50175855 Idfc Container Rail

Logistics: Container rail Thrive(al) of the fittest

Privatization of container rail operations has enticed 16 players, including incumbent Concor, to the space since 2005. These players are eyeing 3% (97m tonnes) of the overall freight market by trying to shift volumes from road to rail. Operators can ‘create the market’ by offering integrated, value-added logistics solutions with last mile connectivity. However, to attain these capabilities and garner higher volumes, operators need to invest heavily in hard infrastructure. As the business entails a longer gestation period, scale and efficiency (utilization and turnaround times) are extremely critical to generate returns of 15%+ on capital employed. In view of their competitive strength, and thereby ability to attract volumes and drive strong earnings growth, we believe Concor, Arshiya and Gateway Distriparks (GDL) are well positioned to generate superior returns. Reiterate Overweight on the sector.

Integrated service offering to attract volumes to rail: While the number of operators appears high at 16, we believe there are enough volumes. With 500 rakes expected to be operational by FY12/13, players are eyeing only 3% (97m tonnes) of the overall freight market. However, volumes are required to be shifted from road to rail, for which operators have to offer timely, reliable and value-added services with last mile connectivity and customized solutions.

Returns linked to turnaround times and utilization levels: Container rail is a highly capital-intensive and long gestation business with hefty investments required in rakes (capacity) and rail sidings (cargo consolidation and value added services, etc) to attract volumes. Hence, asset turnaround time and utilization levels assume greater relevance for an operator to derive economies of scale and be profitable. Once an operator achieves critical mass, we believe it can earn RoCE of 15%+, which can be further augmented by offering integrated services.

Attractive valuations; Overweight: We believe operators need deep pockets to survive the long gestation period. In this context, Concor, Arshiya and GDL possess the competitive edge in terms of funding and strong infrastructure to secure higher volumes. Arshiya and GDL are fast attaining scale, and their rail operations are likely to turn profitable in FY11, supported by an expected upturn in the trade cycle. With 12-30% earnings CAGR over FY09-12E and attractive stock valuations, we are Overweight on the sector and Outperformer on the three stocks.

December 2009

BSE Sensex: 16720

Sector rep

ort

Bhoomika Nair [email protected] 91-22-6638 3337 IDFC – SSKI Securities Ltd 701-702 Tulsiani Chambers, 7th Floor (East Wing), Nariman Point, Mumbai 400 021. Fax: 91-22-2204 0282

Valuations

Company Price Mcap Reco. FY11E (x) Target Upside (Rs) (Rs m) P/E EV/EBITDA price (Rs) (%)Container Corporation 1,227 159,514 Outperformer 16.9 11.2 1,450 18.2Gateway Distriparks 130 13,965 Outperformer 14.5 8.1 160 23.4Arshiya 188 11,040 Outperformer 12.3 8.5 250 33.0Prices as on 18 December 2009

“For Private Circulation only” “Important disclosures appear at the back of this report”

INDIA RESEARCH

DECEMBER 2009 2

SSKI INDIA

Contents Investment Argument ............................................................................3

Container Rail Business: Shift from road to rail the key .....................................3 Utilization Levels, Turnaround Times & ICDs Critical for Profits.....................5 Concor, Arshiya and GDL are Our Bets in the Sector ........................................9

Is There Enough for All? ......................................................................12 Is the market large enough for 16 players? ........................................................12 Rail Transportation vs Roads: Rail wins hands down… ...................................14 …but rail yet to gain market share ...................................................................16 The Rail Container Industry Landscape Post Privatization...............................20

Economics of Container Rail Operators ...............................................21 Hard infrastructure: A key operational requisite ...............................................21 Utilization, Turnaround Time and Value Add Drive Profitability....................23 Profitability Better on Exim vs Domestic Volumes...........................................25 Proforma financials of a rail operator (indicative) .............................................26 Challenges and Risks for Container Rail Operators ..........................................28

Companies ...........................................................................................30 Arshiya International .......................................................................................31

Container Corp................................................................................................41

