The continuous rise in crude oil prices along with the depreciating rupee is sending shivers down the Street. But, it is yet to dampen sentiment among truck operators as they have been comfortably passing on the hike in diesel price to the end user, through higher truck rentals (freight rate).
A report by Indian Foundation of Transport Research and Training indicates that freight rates over the nine months till September-end outpaced that of diesel on arterial routes by a wide margin (see chart). True, a rising trend in freight rates is a proxy for improving economic activity and mirrors healthy movement of goods. Normally, activity stalls during heavy monsoon rains. But this time around, a steady flow of fruits, vegetables, agri-produce along with constant deployment of trucks for infrastructure and construction activity have kept the rentals high. Cargo from factory gates too was 10-15% higher during September when compared to the recent past.
However, there are reasons beyond mere cargo carriage that support high truck rentals this time. About three-fourths of the contracts are now fixed through transportation agents, logistics service providers and factory unions, with pass-through clause for cost hikes. This has made it easy to pass on higher fuel and operating costs to the end user.
One can also attribute increased movement of goods to the growth of e-commerce too. Analysts say that healthy growth in export-import trade has also given a leg- up to rentals, in the last few months.
Meanwhile, the strict implementation of overloading norms across states is steadily improving fleet utilization and the deployment of more trucks. In turn, it supports rentals and truck sales, which have been growing faster than all other vehicle categories for several quarters.
All the above-mentioned factors support demand for trucks, which in turn supports high rentals. Apart from diesel prices, other costs have been rising too, such as insurance, labour and interest rates. And fleet operators have been smoothly passing on these costs too.
But how long can rentals outpace fuel cost hikes? Some analysts say that the impact of rising costs often hits the commercial vehicle sector with a lag.
Right now, there is the festive season when movement of goods peaks in the country. One needs to watch if rentals will hold out to beat cost pressures, thereafter.