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(Photo: @RailMinIndia on Twitter)
(Photo: @RailMinIndia on Twitter)

Parent Indian Railways’ land sale plan adds to Concor’s near-term woes

Concor will have to shell out higher sums for land acquisition against the current licence fee, potentially raising costs

The prospect of a strategic disinvestment and a shift in management control to the private sector generally fans optimism.

Not so at Container Corporation of India Ltd (Concor). Its stock has dropped 14% since 20 November when the government gave in-principle approval for a strategic divestment in the company. During the time the Nifty 500 index lost just 5%.

Part of the losses can be explained by the deterioration in business environment. Volume growth at the state-run logistics solutions provider came to a standstill in the December quarter. While container volumes improved at major ports in January, sustainability of this recovery remains uncertain. The outbreak of the coronavirus and the impact on trade is seen as a major headwind.

Adding to the near-term uncertainty is disinvestment- related transactions.

Concor has deep interlinkages with its parent Indian Railways. Many of the company’s facilities are based on land leased from the railways, often at concessional rates. According to a report in The Hindu Business Line, the government plans to direct Concor to purchase railway land on which its facilities are located. The company may have to pay as much as 8,000 crore for the land, points out the report.

On the face of it, the move underscores the government’s resolve to proceed with the stake sale. But it can also be aimed at shoring up Indian Railways’ finances. Weak financial condition is forcing the railways to collect advance haulage charges from large customers such as Concor and NTPC Ltd.

(Graphic: Satish Kumar/Mint)
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(Graphic: Satish Kumar/Mint)

Transfer of the land can help the railways garner additional cash. “Note that in the past year, Concor and NTPC had boosted the cash position of Indian Railways by paying advance rail haulage charges," said Kotak Institutional Equities in a note.

But such a transaction can load Concor with debt and reduce its appeal for a prospective buyer. Currently, the firm is estimated to incur land licence fee of 200 crore annually. Land acquisition at circle rates will raise costs.

Recovery of additional expenses through tariff hikes in a competitive environment can be tough. Further, tariff hikes in the recent past at several terminals limit the scope for more such increases. “The new owner would want to re-price the container freight offering higher (to compensate for the debt related interest costs); this could have possible impact on volumes given high sensitivity of pricing to volumes," said Antique Stock Broking Ltd in a note.

Absorption of additional costs without commensurate tariff hikes can hurt profitability. On the positive side, the transaction will pave the way for the strategic divestment, which can help Concor realize its full potential. But a lot depends on the government pursuing this, the price at which this land is transferred and how the firm funds this investment.

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