Gateway Distriparks .........................................................................................49

Brief profiles ...............................................................................................59

Adani Logistics .................................................................................................60

Boxtrans (JM Baxi)...........................................................................................61

Container Rail Road Services Pvt. Ltd (DPW) .................................................62

Central Warehousing Corporation (CWC) ......................................................64

ETA Freight Star..............................................................................................65

Hind Terminals ...............................................................................................66

India Infrastructure and Logistics Pvt Ltd (IIPL) ..............................................67

InLogistics (Innovative B2B Logistics)..............................................................68

Sical Multimodal and Rail Transport (SMART)...............................................69

Other Operators...............................................................................................70

DECEMBER 2009 3

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INVESTMENT ARGUMENT At a freight market size of ~3bn tonnes, we see enough volumes for all the 16 players in the container rail industry. Currently, penetration of containerized rail movement is abysmally low at ~1% for domestic cargo and 30% for the exim business. While we expect 12% CAGR in exim volumes for container rail operators over FY09-11, there is immense scope for volume growth in the domestic segment. However, players need to ‘create the market’ for a gradual shift of volumes from road to rail. This depends on their ability to provide integrated, reliable, regular and cost-effective services, and thereby invest into rakes, terminals, technology and last mile connectivity. Notably, once critical mass is achieved, players can generate healthy returns (15%+) from the business. Besides Concor, we see Arshiya International (Arshiya) and Gateway Distriparks (GDL) well placed to grow profitably. Both the players are in a rapid ramp-up mode and expected to turn their rail business profitable by FY11 with strong earnings growth over FY09-12E.

CONTAINER RAIL BUSINESS: SHIFT FROM ROAD TO RAIL THE KEY Container rail business opened up to private operators

Indian Railways (IR) opened up the container rail business to private operators in 2005. Since then, 15 new players, besides the incumbent Concor, have joined the fray. Of these players, 12 hold a pan-India license while four have opted for a route-specific license, which entitles them to operate only on NCR-JNPT route.

Exhibit 1: Players in Rs500m license fee category (all India)

Players in Rs100m license fee category (sector-specific routes)

All players have collaborations with ICD/CFS operators as also operate from either IR sidings or private sidings Source: Companies, Company websites, IDFC-SSKI Research

3-4 ICDs/Logistics parks59 terminals 218Concor

NATie ups with CFS/ ICD operators7CRRS (DPW)

Khurja (NCR); 5 othersVizag; Tie ups with various private sidings6Arshiya international

More sidings planned3 CFs (Chennai, Tuticorin & Vizag); Tie up with CFS/ ICD operators & private sidings5Sical Logistics

NAHas several ICDs and CFSs of its own-Central Warehousing Corp (CWC)

NANA-Reliance Infrastructure Leasing

NANA-Kribco

Land acquired for more sidings

Patli in Gurgaon (NCR) and Kishengargh, Rajasthan5Adani Logistics

2 owned sidingsTie ups with CFS/ ICD operators7Emirates Trading Agency (ETA)

PanipatTie ups with CFS/ ICD operators9India Infrastructure Logistics PvtLtd (APL)

New locations in strategic alliance with Allcargo

Strategic alliance with Allcargo & CWC at JNPT, Mundra & NCR10Hind Terminals (MSC Group)

Faridabad (NCR)3 ICDs - Garhi (Delhi), Sanewal (Ludhiana), Kalamboli (Mumbai)18Gateway Distriparks (GRFL)

Planned rail sidingsOperational rail sidingRakes operationalCompanies







NANA-Kribco









NANA-Pipavav Rail Corporation (PRCL)

NANA2Delhi Assam Roadways Corp.

