Clipped from: https://prime.economictimes.indiatimes.comAfter the initial pleasantries, the disquiet in Sachin Jain’s voice on the other side of the call is obvious when asked about business volume. Jain has been running a transport company, Jain Carrying Corporation India, in Delhi for over 28 years, but “there has never been a more difficult time” in his life.
Jain’s company largely transports textiles from Delhi to Gujarat and Maharashtra. But due to the lockdown, 70% of his 150-odd trucks are stuck midway. Business has reduced to 20% of capacity and liabilities are piling up.
Jain says he now has bigger hurdles to cross, as the lockdown is being eased out. He will have to provide for fresh expenses that are coming up – 33 vehicles need insurance renewals, 25 are due for permits. Besides, the company pays INR30 lakh towards truck EMIs. While idle trucks have resulted in a loss of INR25 lakh in two months, the company had to shell out INR10 lakh towards parking charges. “Unless we have funds to the tune of INR1 crore, we can’t start work. I have no clue how we are going to do this,” he says.
While Jain is evaluating whether he should take more loans to repay past debts, Jodhpur-based Dilip Lamba, who runs Harsh Road Carriers, narrates another story of distress. Lamba runs a much smaller entity with seven-eight trucks, largely transporting utensils and limestone from Rajasthan to Uttar Pradesh and Bihar. He says the current situation has only added to the pain that truckers had been suffering over the last three years. “Profit wala kaam teen saal pehle hi khatam ho chuka tha (profit had vanished three years ago),” he says.
The transport business is becoming unsustainable for the likes of Lamba because in the last three years costs such as diesel and staff salaries have gone up, but freight charges and total volume of loads available have changed very marginally.
“In 2016, the freight rate from Delhi to Kanpur was INR2,500 per tonne. Now it has just increased to INR2,600 per tonne. At the same time, diesel prices have increased from INR50 to INR70. Profits have slipped into losses,” says a desperate Lamba, who is now considering other options for livelihood. “We are only surviving to feed our families, the staff, and the drivers who have stayed with us for a generation.”
The stories of Jain and Lamba pretty much sum up the insurmountable challenges faced by small logistics companies across the country. While bigger transporters who have contracts with cement and mining companies are in a better position, the smaller operators may not be able to keep their head above the water till normalcy returns to the economy .
A big question mark on survival
Margins in the transport business range from 5 % to 6%, say experts. Most trucks owned by the transporters are bought on loan. The companies have to invest INR95 to make INR5. If capacity utilisation is anything less than 90%, they will be under stress, since there is no way to recover the last two months’ capacity loss. “If this continues, by the time we get to 100% production capacity, 20%-25% [of the transporters] at the lower end of the pyramid – those who make ends meet taking loans or those who own at least 50%-100% of their trucks with institutional finance – will be in the red. They will die,” says Sushil Cherian, an independent logistics consultant.
Many transporters don’t see a bright future in the short term even if the lockdown is further lifted. That’s because opening up doesn’t mean the economy will get back on its feet at once. Demand and industrial production won’t bounce back to normal anytime soon.
Mohan Subramaniam, programme director of Transmitr Sewa Foundation, a Navi-Mumbai based NGO engaged in uplifting and training the driver community, and former executive director at Shriram Transport Finance, one of the largest asset-financing NBFCs, says, “Even if 60%-65% normalcy returns to the industry in terms of freight availability, it can bounce back. But the major issue is that 65%-70% of cargo loads are available from small and medium enterprises. This lot of companies are in a much bigger mess than large companies in terms of restarting production.”
According to industry sources, with the economy in the grip of a slowdown, truck utilisation even in January this year was about 65% of capacity. The Covid-19 situation has only aggravated underutilisation of assets.
According to industry estimates, about 70% trucks are still standing idle. Production zones are gradually opening up, but many consumption centres were still in the red zones till Unlock.1 was announced. That resulted in vehicles being stuck for days for lack of return loads. For operators running only 20% to 30% of their vehicles, there is cut-throat competition for loads. So, most operators are unable to increase rates despite the rise in diesel prices. For most of them, it is a no-profit, no-loss situation.
