Container Corporation: Indian Railways reduce haulage charges in key categories by 5-13%; Positive for volumes

26 Mar 2013

Update |Sector: Midcap

Container Croporation

CMP: INR1025

TP: INR 1322

BUY

CONCOR: Indian Railways reduce haulage charges in key

categories by 5‐13%; Positive for volumes, margins; Buy

(CCRI IN, Mkt Cap USD2.5b, CMP INR1025, TP INR1322, 29% Upside, Buy)

EVENT: Railways to cut haulage charges for CTOs by 5‐13%

Indian Railways has decided to cut haulage charges for Container Transport

Operators (CTO) players by in select categories by 5‐13%.

The rate in the 10‐20 tons category has been cut by 5%, while charges for empty

and flat containers in the 20 tons slab has been cut by ~13%.

BACKGROUND: 16‐31% hike in haulage charges since Dec‐12

Indian Railways had increased haulage charges by 16‐31% across segments in

two stages (22% by December 1 and ~7% by February 1).

The hike in haulage charge was 31% (22% in Dec‐12 and 7% in Feb‐13) for freight

up to 20 tons and 16% (9% in Dec‐12 and 7% in Feb‐13) for freight above 20

tons. Almost 75% of industry traffic falls within the 14‐15 ton range.

Given the unprecedented increase by Indian Railways, industry was hopeful of

partial roll back of haulage charges, but the same had not transpired till now.

Most CTO players, including CCRI, had only been able to pass on 60‐70% of the

haulage hike given customer resistance. While this had a negative impact on all

CTO players, the private players were the worst hit given majority were already

making losses.

Change in haulage charges (INR/ TEU for 1000Km)

India’s transport modal mix is adversely skewed in favor of roadways. While in

developed countries, ~70% of containers are transported through rail route, in

India the share of rail transport in overall container transport is only ~21%.

While worldwide railways is the preferred mode for bulk transport for >400Km,

in India this lead distance is ~700Km.

Indian Railways (IR) is the sole owner of the rail network and the sole haulage

service provider for the container rail transport operators (CTOs). Over the last

decade, IR has used the freight segment to subsidize its passenger segment. As

such, since FY03, there has been no hike in passenger rail fares, while freight

charges have been steadily increased.

Container Corporation

Haulage charges are a pass‐through cost for CTOs like Concor. Nonetheless,

since the rail transport mode has substitutes such as roadways (particularly for

shorter durations), any major increase in freight rates has the potential to

negatively impact overall demand. The industry mix is ~80% EXIM and ~20%

domestic. The domestic demand is more price sensitive than the EXIM demand.

IMPACT: Haulage charges cut to boost volume growth and margins

We believe this cut in haulage charges could boost growth for CTO players and

positively impact margins. We expect CCRI’s EBITDA margins for FY14 to get

positively impacted by ~1‐1.3%. The potential FY14 PAT impact could be ~5%.

During our recent meeting with CCRI the management had mentioned that they

have absorbed ~6% of the haulage hike across categories and the entire impact

of hike in empties haulage. At the same time the company had also hiked non‐

haulage charges and planned to pass on the remaining hike in a phased manner

in FY14, due to this the company estimated the impact of the absorbed haulage

hike to be ~2% for CCRI for FY14.

In the past management has mentioned that the average tonnage for them is

~16 tons which accounts for ~50‐60% of its traffic. The competition from

alternatives for the category above 20 tons is small as this cargo has to mostly

move by rails. Hence, as the cut has been for 10‐20 tons category we expect it to

have a positive impact for CCRI.

VALUATION AND VIEW: Buy with target price of INR1,322/share

Over FY13‐17, CCRI would be a big beneficiary of (1) the government’s focus on

Indian Railways to correct freight transport modal mix, (2) infrastructure

projects like the DFC and container port capacity expansions, and (3) key

reforms such as GST and FDI in retail.

Since 2006, ~15 new players have entered the CTO business. However, none of

them have been able to mimic CCRI’s success.

By virtue of its legacy pan India strategic assets, CCRI enjoys an inimitable

resource advantage over its peers, which is steadily increasing with time.

While concerns such as high empties cost, increase in haulage rates and muted

near‐term growth outlook remain, the long‐term prospects are favorable for

CCRI and outweigh near‐term concerns.

We believe CCRI’s inimitable pan India network provides it with a significant

moat, which coupled with positive long‐term industry prospects, will allow it to

enjoy a prolonged period of growth. We believe DCF is the best way to capture

the intrinsic value of CCRI, given its stable cash flow, consistent payout ratio,

robust operational RoCE and low reinvestment requirements.

CCRI trades at 13.9x/ 12.5x its FY14/15 earnings. Maintain Buy with a DCF based

target price of INR1,322 (29% upside).

26 Mar 2013

Container Corporation

26 Mar 2013

Container Corporation

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Container Corporation

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26 Mar 2013