Concor: Competition from road sector, high valuations cap upside

Rollout of GST and infra projects could increase competitive intensity for Concor

Despite the promise of the dedicated freight corridor (DFC) helping it to stay ahead of the competition, Container Corporation of India (Concor) could face a tough time if its recent performance and the market share gains for the road players is anything to go by. Earlier this month, the government had highlighted plans to set up an integrated transport and logistics framework helping create a hub-and-spoke model, lower logistics cost and setting up 35 multi-modal logistics parks (MMLP). Analysts at Antique Stock Broking believe that though the rollout of the infrastructure projects (including DFCs) and implementation of the goods and services tax or GST (with increased share of third party logistics) would help logistics companies, it could also potentially increase competitive intensity for industry leaders (like Concor), which are also looking to aggressively expand presence through MMLPs.

The bigger worry is doubts on the shifting of cargo from rail to road players once the DFC is completed. The first phase of DFC is expected to start in FY2020. Analysts at Kotak Institutional Equities say that the railways share of exim (export-import) containers has further declined in FY2017. "This makes us question our belief on the eventual shift of cargo post commissioning of the DFC," they add. Analysts estimate that the share of rail traffic has slipped below 20 per cent for the year-to-date FY2017. This is in a year when Concor has increased its capacity through double stacking (container above another container), import congestion charges were waived off by railways and the road players passed on the 10 per cent diesel price increase to the customers. Customers prefer road players as they offer door to door service and have a more efficient and flexible cost structure. Unlike its road peers, pricing and costs are out of its Concor's control which caps upside. The only segment in which rail works out better is in bulk cargo. While DFC and double stacking will enable higher speeds and capacity, given road ministry's moves to create expressways with dedicated freight lanes could keep the competition (from the road sector) at elevated levels going ahead.

Analysts at Kotak prefer to play the containerisation and higher trade led volumes themes through ports which they find more reasonable on valuation front than Concor. While Concor trades at 15 times FY19 enterprise value to operating profit, ports such as Gujarat Pipavav are available 11 times.

Analysts thus are cautious on the Concor stock. Emkay Global has a sell rating on the stock on persisting structural issues in the form of falling lead distances, competition from road and weak export-import trade.