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Recently, the Container Corporation of India (CONCOR) stock has seen sharp gains on strong December quarter results and expectation of a favourable Railway Budget. Given the company’s vast infrastructure across the country, any impetus to projects such as the dedicated freight corridors will lead to jump in rail transport volumes and benefit the company. Analysts say the government’s efforts to improve rail infrastructure, especially dedicated freight corridors, and the ‘Make in India’ push will help shift some volume from the road to the rail sector. Any progress on this front in the Railway Budget and better execution will benefit companies such as CONCOR in the medium term, says an analyst at a foreign brokerage firm.
The stock’s recent gains have also been due to the company’s ability to pass on rail haulage charges and maintain pricing power. After a price rise in December 2014, the company could announce another next month to offset the increase in haulage charges. The pricing power results from the company’s dominance in the container transport segment (it has 75 per cent market share).
For the stock, the key trigger has been the uptick in export-import (Exim) volumes in the December quarter. The Exim segment, which contributes 77 per cent to its revenue (the other segment is domestic business), grew a healthy 12 per cent, helping revenue grow 17 per cent year-on-year during the quarter. The price rise in the December quarter, as well as better margins, meant Exim segment realisations were the highest in about four years. At 20 per cent, annual growth in net profit was above expectations, owing to higher proportion of double-stacked operations and price increases. Analysts say the company’s performance in the Exim segment is likely to sustain in the coming quarters, with the management confident of maintaining volume growth in this segment in FY15 at 12 per cent.
Volumes in the domestic business, however, continue to be sluggish. Higher haulage charges (paid to Indian Railways) and diversion of some capacity to the better-performing Exim segment led to a 11.3 per cent fall in domestic volumes, with revenue declining five per cent year-on-year.
Though a smaller part of CONCOR’s business segments, the higher haulage charges (despite a fall in fuel prices) and a shift of some traffic to the road sector are impacting the company’s performance. This is also reflected in the margin in the domestic business, which is at a four-quarter low of 5.3 per cent, while the Exim margin is 24.6 per cent. The domestic business is expected to record volume growth of about three per cent in FY15.
Due to a better Exim performance and an expected price rise in March, analysts have increased their FY16 earnings estimate for CONCOR by about five per cent. At the current price of Rs 1,596, the stock is trading at 22 times its FY17 earnings estimate. While the potential gain from these levels appears marginal, given the target price of Rs 1,670, investors will have to wait for a better entry point and a longer holding period to make money on this mini-Navratna company.
