Concor’s benefits from volume recovery depend on two-way traffic
Shares of Container Corporation of India Ltd (Concor) hit a new 52-week high last week, perhaps due to data pointing to continuing strength in its business volumes.
Container volumes in terms of twenty-foot equivalent units increased by 5.4% in July at major ports and, more importantly, volumes at Jawaharlal Nehru Port Trust (JNPT) expanded 7%.
Growth is not only better than what JNPT clocked in April-July this year, but is also way ahead of the previous fiscal year’s growth. Given that JNPT is India’s biggest container port and where Concor commands a lion’s share in container rail traffic, these volume trends augur well for the company.
Sandeep Mathew, an analyst at SBICAP Securities Ltd, says exim (export-import) container rail volumes of Concor “should closely mirror (if not exceed) market growth”. To be sure, one needs a breakup of rail and road volume growth from JNPT to arrive at a firm conclusion on whether volume recovery at JNPT will have a commensurate impact on Concor’s volumes and earnings. Further, given the recent subdued trends in exports, one cannot be sure if the container traffic portends healthy earnings growth for Concor.
The challenge is export-import imbalance. While exports are expanding at a slow pace, recent trade data show imports are growing faster. This puts a rail container operator such as Concor at a disadvantage.
Lack of enough goods traffic in any one direction means its rakes return with a lighter load, which means empty running and an under-recovery of costs. If rail container freight is not viable, then freight forwarders also tend to dismantle and de-stuff the cargo at ports and transport it by road. That is lost business for Concor.
Concor is trying to get around this problem with double-stacking of containers and circuit networks, where the train will travel further down the destination, or take a detour to pick up return cargo. The company has begun to see the benefits. The June quarter has seen a notable improvement in its profitability, thanks to double-stacking and intelligent route planning, which pushed up volumes.
But these results did not see widespread earnings upgrades. There are two reasons for this. One, there is a fear that volumes may soften in the current quarter due to floods in Gujarat. Second, as Jefferies India Pvt. Ltd points out, Concor may have to pass on some of the cost savings to customers. “While a ramp-up of double-stacking volumes is helping save costs, the scope for further cost improvement from present levels is limited,” Motilal Oswal Securities Ltd said in a results review note.
The July port volume data will have a bearing on these views. But the extent to which it will influence earnings expectations will depend on the change seen in costs and pricing trends in the current quarter, which will be known when it reports earnings next.