5-6 sidings plannedVizag & Rajasthan; Tie ups with CFS/ ICD operators12Boxtrans (JM Baxi and Co)

3 sidings planned Kalamboli (JNPT); Tie ups with CFS/ ICD operators12Inlogistics (B2B)







DECEMBER 2009 4

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Enough freight volumes in the system… India has a large freight market estimated at 3.1bn tonnes in volumes, which have been expanding (8% CAGR over the past three years) in line with the rapid economic growth. Interestingly, only 30% of this cargo is estimated to be handled by the railways despite rail being a cheaper, faster and more efficient mode of freight movement against roads due to lack of focus by IR on aggregation of cargo. Indian railways are trying to address the loss of market share through containerized operators.

Exhibit 2: Indicative break-up of freight handled in the country (m tonnes) FY06 FY07 FY08 FY09 Rail freight 667 728 794 850 Road freight 1,353 1,478 1,612 1,726 Sea freight 424 464 519 530 Air freight 1.40 1.55 1.71 1.70 Total freight in the country 2,445 2,671 2,927 3,108 Source: Industry data, IDFC-SSKI Research

…but penetration of container rail is quite low The domestic segment is extremely fragmented with limited penetration of containerized rail movement, which is estimated to be 1% (~6m tonnes) currently. Penetration of container rail is relatively higher in port volumes (exim cargo) with 30%, or ~2m TEUs, being transported by rail. Currently, the container rail industry has a capacity of ~315 rakes, of which Concor accounts for 218 rakes with the remaining being with private players.

As per our discussions with various operators, the total number of rakes is likely to increase by 200 rakes to 500 rakes over the next three years. With 500 rakes operational and at 100% utilization, we estimate that container rail operators would have a capacity of 97m tonnes. Notably, the targeted volumes are 3% of the overall freight market in India (including all modes of transportation) and only 6% of the volumes moved by road. Accordingly, we believe there are enough volumes for all the players in the system.

Exhibit 3: With 500 rakes, container rail operators to have 3% capacity of overall freight market Total no. of rakes (Concor and private operators) 500 Per rake capacity for a trip @ 100% utilization (TEUs) 180 Average no. of trips / month / rake 5 Total capacity in a month (TEUs) 450,000 Annual capacity (TEUs) 5,400,000 Average loading per container (tonnes) 18 Total capacity of rail operators (m tonnes) 97.2 Estimated freight in India for FY09 (m tonnes) 3,108 % of volumes for container rail operators 3.3 Total road freight in India (m tonnes) 1,726 % of volumes for container rail operators 6.0 Source: IDFC-SSKI Research

Despite being cheaper than road, IR estimated to

be handling only 30% of India’s freight volumes

In the domestic market, container rail estimated to have only 1% penetration

With estimated rake capacity of 500 over next 3

years, operators eying 5-6% of road freight

volumes

DECEMBER 2009 5

SSKI INDIA

End-to-end integrated services to drive volumes and shift to rail While target volumes of container rail operators appear to be low in comparison to the total freight market, players face the imperative to ‘create the market’ – a time consuming process in our view. To attract volumes to the container rail segment, operators need to provide reliable, regular and integrated services to develop and create a market – especially in segments with cluster of clients, for which aggregation of cargo can be done for an entire rake movement.

Exhibit 4: The right steps towards ‘creation of market’

Source: IDFC-SSKI Research

Last mile connectivity is the key differentiating factor between rail and road movement. In order to attract volumes, container operators need to provide integrated service offerings that include last mile connectivity by road for ensuring a seamless transportation service to clients. To provide this service effectively, a hub-and-spoke model, wherein movement from hub-to-hub is via rail and the end destination is serviced by roads, is the apt solution. For last mile connectivity, operators can either tie-up with truck operators or own trucks for road haulage. The hub-and-spoke integrated model, by integrating the cost-effectiveness of rail and the point-to-point delivery of road, will prompt customers to outsource their logistics requirement to a container rail operator and drive the shift of volumes from road to rail.

