The lease rates for industrial use of the railways' surplus land may be slashed across the board soon with an extension of the licence period to 35 years from 5 years now for private players.
Railways' LLF policy was originally applicable to land let out for commercial purposes such as opening bookshops, kiosks, etc, but it was extended to container business (industrial use) this year.
The lease rates for industrial use of the railways’ surplus land may be slashed across the board soon with an extension of the licence period to 35 years from 5 years now for private players. The move could not only encourage commercial use of these land parcels, including as real estate, but could also boost investor interest in Container Corporation of India (Concor), which is being sold to a strategic buyer in the current financial year.
It was only in April this year that the railways notified a new land licensing fee (LLF) regime, and extended it to its very own Concor. Until then, Concor had been paying land lease rentals to the transporter on a per-container (20-feet equivalent unit container) basis, which entailed much lower outgo. The LLF being charged by the transporter now is 6% of land value in the first year of licence; the rate will increase at a rate of 7% annually to factor in inflation.
The new regime has proven to be expensive for Concor – while it paid Rs 120 crore as land rentals to the railways in FY20, a similar amount was paid in just the first quarter of FY21. This negatively impacted the company’s profit after tax, which declined 73% on year to Rs 62 crore in Q1FY21.
According to official sources, an inter-ministerial panel is now weighing an LLF regime under which the first-year rate would not be more than 5% (it could even be fixed at as low as 2%), and annual inflation rate would be a more realistic 5%, which is within the RBI inflation target of 4+/-2%.
Concor has as many as 64 inland container depots and some 25 of these are situated on the railway land. Even before the latest rate revisions, the cost of using railways land was higher for the company, than what it had to fork out to farmers and other land sellers. The company has been trying to reduce the share of railway land for its container depots.
The Centre plans to sell a 30.8% stake in Concor to strategic buyer, while its total holding is 54.8%.
In March this year, the Concor stock plummeted 52-week low of `263.2, down 57% from the 52-week high of Rs 617.4. Thanks to the buzz that LLF may be reduced, the stock has recovered some ground recently. At last Monday’s closing price of Rs 384, the Centre’s 30.8% stake was worth Rs 7,206 crore on the BSE; this was still 34.5% lower than Rs 11,000 crore on November 20, 2019, when the Cabinet gave its nod for the stake sale.
Railways’ LLF policy was originally applicable to land let out for commercial purposes such as opening bookshops, kiosks, etc, but it was extended to container business (industrial use) this year.
ICICI Securities said in a note recently: “Land issue creates greater challenges amid weak volumes. From April 1, the railway ministry revised the annual LLF norms for Concor (railway land on which 25 of Concor’s total 64 terminals operate). The change should be seen in the backdrop of Concor’s privatisation, as earlier mode of LLF payment provided certain advantage to the company vs other private container terminal operators. Earlier method of payment was based on Concor’s volumes and was, thus, variable in nature (`1,175/TeU).”
“The revised mode of payment is fixed in nature. This has caused LLF payment to jump from the earlier `120 crore paid in FY20 to (an estimated) Rs 450 crore in FY21. However, as per the Concor management commentary, the ministry has demanded an even higher fee of Rs 777 crore (for two of its biggest terminals) that the management is actively contesting. Hence, in an environment of steep volume de-growth, the fixed nature of expense is expected to create margin pressure for the company,” it wrote.
In its annual report for FY20, Concor said: “The recent change in the Railways method for charging LLF at the rate of 6% of value of land, will have significant impact on the Company’s financials and the same has been suitably represented to the Railways. Taking into consideration the business viability and to mitigate the impact of increased LLF on Railway land, the company has surrendered its fifteen terminals built on railway land.”
Post-2005, Concor has not picked up any land from railways as it bought land along rail tracks from farmers at cheaper rates.