Freight cut a relief, but upsides for Concor limited: Analysts

Most analysts have cautious or neutral call on the stock, given the economic environment and competitive pressures

The stock of Container Corporation (Concor), India’s leading container freight operator, is up a little over four per cent since the last week of March and 20 per cent over two months on stabilising container volumes and the recent cut in rail freight.

After two price increases, Indian Railways cut freight rates from April 1. The price cuts vary between five and 13 per cent after the 31 per cent rise in February. Despite the near-term positives, most analysts have a cautious or a neutral call on the stock, given the economic environment and competitive pressures.

IDFC Institutional Securities analyst Bhoomika Nair says the lower volumes, combined with pass-through of the rate cuts, would offset the benefits of the cut in rates. The Concor management, according to IDFC, has indicated that volumes remain weak due to the persistent macro-economic weakness, higher freight rates and competition from roads.

Though the research firm acknowledges Concor’s balance sheet strength and strong infrastructure, it has a neutral rating on the stock, given short-term issues such as flat growth at JNPT, which accounts for about half of Concor’s volumes and high capex on logistics parks, estimated at Rs 1,100 crore in FY13. These short-term overhangs are likely to drain cash and lead to a fall in return ratios (return on capital employed) from 22 per cent in FY12 (it was about 30 per cent in FY07) to 15 per cent in FY14.

IDFC prefers Gateway Distriparks Ltd (GDL) in this space, given the company’s focus on improving profitability of its rail business by enhancing its inland container depot network. The firm has an outperformer rating for GDL, given its rail business growth potential and healthy cash flows from the Container Freight Station operations.

IIFL in a recent report (March 25) has a ‘sell’ on Concor due to weakness in domestic economy, in export-import volumes and the fact that the company has been losing market share to private players in the rail container business. According to its analyst, Manoj Singla, revenue growth has remained in single-digit since FY08 due to continued delays in adding capacity and higher competition in both railway transportation and in roads from private players. Margins and return on equity have also continued to trend down over time.

Analysts led by Lokesh Garg of Kotak Instiutional Equities have a cautious view on the Concor stock given that the upside to their target price (Rs 1,150) is limited due to the run up after the December quarter results. Reduction in empties haulage cost (empty wagons and containers) though, is positive, particularly in the current context of a high trade imbalance.

 

While the short-term outlook is not encouraging, given the company’s ability to leverage recovery, strong balance sheet and wide

 

infrastructure, investors with a long-term perspective could wait for a correction to add the stock in their portfolio.