UTILIZATION LEVELS, TURNAROUND TIMES & ICDS CRITICAL FOR PROFITS A capital-intensive business

To grow the container rail market and drive a shift in volumes from road to rail, operators should possess the ability to provide reliable and cost-effective solutions. Towards this end, players have to invest into creation of an asset base comprising rakes, terminals (ICDs/ rail sidings), containers, container handling equipment (reach stackers, etc) as also truck-related and software investments. Higher the number of rakes and terminals with an operator, higher is its ability to handle, and thereby attract, cargo. While these facilities impart the ability to offer seamless and

• Aggregation of cargo to fill an entire rake load

• Improves turnaround time of assets

Regular & reliable services

• Timely delivery• Scheduled services or

as per requirement –daily / weekly, etc

Integrated solutions

• Road bridging• End to end services to

provide first and last mile connectivity

Innovative solutions

• Customised wagons or containers for different cargo

• Eg. customisedwagons for cars

• Reefer containers

Aggregation of cargo Value added services

• Customs clearance• Warehousing solutions• Stuffing & De-stuffing• Packaging & labelling, etc

Market creation Shift from road to rail

Drivers for growth in volumes

















Players need to ‘create the market’ by offering

innovative and efficient solutions

Players need to attain a critical asset base to

attract volumes

Hub-and-spoke model can plug the gap in terms of

last mile connectivity

DECEMBER 2009 6

SSKI INDIA

integrated solutions, it also makes the business extremely capital-intensive, with a long gestation period requirement.

Exhibit 5:The business is extremely capital intensive, thereby having a long gestation period


Higher utilization and turnaround times – critical for profitability There is no set break-even level of utilization for a container rail operator as the break-even point depends on the distance moved by a rake, tonnage, value-added services, realizations, etc. Break-even level, to some extent, is also dependent on the capital structure and asset base of a company. In this light, break-even levels can vary from 65-85% based on the above factors.

Considering the above, utilization levels (in turn highly dependent on return loads), and turnaround times are extremely critical in determining the profitability of these operations. Container rail operators have to pay the Indian Railways (IR) a fixed charge for using the rail network to move a rake to the destination. Thus, return loads – i.e. cargo to be moved from the destination to the start point – go a long way in improving utilization levels and profitability of the business. Also, faster turnaround time of a rake increases the capacity and ability of the operator to handle higher volumes. Hence, operators tend to balance turnaround times and utilization levels for improving profitability levels. The average turnaround time in the domestic business typically stands at 3-4 trips (to and fro) in a month per rake, while turnaround times for exim segment can go up to 7-8 trips (to and fro).

Sidings – required to operate on hub-and-spoke mechanism ICDs/ Rail sidings play a critical role in attracting cargo volumes and achieving a faster turnaround of rakes as also improved utilization levels for an operator. Rail sidings enable an operator to expedite the process of loading/ unloading containers on to the rake. Moreover, the cargo can be consolidated from various clients for an entire rake movement, thereby enhancing utilization levels. Such rail sidings/ ICDs can act as a hub from where rail connectivity can be provided, while nearby locations can be serviced by roads. Moreover, the hubs can be utilized to provide value added services to clients such as warehousing, packaging, etc.

Capital intensive business

RakesRakes Container handling equipment

Container handling equipment ContainersContainers Rail/sidings/ICDRail/sidings/ICD

Road related infrastructure- Trucks, etc


Capital intensive business

RakesRakes Container handling equipment

Container handling equipment ContainersContainers Rail/sidings/ICDRail/sidings/ICD



Faster turnaround of rakes augments a player’s

capacity to handle higher volumes, and return loads improve utilization levels

Rail sidings expedite loading/ unloading of

containers on to the rake

DECEMBER 2009 7

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Exhibit 6: Sidings can significantly enhance turnaround times and thereby drive profitability


Long gestation business, but high returns over the longer term The container rail business is capital-intensive and requires a long gestation period to build volumes. However, once a company achieves a level to attain economies of scale in terms of rail sidings, rakes as also volumes, returns are typically quite high. Our analysis reveals that on a base of 40 rakes and 4 ICDs at critical locations, an operator has the ability to generate returns in excess of 15% (provided utilization levels and turnaround times are high). Further, returns can be improved beyond this level by optimizing the mix between exim and domestic cargo, faster turnaround of rakes, higher utilization levels, etc.

