Concor: Competition, high valuations cap upside

Market share loss, competition in the road sector could dent gains from dedicated freight corridor

Despite the promise of the dedicated freight corridor (DFC) helping it to stay ahead of competition, Container Corporation of India (Concor) could face a tough time if its recent performance and the market share gains for the road players are anything to go by. Earlier this month, the government had highlighted plans to set up an integrated transport and logistics framework, helping create a hub-and-spoke model, lower logistics cost and setting up 35 multi-modal logistics parks (MMLP). Analysts at Antique Stock Broking believe that though the rollout of the infrastructure projects (including DFCs) and implementation of the goods and services tax or GST (with increased shares of thirdparty logistics) would help logistics companies, it could also potentially increase competitive intensity for industry leaders (like Concor), which are also looking to aggressively expand their presence through MMLPs.

The bigger worry is doubts on the shifting of cargo from the railways to road players once the DFC is completed. The first phase of the DFC is expected to start in FY20. Analysts at Kotak Institutional Equities say that the railways’ share of exim (export-import) containers further declined in FY17. “This makes us question our belief on the eventual shift of cargo after the commissioning of the DFC,” they said.

Analysts estimate that the share of rail traffic has slipped below 20 per cent for FY17 year-to-date. This happened in a year when Concor increased its capacity through double stacking (container above another container), import congestion charges were waived by the railways, and the road players made the customers pay the 10 per cent diesel price increase. Customers prefer road players as they offer door-todoor service and have a more efficient and flexible cost structure. Unlike its road peers, pricing and costs are out of Concor's control. The only segment in which the railways functions better is bulk cargo. While the DFC and double stacking will enable higher speeds and capacity, the road ministry’s moves to create expressways with dedicated freight lanes could keep the competition (from the road sector) at elevated levels.

Analysts at Kotak prefer to play the containerisation and higher trade-led volumes themes through ports, which they find more reasonable from the valuation point of view than Concor. While Concor trades at 15 times the FY19 enterprise value to operating profit, ports such as Gujarat Pipavav are available 11 times.

Analysts thus are cautious on the Concor stock. Emkay Global has a sell rating on the stock on persisting structural issues in the form of falling lead distances, competition from road and weak export import trade.

The bigger worry is doubts on the shifting of cargo from the railways to road players once the DFC is completed. The first phase of the DFC is expected to start in FY20. Analysts at Kotak Institutional Equities say that the railways’ share of exim (export-import) containers further declined in FY17