Lack of clarity on new policy likely to cap further upside for Concor

The stock of Container Corporation of India (Concor) added to its gains on Thursday, rising 9.4 per cent in the last two trading sessions. While the positive for the stock is progress on the divestment front, given announcement of a new policy, brokerages have taken a ‘neutral’ to ‘negative’ view due to the lack of clarity related to leasing of railway land for Gati Shakti terminals.

Kotak Institutional Equities says that the emerging details of the revised land licence policy are negative versus its expectations. Aditya Mongia and Teena Virmani of the brokerage say that the company may have more to lose if it considers rebidding its terminals in search of lower land license fee (LLF).

The new policy has reduced the annual LLF to 1.5 per cent from 6 per cent now. The annual outgo (at 6 per cent) for Concor due to the LLF for the 2022-23 financial year (FY23) is pegged at around Rs 400 crore. The brokerage had estimated a 3 per cent of LLF in its estimates and downgraded the stock to ‘reduce’, given the 26 per cent price uptick since its upgrade in May.

The lack of clarity in the policy could be a near-term headwind for the stock. JM Financial, which has maintained its estimates for the company, believes that if Concor is to take the option of moving to the new regime, it will have to win the terminal back on the basis of a revenue share model in the competitive bidding process. Moreover, there is no clarity yet about recovery of the investments the incumbent operator has made in the infrastructure at those terminals, says the brokerage. In addition to these questions, the quantum of annual escalation, which is currently at 7 per cent, will also need to be factored in by investors.

The positive for the stock is that the new policy lifts the LLF overhang, clearing the way for divestment. The government, which has a 54.80 per cent stake in the company, plans to divest 30.8 per cent share. At the current price, it should fetch the government just under Rs 14,000 crore.
 

Nomura Research says that with this decision by the Union Cabinet, visibility on divestment of the stake in FY24 increases materially and thus investors can start factoring in potential acquisition synergies for an acquirer.

Priyankar Biswas and Neelotpal Sahu of the brokerage estimate the synergies to be at around Rs 130-140 a share and believe that after this event, the stock could eventually trade in the band of Rs 880-920 a share.

The price targets of brokerages range between Rs 730 and Rs 918. At the upper end, this offers a return of 25.5 per cent for the stock, which is trading at Rs 731. With further details regarding the railway land lease policy expected over the next three months, investors should await clarity on the same and the divestment schedule before considering the stock which is trading at 38 times its FY23 earnings estimates.