however, tend to have lower fleet utilisation since they do not have a strong market
network on both origination and destination, which increases their waiting time and hence
lowers fleet utilisation.
• The nature of goods that an operator can transport may also affect availability of freight as a
weak economy hits demand for specific goods.
• The skew in favour of metro routes vis-a-vis tier-I and tier-II routes, also affects utilisation
levels.
• LFOs generally have a pan-India or multi-regional network and ply mostly on the metro
routes.
• They also service tier-I and tier-II routes through spot arrangements with local players in the
market, but this does not affect their utilisation levels as this is done via attached fleet.
• On the other hand, SFOs and medium freight operators (MFOs) generally have a regional
presence
26
and cater to the tier-I and tier-II routes.
• In 2016-17, utilisatiion was in an uptrend up until demonetisation which brought down freight
availability in the H2 2016-17,.
• This hampered growth in utilisation, keeping it at 2015-16 levels (at ~65%).

27
 Road Traffic Demand
Trends

28
Share of roads in total freight movement (BTKM terms)

Source: Industry, Crisil research

29
Roads remain the preferred mode for non-bulk transportation
• Roads are expected to gain a significant share in non-bulk commodities transportation
as:
• Rail does not cater to piecemeal freight transportation.
• Entire rakes are provided for transportation and not just single wagons (although the
Indian Railways is looking into multi-point loading, it would still not attract small-
sized cargo).
• Road transport has better service quality and is more reliable.
• Road transporters operate on a much smaller scale.
• Also, given the large number of road-transport operators, customers have better
bargaining power.

30
Roads predominantly transfer non-bulk freight

Source: Ministry of Surface Transport, Crisil research

31
Efficiency gains due to better road infrastructure to aid road freight
• Pace of road execution to increase moving ahead

Source: NHAI, MoRTH

32
 Efficiency gains due to better road infrastructure to aid road freight
• Pace of road execution to increase moving ahead
• With the government's thrust on infrastructure, especially roads, execution by the National
Highways Authority of India (NHAI) is expected to reach up to 14 km/day in 2021-22
versus 7.2 km/day in 2016-17.
• Investment in road projects to increase 2 times to Rs 10 trillion over the next five years,
with investments in national highways growing the fastest, at about 3 times.
• This improvement of road infrastructure is expected to increase the daily running of trucks
~10% (apart from efficiency gains from the removal of check posts).
• This higher efficiency would lead to higher fleet utilisation, leading to lower demand for
trucks.

33
 Rail Traffic: Overview

34
Railways steadily lose share to roads

Source: Ministry of Railways, Crisil research

35
 Railways steadily lose share to roads
• Railway traffic growth is positively correlated with rise in index for industrial production
(IIP).
• However, Indian Railways has not been able to capture this growth due to unavailability of
wagons and lack of infrastructure, consequently losing share steadily to roads.
• This trend has been more pronounced in recent years.
• The chart below depicts the market share of railways and roads in freight transportation.

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Capacity constraints

• Indian Railways has taken several measures to step up the number of its wagons and
improve turnaround time.
• However, increase in capacity has not matched increase in demand.
• Capacity utilisation of railway wagons has been over 100% over the past five years.
• Capacity augmentation is necessary to serve major, high-density freight traffic that
streams on end-to-end basis.
• This will also help to facilitate high-speed passenger train operations on existing routes
and improve the share of railways in the freight business segment.

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Commodity composition of rail freight traffic in tonnage terms (2016-17)

Source: Ministry of Railways, Crisil research

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 Commodity composition of rail freight traffic in tonnage terms (2016-17)
• The capacity-enhancement strategy of the Indian Railways would depend on the growth
pattern of major commodities such as coal and steel.
• For example, with the gap in demand-supply being fed by imports, rail connectivity to
gateway ports needs to be strengthened.
• Similarly, in the case of steel, the expected expansion plans of production capacity in India
entails strengthening of rail linkages between raw material (primarily iron ore and fluxes)
sources and steel plants on priority.

