Concor, Gateway Distriparks track gains as freight shifts to rail segment

The roll-out of the dedicated freight corridor should boost volumes for container train operators

The commissioning of the dedicated freight corridor (DFC) is expected to help the rail segment improve volumes, enable market share gains, and increase the revenue and profitability of container train operators. The key gainers from the shift to rail from the road segment in the listed space are expected to be Container Corporation (Concor) and Gateway Distriparks (GDL).

The entire DFC project covering 2,843 km is divided into the eastern and the western corridors, with the former running from Ludhiana to Kolkata via the National Capital Region (NCR), and the latter connecting JNPT and Gujarat Ports to Tughlakabad and Dadri in the NCR. The Western DFC accounts for 70 per cent of the country’s container traffic, and of the total 1,500 km, over 73 per cent has been already completed. The full commissioning is expected in FY23.

Lavina Quadros of brokerage Jefferies India says: “We believe this is the year of reckoning for the DFC, as the story of faster and cheaper travel than roads should play out with a shift in traffic. Economically and time-wise, cargo travelling over 430 km should eventually shift to rail from the road.” The gains will be driven by increasing axle loads, longer trains, and double stacking — which will increase capacity, while higher speeds will enable less transit time.

The Railways currently accounts for 24 per cent of the export-import (EXIM) container traffic. While the country’s container traffic (road and rail) at ports is expected to grow annually at 7 per cent over FY22-26, Equirus India Equity Research expects rail container growth at 12 per cent. It expects the rail market share to grow 400 basis points to 28 per cent over this period. The government has a target of taking the share of the Railways in EXIM container traffic to over 32 per cent by FY26.

In addition to the multiple benefits of the DFC and multimodal logistics infrastructure, which is coming up over the next year and a half, what may lead to the shift from road to rail is the rising running costs in the road/truck segment. 

Increasing costs (insurance, toll, and fuel) — which lead to a higher road freight — can lead to a market share loss for the road segment. Led by a reduced transit time and cost efficiencies, the rail freight witnessed 15 per cent growth in FY22 to 1,418 mt. The Railways is now looking at scaling this up by 19.8 per cent to 1,700 mt in FY23.

Given the multiple triggers, especially driven by the DFC, brokerages believe container terminal operators (CTO) — such as Concor and GDL — shall be key gainers, largely on the back of a higher volume and asset utilisation. Concor dominates the CTO market with a 67 per cent share. Private operators include Adani Logistics, Gateway Rail Freight, and Hind Terminals — which have a sizeable infrastructure.

The DFC is expected to increase Concor’s volumes by 21 per cent annually over the FY21-25 period. Given the Rs 7,000-crore investment over FY12-21 on development/expansion of terminals, acquisition of wagons, purchase of handling equipment, and IT infrastructure, the company appears to be best placed to capitalise on the emerging opportunities in the logistics space, believe Equirus India Equity Research. A net cash balance sheet and strong cash flows will allow the company to expand its asset base further. What may be an incremental trigger is clarity on the land licence fee policy, as well as progress on disinvestment/privatisation in the current year. The company is expected to grow its revenues and net profit by 15 per cent and 21 per cent, respectively, over the next two years.

Analysts at Nirmal Bang Research expect the full commissioning of the DFC by the end of FY23 to help GDL increase its sales (over 26 per cent rail volume growth) and realisations; operational efficiencies and cost reduction should help expand the margin. While they expect revenues to grow annually by 15 per cent over FY21-24, earnings growth is estimated to be faster at 44 per cent over the same period, on the back of operating leverage, higher operating profit growth, lower depreciation, and annual interest savings. The balance sheet remains strong with net debt-to-equity at 0.3 times; it is expected to turn free-cash-flow positive in FY22, supported by negative working capital and lower capital expenditure.

From their lows in March, both stocks have gained 15-17 per cent. Given their target prices, GDL can see upsides between 15 per cent and 45 per cent; Concor may see an upside between 5 per cent and 35 per cent. Investors can consider GDL at the current price and Concor on dips.