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Sector update: Logistics - 2HFY21 to see DFC benefits

Below are key takeaways from our meetings with Dedicated Freight Corridor Corporation of India Ltd. (DFCCIL), Container Corporation (Concor) and Gateway Distriparks (GDPL).:

Western DFC - Gujarat ports to be connected by H2FY21: The first leg of Rewari-Madar (306kms) is likely to be commissioned by Dec 2019, while the entire Rewari-Palampur line (640km) is likely to be commissioned by Jun 2020 (earlier Mar 2020). The Rewari-Palampur stretch would play a critical role in connecting the Gujarat ports of Mundra and Pipapav. The work on the stretch is 82% complete, with most of the track laying to be completed by Jan-Feb 2020 and signalling work by Jun 2020. On the other hand, the entire DFC stretch connecting Dadri-JNPT is expected to be completed by Dec 2021 (Q3FY22), as barely 10kms of land acquisition is pending and construction contracts are awarded.

DFC commissioning to drive higher rail share: led by improved efficiencies, faster turnaround time and guaranteed transit time. This will be facilitated by ease in rail congestion, which is currently caused by movement of passenger trains, mail trains and preferential speeds for some bulk cargo movement. Moreover, ~6,000kms of feeder routes are being modernised, electrified and strengthened, allowing them to carry double stack and heavier cargo rakes. Moreover, the strengthening will enable smooth transition from origin to DFC network. Accordingly, in the initial phase of commissioning, rail volumes would likely see 15% CAGR. By 2031, DFCC estimates rail share to rise to 40-50% from 25-30% currently. Sharper volume trajectory, increased double stack running and operational efficiencies will likely drive improved volumes and profitability for container rail operators, post commissioning of DFCC.

Indian Railway (IR) haulage charges to remain stable: IR seems unlikely to take any price hikes in FY20E and is expected to maintain its current haulage charges, even post DFCC commissioning. We note that access charges between IR and DFCC is yet to be finalised, thereby making it a key aspect to be monitored to track any changes in pricing policy.

IR to continue investments in freight corridors: In order to improve rail logistics and increase the share of rail in transportation, IR plans to construct further DFCs across the country: (1) Kharagpur–Vijaywada as an East coast corridor, (2) Dhankuni–Bhusawal and Rajkharsawan–Andal sections of East-West corridor, and, (3) Itarsi–Vijaywada section of North-South sub-corridor. Further, investments in electrification, high speed corridors, signalling, modernisation, etc, is likely to sustain.

Volume weakness continues in Q3FY20: As seen in H1FY20, Oct and Nov 2019 have been particularly weak, considering the macro slowdown, festive season, etc. While there has been some volume uptick in early Dec 2019, overall scenario appears muted.

Concor to add 270 rakes over next 5 years: to cater to the strong volume uptick, once DFCC is commissioned. Moreover, additional rakes will also cater to volume traction from new businesses, which are asset-light models with limited capex: (1) Coastal Shipping – currently operates 2 ships from Kandla to Tuticorin, Concor aims to scale coastal logistics to 50m tonnes annually (Rs50bn annual revenues) over next 5 years; (2) Distribution logistics – Concor aims to build 20 centres covering 5m sq ft over the next 5 years (one warehouse in Chennai is under construction); (3) Bulk logistics – Concor plans to move bulk cargo like cement and foodgrains in specialised containers in a bid to reduce higher packaging and multiple handling, thereby augmenting volumes for Concor.

Valuation and view

Long term volume trajectory seems strong, led by increase in rail market share, once DFC becomes operational in H2FY21 and accelerates into FY23, by when it would be entirely operational. However, considering near term weakness in earnings and rich valuations, we have a Neutral rating on Concor (30x FY21E earnings), but continue to prefer GDL (11x FY21E earnings, 5.6x FY21E EV/EBITDA).