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 Railways: Reform
Initiatives

40
 Reform initiatives
• Market-driven tariff policy linked to seasonality and price elasticity of demand has also
played an important role in driving demand for rail freight services.
• Across the board, freight rate hikes have been replaced by selective changes in tariffs in
response to market forces.
• The Indian Railways has announced the following initiatives to ensure high utilisation of
wagons throughout the year:
• Enhancement of service standards: The Indian Railways aims to be a logistics solution
provider, with services such as warehousing and cold storage facilities.
• PPP initiatives: These initiatives are meant to attract private investment in crucial
infrastructure projects.

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 Reform initiatives
• Efficiency improvement: This will be effected through better resource management --
increased wagon load, faster turnaround times and dynamic pricing policy.
• Improved tonnage capacity: The Railways have increased axle load to 25 tonnes (stainless
steel wagons) from 22.9 tonnes (BCN and BOXN wagons) to improve freight-loading
capacity.
• Steady tariff regime which would ensure the competitiveness of IR vis-a-vis other modes
of transportation.
• With recent announcements about withdrawal of busy season surcharge & port congestion
surcharge, automatic freight rebate scheme, opening up of containers for bulk commodities
etc, it is expected that outlook for freight rates would be stable.

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 Reform initiatives
• Improvement in handling infrastructure: With liberalization in PFT/ sidings policy,
establishment of logistics park, two point loading, part loading, and increasing
containerization, the loading/unloading time would be optimised and thus affecting the
wagon utilisation positively.
• Increase in average speed of freight trains: With faster transit speeds of freight trains,
time taken to transfer cargo between two points would decrease and the wagon can do more
trips within the same time. This will result in improved wagon utilisation and thus improved
carrying capacity.
• Wagon additions: Wagon addition is directly related to carrying capacity of IR.
• Both wagon addition as well as higher capacity wagons remain key monitorables

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 Rail continues to dominate bulk transportation space
• Rail continues to be the preferred mode of transportation for bulk traffic, due to factors such
as higher leads, large volumes, lower freight rates and presence of rail sidings.
• Commodities in the non-bulk segment are primarily transported by road.

Railways introducing schemes to boost revenues

• To promote development of railways for freight transportation in India, the Indian
Railways has framed policies and various supportive schemes.
• The Indian Railways is one of the largest transportation and logistics networks of the
world.
• It runs about 12,000 trains, carries over 23 million passengers per day and connects about
8,000 stations spread across the sub-continent.
• Currently, Indian Railways runs more than 7,000 freight trains per day carrying about 3
million
44 tonnes of freight every day.
 Rail Traffic: Expected
Improvements

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 Railways freight to grow faster than road in the long run

• Rail freight traffic will increase at 8-10% compound annual growth rate (CAGR) from
fiscals 2017 to 2022, higher than road freight traffic.
• Various route rationalisation initiatives by the IR are expected to put pressure on average
lead distance for rail freight.
• However, commissioning of the dedicated freight corridors (DFCs) and proliferation of the
hub-and-spoke warehousing model post the Goods and Services Tax would lead to a
marginal net increase in average lead distances.
• Tonnage growth would be ~8% as about 500MT additional capacity will be created in the
IR due to DFCs, doubling of lines, and using 25T axle load wagons, along with various
network and route rationalisation initiatives.
• Overall primary freight is expected to grow only by 5-7% due to weaker industrial and
agricultural growth along with low share of imports in the next five years.
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Railways freight to grow faster than road in the long run
• The IR's share in total freight movement is expected to be 32.5% (considering only road
and rail) in fiscal 2022, up from 27.5% in fiscal 2017.

