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For 3QFY2011, we expect Concor and Gateway Distripark
(GDL) to report strong revenue growth of 11.6% and 10.7%
yoy respectively, on the back of healthy volume growth in the
Exim segment following inventory build-up ahead of the festive
season both domestically as well as abroad. We expect Allcargo
Global Logistics (AGL) to post robust revenue growth of 25.7%
yoy on a low base and consistently improving ECU Line numbers.
Operating margins are expected to remain stable for our
coverage universe. While Concor and GDL are expected to
report moderate PAT growth of 6.9% and 4.8% yoy respectively,
we expect AGL's PAT to spike 61.5% yoy on a low base and
moderate appreciation (2.6%) of rupee vis-à-vis the euro
during the quarter. Overall, we expect a 16.0% and 24.4% yoy
increase in revenue and PAT respectively, for our coverage
universe.
Container volumes stabilising at higher levels
The container traffic data released for FY2011 YTD (April-Nov
2010) by the Indian Port Association (IPA) has registered robust
growth of 12.2% yoy on a low base and demand generated by
the festive season. The JNPT port, which handles around 60%
of the country's container volumes, has registered 7.8% yoy
growth in volumes. The Chennai port, which handles around
17% of the country's container volumes, has recorded strong
increase of 28.0% yoy in volumes for the mentioned period.
The container data for FY2011 so far indicates that the volumes
have stabilised at higher levels albeit on the low base of FY2010.
Going ahead, we expect the ports to sustain the monthly
run-rate and surpass the 7.0mn TEU mark set for FY2011.
Company-wise, Concor is expected to post a 13.0% yoy increase
in Exim volumes, while GDL is expected to report 9.6% yoy
growth in CFS volumes for 3QFY11.
Exports picking up
In October 2010, India's exports stood at `79,763cr (+15.3%
yoy), whereas imports were valued at `122,970cr (+1.5% yoy).
Cumulative value of exports for the April-October 2010 period
stood at `556,162cr (+20.3% yoy), while the cumulative value
of imports stood at `876,997cr (+17.9% yoy) for the period.
Thus, the trade deficit increased 14.2% yoy to `320,835cr during
the mentioned period. The revival in Exim trade has been visible
in the overall port throughput as well as container volumes.
Key developments
Railways hiked Exim haulage charges
The recent revision by Indian Railways (IR) on transportation of
nine commodities, which was put on hold, has now been revised
upwards with effect from Jan 2011. Consequently, Concor as
well as the private operators will be revising their rail freight
tariffs with effect from mid-Jan 2011. We believe this could
result in substantial traffic moving to the road segment if the
operators choose to pass on majority of the hike. However,
given the intense competition, the operators may not be in a
position to pass on the hike substantially, which could impact
profitability of the rail container operators going forward.
AGL continues inorganic expansion
During 4QCY2010, AGL's wholly-owned subsidiary acquired
a controlling stake for US $22mn in two Hong Kong based
companies engaged in non-vessel owning common Carrier
(NVOCC) business in China and other parts of the eastern
region. While AGL already has eight offices in China, the
acquisition adds one in Shanghai (75% stake with an option to
raise it further to 100% at same price) and another in Ningbo
(100% stake). The acquisition has been made at reasonable
valuations of 6.2x CY2009 EBITDA. Further, the acquisition is
expected to add US $35mn in revenues and US $3.6mn at the
EBITDA level on a yearly basis. AGL has also acquired two vessels
of approximately 6,500 dead weight tones (DWT) each to
augment its project cargo movement business. This would help
it in saving the ship chartering and hiring charges and increase
control across the project cargo supply chain.
GDL outlines expansion roadmap
GDL's 60% subsidiary, Gateway Distriparks (Kerala) (GDKL),
won a tender floated by the Cochin Port Trust for a 2.58 hectare
plot in Vallarpadam on a 30-year lease. It is a prime site opposite
the US $442mn International Container Transhipment Terminal
(ICTT), which is India's first trans-shipment hub designed to
reduce dependence on ports like Colombo, Dubai, Singapore
and Salalah. GDKL already owns an eight-hectare freehold
property at Kalamasserry, which together with this leasehold
land, will enable it to create adequate capacities to handle
containers in sync with the capacities and throughput of the
ICTT. GDKL's total investment in Vallarpadam and Kalamasserry
exceeds `50cr. However, we expect GDKL to witness stable
volumes only after 1HFY2012 once the necessary infrastructure
is established.
