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Container Corporation: What lies ahead?

Aug 28, 2007

Container Corporation of India (Concor) is a near monopoly as far as container train operations in India is concerned. Besides transportation, Concor provides a number of value added services like warehousing (both transit as well as bonded), less than container load (LCL) consolidation, custom clearance, factory stuffing and destuffing, container maintenance and reefer services (for perishable cargo). Over the past few years, the company has significantly ramped up its fleet of high-speed wagons. As of March 2007, it had a total base of 8,300 wagons (including wagons leased from the Indian Railways) and a network of 58 rail-linked terminals. Historical performance: The growth in container traffic [in terms of twenty equivalent foot units (TEUs)] is closely linked to the economic growth. In the past 10 years (FY98 to FY07), the annual growth in container traffic for Concor has averaged 11.7%, compared to a 6.6% average growth in GDP. This translates into a correlation of 1.9 times, i.e., over longer duration, container traffic for Concor has grown nearly twice that of the real GDP. For Concor, the topline performance is a function of volume growth as well as relaisations (revenue per TEU). The realisations during the ten-year period have grown at an average rate of 6% per annum.

Rail-road economics: Container transportation is a Rs 90 bn industry in India, with container transportation by road at 65% of the market with the remaining coming from the railways. Rail transportation has huge cost advantages over road transportation in long-distance haulages. For instance, the cost of transportation of a 20 metric tonne (MT) container from JNPT (Jawaharlal Nehru Port Trust) to NCR (National capital region) through rail is around Rs 13,000 as compared to Rs 42,000 by road. A steady increase in diesel prices and the ban on overloading of trucks are some of the factors that have worked in favour of Concor.

No meaningful competition: The key entry barrier in the container transportation business by rail is the terminal network. The location of a terminal is of prime importance as it should be well connected with different modes of transportation and also should be near the place of production. We believe it would be very difficult for the new entrants to match Concor in terms of infrastructure. In fact, Concor has tied up with six of the thirteen new entrants to avoid duplication of infrastructure. Also, it would take some time for the private players to get their own rolling stocks. Reliability and predictability of service provider, hinterland connectivity and stability of cost of services would be the key differentiating factors among service providers in the future.

The cold chain initiative: Concor recently entered the cold chain business through its wholly owned subsidiary Fresh and Healthy Enterprises Ltd. The initial investment in this venture is Rs 1 bn, which the company plans to extend to Rs 15 bn over the next 3 to 4 years. The investment will be primary towards setting up of cold storages at different locations across India. The operations will include procurement, import, transport, handling, storage, grading and packing including branding, distribution, marketing, export & selling of fresh fruits, vegetables and frozen foods.

What to expect?
Going forward, given the economic buoyancy and growth in container trade, we expect Concor to maintain its long term average rate of grow of 15% to 17% per annum. The company has been recently focusing on its domestic business, which primarily involves transportation of container with the destination and origin both within the boundaries of the country. The operating margins are expected to remain stable as the railways have agreed to increase the haulage charges only twice in a year, compared to random hikes in the past. Strong balance-sheet (zero debt on books) and higher return ratios (ROE/ROCE of 25%) will help the company to meet its expansion plans internally. We shall soon initiate our research coverage on the company.

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