Hard Hitting comments on the Indian Railway Budget

The Railway Minister Laloo Prasad Yadav has been an entertainer and shrewd politician. As the GDP growth surged, the fortunes of the railways also improved. Remember that the logistics sector tracks GDP growth.
The media proclaimed Laloo Prasad Yadav to be the expert who turned around this ailing public sector enterprise!!!!
"A rising tide lifts all boats." How is the Railways going to react to the impending slowdown in domestic and international trade?

Here is some very 'constructive' criticism of Railway Policies over the last 5- 6 years, that will hopefully encourage policies to reinvest in infrastructure and plan for long term growth opportunities of the Indian Railways.

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A tale of missed opportunities: Sumant Chak

BS Reporter / New Delhi February 14, 2009, 0:39 IST

The operational and financial performance sustained over the last five-six years has been commendable. Sadly, these are also years of missed opportunities, with capacity generation and modernisation of the system being the important casualties.

The system’s capacity to run trains has been exploited to saturation. The ground reality is that there has been no important capacity generation in the last five years. Similarly, older coaches, locomotives and wagons continue in service with no improvement in passenger comfort or freight carrying capacity. The dedicated freight corridor project, which signalled the intent to increase system’s capacity substantially, remains mostly on paper.
Similar is the case of a slew of projects announced over the years. Coach, wheel and locomotive factories that were promised some years back have languished in the files and none is even remotely close to fruition.
It is important to understand that the railway infrastructure is not created in a day. Unless project planning and execution are given priority, the country’s railway will not become world-class. The increasing populism in the last two budgets and this one, therefore, reflects a tale of missed opportunities. Future generations will rue today’s tardiness.

Sumant Chak, Director (International Relations), Asian Institute of Transport Development, New Delhi Former Additional Railway Board member. """"

SOURCE:http://www.business-standard.com/india/news/a-talemissed-opportunities-sumant-chak/01/30/349017/

THE CRASH

Sorry for not posting an update sooner. Over the last couple of days I was busy at work, looking for stocks to buy in the crashing Indian markets.

I bought into Reliance Petroleum, Asahi Glass, Reliance Communications and yes added a little Concor.

I will put up a report on Asahi India Safety Glass; a company I believe has excellent long term potential.
Asahi Glass reported a loss for the third quarter, as a result of amortization and interest costs. With its new plants now complete and in various stages of commissioning, its future prospects are bright, as the company is now the largest integrated glass manufacturer in India. I will continue to buy it on declines.

My other Long term investment Concor held on surprisingly well, as the rest of the market collapsed. It reports results by the end of the month, and as the company is cutting prices to take on the competition, margins could be under pressure.
Longer term tie ups with Reliance logistics, Bharti -Walmart, the Transport Corporation of India etc stand it in good stead. Also its stakes in Ports and container terminals are additional positives for the stock
Its competitors in the private sector are struggling with large borrowings and increased capital expenditure charges.
I will buy some more Concor after the results.

I had not made many purchases over the last few months, except for Elecon Engineering, Sanghvi Movers and Concor, which have somewhat survived the bloodbath.

As I said before, the overvaluation in Indian Equities needed to be corrected and overvalued sectors like Real Estate, Brokerage Firms, the Power sector, and many momentum counters were really beaten down.

Always invest with an adequate margin of safety and do so according to your own investment risk profile.

Do read my blog post Smoke and Mirrors (31 / 12 / 2007). It talks about my outlook for 2008. Also do take a look at my blog post on Investing in Gold.

I see more downside for the US Markets, and Asia as the US goes into recession.
The 0.75 % rate cut will really hurt the US Dollar. Currencies that are USD pegged are going to have a hard time dealing with inflation in their local economies. This should be positive for GOLD. In the near term the continued sell off could hurt gold prices.


Will put up another update soon.

