As we introspect on the volume and margin benefits of Dedicated Freight Corridors (DFC) for freight carriers like Container Corporation, US adoption of the Staggers Rail Act (Staggers) in the early 80s and the development of US rail-road carriers since, throws an interesting insight. Passing of Staggers by the US Congress was a breakthrough moment for US railroad freight carriers, which allowed an ailing and largely bankrupt industry to revive on the back of pricing deregulation—in the 1970s, more than 21% of US’ national rail mileage, was accounted for by bankrupt railroads. Interestingly though, while volumes of US railroads went up in an expanding freight market scenario post Staggers, there is no remarkable evidence that it led to any major intermodal shift from road to rail.
Also, as the volume and the operating efficiencies accrued to US railroads post implementation of Staggers, a large amount of these were passed to rail customers in the form of lower rates. This was despite a consolidating industry implying reducing competition. Interestingly, cost efficiencies and volume improvements still allowed players like Union Pacific to increase Ebitda margins from 21% in 1975 to 27% in 1991. To note here, unlike in India where players like Concor are only investing in intermodal terminals (rechristened as hubs), US railroads were in charge of track investments as well, making their asset-intensity and investment-requirement much higher vis-à-vis Indian freight carriers and perhaps justifying higher margin requirements. The extent of benefit transfer to customers in the Indian case will determine the investment case for Concor. We fail to find one at current valuations. Downgrade to Hold.
Staggers ushered a new era of volume and productivity improvements for US railroads, akin to what DFC is expected to bring: By 1978, the railroad share of intercity freight in the US had fallen to 35%, down from 75% in the 1920s. Railroads lacked the funds to properly maintain their tracks, let alone invest in new lines (with investment in tracks of select routes being under the purview of rail road carriers in the US) – which was accelerating the rail to road shift (similar to India where infrastructure is the main bottleneck). Staggers, allowing market-driven pricing of services, brought back profitability, and consequently investments into infrastructure, and what ensued was a period of remarkable volume and productivity growth.
US railroads passed major part of the productivity and volume benefits to the consumers; will the story turn out to be similar for India? The competitive intensity of India’s western corridor may ensure that Concor will have to pass operational and volume benefits to the customers (similar to the US railroads in the 1980s-1990s) and it is the estimation of these benefits transferred which will determine the investment case for Concor. We fail to find one at current valuations. Downgrade to Hold with a revised target of Rs 1,304/share.