Transport companies that have suffered huge losses in the last two months are struggling to make upfront payments to bring their vehicles back on the road.
Transporters have around INR1 lakh of fixed annual expenses per vehicle per year, as shown in the graphic below. Resumption of toll tax, which accounts for about 15%-18% of the operating costs, from April 20 by the National Highways Authority of India is adding to the expenses.
While freight rates are almost constant, the cost of operations is on the rise. Diesel, which accounts for about 60% of the operating cost, has increased by 10% in the last one year. Labour costs are going up, too, according to transporters. For example, says a trucker, “Those who used to charge INR600 to load a truck with fruits are now charging INR3,000.”
The biggest operational challenge at present is availability of drivers and labourers, who have fled to their villages. As the harvest season is on and the risk of Covid-19 spread has escalated, they are unlikely to come back anytime soon.
In the trucking ecosystem, both ends of the pyramid have their own set of challenges.
While smaller entities are struggling to get business in an increasingly competitive market, for the bigger players, more assets mean more liabilities. Selling off a part of the fleet is not an option now since there are no buyers. Some industry insiders say transporters who have built some capital base in the form of godowns and warehouses will be better off since they can liquidate them to meet liabilities.
Large transportation companies get the largest share of the transportation business. But the smaller entities are a very important cog in the wheel, as the big players are not always able to meet the requirements of their clients alone. Therefore, they engage the small operators from the open market. Many medium-sized transport companies engage with local brokers to book trucks. Many small transporters also work exclusively for large companies for a more stable business.
Automobile carriers: from ICU to ventilator
Automobile carriers, the companies that transport cars and two-wheelers, are one of the worst hit by overcapacity. The automobile industry has been battling puny demand for the last couple of years. The pandemic has come as a double whammy.
“We were already in ICU and now we have gone on ventilator,” says Vipul Nanda, chairman and managing director, Mercurio Pallia Logistics, which owns about 300 trailers. Since a vehicle carrier is tailor-made, it cannot be used to transport other cargo. Auto-industry transporters cannot sub- contract their vehicles. That’s why all the 15,000 car carriers in India are owned by the transport companies – about 100 of them. “A car carrier costs about INR35 lakh. So, it is always bank financed. Therefore, if things are not running well, it is very easy to go bankrupt. We are on the verge,” says Nanda, for whom business has reduced to about 15% of capacity. Most companies transporting cars own at least 100 trailers.
Automobile carriers have also been affected, as part of the freight has moved to the railways and automobile production has not increased. “Around 10% of the volume and 25% of the freight has moved to the railways in the last one year or so,” says Nanda.
Will the stimulus for MSMEs help? Not really
As part of the recently announced INR20 lakh crore package, businesses, including MSMEs, have been promised INR3 lakh crore collateral-free automatic loan, which will have a tenure of four years along with a 12-month moratorium. While the fine print of this package is yet to be understood, the logistics sector is sceptical whether help will reach the sector as urgently as needed.
To be sure, the option of collateral-free loans was always there for MSMEs. Registered MSMEs were always eligible for credit up to INR1 crore without collateral from eligible financial institutions. However, industry associations say there has been very little awareness about the scheme in the transport community.
Also, MSMEs, according to government provisions, are guaranteed payments by their customers within 45 days. All companies that have MSMEs as their vendors have to publish their names and outstanding payments in their annual reports. However, these rules are only on paper for most companies. In the current scenario, the payment cycles have only worsened. “These schemes are just provisions, they were never backed by campaigns for spreading awareness about them. People did not know that transporters can be registered as MSMEs,” says Mahendra Arya, president, All India Transporters Welfare Association (AITWA).
The structure of the logistics industry is based on ownership. Around 85% of the logistics entities in India are single-owner operators or have up to 10 trucks. Many families own multiple trucks in the name of each individual family member. According to SP Singh, senior fellow and coordinator at Indian Foundation of Transport Research and Training (IFTRT), if an entity is a fleet owner, the vehicle as well as drivers need to be registered. If it is an intermediary or a goods-booking agency, it has to be registered as a common carrier under the Carriage by Road Act. There are about 250,000 such entities that control about 80% of cargo bookings in the transportation business. At present, only 10%-15% of them are registered. Most fleet owners are attached to goods-booking agencies.
