As volume decelerates, Concor’s divestment euphoria begins to fizzle out

Shares of Container Corp. of India Ltd (Concor) had gained 30% in one month hitting a new 52-week high on 1 October following the news of a possible strategic divestment by the government. But this euphoria is now losing steam.

The stock has dropped 10% from the highs in October as investors began acknowledging the challenges in divestment, and also in earnings.

One warning on earnings came from the company itself when it cut its volume growth guidance for the current fiscal year to nil from the earlier projection of double-digit growth.

Export import (exim) container rail volumes, from which Concor derives much of its earnings, dropped 2.7% last quarter, which means they are down 1.9% in first half of the current fiscal year. Thanks to better realisations, the impact on revenue was mitigated, which grew 1% last quarter. But even this is bringing no solace.

Trade slowdown is accentuating competition. Concor is losing market share because of aggressive pricing by private sector firms. “While Concor’s Exim origination volumes have declined in 1HFY20, we note that Indian Railways’ Exim originations have grown, implying market share loss in Concor’s core Exim business,” SBICAP Securities Ltd said in a note. “Management also highlighted that Concor’s market share in JNPT (Jawaharlal Nehru Port Trust)/Mundra have fallen in Q2FY20 as the company is avoiding the unprofitable shorter-lead Exim traffic at these ports,” added analysts at SBICAP.

Of course, the lure of Concor is its dominant market position in container rail transportation, and the benefits the company is expected to reap from the forthcoming dedicated freight corridor. But a prolonged slowdown in trade can delay these benefits, some analysts feared.

Then there was the much talked about strategic stake sale. While Concor’s unique position in container rail transportation in India will undoubtedly attract prospective investors’ attention, ownership change, as being envisaged by some in the market, will not be easy.

As a government entity, Concor is given preferential treatment in land leases from Indian Railways vis-à-vis private operators, a former head of Concor told Motilal Oswal Financial Services Ltd.

Also, handing out a company with dominant market presence to private players can be detrimental to competition. “Private ownership of Concor could be harmful for the rail logistics sector in the long run as a dominant private owner could resort to predatory pricing in an attempt to eliminate competition, which the current management does not believe in,” Motilal Oswal said in a note after it’s discussions with the former head of Concor.

While the concerns highlight the difficulties in Concor’s strategic stake sale, the slowdown in business volumes provides no reason for optimism, at least in the near-term.
Source: Livemint