Concor sees boost from strong volume growth

Aggressive capex roll-out unlikely, given its record and divestment uncertainty: Experts

The stock of Container Corporation of India (Concor) was the top gainer in the BSE 100 Index on Wednesday, rising 6.3 per cent in trade. The country’s largest container train operator has gained over 9 per cent since the start of the week.

The stock was under pressure on Friday on weak operational performance in the January-march quarter (Q4) and a substantial capital expenditure (capex) programme announced by the company.

Concor is planning to spend ~8,000 crore to ~10,000 crore over the next three-four years to augment its infrastructure, rolling stock, containers, and equipment. This investment shall be higher than the previous cycle; the company had invested about ~3,800 crore over the past four years.

Priyankar Biswas and Neelotpal Sahu of Nomura Research say the stock correction last week was overdone, given its record on capex and impending divestment. “The previous five-year capex target was ~6,0008,000 crore or ~1,200-1,600 crore per year, while actual capex was ~3,800 over FY18-22 or significantly below target and in none of the financial years, did capex cross ~1,200 leading, us to view the ~8,000-Rs 10,000 capex target as optimistic,” say the Nomura analysts.

Given that the capex is largely on equipment, it can be easily deferred if volumes trail the management’s target. Long-term capital allocation plans amid talks of Concor's divestment are inconsequential, they add.

A key factor for the stock will be the volume and margin trajectory. The company is optimistic about growth and has a target of achieving a volume of 5 million twenty-foot equivalent units or TEUS in FY23 on the back of 10-12 per cent growth in the export-import segment and a 25 per cent rise in the domestic segment.

A significant chunk of incremental domestic growth is expected to come from the containerisation of bulk goods, such as cement and food using flexi bags. Cement shall be a big focus area as only 74 million tonnes of total cement production volume of 300 million tonnes are transported by rail. The company is planning to transport 12 million tonnes of cement over the next four years, which is significant considering that this segment’s volume will be equivalent to the company's overall domestic volumes in FY22. The company plans to add 50,000 to 100,00o containers to support its growth plans.

Progress on the western dedicated freight corridor or WDFC (Rewari to Palanpur) has helped the company improve efficiency and register faster turnaround times with more gains to follow as JNPT is linked. Alok Deora and Dhirendra Patro of Motilal Oswal Research expect volumes to pick up with the commissioning of DFCS, thereby leading to 19 per cent annual revenue growth over the FY22-24 period. With the pick-up in domestic volumes and efficiency improvements from DFCS, Concor’s operating profit margin is likely to be stable at 23 per cent, resulting in 20 per cent annual operating profit growth over FY21-24, they add.

While there were worries related to the withdrawal of haulage rebates by the Indian Railways, the company was able to pass on the same to customers. The company expects gross margin to be 31-32 per cent (FY22 at 31 per cent). The go-ahead for the long-term land leasing policy shall help the government proceeds with the divestment of a 30 per cent stake in the company.

At the current price, the stock is trading at 29 times its FY23 earnings estimates. Analysts at Centrum Research believe the structural and positive change in the Indian Railways’ approach towards freight, Dfc-led growth resurgence for rail movement of containers and a robust outlook for domestic business will support the stock’s premium valuations. Given the pending nod for leasing policy and divestment, investors should await clarity on both before considering the stock.