Changing Landscape of Indian Logistics Industry

The Indian logistics industry is growing at a rate of 10.5% per annum and estimated to be around USD215 billion in FY2020. The logistics sector is estimated to provide a livelihood to over 22 million people and the number is growing rapidly. Growth of this industry is driven by increasing consumption across sectors and growth of eCommerce industry in specific. Total logistics costs account for 3.5-5% of the retail price in CPG up to 20% in commodities and process industries.

Improved road infrastructure, increased axle load for commercial vehicles and more importantly with the implementation of GST, the Indian logistics industry is undergoing a major structural change. Consolidation of warehousing network (shift towards hub-spoke model) and increasing tax compliance is driving the business move more towards organized players in warehousing and transportation.

Growing Warehousing Business

The share of warehousing costs is increasing with emerging industries and sophistication of warehousing activities. With the implementation of GST, improving road infrastructure and increased axle loads for trucks are resulting in the consolidation of warehouses. Hence, the warehousing industry is in a major boom where we are seeing large private equity players showing investment interests in creating logistics real estate.

Estimated that country has over 300 million sq. ft. of space of which only 12-15% is grade A. The need for warehousing space is driven by both growths in fresh demand and replacement of old godowns or grade C warehouses.

Road transportation is estimated to be 60-70% of India’s domestic freight. However, the segment is considered to be inefficient. The inefficiency is attributed to the high fragmentation of the industry where small to medium fleet owners control over 90% of the trucking industry in India. However, higher GST compliance is creating a level playing field for organized third party logistics players by virtue of access to the input tax credit.

Qwixpert’s financial analysis of several logistics firms in the country shows that median growth was just 3% and the median return on capital employed (ROCE) was 19%. Companies who have grown more than medium while maintaining median ROCE are those have a good mix of contract logistics services in addition to customers of 3PLs are starting to ask for complete solution and not just a commercial quotation. Also, with the increasing cost pressures with the client, they expect 3PLs to improve productivity to manage the manpower cost increase. Hence, it is very important for 3PLs to choose the industry sector to target based on the inherent strengths and right aspirations.

Transportation players moving towards integrated 3PLs