Twin blow for Concor

Last Updated: Fri, Nov 30, 2012 03:20 hrs

The stock of Container Corporation of India (Concor) was down three per cent last week, after the railways raised the transport cost for companies that use its network to move containers by 31 per cent. At about 57 per cent, haulage or freight charges paid to the railways are the biggest component of a container train operator’s operating costs. Hence, this recent increase may impact margins. Analysts led by Lokesh Garg of Kotak Institutional Equities Research, say at a 75-80 per cent passthrough, Ebitda margins will be impacted by three percentage points (or 300 basis points).

With Concor stating that it will absorb part of the increase, margins at a time of muted volumes will be impacted more than what the Street is estimating, says an analyst with a domestic brokerage. While the rise in rail haulage charges is an issue, the solace for Concor is that the impact will be more on private container train operators, say analysts, thanks to Concor’s strong infrastructure and pricing power. The key, according to analysts, is the recovery in volumes, which will enable Concor to sweat its assets more. Although most analysts are positive on Concor’s long-term prospects, given its unmatched strategic assets, infrastructure thrust (port expansion, freight corridor) as well as increasing potential for transport via containers, they say that the company’s near-term prospects are not encouraging. The stock, after falling to its two-month low of Rs 918.5 last week, has recovered along with the broader markets and at the current price of Rs 961 is trading at 13 times its FY13 estimates. Given the headwinds on volumes and costs, long-term investors should await for more attractive entry points.

Steep rise
A sharp rise in haulage charges will hurt the company, the largest in the container segment. Himanshu Nayyar of Quant Global Research believes that there could be a 10 per cent volume fall in the lightweight category (10-20 tonnes, which has seen the biggest hike). “Container Corporation handles the biggest volume in this category and we expect its earnings to be affected the most,” he says in a recent report.

While the Concor management has indicated that it will absorb part of the cost and protect overall margins, it will be difficult given that it does most of its business in the lightweight category with average per container weight at 15 tonnes. Given that this category is among the most price-sensitive, there could be a shift to the road transport segment as well which could impact volumes.

However, Aditya Makharia and Ritesh Gupta of J P Morgan while saying that higher freight rates will impact demand, indicate that freight rates on the road segment have also gone up post the diesel price hike. Thus, the cannibalisation by the roadways will be restricted as customers will face a broad based increase in freight costs, they add. Moreover, given Concor’s return ratios, it is in a better position than most of its peers to ride out the jump in costs. Hence, there is a possibility that the current situation could help it gain market share from its peers. Say Kotak Research analysts, “Concor operates at a higher return on capital employed of 22 per cent compared with other private operators Gateway Distriparks (five per cent) and Arshiya International (13 per cent), which limits the ability of some of them to absorb a greater share of the haulage price hike.” Concor, which has a 75 per cent share, could gain market share by controlling the extent of the passthrough of the hike, they add. On the whole, how much volume share Concor is able to grab will reflect on its topline, but yet margins are unlikely to hold which should result in pressure on profits.

Volume worries
Meanwhile, muted demand is the key worry, with domestic demand showing sluggishness and Exim volumes exhibiting volatility. Though the latter is estimated to have recovered partly in October-November, domestic volumes continue to be muted.

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