The Hindu Business Line : Container Corporation: Buy

Container Corporation of India is embracing contemporary technology; scanners to check consignments and their authenticity is part of this initiative.

AN EXPOSURE can be considered in the stock of Container Corporation of India, which is a premier logistics play. This sector will continue to figure prominently in the preferences of institutional investors, as Corporate India places greater stress on efficiency in supply-chain management and outsources this function to logistics service providers.

As Container Corporation's (Concor) fundamentals are in excellent shape, the stock holds potential to deliver attractive returns from a two/three-year perspective.

The principal risks in the near term are the pressures on margins due to higher railway freight charges and the high degree of institutional ownership of the stock, which could dampen the upside potential.

If the government decides to sell 5-10 per cent of its stake in the company, as part of the recently-indicated disinvestment plan for profit-making PSUs, it will be a positive for the stock.

Such a move will enhance investor interest in the stock and could lead to higher valuations. The stock now trades at 16 times the likely per share earnings for FY-07. The valuation is even more attractive from a two/three-year perspective.

We have been bullish about the stock for close to four years now, with the latest `buy' at Rs 890 in May; the stock has risen many times during this period.

We remain confident about Concor's growth prospects. Over the past couple of years, the stock has graduated to a large-cap status with a market capitalisation that is in excess of Rs 9,000 crore now.

At this stage of the bull market, the Concor stock also provides an exposure that could not only deliver gains, but also weather any choppiness in the market with marginal damage to valuation.

Buy the stock with expectations of steady, and not spectacular, returns. Our positive view is based on the following factors:

We expect the profitability levels to improve, as the pressure on margins faced by Concor over the past few quarters is likely to abate gradually.

With a new freight structure introduced this year for Concor, a higher cost-structure was inevitable; a part of the decline in margins is perhaps of a lasting nature. Higher railway freight expenses, which have not been passed on fully to customers, has cut operating margins by five percentage points over the past year. The tidings are likely to be better, as the company passes input cost hikes in phases to customers.

As activity picks up at the relatively new container terminals at Mundhra and Pipavav in Gujarat, Concor is likely to be the prime beneficiary.

Not only will it be an alternative to the Mumbai terminal that gets congested frequently, it will also provide for two-way traffic that could prove beneficial for the revenue stream, especially in view of the spike in freight costs.

The phased commencement of operations at the new terminal that is being developed in Mumbai is also likely to expand revenue opportunities for Concor over the next couple of years; this new facility will provide a boost to containerisation and also alleviate congestion pressures that now dog the terminals in Mumbai.

That the new facility is owned by a joint-venture between Concor and Maersk, in which the former holds 26 per cent, is also likely to work in the company's favour.

Concor has been in an investment mode and that should scale up its capacity substantially by end-2006. Its wagon expansion programme has been on fast-track over the past year-and-a-half; high-speed wagons at Concor's disposal are likely to double by 2006 compared to what was available in March 2004.

The effects of this scaling up of high-speed wagons and the expansion in the network of container terminals and freight stations are likely to reflect in revenues and earnings from FY-07.

The buoyant export growth, a rising share of non-oil imports, and a robust industrial growth and investment are likely to provide ample opportunities to deploy the expanded facilities profitably.

Private players can now enter the business of containerised freight movement by rail in which Concor has had a monopoly. We do not, however, expect any serious competition for the next few years, due to the stiff entry barriers imposed by the government and Concor's dominant presence.

It will take several years for even a player with deep pockets to attain the scale of operations that will pose a challenge to Concor. The latter also has a partnership with a couple of potential entrants and this may also work to its benefit.

A zero-debt status, the ability to raise equity, if required, at attractive prices (the company has never tapped the markets) due to institutional investor interest, a clean balance-sheet, the robust cash flows from operation that take care of expansion plans, and a steady earning growth of about 20 per cent, all make this stock attractive.

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