Railway deal, coronavirus' disruption of global trade to weigh on Concor

While valuations are attractive, disruption will keep volumes muted

The Container Corporation of India (Concor) stock has shed 49 per cent since the highs of February on worries related to the purchase of land from the railways and the disruption caused by the outbreak of Covid-19 on global trade.

Even before the current meltdown, the stock was on a downtrend due to a possible Rs 8,000-crore deal with the Indian Railways, which entails buying the latter’s land on which the containerised cargo transporter operates a majority of its terminals.

The immediate impact, however, is from the demand slowdown due to disruption of the export-import trade which accounts for a majority of Concor’s revenues.

Analysts at ICICI Securities have lowered their volume estimates for 2020-21 and 2021-22 by 6 per cent each. The other worry for the company, which dominates the country’s container rail freight business, is higher competitive pressure from the road segment.

 

 

The sharp fall in crude oil prices will improve the profitability of road transporters, compared to rail freight operators such as Concor. Analysts at Kotak Securities highlight that the share of rail in container traffic has moved in the range of 19 per cent and 22 per cent over the past decade. They add that any sharp decrease in diesel prices is negative for rail container traffic and vice versa.

The other worry is the potential buyout of the inland container depot land by Concor, which could impact its cash flow generation over the next few years. Given the Rs 3,000 crore of net cash estimated at the end of 2019-20, Concor would have to take a debt of Rs 5,000 crore to fund the purchase. This would make it a net debt company, from net cash surplus. This, according to the brokerage, would limit Concor’s scope to use the pricing lever to drive market share gains from commissioning of the dedicated freight corridor.

Despite the cut in earnings estimates, analysts at Edelweiss have upgraded the stock, given the sharp fall in stock price even after factoring in the purchase of railway land. The business prospects for the next couple of quarters, however, remain weak. While the land purchase may also put off potential buyers, any progress on divestment will be a positive from the investors’ point of view.