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• Railways will continue to lead in bulk freight movement
• The IR's share in bulk commodity transport is expected to improve to ~47.3% by fiscal
2022 from the current 41.9% .
• Rail is the preferred mode of transport for bulk commodities as:
• Large rakes help faster evacuation:
• The Railways have a much higher load-carrying capacity than roadways.
• A single rake can carry 2,610-3,465 tonnes while a multi-axle vehicle can carry a
maximum payload of only 45 tonnes.
• Lower freight rates: The cost of rail freight is considerably lower than road freight in India
(66% of road freight), making it economical to transport bulk commodities by rail on long-
haul routes.
• Presence of rail sidings: Rail sidings are generally installed at the plant or at warehouses
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• Railways will continue to lead in bulk freight movement
• This eliminates multiple handling and last-mile connectivity costs, making it more cost-
effective to transport bulk commodities by rail. Moreover, long-term contracts between
consumers and generators of bulk freight makes investment in rail sidings preferable.
• Higher lead distances: The concentration of bulk commodities in select regions leads to
higher lead distances for freight movement.
• For lead distances of 500-600 km, transportation by rail is more economical.

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• Modal share for bulk commodity transport (in BTKM terms)

Source: Crisil research

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Steps taken to counter lower average lead distance

• Average lead distances have been falling as production and consumption centres are being
set up in proximity.
• To tackle this, the IR has been reducing the telescopic fare advantage (i.e., marginal freight
rates now come down at a higher rate with distance travelled).

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$140 billion investment between fiscals 2016 and 2020

• The IR plans to invest $140 billion in infrastructure and improving the mobility of its
services over the next five years.
• Of the total investments directly relevant to freight, about 23% will go towards network
decongestion (including DFCs, electrification, doubling - including electrification and
traffic facilities), and an equal amount will go towards network expansion.

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Investment plans in Railway Budget for 2015-19

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Investment plans in Railway Budget for 2015-19

Source: Ministry of Railways, Crisil research

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Long-term contracts with clients to generate assured freight for Railways
• In order to obtain sustained transportation of various commodities susceptible to market
trends, the IR has decided to sign longterm tariff agreements/ contracts with key freight
customers using pre-determined price escalation principles.
• Under the agreement, companies will get assured wagon supplies and better rates for
assured tonnes moved on rail.
• Tata Steel, SAIL, Ultratech Cement, and India Cement have already entered into long-term
contracts with IR.
• Another nine agreements are expected to be signed in fiscal 2018.

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East and West DFCs to ease capacity constraints from fiscal 2020
• The first phase of the DFC project will include the Western DFC, running from Mumbai to
Dadri near Delhi, and the Eastern DFC, running from Dankuni in West Bengal to Ludhiana
in Punjab.
• The western corridor will mainly cater to containers as 60% of container traffic originates
from this region. The eastern corridor will cater primarily to dry bulk cargo.

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Execution status of DFCs

Source: Ministry of Railways, Crisil research

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Expected completion schedule of DFCs

Source: Ministry of Railways, Crisil research

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Expected completion schedule of DFCs

Source: Ministry of Railways, Crisil research

• The IR announced on February 2017 that the first portion of the 380 km-long DFC between
Ateli and Phulera will be operational by fiscal 2018-end.
• Moreover,
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500-600 km of additional track length will be operational by fiscal 2019.
Features of DFC

Source: Ministry of Railways, Crisil research

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Features of DFC
• DFCs are intended to help the Indian Railways regain lost freight share. Cutting turnaround
time between the importing and consuming destinations, they are expected to compel
several industries to realign logistics strategies.
• DFCs and associated logistics parks can help lower plant-level inventory to a great extent,
bringing huge savings in working capital.
• Sectors such as cold chain and transportation of perishables and express distribution may
be encouraged to choose rail for freight due to the expected efficiencies of DFCs.
• DFCs would not only bring faster freight movement but would also help the overall
economy through decongestion of major highways due to the partial shifting of some freight
to rail.
• It will also allow for faster evacuation of cargo from ports, improving efficiency.
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Containerisation via rail to grow in the long run
• Railways failed to make a major headway into container traffic between fiscals 2012 and
2017 as container traffic via railways and at major ports grew at a similar pace of 4%
CAGR. Container traffic via the IR was impacted due to tariff hikes, port congestion
• charges, and capacity constraints.
• Traffic of export-inports containers will recover due to various tariff rationalisation
initiatives by the Railways, and phased commissioning of DFCs.
• The IR opened as many as 43 commodities for container traffic at the concessional FAK
(Freight any kind) rates in fiscal 2017.
• Based on indications from the IR, a few more steel products to also be part of the expanded
list of the commodity basket that would be opened for containerisation.

