Container Corporation

Shareholders with a long-term perspective can remain invested in the stock of Container Corporation of India (Concor) which, by far, is the most dominant multi-modal logistics player in the country.
Improving trends in container volumes helped by the recovery in Exim and domestic demand at a macro level, and Concor's superior rail infrastructure network, hinterland connectivity, deep pockets and established rapport with its clientele at the company-specific level, underscore our recommendation.
At the current market price of Rs 1,270, the stock trades at about 17 times its likely FY-11 per share earnings.
While this is a tad expensive, what also underscores our ‘hold' recommendation is the uncertainty over what market share gains would accrue to the many players, including Concor, in the container rail business, especially after the financial fortification of some of its competitors.
Note that to a great extent the premium valuation enjoyed by Concor during the slowdown (and before that) was due to the lack of financial muscle among its competitors.
Given the direct relationship between the capex incurred and likely revenues in the container rail business, the lack of financial strength among its competitors indirectly helped Concor's business model. That has now changed with some players getting access to private equity.
Braving the slowdown
When most other players were grappling with the economic slowdown, cutting down on their capex plans or shelling out significant interest outgo to meet funding requirements, Container Corporation, helped by the sheer size of its operations, zero-debt status and depreciated asset base, managed to fare fairly well; it did have its share of misfortunes though.
Falling revenues from the high-margin Exim segment and running of empties had suppressed the company's growth momentum, leading to lower revenues and profits.
From an over-20 per cent revenue growth levels in the three years to 2007, Concor's revenue growth fell to as low as 2 per cent last fiscal.
But what's commendable is that this did not prevent Concor from using the opportunity to add to its wagon fleet, improve its terminal infrastructure or even buy handling equipment. For instance, in FY-09 alone, the company added 1, 395 high speed wagons to its existing fleet of owned wagons; increasing its holding of high speed wagons to 8117.
What's also unique to Concor is the significantly lower fixed cost (about 10 per cent of total expenses) structure it enjoys.
This appears to have afforded it better control over its margins during the difficult years.
While operating profit margins did contract during the slowdown (it went down from over 29.1 per cent in FY-07 to 27.2 per cent in FY-09), the extent of contraction would have been higher but for its many cost-management initiatives.
Improving outlook
The tight leash on costs plus lack of any interest liability (zero debt on its books) and a largely depreciated asset pool seem to put in their bit in helping the company sustain its net profit margins (at about 23 per cent) over the two-year time period.
After having roughed it out during the economic slowdown, the recent uptick in trade volumes portend better days for the company. Container volumes in November grew 21 per cent over the corresponding period last year and 7 per cent over the previous month.
The growth also appears to have been broad-based with volumes across major ports showing positive growth signs, albeit on the low base seen last year.
But the reversal in trade volumes would benefit Concor as also its competitors. It is in this context that the extent of gains that the company can extract for itself remains to be seen.
Though there's no doubt that the balance is weighed in favour of Concor given its strong infrastructure, strategic alliances, end-to-end logistics solutions as well as the yet to be proved execution capabilities of some of its competitors may also keep a lid on its overall realisations. The company may even have to resort to aggressive pricing to keep its competitors at bay.
The onus of driving growth, therefore, may depend on the container volumes that it would be able to attract.
Here again, if the mix of domestic and Exim business continues to be tilted towards the low-margin domestic business, the company's overall margins may get pressured.
The company's performance over the next couple of quarters, therefore, may bear a close watch.
via BL