Container Corporation: Buy

Investments with a two-three year perspective can be considered in the stock of Container Corporation of India (Concor). While slackening demand and tightening of lending has taken a toll on most logistics players,

Concor, given its vast infrastructure network, market leadership and strong balance-sheet, appears best-placed to sail through the current crisis and to ride any future revival.

Our recommendation also draws strength from the fact that logistics as a sector is still in its nascent stage in the country and, hence, has a huge untapped growth potential, especially so for containerisation.

The position of strength that Concor enjoys among the handful of listed players in this place also underscores our view.

At the current market price of Rs 652, the stock trades at about 10 times its likely FY-09 per share earnings. This appears justified, as despite the slowdown in port volumes and container traffic, the company may be able to manage a ten per cent growth in earnings over the next two years. Investors should consider accumulating the stock on dips instead of buying at one go.
Competitive edge

The drying up of export-import volumes in the past few months, especially in December 08 and January 09, portend tough times for logistics players.

Companies may not only fall short of their revenue targets, the running of empties and increasing pressure on pricing may also overshadow earnings.

That said, it is these challenges that put Concor in better light. With zero debt on its books and sufficient cash in hand (Rs 1,700 crore as of December 08), Concor has a significant edge over its competitors.

While the new players may find it increasingly tough to sustain their presence in this highly capital-intensive business, especially if the economy were to take a turn for the worse, Concor, owing to its vast infrastructure network and market leadership, appears to have sufficient wherewithal to survive.

For one, a highly depreciated asset base as also a high return on incremental investment may give it sufficient leeway to lower its rates and take a cut in its margins, if the need arises. Two, its widely spread-out rail network, providing the best of hinterland connectivity, may also shield it in these challenging times.

Unlike some of its peers, whose presence is limited to specific ports, Concor’s well-diversified port portfolio may offer it some protection — relative to its competitors — from a drastic slowdown in volumes at specific ports. And, third, the company’s large wagon fleet, which supersedes that of its peers. Besides, Concor’s management only recently made it known that despite the drop in volumes, it is likely to continue with its expansion (capex of Rs 3,000 crore over a span of five years).

While the threat from competition may still persist and become worrisome only in the long run, private players eyeing the container rail business may till such time be forced to shell out huge investments for putting up adequate infrastructure. That said, it needs a mention that the entry of new players in the container rail business did take away some of the business away from Concor.
Earnings outlook

For the quarter-ended December 08, driven by a 10 per cent fall in volumes, the company’s revenues remained flat even though the quarter saw a 14 per cent increase in realisation.

However, the increase in realisation was mainly due to the increased dwell time of containers and not because of any hike in prices. This means, sustaining realisations at these levels may not be plausible.

Operating margins, however, improved by 1.6 percentage points to 28.9 per cent, helped by higher terminal and warehousing charges (partly due to high dwell times) and improved operating efficiencies. Profits grew by 7 per cent.

That said, the company’s performance in the coming two-three quarters may bear a close watch as any significant drop in volumes and earnings may call for a re-look at the investment argument.