Volume led gains for Concor, Gateway Distriparks

Recovery in domestic volumes expected to propel growth going ahead

The two largest operators of container freight and train freight in the country had a strong September quarter, on the back of robust export/import (exim) and higher rail freight volumes.

Exim trade involves movement and storage of containerised cargo to and from ports. The rail freight business reflects cargo movement between two locations. Volumes in the exim business, which accounts for 84 per cent of Container Corporation of India's (Concor's) revenue, were up 12 per cent. Gateway Distripark’s results were boosted by a 32 per cent jump in railway freight volumes. The segment accounts for about 60 per cent of its revenue.

Volume-led gains helped Concor and Gateway outperform analyst expectations, with year-on-year revenue growth of eight per cent and 16 per cent, respectively. Container volumes have risen by three to five per cent over a year at various ports in recent months. Analysts at IDBI Capital believe the recovery in container volume growth will further improve at major ports due to improving exim and a manufacturing revival.

While exim growth was strong for Concor, the rise in domestic volumes were muted at 1.3 per cent over a year, with the company diverting rakes to the exim segment to address the higher demand there. With domestic demand expected to recover, analysts expect the company to add a higher number of rakes in the second half of the financial year, as only six of 18 rakes for FY15 have been added in the first half.

Domestic volumes are the issue for Concor. For Gateway, its container freight station (CFS) operations, especially at Navi Mumbai's Hawaharlal Nehru Port Trust (JNPT), saw realisations drop three per cent over a year. Though volumes at the port, which account for about 55 per cent of CFS volumes, were up 12 per cent over a year, overall demand growth was benign and competition severe in the September quarter.

While demand saw some recent recovery at JNPT, revenue growth for the division is expected to come from the Kochi CFS and the Faridabad inland container depot, which commenced operations in August.

On profitability, the CFS business is crucial for Gateway. The 42 per cent margins of the division are nearly double that of the railway and cold chain segments which have margins of 20-23 per cent. The fall in realisations across its CFS centres dented the segment margins by 59 basis points (bps) to 42 per cent in the September quarter. However, overall Ebitda (earnings before interest, taxes, depreciation and amortisation) margins improved 298 bps to 28.9 per cent, on the back of a steep 723 bps increase in the rail division’s margins, with the company moving out of non-profitable short-distance routes.

Concor improved its operating profit margins by 260 bps to 23.8 per cent, with lower empty (rake) running costs (down 16 per cent over a year) and quadrupling of double-stacked rakes over the past year. Concor achieved volume growth of 13 per cent in the first half of the financial year and the management has said it expects 15 per cent for all of FY15, with the incremental growth expected to come from the domestic segment.

For both entities, operational performance was better than expected. However, a higher depreciation charge (over 200 per cent) dented Concor’s net profit, which fell 21 per cent over a year to Rs 192 crore. Adjusted for the excess depreciation, net profit is in line with analyst estimates of about Rs 260 crore. The latter expect the depreciation charge to rise by Rs 200 crore every financial year, impacting its earnings. Led by strong performance from its rail division, Gateway’s net profit spurted 42 per cent to Rs 48 crore.

Over the past year, stock returns from Gateway Distriparks (150 per cent) have been higher than that for Concor (73 per cent). After unlocking value in the cold chain subsidiary (Snowman Logistics) by listing it, improving of CFS realisations and listing of the rail business (where volumes and margins are expected to look up) are the next triggers.

Gateway continues to be the most preferred stock of analysts in the logistics space, with 76 per cent having a 'Buy' rating on it as compared to 54 per cent for the Concor stock. However, given the gains over the past year, the target price for Concor after the results (Rs 1,388) and Gateway Distriparks (Rs 330) means marginal gains for the former and about 14 per cent gain for Gateway. Buy Concor on dips, while investors can take exposure to Gateway.