Container Corporation of India: A slow coach

Container Corporation of India (Concor), a State-owned rail transport service provider, has been facing some tough times.

The company reported near flat revenue and a 23 per cent Y-o-Y dip in profits in 2015-16; this compares to an average revenue and profit growth of over 12 and 5 per cent, respectively, in the earlier three years.

In the first half of 2016-17, revenue and profit decreased 7 per cent and 23 per cent Y-o-Y as average realisation reduced due to higher competition from the road segment.

Management revised volume growth guidance to 6-8 per cent for 2016-17, down from 9-10 per cent early in the year.

Concor’s stock price has been on a decline in the past year. In the last month, the stock price fell about 15 per cent. It currently trades at 27 times its trailing 12-month earnings.

While this may appear cheaper than the average multiple of 32 times the stock traded in the last nearly three years, it is high compared with the stock’s five-year average multiple of 22 times.

The stock re-rated in mid-2014 on expectations of structural shift to cheaper and energy-efficient rail transport.

Railway was supposed to wrest share from roadways, thanks to GST and higher rail efficiency from the dedicated freight corridor (DFC) projects.

The company is a leader in its segment, with a vast network of 63 container depots to handle domestic and export-import cargo, and a fleet of over 11,000 wagons. Being State-owned, it has access to strategic land at low cost; it has a strong balance sheet with no debt.

These positives are already priced in; its near-term prospects remain murky as export-import (exim) trade volumes and realisations may not pick up in a hurry.

However, long-term fundamentals remain intact and Concor is investing to expand operations. So, investors with a view of two to three years can hold the stock.

The company earns over three-fourth of its revenue from the exim segment. Volume growth in this segment has been tepid in the last few years.

In the September quarter, volumes increased 4 per cent, aided by import growth. However, realisation has been on a downward trajectory in the last four quarters due to higher competition from road operators, lower travel distances and ports removing congestion surcharge.

From a high of over ₹20,000 per TEU (20-tonne equivalent unit) last year, average rates fell to ₹17,605 per TEU in the September quarter.

Revenue growth may continue to be sluggish in the near term; while agriculture exports may aid exim volume pick-up, coal and other metal imports are likely to be slow.

Also, there may be some impact of demonetisation on overall volumes. Rail transport is typically non-cash, but the first and last mile goods movement is through trucks and cash crunch may limit volumes.

Slowly but surely, the shift to rail transport and uptick in the lacklustre exim volume growth would aid sales.

The company is setting up 15 multi-modal logistics parks to provide single window services at an investment of ₹11,500 crore in 2016-17.

With the implementation of GST, companies may transfer goods from factories to secondary warehouses which serve as distribution hubs. This could aid revenue in the long term.

Concor’s operating margin has been under pressure due to various factors.

In the September 2016 quarter, expenses increased due to running costs of empty containers, and operating margin slipped to 15.7 per cent.

In the June 2016 quarter, profit was hit due to a steep increase in land lease charges. In 2015-16, operating margin dipped below 19 per cent from over 22 per cent in the past.

Margin may remain under some pressure as Concor has been offering discounts to increase volume amidst competition.

When the macro environment improves, the benefits of double stacking of export cargo could aid margin.

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