Demand in the logistic sector is seen tapering slightly across all parameters, from the all-time highs, points out brokerage Nuvama Wealth Management Ltd in its report.
"Optically, year-on-year (YoY) growth looks high, but sequentially we saw the pace flattening in January 2023, whereas February 2023 saw minor tapering," said the brokerage.
The brokerage analyses three distinct parameters in its report —container train volumes, e-way bill data, and container data—and concludes that while demand in the logistics industry is still respectable, there are early signs of tapering.
According to the report, for February, intrastate e-way bill slipped 1% month-on-month (MoM) (up 22% YoY), whereas interstate e-way bill remained flat MoM (up 12% YoY).
"Should this trend continue, it would only be a matter of time before we start seeing flattish growth on a YoY-basis, given the deceleration in demand in recent months," said the brokerage.
More significantly, the brokerage claimed, freight rates have stayed range-bound over the past six months. However, trucker profitability is still at record highs.
"As a result, we continue to like VRL – the company recently announced a price hike (5% for non-contractual customers) and continues to expand capacity while penetrating deeper in north and north-eastern regions," added the brokerage.
As February tends to be a seasonally weak month for container rail volumes, the brokerage saw 9% drop in overall volumes for the month.
The brokerage in its logistics coverage universe is bullish on Blue Dart Express Ltd, VRL Logistics Ltd, and TCI Express Ltd. The brokerage has retained 'buy' rating for these stocks.
Let's look at the brokerage's forecast for these companies.
Blue Dart Express
As per the report, the present margin distress is not structural; it is temporary. Aircraft addition is a clear indication of strong demand from tier-2 and tier-3 cities, despite hurting near-term margins.
"With 15%-plus earnings growth and 40%-plus return on equity (RoE), we see the recent correction as a good opportunity. We retain 'buy' rating with a target price of ₹10,330," said the brokerage.
Recently, VRL Logistics sold its passenger bus division, turning it into a pure-play less-than-truckload (LTL) trucker.
" At 20 times FY24E price-to-earnings (PE) with a RoE of 25%-plus, we find VRL attractively priced. We retain ‘buy’ rating with a target price of ₹695," said Nuvama.
"Improvement in trucking profitability should help TCI in its freight division. At 13 times FY24E PE, TCI is a great value pick given 15% growth and 21% RoE. We retain 'buy'," said the brokerage.