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  • Why freight rates are indicating big economic activity in recent months

    Publish Date: September 24, 2018

    Freight rates are prices at which certain goods are delivered from one point to another. So, in a way, freight rates are a proxy for broad-based demand. Cargo moves when there is a need. Data shows that these rates have shown increase in seasonally weak quarters.

    The rise in these rates is much beyond the fuel price rise, indicating that the growth is coming from actual demand. With economic activity clearly picking up pace, the related transportation ecosystem is ripe for disruption by those having a network of customers/vendors. Stocks like L&T, Container Corporation, and Mahindra Logistics could benefit. Read on to know more.

    What growing freight rates indicate

    Freight rates have been on an upswing through CY2018. We are pleasantly surprised that such hardening of rates is happening in a seasonally weak quarter such as the current one. The changes in rates are more than compensating for the increase in fuel price. Typically, rates track fuel price rise. But any extra hike indicates good tidings for the economy. Strengthening freight rates also come at a time when there is a strong growth in supply through commercial vehicle (CV) sales and the supply of higher-tonnage CVs. Our interactions with experts suggest that the broad-based nature of demand growth is cutting across fruits and vegetables, infrastructure asset creation, and consumer demand.

    Also read - August inflation data was soothing, but will it last long?

    Many wonder how a rise in economic activity immediately translates into gains for the economy. Earlier, the effect may have been with a lag, but with Goods and Services Tax (GST), the effects are captured swiftly. An uptick in economic activity should have a positive effect on GST collections. This also has positive implications for growth capital for further infrastructure asset creation. The benefits of greater tax compliance by the GST ecosystem can become more visible and provide further boost to GST collections, which stood at Rs 93,960 crore in August.

    Effects of formalisation on transport ecosystem

    The formalisation of the transport ecosystem brings about different changes. First, there is strong recovery in demand for mobility. Second, customers’ preferences for vehicles are more specific. Third, we feel there is a need for skilled drivers for modern vehicles. Thus, the logistics ecosystem is ripe for disruption. The institutions that can leverage networks and inspire trust can eke out nifty gains. The logistics sector has good profitability but suffers from a weak starting point to leverage the benefits of input tax credit. There are huge opportunities in multi-modal transport.

    We consider Container Corporation (Concor) (opportunity beyond rail transport) and Mahindra Logistics (established 3PL network) to be key beneficiaries of this trend. Our discussions with Concor suggest scopes for developing a large-scale logistics business in coastal shipping and distribution logistics over the next few years.

    Also read - Weekly wrap-up: Market updates, news and insights for the week ending 21st September

    These integrated firms can replace brokers. The current trucking ecosystem needs brokers who provide guarantee when the customer gives cargo to the transporter. Also, the broker ensures return cargo for the transporter. Mahindra Logistics, for instance, is taking steps to strengthen its network of business associates by digitising the billing process of the business associates. Such initiatives can eventually diminish the role of a broker, thereby helping the company enjoy a greater share of the business.

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