Pricing power boosts Concor's outlook

ET Intelligence Group: Analysts have upgraded the earnings estimates for Container Corporation of India (Concor) by 15-20% for FY22 after the country’s largest container train operator demonstrated pricing power by imposing land usage surcharge at the Tughlakabad terminal without affecting cargo volume.Historically, Concor’s pricing power has not been its strongest point. However in the first fortnight of December 2020, it imposed a land usage surcharge of Rs 5,000 per twenty feet equivalent (TEU) at the Tughlakabad terminal on the loaded imported containers. Since it has applied surcharge in segments where it has lesser competition, its cargo volume has remained unaffected. If the surcharge is sustained, Concor’s realisation may improve by 4.5-5% for FY22 compared with the earlier assumption of 2-2.5% growth.In addition, Concor’s traffic handling may improve after the linking of the Katuwas terminal to the Western Dedicated Freight Corridor (WDFC) which will provide access to import container load from ports in Gujarat including Mundra and Kandla. Also, the inquiries of load movement on Palanpur-Katuwas segment in the WDFC have been encouraging thanks to cost saving. The Gujarat ports are expected to connect to the WDFC in the first quarter of FY22, which may increase Concor’s volume by over 20%. The imported container load called EXIM volume accounts for 84% of Concor’s volume while balance is the domestic load.Cost saving, lower lead time and faster turnaround due to a dedicated freight corridor is likely to result in the transition of the cargo load to railways from the roads. In the developed markets, rail transport accounts for 60-65% of the cargo transport. In India, it is just 30% due to preference to passenger trains and no fixed delivery schedules for freight load. With the commissioning of WDFC, the share of the rail transport will increase in India.Further, rising diesel prices will make rail transportation cost efficient. At the current diesel prices, the cargo transport for more than 350 kilometres is more efficient by rail compared with trucks.The improving volume growth and pricing power may double the company’s operating profit per TEU in the next 4-5 years compared with the FY20 level. The operating margin may have further upside if the company achieves settlement with Indian Railways for land licencing fees (LLF) – the amount paid for usage of terminals owned by the latter. According to the Railway estimate, LLF is around Rs 1,300 crore per year while Concor believes it should be around Rs 450 crore.At Thursday’s closing price of Rs 615.6, the stock was traded at 38 times the one-year forward earnings, a 17% premium to the long-term average valuation. The premium may expand following divestment linked upside, improving volume growth supported by margin improvement.

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