Singh says “organised” and “unorganised” are very loosely used terms. “You cannot run a 2,000km journey without being organised. You may own two trucks or 500 trucks, you have to have a bank account and PAN, go through vehicle registration, and pay toll, taxes, and EMIs.”
Unfortunately, the biggest lot, the 85%, is the hardest hit and a large section of it, especially single-truck owners, may not be able to avail of the benefits of any government scheme because of their informal nature. The major reason for them to remain unorganised is to carry overloaded trucks and cargo without invoices, skipping e-way bills. “These entities are largely run by illiterate folks, who neither have the wherewithal to organise themselves nor can hire professionals to help them comply with statutory requirements,” says Kultaran Singh Atwal, president, All India Motor Transport Congress, a major industry association.. “When they were not able to organise themselves in the best times, how can they do so now?”
Industry insiders says the revised definition for MSMES might actually be a dampener for many in the transportation business, as the new criteria include turnover limits besides investment in plant and machinery.
Here’s what qualifies MSMEs in both manufacturing and services sectors:
- Micro: investment less than INR1 crore plus turnover less than INR5 crore
- Small: investment of less than INR10 crore plus turnover of less than INR50 crore
- Medium: investment of less than INR20 crore plus turnover of less than INR100 crore
Arya of AITWA says under the new definition, many companies that already qualify as MSMEs will fall off the bracket because of the upper limit of INR100 crore turnover. “Transportation is a high turnover business. One long-distance round trip can easily make INR1 lakh for truckers. Therefore, INR100 crore is a very easy target. There are many companies above INR100 crore turnover,” he points out.
The shadow of EMIs
Truck loans generally have a five-year term. Transporters are a readily available database for banks and NBFCs, competing hard to win business.
Since the economy has been in the grip of a slowdown for the last one year, the delinquency rate in commercial-vehicle loans has been high. Prior to March, a minimum of 40,000 vehicles had been repossessed by financiers, according to an estimate by IFTRT. The vehicles are now lying in 150-odd repossession yards across the country. Repossession is expected to increase manifold once the moratorium is lifted.
By December last year, about 50,000 commercial vehicles had reportedly been seized by banks and NBFCs across the country. What makes things worse is the fact that 40% of these vehicles were only a year old. The delinquency rates are expected to increase since the slowdown has only worsened the situation.
The EMI moratorium, which has been extended from three months initially to six months, is only a breather, not a waiver on repayment. Banks and NBFCs are in a tight spot themselves for fear of rising NPAs. “When it (the lockdown) ends, EMIs will resume and for that enough freight has to come back in the market. Drivers must come back to their wheels. Else, they (the transporters) risk falling into the NPA category,” says Mohan of Transmitr Sewa Foundation. The problem is, he adds, for small operators having less than 10 trucks and those with more than 500 trucks, the NPA norms are the same. If the EMI default continues for more than 90 days, the account falls into the NPA category.
Experts also blame it on reckless lending and stiff competition between banks and NBFCs to woo transporters. Another reason is that this industry has always been dependent on a single finance product, the term loan. In many countries, other modes of financing, such as buybacks and leasing of trucks, are popular.
Industry associations have put forward several relief measures, which have not been accepted by the government yet. For example, the three major overheads for transport companies, apart from operational expenditure, are salaries, rentals, and interest costs. These can be computed for three months and can be credited to the income-tax records of companies for the next two years.
AITWA has written to Insurance Regulatory and Development Authority with a novel relief measure: “Companies have paid premiums to insurance companies even though their vehicles have not been moving. When there is no truck movement, how can there be any claims? Henceforth, if a part of the premium paid can be refunded to companies, that can put some cash in the hands of the entrepreneurs.”
Cash is what transport companies need right now to get back what’s lost.