The industrial sector is on a rebound, attested by the latest IIP (Index of industrial production) numbers. That’s good news for auxiliary industries such as logistics. Container Corp. of India Ltd (Concor), a multi-modal logistics provider with an annual turnover of about Rs3,400 crore, has witnessed the positive effect of the recovery in its domestic business. But trade related to exports and imports (exim business) has been hit owing to the global slowdown. The exim business accounts for around 80% of Concor’s revenues and nearly 90% of its profit before interest and tax.
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Container traffic at major ports in the country fell 6.3% in April-September period, according to Indian Ports Association data. During April-August, government data show that non-oil imports fell 25.6% and exports 31%, both in dollar terms. That’s a difficult operating environment for a logistics player such as Concor.
In this backdrop, it’s commendable that the company managed to grow its revenues by 6.2% to Rs 960 crore on the back of a 4% increase in exim revenues and a 16% rise in domestic business. However, since the exim business is a more profitable one, the change in mix has affected its margins. Besides, the declining market and growing competition are making it difficult for higher costs to be passed on. Operating profit margin during the quarter fell to 26.4%, compared with 29.9% in the corresponding period last year. A combination of higher depreciation and lower other income further hit profit, which fell 8.9% to Rs204 crore.
Concor’s performance has improved compared with the April-June quarter. Revenues rose 5.8% and net profit 1.7% on a sequential basis. It must be noted here that the business had rebounded smartly in April-June period, and hence the improvement in revenues last quarter is a good sign.
Having said that, competition in the multi-modal market has been rising, with nearly 15 new container train operators in the market. According to the company’s annual report, 13 of these have started train services. Concor has realigned its strategy, focusing on providing total logistics and transport solutions. It is entering into strategic alliances to make better use of its infrastructure and boost income growth. For instance, two of the 13 providers have a tie-up with Concor to use its facilities. It remains to be seen if Concor is able to retain its competitive edge. In the medium term, investors will await a recovery in global trade that will lead to better performance. The second half will see an improvement due to the base effect, since the slump in global trade was pronounced in the second half of fiscal 2009.
Concor’s shares have done well in the recent rally, rising, up 90%-plus from its lows in early March this year. But the stock gets a rich valuation of 18 times estimated earnings for the current fiscal. Nomura’s research analysts pointed out in a recent note that at current valuations, the stock is trading above the cycle mean of 14 times earnings, even as Concor risks market share losses with competition strengthening on the back of easing liquidity. Gains for shareholders, therefore, may be limited.
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