The stock of Container Corporation of India has gained more than 7 per cent over the last week on revenue growth expectations, higher volumes and improving operating metrics. The company, according to BOB Capital Markets, expects its revenues to grow 3.5 times over the next six years, after the roll-out of the dedicated freight corridor (DFC). It also expects significant revenue contribution of up to 40 per cent from new businesses such as coastal shipping and distribution logistics.
The western segment of the DFC is expected to be completed by the end of this financial year and should benefit the company with connectivity to Gujarat ports. Given the larger share of business from JNPT, Mumbai, significant gains would accrue to the company once connectivity extends to JNPT.
Container train operators are expected to benefit, given the ability to take higher payloads, reduce travel time, and ensure assured delivery times. Analysts at CGS-CIMB said higher volumes and speed would ensure improvement in asset utilisation. This should boost return on capital employed from 13 per cent in FY19 to over 35 per cent, after the commission of the DFC project in FY22.
The company increased the free storage period at container freight station and container depots, which is expected to boost volumes. This should compensate for lower storage revenue.
Further, the company's assured pricing model in FY20 (advance payment to railways) after a price increase of 4-5 per cent in April is expected to be beneficial, as higher volumes should help offset the loss from interest income.
The company, however, could face pressure from road transport, given falling freight rates on the back of lower diesel prices and higher truck supply. While some of the steps should help, benefits of the DFC project and logistics parks are expected to come through only when volumes increase and projects are commissioned. Most analysts are cautious on the stock, given the valuation, which at 30 times its FY20 earnings is on the higher side.