Exhibit 7: Proforma financials of a rail container operator

Asset details (Rs m) Operational details – key assumptions Rakes (no.) 40 Average time per trip (days) 6.0 Cost / rake 122 Average trips / yr / rake (no.) 61 Cost of all rakes 4,860 Capacity (TEUs) 219,000 Cost of setting up 1 ICD 750 Cost of setting up 4 ICDs 3,000 Utilization (%) 90 Other handling equipment & establishments 500 Registration fees 500 Volumes handled (TEUs) 197,100 Total Capital Employed 8,860 Realization (Rs/TEU) 30,000 Gearing (x) 1.5 Debt 5,316 Revenues (Rs m) 5,913 Interest rate (%) 11 EBITDA (Rs m) 1,707 Depreciation rate (%) 5 PAT (Rs m) 577

RoCE (%) 14.3 RoE (%) 16.3 Source: IDFC-SSKI Research

Aggregation & consolidation of cargo (improves

utilization levels)

Area to provide value added

services

Faster turnaround times

Act as hub centers(operate on hub &

spoke model)

Benefits of

sidings

Aggregation & consolidation of cargo (improves

utilization levels)

Area to provide value added

services

Faster turnaround times

Act as hub centers(operate on hub &

spoke model)

Benefits of

sidings

Realization vary based on tonnage and distance; value added services can enhance realization

RoE can improve significantly with faster turnaround time and higher utilization levels

Blended turnaround time

With critical mass, players can generate returns of

15%+ which can be further augmented

DECEMBER 2009 8

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Sensitivity analysis to turnaround time and utilization levels To arrive at profitability of the business, we have assumed a base case of 4.6 trips per month for an operator. In case the frequency of trips goes up to five a month, average profits for a player would increase by 20%. Similarly, profits are highly sensitive to utilization levels, and a 1% increase in utilization rate improves profits by 7%. The capital structure can also have a significant impact on profits and return ratios of an operator. On the other hand, lower utilisation levels and turnaround times, have an extremely adverse impact on financials, as is being witnessed by the players over the past 2 years.

However, these variables impact returns based on the extent of value-added services provided by an operator and the ability to provide integrated solutions. The higher the degree of integrated services provided, higher would be the stickiness of customers even at higher prices. Operators can thereby reduce the dependence of profitability to utilization levels and turnaround time.

Exhibit 8: Sensitivity analysis

Profit increase (%) RoE (%) 1% increase in utilization levels 8 18 Turnaround improvement by 0.5 days 23 20 Gearing (2x) (10) 18 Source: IDFC-SSKI Research

Risks of an operator • Operators’ financial performance is highly dependent on utilization levels – a

function of return loads. Therefore, lower utilization levels can have material negative impact on profitability.

• Turnaround times have a bearing on players’ capacity. Consequently, lower turnaround times impact capacity adversely, and thereby revenues and profits as the business is extremely capital-intensive and entails a long gestation period.

• Non-availability of land, and at an economical cost, to build ICDs at strategic locations can hamper the ability to garner volumes.

• Operators have limited control over the largest cost component (rail haulage), as IR typically increases rates on an ad-hoc basis.

• There is no third-party independent arbitrator in case of any dispute between a container rail operator and the IR.

A higher degree of integrated services assures

customer stickiness even at higher prices

DECEMBER 2009 9

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CONCOR, ARSHIYA AND GDL ARE OUR BETS IN THE SECTOR With funding and infrastructure in place, listed plays better placed

Based on our interaction with various industry players and analysis of the industry, we believe the listed entities – Concor, Arshiya and GDL – are well positioned to capitalize on the expected growth in industry volumes. Further, all the three players have cash on books, either from internal accruals or fund raising.

Our universe of players are also ahead of the curve in terms of infrastructure (rakes, sidings, long term contracts with clients, etc), which imparts a strong competitive edge to them against smaller peers. With all the building blocks in place, the rail businesses of these players are set to turn profitable in FY11E. The healthy profit growth, we believe, will enhance shareholder value over the medium term.