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 Waterways

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Push towards waterways to bear fruit in the long run
• At present, India's logistics cost is practically double that of China.
• Moreover, only 3.5% of goods are transported through low-cost waterways.
• The cost of waterways is barely 33% of road transport costs and railways, and 66% of road
transport costs (source: 223rd Report on The National Waterways Bill, 2015 by department
related Parliamentary Standing Committee on Transport, Tourism and Culture, 2014-15)
• The government is stressing on waterways as a means to cut overall logistics cost by one-
third.
• The Shipping Ministry plans to offer companies an incentive of up to Rs 1 per tonne per km
to transport goods, including foodgrains, automobiles, cement, and other commodities,
through inland waterways and coastal shipping.
• The proposal is under discussion and is likely to be presented before the Cabinet for
approval.
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Push towards waterways to bear fruit in the long run
• The Shipping Ministry also suggested changes in the ‘cabotage law’, under which only
Indian-registered ships are allowed to ply on local routes for carrying cargo.
• The changes would add capacities for movement via coastal shipping.

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Sagarmala to double share of waterways by 2022-23 once commissioned
• Sagarmala is a national programme, aimed at accelerating economic development in the
country by harnessing the potential of India's coastline and river network.
• The project's vision is to:
• Reduce cost of transporting cargo by optimising the modal mix
• Optimise time/cost of EXIM container movement
• Improve export competitiveness by developing port-proximate manufacturing clusters
• Lower logistics cost of bulk commodities by locating future industrial capacities near coast

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Projects under Sagarmala
• Port modernisation: Includes various port efficiency improvements, 40+ capacity
enhancements, along with 6-8 new ports.
• Port connectivity: 80+ connectivity projects, connecting ports with industries along with
seven dry ports
• Port-led industrialisation: Building 14 coastal economic zones hosting 12 high potential
industries

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Targeted impact for Sagarmala
• Infrastructure investment mobilisation: Rs 4 lakh crore
• Logistics cost saving per annum: Rs 35,000 crore to Rs 40,000 crore
• Boost to exports: $ 110 billion

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 Logistics Performance
Index (LPI)

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LPI: India improves its ranking by 19 places

Source: Crisil research

70
India improves its ranking by 19 places

• The increase in overall score in 2016 was led by an improvement in "customs," that
jumped from rank 65 in 2014 to 38 in 2016.
• Reforms such as single window interface for trade (SWIFT), reduction of documents
required for export and import, and other initiatives led to an improvement in "customs"
ranking.
• The countries were assessed on the following parameters:

• Efficiency of customs and border clearance ("customs")

• Quality of trade and transport infrastructure ("infrastructure")
• Ease of arranging competitively priced shipments ("ease of arranging shipments")

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India improves its ranking by 19 places
• Competence and quality of logistics services - trucking, forwarding, and customs brokerage
("quality of logistics services")
• Ability to track and trace consignments ("tracking and tracing")
• Frequency with which shipments reach consignees within scheduled or expected delivery
times ("timeliness")

72
India's LPI performance: parameter-wise analysis

Source: Crisil research

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 GST Impact

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GST to indirectly impact road freight movement

• Proliferation of the hub and spoke model to add to efficienciesThe Centre used to levy a
uniform tax, central sales tax (CST), on interstate sales besides the local value-added tax
paid to state governments.
• To avoid interstate CST, companies were forced to maintain at least one warehouse in
each state.
• For most companies, tax avoidance was a company's primary concern while setting up
its distribution network.
• This resulted in the creation of multiple inefficient warehouses in each state.

