Container Corporation

Shareholders with a long-term view can continue to hold the stock of Container Corporation of India, the country’s biggest carrier of rail cargo containers. Concor’s widely distributed rail infrastructure network, huge wagon inventory and strategic tie-ups and joint ventures with other prominent logistics players, make it by far the best play in the rail logistics space in India. Further, the government’s increasing spending on developing port infrastructure and the likely diversion of road freight to rail, if oil prices continue to rule high, also makes a strong case for remaining invested in Concor.

While the stock has corrected significantly from its highs in the recent past, the growth outlook for the company still remains on a strong footing. At the current market price of Rs 835, the stock trades at about 13 times its likely FY-09 per share earnings. Investors looking for fresh exposure to the stock can consider accumulating it at dips.
Holding fort

Despite the entry of private players in the container rail haulage business, the primary reason for the stock’s de-rating, Concor has been able to hold on to its bastion successfully. It contributed to over 94 per cent of the container rail traffic last year as against the 6 per cent carried by all the new entrants. Further, the company’s massive infrastructure network (over 57 inland container depots) and its huge wagon inventory (over 8,500 wagons with plans for further addition), which are virtually unmatched by competition, have made Concor the obvious infrastructure partner for even some of the other rail logistics players — Allcargo Global Logistics and Gateway Distriparks have floated joint ventures with Concor.

While there is no denying that, over the long term, Concor may have to deal with a stronger and better-equipped competition, the private players eyeing the container rail business till such time may have to shell out huge investments for putting up adequate infrastructure. At a time when the new entrants are battling with high investment costs and long gestation periods, Concor is already sitting on a large and highly depreciated wagon fleet, making its return on incremental investments the most attractive among its peers . Further, given the macro headwinds now lurking over the economy, Concor may be best-placed to take cuts in margins compared to its peers.
Strategic initiatives

In a bid to further strengthen its service offering and pre-empt competition from road transport business, Concor has partnered with companies such as Transport Corporation of India and Reliance Logistics. Through these initiatives, Concor seeks to provide end-to-end intermodal logistics solutions to its customers.

Further, it also proposes to enter the air cargo and shipping business (through JVs) and has procured responses from prospective partners for the same. The management has indicated that these ventures would begin operations by the end of this fiscal year. This appears strategic as well as a logical extension of Concor’s current business offerings and will help it establish presence in the entire length of the logistics chain.
Results scorecard

The first quarter numbers of Concor reiterate its growth potential. While revenue growth was sedate at 6 per cent, it was hampered to a great extent by the Gujjar agitation in Rajasthan during the quarter. That the volumes in major ports in the country during the same quarter grew by only 8 per cent puts Concor’s revenue growth in better light. Earnings registered a growth of over 8 per cent on a year-on-year basis, driven mainly by the 40 basis points expansion in operating profit margins to over 29.6 per cent.

Margins bettered on account of rationalisation in the tariff structure of its exim business. On a segmental basis, while the exim business grew by 8.6 per cent, Concor’s domestic segment reported a 5 per cent decline in revenues.

But with the Gujjar agitation now behind us, revenue growth is likely to improve in the coming quarters. The management has, given the slower start in the first quarter, brought its guidance for the domestic segment down to 15 per cent from 20 per cent.

On the margins front, Concor may well be able to sustain its present margins as the management has indicated that it will pass on the 14-16 per cent hike in haulage charges by the Indian Railways, entirely to its clients.

via BL