CONCOR : PART 4 : CONCLUSION

I am positive on the long term outlook of the Indian economy. Investing in CONCOR allows you to participate in the core infrastructure development of the country and the subsequent benefits of expansion in trade once all the infrastructure is in place. The stock currently trades at Rs. 1790 (at a PE Ratio of 17 times its trailing 12 month earnings) and has sharply underperformed the BSE SENSEX Index over the last year. It has been rangebound between Rs.1800-2400. According to technical analysts, it has a long term support at Rs. 1550.

Reasons to Invest:

• Established integrated rail logistics giant.


• Long gestation period in the logistics business.


• Improvement in Road and Port infrastructure.


• Concor is DEBT FREE.


• Unlocking of value through Privatization/Disinvestment: The Indian Railways currently holds 63.09 % in CONCOR. The Indian government has recently been divesting stakes in public sector enterprises in the power sector, so a further stake sale by the government in the future cannot be ruled out.

Concerns:

• Increased competition from the private sector


• Increased rail freight charges payable to Indian Railways.


• Delays in development of Port and Rail Infrastructure.


• Delays in implementation of the Dedicated Freight Corridor Project.


• Slowdown in Export- Import (EXIM) business, if there is a global slowdown, (EXIM =80% of total business now)


• Risk of a rising Rupee hurting Indian Exporters


• Low Liquidity of CONCOR stock: The stock is thinly traded, with 27% being held by Foreign Institutional Investors, many of whom have been long term investors, and just 2% being held by individual investors.
  I have been holding shares of CONCOR over the last two years and have been buying the stock this week. I will continue to add it on declines.
  For a patient and risk averse long term investor, this integrated rail logistics player is an ideal bet.

CONCOR : PART 3 : JOINT VENTURES

In January 2006, the Indian Government opened up the container haulage sector to the private sector. 14 companies have entered the field which until recently was the sole domain of CONCOR.

CONCOR has entered into a number of joint ventures with private sector players, who will use Concor’s pan India infrastructure setup, till they are able to set up their own.
Concor has also taken stakes in port terminals and container terminals, to enable it to become a fully integrated player.
CONCOR signed Memorandums of Understanding (MOUs) for co-operation and co-share/use of resources with eight out of fourteen new entrants (PIPAVAV Railway Corporation Ltd, Central Warehousing Corporation, Gateway Distriparks, Hind Terminals, Mundra International Container Terminals. India Infrastructure Leasing Company, Delhi Assam Roadways and J.M. Baxi Group).

THE DADRI ICD
CONCOR’s inland container depot (ICD) complex at Dadri is a mega terminal spread over 110 hectares, connected by six railway lines, designed to handle 5,00,000 twenty-foot equivalent units (TEUs) per annum when fully operational. While a portion of the ICD has been developed by CONCOR on its own, the rest is being developed by entering into partnerships with private shipping lines who will manage the Container Freight Stations (CFSs) within the ICD independently.

Star Track Terminals Pvt. Ltd.: A Joint venture with Maersk India Pvt. Ltd. for setting up and running a CFS at Dadri, U.P. India (CONCOR shareholding 49%)
Trident Terminals Pvt. Ltd.: A Joint venture with APL India Pvt. Ltd. for setting up CFS at Dadri, U.P. India (CONCOR shareholding 49%)
Albatross CFS Pvt. Ltd.: A Joint venture with Transworld group of Companies for CFS at Dadri, U.P. India (CONCOR shareholding 49%)
CMA-CGM Logistics Park (Dadri) Pvt. Ltd: A joint venture with CMA-CGM Global India Pvt. Ltd. (CCGIPL) for CFS at Dadri, UP. India (CONCOR shareholding 49%)

JAWAHARLAL NEHRU PORT TRUST (JNPT) CONTAINER TERMINAL
Gateway Terminals India Pvt. Ltd.: A Joint Venture with Maersk A/S, Copenhagen for the third container berth at JN Port, Mumbai. India (CONCOR shareholding 26%)

CONTAINER GATEWAY: A joint venture between Container Corporation of India and Gateway Rail Freight (a subsidiary of Gateway Distriparks). (CONCOR shareholding 49%)
The existing rail linked terminal at Garhi Harsaru, Gurgaon just outside the capital New Delhi, will be expanded into a mega terminal with connectivity to the proposed Western Dedicated Freight Corridor. The JV will provide connectivity for cargo from the national capital region (NCR) to the gateway ports of JN Port, Mundra and Pipavav.

