Both state-run and private sector logistics companies are reportedly planning to increase rates by 8-10% on the back of an increase in haulage charges by Indian Railways. Industry watchers think these companies are not too concerned about losing out on volumes as the quicker-than-expected economic recovery and improving exports would spur volumes in the next few months. In a recent report, Goldman Sachs points out that, reflecting the recovery in domestic and export-import (exim) demand, container volumes at 12 major Indian ports have seen an year-on-year growth since August.
The November 2009 volumes are the highest since March 2008. In November, container volumes registered a 21% growth on a yearly basis and 7% sequentially. ?We see improvement in transportation infrastructure and GST reforms as key tailwinds that would support growth for the sector,? says Goldman Sachs. ?We expect growth in container volumes to remain high over the next six months (helped by the base effect), resulting in an improved utilisation and pricing environment for the rail container haulage companies.?
Interestingly, India has a large freight market estimated at around 3.1 billion tonnes in volume, that has been expanding at an 8% compunded annual growth rate (CAGR) over the past three years. However, only 30% of this cargo is estimated to be handled by the railways despite rail being a cheaper, faster and more efficient mode of freight movement. Privatisation of container rail operation has enticed 16 players who are eyeing 3% (97 million tonnes) of the overall freight market by trying to shift volumes from road to rail.
To be able to grow marketshare and garner higher volumes, operators need to invest heavily in infrastructure. ?As the business entails a longer gestation period, scale and efficiency (utilisation and turnaround times) are extremely critical to generate returns of 15%plus on capital employed,? observes IDFC-SSKI Securities in a recent report. SSKI believes that given their competitive strengths, companies such as Concor, Arshiya and Gateway Distriparks Ltd (GDL) should do well.
Concor, the player in the container rail business with a 95% marketshare, dominates the exim sector. It has adopted a multi-pronged strategy centred on long-term volume contracts with clients, picking up equity stakes in ports (such as JNPT terminal 3), setting up logistics parks in strategic locations, etc. ?These initiatives, we believe, will enable Concor to maintain its leadership and grow its volumes in the coming years and thus sustain margins. We expect 12% CAGR in Concor?s earnings over FY09-12 (15% CAGR over FY10-12),? adds the IDFC-SSKI report.
GDL, a big private rail container operator, is expected to register 37% y-o-y growth in net income in 2HFY10E, against the 24% y-o-y decline seen in 1HFY10. ?We forecast GDL?s EBIT margins to expand by 440 basis points and capital returns to improve by 400 basis points over FY10E-13E through better utilisation rates and return of pricing ability in multiple segments,? notes Goldman Sachs.