Logistics stocks look promising

While high-profile investors are checking into these, retail ones need to be cautious given the lack of volume growth on a sustained basis

Stock prices of leading logistics companies have been moving up on upgrades and expectations of a recovery. While Gateway Distriparks and Transport Corporation of India (TCI) have touched 52-week highs, Concor, too, has seen some uptick in a week.

The interest has peaked following reports high-profile investors have picked stakes in smaller logistics companies such as Gati and TCI and some unlisted entities.

Analysts at Sharekhan said the recent surge in exports and the growing consensus the gross domestic product growth would pick up gradually after bottoming out in FY14 have rekindled interest.

Given these companies have infrastructure, any revival will boost utilisation and financials. "For a large number, the capex (capital expenditure) cycle is over and it is time to reap benefits. Investors are interested given the lower valuations, strong prospects and upside once the economy starts to revive," says Deven Choksey, managing director, K R Choksey.

Analysts say the sharp rise was also aided by the mid-cap rally since the start of October. The expectation was the companies were trading at trough valuations, much lower than their asset value.

"Given the correction, early investors want to take advantage of a re-rating after earnings recovery. There could be a repeat of FY07 when the stocks were in the limelight as the sector P/E (price-to-earnings ratio) got re-rated," says an analyst.

However, other than a couple of data points showing a bit of an improvement, the sector's potential has not reflected in the financials. After eight months of decline, container volumes rose 4.5 per cent in December year-on-year (y-o-y), a positive sign.

Cargo growth, led by higher coal, iron ore and fertiliser volumes, too, was up 5.7 per cent, y-o-y. However, Religare Institutional Research analysts Prateek Kumar and Mihir Jhaveri say there needs to be further evidence of a sustained volume growth to signal any recovery. In rail and container freight station, analysts are most bullish on Gateway Distriparks. Among smaller companies, a few track Gati and TCI. The stocks are quoting well above their 12-month targets.

Container Corporation of India Ltd
The scrip of India's largest logistics firm has seen an uptick due to upgrades and expectations of volume and margin growth. For the December quarter, the firm is expected to post an 18 per cent revenue growth. While export-import volumes are expected to show a marginal improvement (sector volumes were up two per cent, y-o-y), domestic volumes are expected to move up after four quarters of fall led by a volatile rail policy.

Kotak Institutional Equities analysts led by Lokesh Garg recently upgraded the stock  citing multiple growth drivers including market-share recovery, exports pick-up, reduction in export-import volume gap, margin improvement and domestic recovery. While the company grew its volumes at two per cent a year between FY08 and FY13 and lost market share, it is expected to benefit.

This will come about as the pricing gap with road reduces (diesel price deregulation), higher exports boost volumes and help it grow its volumes in line with the 11 per cent historical container traffic growth. The analysts have a target of Rs 850, while the current price is Rs 740. The stock is trading at the lower end of its one-year forward price-to-book value. Consensus call of analysts, according to Bloomberg, is divided with the number of 'buys' being slightly higher than 'sells'. Investors could enter the stock on corrections given the consensus target of Rs 765 offers upsides of three per cent.

Gateway Distriparks
The key trigger is value unlocking of subsidiaries. While the Street will keep an eye on the initial public offering (IPO) for its cold-chain subsidiary over the next quarter, in the longer term, its other subsidiary that houses the rail business could get listed.

Analysts say given the valuations for the two, they are likely to fetch Rs 1,000 crore, 65 per cent of its current market capitalisation. The container freight station business, its bread and butter, forms 31 per cent of its revenues but half its operating profits with the highest margins (among its business segments) of 42 per cent.

The recovery of volumes will help it maximise gains because the assets are in place. The stock has lifted 35 per cent since October. What attracted investors was the stock had given an attractive dividend yield of five per cent in FY13.

Seventeen of 20 analysts, according to Bloomberg, have a buy, with the rest having a hold recommendation. With a target of Rs 160, investors can expect to make 14 per cent from the current levels of Rs 140.