Container Corporation: Volumes pass the tariff test; weakening exports a concern :: Kotak Sec,report

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Volumes pass the tariff test; weakening exports a concern. The December
container rail data for Indian Railways suggests negligible impact on volumes post the
sharp tariff hike (from December 5, 2014). This conforms to our view of remaining
demand for railway container transport being broadly inelastic. Overall volume growth
for 3QFY15 has remained steady at 12% (~8% adjusting for double counting). What
worries us more is the weakening of containerzable exports (flat yoy in 3QFY15).
We retain our estimates for now and `1,330 TP (20X September 2016E EPS).


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Indian Railways’ pricing increases by about 22% on a blended basis
Data from Indian Railways suggests a 22% blended increase in its pricing in December (here we
would adjust the 18% mom increase in December 2014 for four days of unchanged tariff). This
increase is lower than the ~30% hike announced by the Indian Railways (haulage rate hike +
congestion charge). We would wait for more monthly data before concluding on the quantum
impact of the haulage hike.
Modest impact of tariff increase on container volumes, as expected
Similar to the last price increase (November-December 2012), even this time there has not been
a dip in volumes on an mom basis. This is in spite of the hike this time being around 2X that of
last time. The demand environment is better this time and railway pricing is still comparable to
road pricing after the hike. Moreover, the remaining market for rail-container traffic is likely less
elastic to price movements (price-sensitive customers have likely already moved to roads).
3QFY15: growth momentum sustains; capacity constraints continue to reflect in domestic
Rail transportation activity for container cargo has sustained at 12% yoy growth in 3QFY15
(similar growth reported in 2QFY15). Exim activity has grown strongly at the cost of domestic
growth (down 6% yoy). We build a 6% fillip to revenues for 3QFY15 for Concor. We are thus
building a 14% yoy growth in 3QFY15 versus 8% growth in 2QFY15.
Risk is more from stagnation in exports as has happened in 3QFY15
We note greater risk to rail container business from stagnating exports. Containerzable exports
have flattened yoy in October-November 2014 versus a steady growth reported over the past
several quarters. The weakness is driven by textile exports, which have declined in the past few
months. Weak demand from China and preclusion of full-tariff shipments can lead to weakness
in cotton and overall exports over the next few quarters.

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http://www.kotaksecurities.com/pdf/indiadaily/indiadaily16012015kl.pdf