BackFor container rail firms, declining Exim traffic raises earnings risks
Container volumes in the domestic market declined 4.4% in Apr-Aug against a 5.3% expansion in Exim volumesEvidently, investors are worried and underperformance in the Concor stock has intensified
PremiumTurbulence in the broader economy notwithstanding, container rail transporters have been steady, thanks to stable railway freight charges and the promise of a dedicated freight corridor. But the situation is changing for the worse.
The export-import (Exim) container rail volumes on Indian Railways, which generates a large portion of the revenues for Container Corp. of India Ltd (Concor) and Gateway Rail Freight Ltd—a unit of Gateway Distriparks Ltd—continue to slow. As Chart 1 shows, Exim traffic in tonnage fell by 0.5% in August on a year-on-year basis. In July, traffic grew by just 1.9%, significantly slower than the 7.7% expansion seen in the June quarter.
Agreed, the slowdown in growth this quarter comes on a rather high base. For instance, in August last year, traffic grew by a robust 13.7%. Even so, as Chart 2 shows, growth so far in FY20 has been remarkably slower than the previous two years. Continued slowdown will impact Concor and Gateway Rail Freight, said analysts at JM Financial Institutional Securities Ltd. The scenario is worse in the domestic container (non-Exim) segment. Domestic container volumes are down 4.4% in April-August vis-à-vis 5.3% expansion in Exim container volumes.
These trends, if sustained, will trigger another reset in earnings expectations of container train operators, particularly for Concor. Analysts moderated their earnings estimates after Concor reported an unexpected drop in volumes in the June quarter.
Still, it will be difficult to meet even the lowered earnings estimates if the current volume trajectory continues, warn analysts at Edelweiss Securities Ltd. “This (container rail volume) trend now strongly challenges Concor’s annual volume growth guidance of 10-12% and has created room for disappointment. Street’s FY20 volume growth estimates are lower than guidance, but still at 7-8%, which will be difficult to meet, in our view. Looking at the near term, Q2FY20 looks another weak quarter in the offing, with July-August volume growth flat so far," they said.
Evidently, investors are worried and underperformance in the Concor stock has intensified. A prolonged slowdown can weigh on the stock’s valuations even as the forthcoming dedicated freight corridor is expected to sharpen the competitive advantage for container rail transporters.
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