Container Corporation: New players, cost controls key to profit growth

Container Corporation, (Concor), the largest player in the domestic logistics sector, reported a subdued performance during the June 2010 quarter despite a decent growth in total goods transported.

The lower sales growth and falling net profit was the result of shorter transportation routes, also known as lead distance, chosen by its customers. Lead distance refers to the distance in kilometres the goods cargo of a client is transported on Concor’s all-India network.

During the June 2010 quarter, average lead distance dropped nearly 8% from the yearago levels even though volumes grew 7.4%. A gradual increase in movement of EXIM (export and import cargo) traffic towards ports in Gujarat, such as the Mundra Port, can be cited as a key reason for the falling lead distance.

This, in turn, has reduced the transportation distance across Concor’s network, especially while bringing goods from Gujarat ports to clients in northern region. As a result, the company’s net sales grew barely 0.9% year-on-year to Rs 915.9 crore in the June quarter.

To Concor’s credit, total operating costs were largely under control amidst tougher operating environment. The company’s operating margin fell just 30 basis points year-on-year to 27%. Net profit fell 3.7% to Rs 193.5 crore.

Realisations fell 7.7% in its key EXIM segment, which contributed 78.6% to total segment sales. Higher volumes of goods transported nevertheless, helped keep the segment profit broadly flat at Rs 198.6 crore in the June 2010 quarter.

In its domestic segment, goods volume grew 6.3% on flat realisations . However, the segment profit fell 13.4% y-o-y to Rs 26.6 crore. According to analysts, this was due to Concor’s inability to fully pass on the impact of railway tariff, which went up last January.

Concor plans to expand its wagon and terminals network for a cost of over Rs 600 crore in FY11. While this may support its future growth, the real challenge, going ahead, will be to sustain tough competition from as many as 15 private players which have entered the logistics sector. Moreover, Concor will also have to deal with the declining trend in the lead distance on its network.

At Rs 1,412.4, Concor trades at nearly 24 times its trailing four quarters earnings. Its smaller peer Allcargo trades at 14.7 times on a trailing basis and appears reasonable. It needs to be seen whether Concor continues to retain its margins in future through cost control at a time when its topline is under pressure.