Please Share:: 
Break-down of cost economics makes recent large hike less relevant. The
unprecedented increase in freight costs dents Concor’s chances of gaining market share
from roads—it is fghting capacity constraints and a worsening exim imbalance. With
this hike, Indian railways is likely trying to leverage (1) its limited capacities and
(2) buoyant and inelastic demand, factors that would help Concor to pass on the large
hike (possibly in phases). DFC is the endgame when cost economics would regain
relevance (impact unlikely before FY2019). We revise our target price to `1,330 from
`1,300 based on 20X FY2017E EPS (discounted to September 2016).
�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��
��
Sharp increase in haulage rate; additional (though temporary) overhang of congestion charge
Indian railways has (1) increased its haulage rates by about 27% for all key tonnage classes and
(2) put a 10% congestion surcharge on containerized imports (additional 3-5% blended
impact). This yields 30-32% increase in haulage costs, requiring ~25% increasing in realization
to nullify the absolute increase in cost. Leveraging the strong demand and limited supply,
Concor has suggested passing on the absolute cost increase to start with. It would then take a
call on whether to reduce prices incrementally based on the response from competition and
customers.
Hike may be passed on over time, leveraging skewed demand-supply and inelastic demand
Concor passed on 16-17% cost increase in a weak-demand environment in March 2013
without taking much of a hit on volumes. This reflects the inelastic nature of demand for rail
container cargo transport. Most customers that could shift shifted to roads, leading to a 25:75
rail-road mix versus a 75:25 mix warranted by cost economics. This time, the demand
environment is better. While the cost increase is larger (almost 2X) Concor would likely be able
to pass on the cost increase possibly in phases over the next 1-2 years.
IR may leverage its limited capacity through more such hikes until it develops spare capacities
Container cargo accounts for a small proportion of overall rail freight and thus cannot materially
change the weak financial position of Indian Railways. However, the present high cost increase
possibly indicates Indian Railways’ intention to leverage its limited capacities against buoyant
and inelastic demand until it develops spare capacity (with the commissioning of DFC).
Hike lowers chances of share gains from roads; DFC is the endgame but still a long time away
On a net basis, the cost hike will lower the chances of share gains from roads. Worsening exim
imbalance and capacity constraints (rakes, lines and terminals) had impacted the potential of
such share gains. DFC is the endgame, as it would unclog line capacities. Concor is investing in
new terminals and may emerge stronger versus the competition post DFC. DFC though is a
longer term phenomenon (initial impact not before FY2019). We revise our estimates to
`48.9/`55.4/`70.4 from `50.2/`59.9/`73.4 over FY2015-17
Break-down of cost economics makes recent large hike less relevant. The
unprecedented increase in freight costs dents Concor’s chances of gaining market share
from roads—it is fghting capacity constraints and a worsening exim imbalance. With
this hike, Indian railways is likely trying to leverage (1) its limited capacities and
(2) buoyant and inelastic demand, factors that would help Concor to pass on the large
hike (possibly in phases). DFC is the endgame when cost economics would regain
relevance (impact unlikely before FY2019). We revise our target price to `1,330 from
`1,300 based on 20X FY2017E EPS (discounted to September 2016).
�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��
��
Sharp increase in haulage rate; additional (though temporary) overhang of congestion charge
Indian railways has (1) increased its haulage rates by about 27% for all key tonnage classes and
(2) put a 10% congestion surcharge on containerized imports (additional 3-5% blended
impact). This yields 30-32% increase in haulage costs, requiring ~25% increasing in realization
to nullify the absolute increase in cost. Leveraging the strong demand and limited supply,
Concor has suggested passing on the absolute cost increase to start with. It would then take a
call on whether to reduce prices incrementally based on the response from competition and
customers.
Hike may be passed on over time, leveraging skewed demand-supply and inelastic demand
Concor passed on 16-17% cost increase in a weak-demand environment in March 2013
without taking much of a hit on volumes. This reflects the inelastic nature of demand for rail
container cargo transport. Most customers that could shift shifted to roads, leading to a 25:75
rail-road mix versus a 75:25 mix warranted by cost economics. This time, the demand
environment is better. While the cost increase is larger (almost 2X) Concor would likely be able
to pass on the cost increase possibly in phases over the next 1-2 years.
IR may leverage its limited capacity through more such hikes until it develops spare capacities
Container cargo accounts for a small proportion of overall rail freight and thus cannot materially
change the weak financial position of Indian Railways. However, the present high cost increase
possibly indicates Indian Railways’ intention to leverage its limited capacities against buoyant
and inelastic demand until it develops spare capacity (with the commissioning of DFC).
Hike lowers chances of share gains from roads; DFC is the endgame but still a long time away
On a net basis, the cost hike will lower the chances of share gains from roads. Worsening exim
imbalance and capacity constraints (rakes, lines and terminals) had impacted the potential of
such share gains. DFC is the endgame, as it would unclog line capacities. Concor is investing in
new terminals and may emerge stronger versus the competition post DFC. DFC though is a
longer term phenomenon (initial impact not before FY2019). We revise our estimates to
`48.9/`55.4/`70.4 from `50.2/`59.9/`73.4 over FY2015-17
LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily01122014aa.pdf
No comments:
Post a Comment