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GST to indirectly impact road freight movement
• Implementation of the Goods and Services Tax (GST) in July 2017 has allowed
companies to aggregate state-based warehouses into one large, regional warehouse that
would offer cost and operational efficiencies in geographically large markets.
• Experience shows that as logistical inefficiencies and primary transport costs reduce, the
hub and spoke model proliferates and service levels improve.
• This will make road transport more competitive in the GST regime.
• The proliferation of the hub and spoke model is expected to lead to consolidation of
freight, increasing the need for higher tonnage commercial vehicles.
• Transporters who have invested heavily on lower tonnage vehicles like medium
commercial vehicles, are expected to face lower fleet utilisation.
• GST implementation has also facilitated in the removal of check posts. This will lead to
faster travel times, adding to efficiencies.
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SFOs to be at a disadvantage after implementation of GST
• According to a report by the National Transport Development Policy Committee, about
75% of transport operators in India own less than five trucks (small fleet operators or
SFOs).
• SFOs used to enjoy higher operating margins than their peers because of lower pricing
and higher fleet utilisation through overloading.
• However, with the expected implementation of e-way bill for consignments valued at
over Rs 50,000, SFOs' ability to overload stands greatly reduced.
• Moreover, consolidation of freight due to proliferation of the hub and spoke model is
also expected to generate demand for large fleet operators (transporters owning more
than 20 trucks) rather than SFOs.

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SFOs to be at a disadvantage after implementation of GST
• Moreover, post GST implementation, more organised logistics players, largely LFOs,
would be able to provide end-to-end logistics solutions and have pan-India presence
SFOs will not be able to provide the required services unless they invest and transform
themselves into organised players.
• Better efficiencies achieved through the use of organised logistics partners will lead to
lower freight costs and timely delivery of goods.

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GST to lead to uncertainty in the minds of transporters in 2017-18
• Uncertainty among transporters about the logistics landscape following GST
implementation is likely to lead transporters to withhold truck purchases until clarity is
obtained.
• Transporters are likely to wait until contracts come up for renewal (which are generally
in the second half of 2017-18) to figure out changes in truck demand and routes.
• Uncertainty is expected to reduce from H2 2017-18.
• Proposed scrappage policy to lead to higher number of trucks on trunk routes The
Ministry of Road Transport and Highways (MoRTH) had issued a concept paper
outlining a Voluntary Vehicle Fleet Modernisation Programme to encourage scrapping
of vehicles manufactured before March 31, 2005.

79
GST to lead to uncertainty in the minds of transporters in 2017-18
• Transporters participating in the programme will be eligible for excise/GST benefits.
• The policy was approved by the Committee of Secretaries in February 2017 and is
expected to have been presented to the GST council.
• In August 2017, the ministries sought inputs from original equipment manufacturers for
implementation of the scheme. MoRTH’s proposal is to finalise the policy by the end of
2017 and make a time-bound implementation providing monetary benefit of up to Rs 5
lakh per truck.
• The Centre and states are expected to bear the subsidy burden.

80
GST to lead to uncertainty in the minds of transporters in 2017-18
• Impact on transporters
• Based on our analysis, trucks older than 13-14 years are expected to be scrapped based
on the level of incentives provided.
• Some 135,000-200,000 new medium and heavy commercial vehicles will be replacing
the older fleet.
• These new vehicles replacing mostly heavy commercial vehicles, are expected to ply
on trunk routes.
• This would increase supply of trucks on trunk routes, creating an oversupply, thereby
hampering utlisation. Older trucks (aged 13-14 years and above) generally ply on
secondary routes with lower lead distances.
• Scrappage of such trucks will create a shortfall for trucks that were able to work on
such applications. This would improve replacement prices of older trucks.
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 Growth Outlook

82
 Primary freight traffic to pick up in fiscal 2018

• Primary freight traffic (in BTKM terms) is expected to grow at a modest pace in fiscal 2018,
driven by improved industrial and agricultural GDP.
• Rail lost share to road in fiscal 2017 owing to lower loading and lead distances.
• However, rail share is expected to bounce back, albeit marginally, in the long run aided by
the dedicated freight corridor.

