Ms. Aditya Makharia, Institutional Research Analyst, HDFC Securities
The Indian Railways (IR) is targeting to increase its market share from the current ~28% to 44% in the longer term (FY51) as per the National Rail Plan (NRP) document released recently. The IR has set near-term targets of 33% in 2026, 39% in 2031, 43% in 2041 and 44% in 2051. We believe that the IR has carried out detailed work in assessing these market share targets (which was released in their 1,178 pages document). Under the base case of the railways, it proposes to double the speed of trains to 50kmph gradually and reduce tariff on selected commodity items by 30%. IR is projecting Container tonnage to increase from 54MT to 234MT over FY18-31 (CAGR of 12%). We believe that this would be positive for companies such as CONCOR and Gateway Rail, while roadways will be impacted, which could impact demand for new trucks in the medium term.
Railways have lost market share due to capacity constraints and restricted speeds. It is pertinent to note that share of Rail in freight movement having leads beyond 300 km has fallen from 51.5% (765 MT) in FY08 to 32.4% (727 MT) in FY19. While the quantum of freight movement has remained the same by IR, the share has fallen due to limited capacity amidst an overall increase in freight generation. Railways can gain share in the long lead segments as capacity increases. For instance, while the average leads for containers is 624kms, that of the rail-based is significantly higher at 885kms.
Market share gain potential: The projected potential growth of freight traffic indicates that railways has the potential for almost 2.5x growth over the next decade subject to improved logistics performance of IR. The quantity transported by rail is targeted at 3,167MT by FY31 (1,226MT in FY19). This implies a market share of 39% in FY31 (up from 28%).
Calibrated strategy: IR intends to increase the rail coefficient for cargo where it traditionally has a limited presence, i.e. high-value commodities and non-conventional commodities. Railways believes that the share of conventional freight (traditional bulk traffic) will reduce from 40% of total freight carried in 2019 to 33% in 2051. It intends to reduce tariff by up to 30% on select commodities including BOG, Cement, Containers, Food Grains and RM for Steel. Through price cuts and reduced travel time, it intends to raise rail coefficient - Balance other goods (BOG) from 4% to 16%, cement from 37% to 50%, Containers from 24% to 43% and food grains from 16% to 31%.
Containers - aggressive strategy: The IR expects container tonnage to increase from 54MT to 234MT over FY18-31 (CAGR of 12%). The commissioning of the DFC will play an important part in the same. As savings from double stacking of containers will be ~20% - the cost-savings coupled with timetabled trains will add to the overall growth in rail share. The container coefficient is thus targeted to increase to 43% (from 24).
Price targets: We raise our TP on CONCOR (ADD) to Rs 500 and Gateway Distriparks (BUY) to Rs 160. We raise our FY22/23E EPS by 8% for both the companies and roll forward our TP timeframe to Mar-22 (from Sep-21). We also increase our multiple on Gateway from 8.5x EV/EBITDA to 9x to factor in the improved demand environment and the company's restructuring initiatives.