Railway land deal, Covid-19 trade impact to limit upside in Concor

While valuations are in the attractive zone, disruption would keep near term volumes muted

The Container Corporation (Concor) stock has shed 44 per cent since the start 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 has been on a downtrend on a possible Rs 8,000 crore deal with the Indian Railways which entails buying the land on which it 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 FY21 and FY22 by 6 per cent. The other worry for the company which dominates the container rail freight business is higher competitive pressure from the road segment.  

The sharp fall in crude oil prices would improve the profitability of road transporters as 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 19-22 per cent over the past decade and has had a negative correlation with sharp changes in diesel price in the past.

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 FY20, Concor would have to take debt of Rs 5,000 crore of net debt to fund the purchase. This, according to the brokerage, would limit scope for Concor to use the pricing lever to drive 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. While the land purchase may put off potential buyers, any progress on divestment will be a positive from the investors’ point of view