Channel checks – Awaiting structural changes in weak environment


 

Our channel checks with various stakeholders suggest that railways are focused on increasing volumes and may open up new commodities for containerisation and also rationalise haulage charges. However, there are near-term headwinds for container train operators (CTOs) in the form of EX-IM imbalances at ports and terminals, increases in the terminal capacity and pricing pressure. In fact the entire logistics chain – shipping lines, freight forwarders, Container freight stations (CFSs) and CTOs – are under pressure due to declining international trade volumes. Hence we cut our EPS estimates for CONCOR and GDPL for FY17/18 by 10.5/8% and 21/21% (below consensus). After a c.30% rise since the Feb low (despite a 16% cut to consensus FY17 earnings), we believe CONCOR may be pricing in most of the positives from dedicated fright corridor (DFC) and downgrade the stock to NEUTRAL. We maintain our BUY on GDPL as we believe the risk-reward is favourable.

Channel checks: possible structural changes although near term weak

With a focus on volumes, the Railway Ministry is looking to implement structural changes by freeing up more commodities for containerisation. Moreover, It is willing to look at rationalising haulage charges to attract volumes and market share from road. However, the near term remains clouded for CTOs: a) the EX-IM imbalance both at ports and terminals results in a greater number of empty containers and b) pricing pressure through confidential agreements with shipping lines. The entire EXIM logistics value chain (shipping lines, CFS and freight forwarders) is under increased pressure due to lower volumes, over-capacity, pricing pressure and deteriorating payment terms.

Downgrade CONCOR to NEUTRAL

After a stock price increase of 30% since the Feb low, we downgrade CONCOR to NEUTRAL with a FV lowered from INR1475 to INR1450. We believe at these levels the DFC opportunity seems priced in. In our view, further upside would depend on: a) increase in visibility of DFC commissioning; b) opening up of more commodities for  containers by railways and c) rationalisation in haulage charges by railways. Our checks suggest that the near-term weakness will continue given the EX-IM balance, increase in terminal capacity and pricing pressure. As a result, we cut our EPS estimates by 10.5%/8% for FY17/18 and are 8-10% below consensus

Maintain BUY on GDPL

We cut our EPS estimates by c.21% for FY17/18 based on our channel checks that point to increased pricing pressure in both the rail and CFS businesses. The rail business that contributes 57% to our FV has an excellent DFC opportunity, which is the key reason for our positive stance. While our FY17 consolidated EPS estimate is 13.5% below consensus, we think the market is pricing in just 45% of this opportunity which we value at INR105. We think this provides a good entry point for long-term investors given the stock should start to factor in this value as visibility improves over the year. Moreover, the conclusion of ongoing negotiations with a PE investor on the compulsory convertible preference shares (CCPS) issued by the rail business could act as near-term trigger, in our view.

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