Container Corporation of India: Buy

Investors can consider buying the stock of Container Corporation of India (Concor), a leading multi-modal logistics service provider, with a three-four year holding period perspective. Concor's superior infrastructure, backed by its strategic tie-ups with other players, its cold-chain initiative and an inimitable business model are key positives that support our investment view.

Besides, Concor is well-positioned to benefit from any increase in export-import traffic, given its strong network of inland container depots and wagon rakes.

However, in the light of increasing pressure on margins and a skewed export-import distribution (resulting in running of empty rakes), earnings over the next year may remain subdued. This could cap the upside in stock price over the near-term.

At the current market price of Rs 1,865, the stock trades at about 14 times its likely FY-09 per share earnings. Investors can, however, buy the stock in lots to capitalise on the volatility in the broad markets.

Strong infrastructure

The growing popularity of containerisation combined with an increase across ports' handling capacity augurs well for most players in the logistics space. Given Concor's scale of operations and market presence, it is likely to emerge as a relatively bigger beneficiary of such an expansion in market.

Our view is based on two factors. One, Concor's infrastructure consisting of a total base of over 8,500 wagons and a network of 57 rail-linked terminals which makes it the biggest player in the sector. This not only helps Concor score the highest in terms of hinterland connectivity, it also makes it difficult for other players to replicate its network. The other factor that lends confidence is the company's strategy of forming tie-ups with potential competitors.

Concor has formed strategic alliances with most of the 14 players which have entered the container rail space. Also, it has formed a joint venture with Reliance Logistics to jointly promote end-to-end logistics business. This strategy, apart from providing Concor an additional source of revenue, also discourages direct competition. It also reduces the possibility of infrastructure duplication by these players.

Furthermore, Concor's presence in cold chain through its wholly-owned subsidiary, Fresh and Healthy Enterprises, also holds promise. With the business potential in this space driven by increasing retail activity, prospects of this initiative appear bright. Besides, the absence of any well-established player in the segment also leaves tremendous scope for growth.

margin pressure

Notwithstanding the mammoth infrastructure network, Concor has been facing competition from the road transport players due to the unfavourable railroad economics over short-to-medium distance.

To combat this, Concor has adopted a discount pricing strategy, offering about 10-15 per cent discount to FEUs (40-feet containers).

While such pricing tactic has helped Concor attract more volumes, it has also increased pressure on margins. For the quarter-ended September 2007, despite a robust growth in volumes, lower realisation led by discounts capped growth in revenues at about 7 per cent. Overall margins fell by about 6.7 percentage points to 25.9 per cent. Profit margins also suffered on account of the absorption of surcharge cost and skewed import-export mix, which led to higher running of empty rakes.

The drop in export volumes forced Concor to run empties, thus resulting in a higher operational cost. Fall in earnings, however, was arrested at about 8 per cent due to the 74 per cent increase in 'other income'. Other income was propped by the interest income earned on Concor's cash reserves.

However, since the current growth in volumes has largely been driven by discounts, pressure on margins could remain till Concor records volume growth that could support margins.

In this context, firm oil price outlook and the restriction on truck overloading could translate into long-term positives, diverting some of the road transport cargo towards rail.

Moreover, margins could also see some expansion with a possible rebalancing of exim volume mix.