Concor – unlikely to be impacted by competition Concor is a dominant player in the container rail business with 95% market share and dominance in the exim sector. Concor has created a large asset base over the years in terms of number of rakes, equipment, containers as also a pan-India footprint with 59 terminals. Given this dominance, we see the company largely insulated from competition over the next 2-3 years. Huge cash on books of Rs20bn and depreciated assets lend further resilience to Concor’s business model. To further consolidate its position, Concor has adopted a multi-pronged strategy centered on long-term volume contracts with clients, picking up equity stakes in ports (such as JNPT terminal 3), setting up logistics parks in strategic locations, etc. These initiatives, we believe, will enable Concor to maintain its leadership and grow its volumes in the coming years and thus sustain margins. We expect 12% CAGR in Concor’s earnings over FY09-12 (15% CAGR over FY10-12).

Arshiya – long-term contracts to drive profitability A recent entrant in the containerized rail segment, Arshiya holds a pan-India license. Having commenced operations in March 2009, Arshiya has six rakes operational which it plans to scale up to 30 rakes over the next two years. Being a late entrant, Arshiya has had the opportunity to understand the nuances of the business, especially in terms of return loads which is a critical factor determining an operator’s profitability. Arshiya has been able to enter into long-term contracts due to its end-to-end logistics capability of freight forwarding, supply chain and IT solutions. The long-term contracts ensure higher utilization level for its rakes. Further, Arshiya is in the process of setting up rail sidings/ ICDs, through its subsidiary Arshiya Distriparks, across the country (under owned/ leased land). Within a short span, Arshiya has come a long way – as is evident in its financial performance over the past two quarters. The rail business has achieved break-even (in comparison to loss making peers) and appears set to turn profitable in FY11E. The rail business would further benefit from the commencement of FTWZ operations in FY11E as the zones bring in captive volumes.

We expect 28% CAGR in Arshiya’s earnings over FY09-12 (60% CAGR over FY10-12). Growth would primarily be driven by scale-up with expansion of the container rail business, commencement of FTWZ at JNPT as well as in Khurja, Delhi and a growing core freight forwarding and supply chain solutions business.

Our coverage stocks well placed to grow profitably

An unmatchable competitive edge in terms

of infrastructure and capital structure

Rail business has achieved break-even and

appears set to turn profitable in FY11E

DECEMBER 2009 10

SSKI INDIA

GDL – fund raising to aid turnaround in FY11E GDL is among India’s largest private container rail operators with 18 rakes operational and plans to add another three in the next 2-3 months. GDL is the only private player with three operational rail sidings/ ICDs and another terminal to be commissioned over the next 12 months. Having achieved a critical asset base, GDL’s rail business is expected to secure healthy volumes of 100,000 TEUs in FY10. GDL has rapid scale-up plans over the next two years for the rail operations with plans to add more rakes and terminals. Funding for the business expansion is in place with the Rs3bn raised from the Blackstone private equity group. We expect 15% CAGR in GDL’s earnings over the next three years (22% CAGR over FY10-12).

Valuations attractive – we are Overweight on sector We believe all the three listed entities in the container rail industry have the competitive strength to secure increasing volumes over the next 2-3 years, and generate healthy shareholder returns. At attractive valuations (12-17x FY11E earnings) and with healthy earnings growth ahead, we reiterate Outperformer rating on Concor, Arshiya International and Gateway Distriparks.

