Stock Fundamentals

Container Corporation of India: On the fast track

Meera Siva | Updated on January 24, 2018



Implementation of GST and dedicated freight corridors should accelerate volume growth

Transporting bulk cargo by rail is cheaper and nearly twice as energy efficient than by road. Yet, the share of load moved in India by rail has been dropping over the years from nearly 90 per cent in 1950s to under 36 per cent currently. This is much lower than the nearly 50 per cent share that rail transport has in the US and China. One reason for the higher popularity of roadways in India is the existence of smaller distributed warehouses. The other is the capacity and speed limitation issues in the railways at present.

But these could change in the next few years with a likely structural shift in favour of rail transport. One, the implementation of GST could make it more efficient to operate large centralised warehouses. Two, the dedicated freight corridor (DFC) projects will increase the capacity and transport speed of cargo by rail. Three, freight volumes for core commodities such as coal could pick up as the economy gathers steam.

These factors bode well for Container Corporation of India (Concor), a State- owned rail transport service provider. The company is the leader in the segment, with a market share of 75 per cent. Concor has a vast network of 63 container depots (of the nearly 70 total depots) to handle domestic and export-import cargo and a fleet of over 11,000 wagons.

Investors seem to have taken note of the company’s potential. Concor’s stock is up 30 per cent in the last six months. After the run-up, it currently trades at 32 times its 2014-15 earnings per share. This is at a premium to the average multiple of less than 20 times in the past three years.

But the valuation re-rating seems justified given that the company is an undisputed leader in the growing rail logistics segment. Being State owned, it also has an enviable advantage of having access to strategic land at low cost.

Expansion drive

The company is on an expansion path and hopes to increase its cargo capacity from three million TEU (twenty-feet equivalent units) to over five million TEU by 2017. It is also diversifying its operations and growing its cold-storage, air cargo and port operations. Also in the works are investments to grow its non-containerised cargo segment business by developing six-eight terminals along rail tracks over two-three years. The company is also setting up five logistics parks in Andhra Pradesh and Telengana.

Concor has a strong balance sheet with no debt and sufficient cash balance to fund these expansion plans. It also has strategic partnerships with a dozen logistics service providers including Allcargo and APM Terminals to offer single window multimodal logistics services.

Investors with a three year view can buy the stock, given the company’s strong long-term growth prospects. That said, the Government is planning to reduce its stake from 61.8 per cent stake to up to 51.8 per cent and this may cause short-term price volatility - offering good buying opportunities.

Boost to revenue

In 2014-15, Concor’s revenue and profit grew 15 per cent 11 per cent respectively to Rs 6,150 crore and Rs 1,050 crore. Volumes in its export-import segment (accounting for three-fourth of the revenue) increased 11 per cent in a difficult year when the country’s exports dipped. Domestic volume dropped nearly 4 per cent, but higher freight rates helped revenue growth. The company’s near-term revenue should be aided by volume up-tick while its long-term growth could get a leg-up from significant expansion plans.

Concor will be a key beneficiary of the DFC projects which will enable speedy delivery, higher efficiency and more cargo carrying capacity. Over 3,300 km of new lines will be added by December 2019 in the eastern and western DFCs, boosting freight volumes in at least three ways. One, the load limit that can be carried will be higher. Two, delays will be reduced due to not sharing the line and achieving higher speeds - up to 100 km/hr, from the current average speed of 25 km/hr. Three, cost is expected to be lower by 40 per cent, making rail transport more economical. About 84 per cent of the land for the has been acquired.

Also, coal transport, which accounts for nearly half the freight traffic for Concor, should revive as coal output is expected to double in the next four years. Volumes in other commodities such as iron ore and cement could also pick up as the economy revives.

Concor is also diversifying its revenue by expanding in other segments such as cold chain. It is also planning to grow its air cargo handling business beyond Mumbai airport. Also, setting up freight terminals to handle non-containerized cargo will add to revenue in two to three years.

Published on July 04, 2015

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