Street bullish on Concor's prospects following likely stake sale by govt

Volume gains from dedicated freight corridor remains the key stock driver

The Container Corporation of India (Concor) stock hit record highs earlier this week on expectations that the government is looking to shed a substantial stake in India’s largest rail container operator. The government, which owns about 55 per cent in the company, is exploring options to offload 30 per cent stake to strategic investors along with management control. The Adani group is reportedly among the few investors exploring its options on investing in Concor. At the current market cap of nearly Rs 39,000 crore, the stake sale would fetch the government about Rs 11,700 crore. In the backdrop of these developments, the stock has gained 30 per cent over the last month.

Given that the company dominates the export import (exim) container volumes and has substantial infrastructure both in the form inland container depots as well as at the ports, the buyer gets access to the infrastructure as well as the operator’s customer base. The implementation of the dedicated freight corridor (DFC) in western India will give Concor a poll position helping it to boost volumes, bring in economies of scale and leverage its enviable infrastructure. Even as overall trade volumes have been sluggish, containerisation has continued which is positive for players such as Concor and prospective buyers.

In addition to healthy and consistent growth history of exim container volumes, it will be a tough act for any new entrant to replicate the logistics infrastructure of Concor. Analysts at Kotak Institutional Equities say the related rail transportation business requires scale, timely investments in assets at the right location and network balancing (giving the buyer) protection against new competition.  

The key risk for the company now and for the new owner will be changes in haulage charges by the Indian Railways. The passing on of the same depends on competitive nature from roadways and the need to maintain market share. What could possibly offset some of the pressures on margins is the volume uptick from double stacking and better utilisation of capacities.

While there is little doubt about the gains for the company once the DFC is completely rolled out, most of the gains are already captured in the stock which is trading at 37 times its FY20 earnings estimates. Given the time lag for implementation of the DFC and the stock run up, investors should await a meaningful correction before considering Concor.