MOSL: LOGISTICS-Margin revival in absence of cost push-Volumes recovery led by no further market share loss

​LOGISTICS: Margin revival in absence of cost push; Volumes recovery led by no further market share loss and a favorable base

We believe the Indian Railways is unlikely to increase haulage charges for container rail in the medium term due to a loss of market share to road over the past five years.

• Container rail is likely to retain its market share in the medium term due to the absence of any unprecedented haulage hike (historically, there have been price hikes, which took a toll on its market share). In the longer term, the market share of rail should see an improvement, led by the commencement of the dedicated freight corridor (DFC).
  
• Volumes are expected to recover, with growth of more than 5% YoY over FY17-19, led by a stable market share and a pick-up in EXIM trade.
  
• With no cost push (in the form of haulage hikes) and stable competitive intensity, margin revival for container rail operators appears likely over the medium term.
  

Haulage price hikes unlikely in medium term

• ​Over the past 12-18 months, the Indian Railways has made efforts to course-correct, especially where it has lost market shares. Against this backdrop, we believe that haulage price hikes are unlikely in the medium term, which augurs well for container rail logistics, as haulage constitutes ~75-80% of the total cost for container rail logistics players. The Indian Railways had increased haulage prices by ~25-30% in both 2013 and 2015, which container rail operators had passed on to clients to protect their margins. Consequently, they lost market share to road.