83
 Freight traffic to post modest growth in fiscal 2018

• Primary freight, in billion tonne km (BTKM), to rise 5-7% on-year in 2017-18 (vis-a-vis 2.3%
growth in 2016-17) driven by expectations of 6.3% growth in industrial GDP and a tepid 3%
growth in agricultural GDP.
• Pent up demand in construction post demonetisation-driven weakness is expected to support
BTKM growth in 2017-18.
• Road freight: It is likely to grow ~4-6% in fiscal 2018 after growing ~6% in fiscal 2017.
• Higher growth was witnessed in fiscal 2017 as rail lost share to road. Rail BTKM fell ~5.5%
in the year due to lowering of average lead distances.
• Rail freight: It is expected to grow at a healthy 7-9% in fiscal 2018 due to higher movement
of steel and iron ore owing to increase in exports and commissioning of new capacity in the
east coast railways.
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Freight traffic to post modest growth in fiscal 2018

• Higher cement demand will drive rail movement. Indian Railways (IR) receiving
• long-term contracts with concessions for incremental loading for steel and cement companies
will also aid rail BTKM growth. Coal movement, too,
• is expected to grow at a modest pace due to weak production growth by Coal India Ltd.

85
Road and rail growth in BTKM terms

Source: Crisil research

86
LFOs' profitability to rise in fiscal 2018
• EBITDA margin of large-fleet operators (LFOs) to rise 30-50 basis points (bps) in 2017-18
after an estimated fall of ~125 bps in 2016-17.
• The margins are expected to rise as transporters partially keep the benefit of efficiency
gains due to removal of check posts up to the end of Q3 fiscal 2018 when long-term
contracts will be re-negotiated.
• With reduction in check posts, daily running of trucks is expected to have increased 5-7%.
• However, in Q2 fiscal 2018, increased freight gathering time due to weaker demand in
addition to efficiency gains in turnaround time dragged utilisation levels for transporters.
• Diesel prices are expected to rise 3% in 2017-18, slightly lower than freight rates, which are
expected to rise ~4%, thereby aiding margins.
• Fleet utilisation levels are expected to stay flat due to efficiency gains being negated by
higher
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freight generated.
LFOs' profitability to rise in fiscal 2018
• In fiscal 2017, demonetisation led to lower freight availability, hampering utilisation
growth, which remained stable at 65%. Margins
• are expected to have reduced ~125 bps as freight rates rose slower than increase in diesel
prices. Freight rates rose 7% in 2016-17 while diesel prices rose 9%.

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Transporter profitability

Source: Crisil research

89
Rail to marginally outperform road in the long run
• Rail freight traffic is forecast to increase at 8-10% compound annual growth rate (CAGR)
from fiscal 2017 to 2022, higher than road freight traffic growth.
• Various route rationalisation initiatives by the IR are expected to put pressure on average
lead distance for rail freight.
• However, commissioning of the dedicated freight corridor (DFC) and proliferation of hub
and spoke warehousing model post GST would lead to a marginal net increase in average
lead distances.
• Tonnage growth would be ~8%, as about 500 MT additional capacity will be created in IR
due to DFCs; doubling of lines; using 25T axle load wagons, along with various network
and route rationalisation initiatives.
• IR's share in total freight movement is expected to be 32.5% (considering only road and
rail)
90
in fiscal 2022, up from 27.5% in fiscal 2017.
Rail to marginally outperform road in the long run
• (Primary freight movement can be divided into bulk and non-bulk traffic.
• Bulk freight comprises seven bulk commodities listed by the IR - coal, cement, fertilisers,
iron ore, iron & steel, food grains, and petroleum, oil & lubricants.
• Non-bulk freight encompasses all other commodities.)

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Share of non-bulk traffic to increase

• Non-bulk traffic, which is mostly transported by road, is expected to grow at 6-7% CAGR
from fiscal 2018 to fiscal 2022, from 2.2% CAGR over the previous corresponding period,
following expected improvement in consumption demand, especially consumer durables,
pharmaceuticals and automobiles.

• The share of non-bulk segment in overall primary freight pie is, thus, forecast to
increase to 52.7% by 2021-22 from around 51.9% in 2016-17.

92