Competition, higher haulage charges to impact
Concor's Exim growth
Concor's OPM has been declining over the years, though since
the last two-three years it has stabilised at around 25-27% levels.
Margins declined mainly on account of lower ground rent
revenue, inability to completely pass on the hike in haulage
charges due to intense competition and rebates to clients, all of
which pulled down the company's Exim performance. We believe
that volumes would remain subdued in Concor's Exim segment
in FY2011 due to the slowdown in the northern routes owing to
heavy monsoons and lower exports, leading to higher empties.
In addition, the increase in haulage charges by the IR would
further dent Concor's Exim growth.
Container traffic outperforming overall cargo traffic
Container traffic has increased from 3.4mn TEUs in FY2003 to
6.9mn TEUs in FY2010, registering 11% CAGR during the
period. Meanwhile, cargo at major ports posted 9% CAGR
during the mentioned period. The share of container traffic in
the current decade increased from 11.5% to 18.0% in FY2010,
following increased private participation in handling container
terminals and customer preference in transporting cargo in
containerised form as it reduces handling costs.
While the slowdown in global trade in FY2009 impacted
containerisation more than the overall cargo traffic, the trend
reversed in 2HFY2010 and container traffic is expected to
outperform overall cargo going ahead.
Bullish on the container industry on low penetration
and customer preference
Non-bulk cargo, which constitutes ~35% of the total cargo at
major ports, has the potential to be transported in containerised
form. Earlier, only basic goods were suitable for shipment in
containers, but now most items can be shipped in a container.
It is estimated that 75-80% of the total non-bulk cargo can be
containerised. Currently, the level of containerisation in India is
at ~51%, compared to 80% globally, which indicates the scope
of growth on account of improved infrastructure. The share of
containerised traffic increased by around 700bp during
FY2007-09 despite the slowdown in trade in FY2009; however,
it tapered down in FY2010. We expect the share of
containerisation to sustain at current levels in the near term as
it helps to reduce handling costs. Over the next five years
however, it is expected to increase to 62-65%.
Sensex v/s logistics stocks
During 3QFY2011, the Sensex posted moderate gain of 2.2%.
However, during the quarter, Concor and AGL underperformed
the Sensex by 551bp and 1,180bp, respectively. The overhang
of the IR freight hike from January 2011 is expected to impact
rail container operator margins and investors have begun to
discount the same. For GDL, we expect the increase in the pace
of capex post cash infusion by Blackstone and PAT break-even
in the rail business to be the key triggers for its stock
performance. AGL's performance shall be largely driven by the
uptick in volumes and realisations at its European subsidiary
ECU Line, which contributes ~70% to its revenue. AGL currently
trades at attractive valuations of 6.8x FY2012E earnings and
1.1x FY2012E book value. However, Concor's ability to sustain
operating margins along with market share in rail freight will
determine its stock performance.
Outlook
We believe that sustained growth in the Indian economy with
GDP growth expected at 8.5% over the next few years, as well
as emergence of India as a global outsourcing hub will facilitate
the country's container trade. In the current decade, container
traffic registered 12% CAGR compared to the 9% CAGR posted
by the total traffic at the major ports. We expect this trend to
continue and container traffic to register 11% CAGR over the
next five years driven by the addition of new container terminals
and increased containerisation.
We prefer companies that provide a decent blend of growth
opportunities and are quoting at attractive valuations. We
maintain a Reduce on Concor as the company is losing its
pricing power in the high-margin Exim segment and is trading
at expensive valuations. We maintain a Buy on AGL owing to
reasonable valuations and improved performance by ECU Line
over the last few quarters. We recommend an Accumulate on
GDL and expect the company to register 14.1% CAGR in EPS
over FY2010-12 on account of being present at strategic
locations, its ongoing expansion plans and break-even in the
rail business at the PAT level.
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