Exhibit 9: Comparative valuations

Company Price Market Cap FY11E (Rs) (Rs m) EPS (Rs) EPS growth (%) PE (x) EV/EBITDA (x) P/BV (x) RoE (%) RoCE (%) Container Corporation 1,227 159,514 72.5 11.8 16.9 11.2 3.1 19.9 20.9 Gateway Distripark 130 13,965 9.0 20.9 14.5 8.1 1.9 13.9 8.8 Arshiya 188 11,040 15.3 41.3 12.3 8.5 1.4 12.2 10.9 Source: IDFC-SSKI Research

Exhibit 10: Concor PER band

0

400

800

1200

1600

Mar

-96

Mar

-97

Mar

-98

Mar

-99

Mar

-00

Mar

-01

Mar

-02

Mar

-03

Mar

-04

Mar

-05

Mar

-06

Mar

-07

Mar

-08

Mar

-09

Container Corporation 8.0 12.0 16.0 20.0


Having achieved a critical asset base, GDL expected to secure healthy volumes

of 100,000 TEUs in FY10

DECEMBER 2009 11

SSKI INDIA

Exhibit 11: Arshiya PER band

0

100

200

300

400

Mar

-06

Jun-

06

Sep-

06

Dec

-06

Mar

-07

Jun-

07

Sep-

07

Dec

-07

Mar

-08

Jun-

08

Sep-

08

Dec

-08

Mar

-09

Jun-

09

Sep-

09

Dec

-09

Arshiya International 8.0 12.0 16.0 20.0


Exhibit 12: Gateway Distriparks PER band

0

60

120

180

240

Mar

-05

Jun-

05

Sep-

05

Dec

-05

Mar

-06

Jun-

06

Sep-

06

Dec

-06

Mar

-07

Jun-

07

Sep-

07

Dec

-07

Mar

-08

Jun-

08

Sep-

08

Dec

-08

Mar

-09

Jun-

09

Sep-

09

Dec

-09

Gateway Distriparks 8.0 12.0 16.0 20.0


DECEMBER 2009 12

SSKI INDIA

IS THERE ENOUGH FOR ALL? Since opening up of the container rail business to private players in 2005, 15 new players have joined the incumbent Concor in the fray. Over the next three years, we believe players are eyeing to shift 5-6% of the ~3bn tonnes of the road freight market to the more economical and efficient rail route. To garner higher volumes, players need to identify niches where there are enough volumes for two-way movement of cargo. Integrated and value-added services through reliable and cost-effective solutions, we believe, will expedite the shift.

IS THE MARKET LARGE ENOUGH FOR 16 PLAYERS? Total freight market estimated to be 3.1bn tonnes annually

We estimate India’s total freight market at ~3.1bn tonnes, which has expanded at an 8% CAGR over the past three years. According to industry sources, only ~30% of the freight is handled by Indian Railways, while the remaining gets transported via road. Air cargo movement is limited to light and perishable cargo while sea freight is used primarily for handling exports, imports and trans-shipment cargo.

Exhibit 13: Indicative break-up of freight handled in the country (m tonnes) FY06 FY07 FY08 FY09 Rail freight 667 728 794 850 Road freight 1,353 1,478 1,612 1,726 Sea freight 424 464 519 530 Air freight 1.40 1.55 1.71 1.70 Total freight in the country 2,445 2,671 2,927 3,108 Source: Industry data, IDFC-SSKI Research

Increasing international trade… India’s international trade (exim) has witnessed strong growth over the past few years barring FY09 and FY10E, lacklustre years due to the global recession. While exports have grown on the back of increased competitiveness of the manufacturing sector and policy focus, imports are being driven by rising domestic consumption.

International trade may remain weak in FY10 as well, but we expect strong traction in the long term as the global economy bounces back. We expect the momentum to return in the exports segment driven by manufacturing sectors such as auto, textiles, jewellery, etc. Notably, the GoI has set a target of scaling up exports to US$200bn in FY11E from US$168bn in FY09 (9% CAGR), while over the longer term by FY14E to double India’s exports of goods and services. Imports into India are also set to grow, particularly of oil and capital goods.

Only 30% of the 3.1bn tonnes freight estimated to

be handled by IR

We expect strong traction in exim in the long term as

the global economy bounces back

DECEMBER 2009 13

SSKI INDIA

Exhibit 14: International trade has been growing at a strong pace over the past few years

0

75,000

150,000

225,000

300,000

FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09R

Exports Imports(US$ m)

Source: RBI

…expected to drive 8% CAGR in port traffic… Traffic at major Indian ports has registered 9-10% CAGR over the last 4-5 years, led by strong international trade as well as improved port infrastructure. We expect this trend to persist over the next three years, albeit at a slower pace of 8% CAGR due to sluggish economic activity in FY09 and FY10.