JWG-Air Cargo Complex: A business arrangement with Hindustan Aeronautics Ltd. and Mysore Sales International Ltd. for air cargo business at Bangalore, Karnataka, India (CONCOR shareholding 33.33%)

Himalayan Terminals Pvt. Ltd.: A joint venture with\Nepalese Enterprises (Interstate Multimodal Transport Pvt. Ltd. of Nepal & Nepal Transit & Warehouse Co. Ltd.) for management and operation of rail container terminal at Birgunj (Nepal). Nepal (CONCOR shareholding 40%)

HALCON: A business arrangement with Hindustan Aeronautics Ltd. for operating an air cargo complex & ICD at Ozar airport, Nasik, Maharashtra, India (CONCOR shareholding 50%)

India Gateway Terminal Pvt. Ltd.: A joint venture with Dubai Port International (DPI) for setting up and managing Container Terminals at Cochin, India. CONCOR holds a 15% stake.

India Gateway Terminal (Cochin, India) of DP World, is the first terminal under DP World in India. It has taken over the operations of the Rajiv Gandhi Container Terminal from the Cochin Port Trust to further expand its global port operations. India Gateway Terminal Pvt Ltd are developers and operators of the major new deep water International Container Transshipment Terminal in Vallarpadam.
Vallarpadam’ is the largest single operator container terminal currently planned in India and the first in the country to operate in a special economic zone. The new terminal will make Cochin a key centre in the shipping world reducing India’s dependence on foreign ports to handle transhipment.


Integrated Infra Log Pvt. Ltd.: A joint Venture with IL&FS infrastructure Development Corporation Ltd. to carry on the business of establishing, acquiring, developing,
managing & maintaining logistic infrastructure, etc. India (CONCOR shareholding 50%)

Comprehensive Multi-modal logistics services
CONCOR has recently signed Memorandums of Understanding (MOUs) for alliances with strong road based majors like Transport Corporation of India and Reliance Logistics. Detailed commercial agreements will be signed in due course.
TCI and Reliance Logistics(a subsidiary of the Mukesh Ambani’s Reliance Industries) will now capitalise on the strength of container services provided by Concor's network spread across the country in rail transport and terminal handling, while Concor will use their road transport, shipping and warehousing network.

CONCOR : PART 2 : THE CONCOR ADVANTAGE

Fundamental strengths of CONCOR.

A large integrated logistics player like Concor will clearly benefit from the expansion in domestic and international trade. Exim revenues (80% of total revenues).

Improvement in Railway & Port Infrastructure will be a key driver of growth in containerised traffic.

Slow growth in containerised traffic at ports, has resulted from lack of container handling infrastructure at ports, and poor yard and traffic management at Inland Container depots (ICDs), which also affects smooth transshipment of cargo to ports. Containerisation ensures safety of goods being transported, reduces packing costs and increases the speed of transportation. It facilitates inter-modal transport (entire movement from the point of origin to the destination, using different modes en route like road, rail, ship, airlines etc.
Development of ports such as Mundra, Kandla & Pipavav in Gujarat and Cochin(Kochi) in Kerala, will boost container volumes for CONCOR over the long term.

The company is debt free. This enables future expansion through debt in event of stiff competition from the private sector.

CONCOR’s entrenched market position and the long gestation period required in the rail container logistics business will be obstacles for potential entrants, who will take several years to build an integrated logistics chain.


Concor enjoys a distinct cost advantage by virtue of its Inland Container Depot (ICD) locations, which have rail-head connection and which therefore eliminates multiple handling and transportation.

Replicating such infrastructure would be an enormous challenge for the private sector, with spiraling real estate prices likely to impede land acquisitions for setting up depots.

