Land licence fee changes for Concor will remove major overhang

Topics Concor | Compass | Freight Corridor

Investors should await clarity on the LLF issue, privatisation as well as sustained volume growth before taking an exposure to the stock
Container freight operator Container Corporation of India’s (Concor’s) stock has risen 9 per cent over the past two weeks on expectations of reduction in land licence fee (LLF), progress on privatisation, and improving freight volumes. 

The government is expected to announce a revised land licence policy soon, which could lead to halving of LLF from 6 per cent to 3 per cent. Concor was thus far paying a fixed, volume-based fee for operating 25 terminals on land leased from the railways.  
LLF has been the biggest overhang for the stock as payment towards terminals was expected to increase from Rs 140 crore in financial year 2019-20 (FY20) to Rs 450 crore in FY21. The higher figure is based on a fixed charge of 6 per cent of market value of the land, valued at Rs 7,500 crore. 

The extent of the impact of higher LLF on the company can be gauged from the operating profit margin estimates in the September quarter. Analysts at ICICI Securities expect operating profit to fall 55 per cent and margins to contract by 1,147 basis points year-on-year (YoY) to 13 per cent, mainly due to higher LLF. 

If the decision on LLF is taken early and bids for privatisation of Concor are called over the next two months, there could be progress on a 30.8 per cent reduction of government’s stake in Concor from the current 54.8 per cent. Given the current market capitalisation, this would fetch the company about Rs 7,100 crore. 

The other trigger is the return to growth of container volumes in Septem­ber. Though container rail volumes were down 5 per cent YoY in the quarter, they improved towards the end of the quarter with September recording growth of 7.5 per cent. Domestic volumes saw a sharp­er increase of 11 per cent in September than export-import volume growth of 7 per cent. The start of the dedicated freight corridor would help overall volumes if demand improvement gathers pace. 

While the recent news triggers on government policy as well as demand are positive, investors should await clarity on the LLF issue, privatisation as well as sustained volume growth before taking an exposure to the stock.

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