Near-term headwinds for Concor

Export-import volumes remain muted, and freight corridor booster is expected only after two-three years

The stock of government-owned Container Corporation (Concor) slipped two per cent and was around the floor price of Rs 1,195 on Wednesday, first day of the equity offer for sale, wherein the government is selling a five percentage stake for Rs 1,165 crore.

While the offer price is at a two per cent discount to Tuesday’s close and retail (small) investors will get an additional five per cent discount and may apply from Thursday, this discount might not be adequate protection, with the company's muted near-term outlook. Concor dominates the rail container transport segment with 75 per cent share and would be a beneficiary of a recovery in global and domestic trade. However, volume growth continues to be muted, for various reasons.

The first course is growth worry. Analysts at UBS believe strong macro headwinds in export and import trade and a weak domestic market will mean lower volume growth. The brokerage believes volume growth is likely to be five per cent for FY17 than the nine per cent consensus estimate. The other significant factor is loss of market share to road transport entities, able to undercut rail transport operators on pricing, benefiting from lower fuel costs and oversupply in truck operators. Added to this are rising costs, as the railways' multiple freight rate increases (25-30 per cent in FY16) are passed on by Concor.

Operational mismatch of export and import is leading to empty haulage charges and increasing cost. Exacerbated by having to offer rebates on export cargo to maintain the volumes. This discount-volume trade-off would cap the improvement in operating profit margins, if any. For the December quarter, these were down 540 basis points over a year before, to 19.9 per cent.

The key trigger for the stock would be development of the promised Dedicated Freight Corridors (DFCs). The company is expanding its capacity to five million twenty-foot equivalent units by 2017 and growing its cold storage, air cargo and port infrastructure. And, looking at setting up to eight freight terminals along rail tracks in the next three years. This, with plans to set up logistic parks, should enable it to make the most of the eastern and western DFCs, which will improve efficiency, cargo carrying capacity, reduce delivery times and cut costs.

The first part of the DFCs are expected to be operational by FY19. While the access cost (to the DFC tracks) are not clear for container train operators, there is little doubt that these will be a game-changer and should help Concor put its vast supporting infrastructure to good use. Analysts at Citi say completion of DFCs by calendar year 2019 should trigger a step-jump in asset turns, volumes and margins.

A buy call on the stock, however, depends on revival in domestic capital expenditure and industrial activity, and introduction of the proposed national goods and services tax, which would boost domestic industry and a bounce-back in trade. All of this is uncertain at this point.

The stock has fallen 40 per cent from its 52-week high of last year and is down about 14 per cent since January 1, trading at 24 times its FY17 earnings estimate. This is higher than its past five years' historic average. Investors can look at secondary market purchases on dips to benefit from the strong triggers. However, these will take at least two to three years to play out.