The private sector is currently piggy-backing on CONCOR’s rail operations, through Joint Ventures, until they set up their own container infrastructure.

CONCOR enjoys positive Free Cash Flows vs. negative FCFs for competitors as capital expenditure on acquiring new rakes exceeds cash returns. Rail Logistics players currently face a shortage of rolling stock (wagons) and wagon wheels, due to order backlogs at wagon manufacturing workshops, resulting in a12-15 month time delay for wagon delivery.

Railways regaining market share from Roadways in the future – Once the Dedicated Freight Corridor (DFC) is built, the railways will be the most efficient and economical mode for long haul cargo transport. The DFC is a project of new railway lines exclusively for carrying freight, isolated from normal IR traffic and passenger trains.

CONCOR enjoys a superior Asset Turnover Ratio (= Revenue/Capital employed) given existing infrastructure and rolling stock set up at key locations over the years at low acquisition costs. Its Return on Equity is also well above the industry average.

Load factor of the rail operator is a crucial determinant for profitability in this sector. With established ICD infrastructure in the western ports and the north western hinterland (Dadri,U.P and National capital region (NCR)) region, CONCOR is well placed to benefit from India’s highest traffic cargo route. The Mumbai to Delhi route accounts for 60% of India’s Container movement.


Risks to new players:
New players will thus find it difficult to generate cash in the first few years, and will face serious execution risks as they implement their organic/inorganic growth strategies.

Frequent changes in haulage charges by Indian railways (2-3 times per year) for container train operators and policy changes banning movement of certain categories of bulk cargo through containers, also disrupts long term planning for new entrants.

Also CONCOR, in order to capture higher volumes, deter competition and gain marketshare, has been increasing discounts on the high traffic routes of National Capital Region(NCR) to JNPT/Mundra Port/Pipavav Port.

Lastly heres a note on ICDs CFSs & Rail Freight expenses.

What are ICDs and CFS?CFS and ICDs are facilities set up for the purpose of in-transit container handling as well as the examination and assessment of cargo with respect to regulatory clearances.
An ICD is located in the interiors (outside the port towns) of the country, away from the gateway ports. A CFS, on the other hand, is an offdock facility located near the gateway ports and helps in decongesting the port by shifting cargo and customs related activities outside the port area.

What are Rail freight expenses? They are charges paid to the Indian railways for using its infrastructure facilities such as tracks, signaling systems and locomotives to haul the flat wagons and containers.

CONCOR : PART 1 : The Indian Rail Logistics Giant !

My first post in over a week!!

This is the first of a four part write up of my analysis of CONCOR (The Container Corporation of India), a state owned rail logistics operator. This is a company with strong fundamentals and a solid growth story. Long term Investments can be considered, in the event of a market decline.




















Container Corporation of India (CONCOR), a public sector enterprise and subsidiary of the Indian Railways is the well established incumbent in container train operations in India. Concor also provides a number of value added services like transit and bonded warehousing, consolidation, custom clearance, factory stuffing and destuffing, container maintenance and reefer services. Over the last few years, Concor has significantly scaled up its fleet of high-speed wagons. As of March 2007, its fleet of high speed wagons increased to 5927 & orders were placed for a further 2025 high speed wagons . The container fleet (owned and leased) as of March 2007 was 12,812 containers.

The real strength of this company lies in its strategic network of 58 rail-linked terminals, spread across the country.






















In January 2006, the Indian Government opened up the container haulage sector to the private sector, thus ending CONCOR’s monopoly. Subsequently a number of private sector logistics players and port operators have applied for permits to move containers by rail. Under the new container policy, private players are expected to invest in rolling stock(wagons) and inland container depots. The railways will only invest in laying lines and improving and expanding the existing ones.

Increased competition and pressure on operating margins will have an impact on CONCOR’s financials over the long term. However given its headstart and pan Indian infrastructure setup, CONCOR still dominates Indian rail container logistics.