Container Corporation: Buy

Investors with at least a two-year perspective can buy the stock of Container Corporation, a leading player in the multi-modal logistics space.

A massive infrastructure network, huge wagon inventory and strategic tie-ups with potential competitors in the logistics space inspire confidence in the company’s ability to scale future growth. At the current market price of Rs 901, the stock trades at about 14 times its likely FY09 per share earnings.

Concor had suffered significant de-rating in the recent past on the back of concerns over growing competition given the entry of 14 new private players in the container rail logistics space. The company nevertheless retained its leadership position; it contributed to over 94 per cent of the container rail traffic as against the 6 per cent carried by the new entrants last year.

This dominance may remain given Concor’s pan-India infrastructure network of over 57 inland container depots and 8,500 wagons. Plans to further add to these capacities (capex of Rs 700 crore) would help sustain its leadership. Concor also boasts of a highly depreciated asset base. Backed by a low per unit cost, Concor is also likely to enjoy the best returns on incremental investments while its competitors may continue to grapple with high investment costs.

In a bid to further strengthen its service offering and address competition from road transport businesses, Concor has formed joint ventures with companies such as Reliance Logistics and Transport Corporation of India. Through these ventures, Concor would provide end-to-end inter-modal logistics solutions to its customers.

Further, Concor also proposes to enter new businesses such as container shipping and air cargo. Entry into these segments would be a logical extension of its current business offerings and will help Concor establish presence in the entire length of the logistics chain. In an attempt to overcome any hiccup arising from lack of prior experience in these initiatives, the company plans to carry the new businesses through joint ventures. Concor reported a compounded earnings growth of over 23 per cent on the back of 18 per cent growth in revenues over the last five years.

Notwithstanding this, operating margins declined last year by 2 percentage points to about 27 per cent. Margins came under pressure due to the running of empty rakes as there was a drop in export volumes last year. While Concor has since then taken necessary steps to address this problem, the recent depreciation in the rupee may provide some respite.