Concor can see rerating of more than 20%, if land licensing fee is finalised

(Representative Image)

Container Corporation of India (Concor) can be rerated by more than 20 percent, if the land licensing fee (LLF) is finalised.

The stock opened at Rs 686 today. According to a Nomura report, if the land licensing fee policy is finalised, it could “add as much as Rs 150 per share to the current price on synergy benefits” and ease privatisation of the PSU. In fact, a favourable policy could act as a “key catalyst” given that the company has had a tough June quarter-handling lower Exim volumes (year on year) and seeing possible loss in market share–and given that the company is trading at a “fair valuation”.

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The fee is what container train operators pay the Indian Railways for use of the latter’s land. The operators pay 6 percent of the market value of the land, and Niti Aayog had recommended that the fee be cut to below 3 percent of the market value. The Cabinet has given the go-ahead for this, and news reports said that the Cabinet note is awaiting the PMO clearance.

The calculator the management has done to forecast the fee for FY23 is unclear, but could be read as an indication of a favourable policy next year. According to the report, the management has given the LLF estimate for FY23 at around Rs 3.8 billion, which is not only lower than FY22’s LLF of Rs 3.8 billion (underlying, excluding provisions) but also does not account the 7% annual escalation (as per existing policy) resulting in an LLF of Rs 4.2 billion. 

“The management did not provide clarity on the calculations and thus it is unclear if the Ministry of Railways is planning a change in LLF rates (possibly a lower rate against the prevailing base rate of 6 percent of market value of land) or is contemplating a change in the escalation factor to below 7 percent,” wrote the Nomura analysts.

Ease of Privatisation

The government, which currently holds 54.8 percent in this Navaratna company, has been planning to divest 30 percent of its holding. Reduction in the land licensing fee will make the company more attractive to private players, and make the privatisation easier.

According to the brokerage and investment bank, “once the LLF policy is approved, it removes the biggest overhang on the stock’s valuation, in our view, and prospective strategic stake buyers may start assigning synergy benefits on top of current valuations. We estimate the synergies at around Rs 130- 140 per share; hence, after this event, the stock could eventually trade in the Rs 800-920-per-share band".

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Volume Pressure

Concor, which is a leader in its category, with over 70% market share in container rail logistics, saw the Exim volumes it handles decline in the first quarter. It is also facing pricing pressure from increasing competition. 

“CCRI reported 0.785 million TEU of EXIM handling volumes (down 4 percent on-year), which implies loss of market share as overall rail EXIM volumes had increased. Based on our own checks, we believe pricing aggression has increased significantly even in certain profitable long lead rail routes, and this may well continue for entire FY23. Pricing competition can further erode market share, in our view, thus putting CCRI’s EXIM growth guidance of 10-12 percent for FY23 at risk. We estimate EXIM handling volume growth at 9% assuming market share is maintained,” said the report. 

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