Near-term challenges for Concor

Company faces pressure on volumes and pricing in immediate future

Container Corporation of India (Concor) could face short-term challenges due to rising competition from the roads sector, sluggish volumes and increased running costs due to import-export mismatch. All this is weighing on the company’s margins, which fell steeply (down 730 basis points year-on-year to 14 per cent) in the March 2016 quarter due to dip in originating traffic, empty haulage costs, fall in handling margins in inland container depots (ICD) and limited double-stacking (of container cargo).

Double-stacking enables the company to earn higher incremental revenues with a much smaller increase in costs. Lower double-stacking at 37 trains in the quarter under review, compared with 142 trains in the year-ago quarter, was one of the reasons for muted margins.

Margins, however, are expected to improve given the start of the Khatuwas ICD in Rajasthan, which should lead to higher double-stacking to the tune of 150 a quarter. The downside risk on the margin front is competition, which could drive the company to reduce haulage rates (for transporting goods). Competition from the roads sector is increasing with fleet operators pricing freight at a cost just over their running or diesel costs. The company, which has been losing market share both to the roads sector and within the rail space, could see more risk if freight rates are increased by the railways further.

On the volume front, analysts expect business to improve in the second half of the current financial year due to traction in EXIM trade on a low base and withdrawal of rail port congestion surcharge. Volumes, which grew eight per cent in FY15, fell by six per cent in FY16. The Concor management, however, expects a strong FY17 with overall volume growth at 12.5 per cent, which includes 13 per cent EXIM growth and 8.5 per cent domestic growth. The domestic volumes have shown some growth over the past couple of months on the back of removal of 10 per cent import congestion charge in April 2016. IDFC analysts believe the company will report six per cent volume growth in FY16-18. However, they expect trade imbalance, increased competition compared to road and empty running to dent margins and drive muted two per cent annual earnings over the FY15-18 period.

The key trigger for Concor continues to be the completion of the dedicated freight corridor, which is expected by FY19, as it will help the company improve volumes and efficiencies. The progress of the company’s multi-modal logistics parks is another key moving part given the capex and the impact on the return ratios (like return on equity). While there is little doubt about Concor’s strengths especially given its infrastructure, investors should await meaningful improvement in volumes and operational performance before considering any investment in the stock.