…and 12% CAGR in container port traffic over next three years Container penetration in India is extremely low, at ~54% in FY09, compared to the global average of >75%. This is attributable to the poor infrastructure at ports as also lack of awareness on benefits of containerization. International container traffic at major ports was 6.8m TEUs in FY09, of which 3.95m TEUs was handled only at JNPT port. Mundra and Pipavav handled another ~1m TEUs of traffic, leading to total exim container traffic of 7.8m TEUs.

As international trade grows and port infrastructure (particularly at container terminals) improves, we expect container penetration in the exim market to rise from 54% in FY09 to 57% over the next three years (12% CAGR).

Exhibit 15: Trend of container penetration for exim traffic of major ports (mn tonnes) FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 Total volumes at Major Ports 272 283 288 314 345 384 423 464 519 530 - Container (tons) 28 32 37 44 51 55 62 73 92 93 - Containerizable cargo 72 78 83 97 106 120 138 155 176 171

Source: Indian Ports Association; IDFC-SSKI Research

(5.0)

0.0

5.0

10.0

15.0

20.0

25.0

30.0

(%, yoy growth)

FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09

Port volumes Containerisable cargo Container volumes Container penetration (as % of containerisable cargo)

0.0

15.0

30.0

45.0

60.0(%)

FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09

12% CAGRover next 3

years

9-10% CAGR seen in traffic at major Indian ports over

the last 4-5 years

With improving port infrastructure, container penetration likely to rise

Global average of 75%+

DECEMBER 2009 14

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30% of exim cargo handled by rail; domestic penetration very low Of the 6.8m TEUs handled at the major ports for international trade in FY09, only 30%, or ~2m TEUs, were handled by the railways (27%, or 1.85m TEUs, by Concor). The remaining 4.8m TEUs of cargo was moved via roads. Statistics in the domestic segment, wherein 65-70% of the total freight movement in the country is by road, speak a similar story. The penetration of containerized cargo in the domestic sector is abysmally low at 1-2%. This indicates immense scope for improvement in containerization levels in India.

RAIL TRANSPORTATION VS ROADS: RAIL WINS HANDS DOWN… Containerization facilitates cargo handling

Containerization has brought about revolutionary changes in the concept of general cargo handling, and related shipping and port activities. With economies of scale being the norm in today’s world of production, volumes to be handled have increased manifold, thereby making it difficult to move fragmented cargo in trucks. Containerization standardizes the dimensions of containers and mechanizes handling of containers, thereby enabling quick and easy transfers at an economical cost, and eliminating multiple handling of cargo.

Containerization brings the benefits of road transport to rail transport with respect to flexibility and the size of cargo. Containerization gives flexibility in the movement of assorted cargo, in minimum units, directly from the place of production to the place of consumption, which has led to free flow of cargo through different modes of transport – road, rail, sea and air. Containerization is widely used by all developed countries in international traffic with containers being adopted as basic storage units by shipping lines worldwide for moving break-bulk cargo. Accordingly, cargo such as iron & steel, electronic equipment, auto components, textiles, leather, chemical, paper, yarn, metals, etc can be containerized and moved by container rail operators through rail.

Exhibit 16: Huge benefits of containerisation


Penetration of containerized cargo in

domestic sector abysmally low at 1-2%

Containerization gives flexibility in movement of

assorted cargo, in minimum units

Low handling costs

Low packing costs

Reduced pilferage & breakage

Low insurance costs

Speedy inter-model

transports

Benefits of containerisation

Low handling costs

Low packing costs

Reduced pilferage & breakage

Low insurance costs

Speedy inter-model

transports

Benefits of containerisation

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Transportation via rail is cheaper than by road Movement of cargo by rail is cheaper than that by road over longer distances, mainly owing to economies of scale offered by the former. Our analysis reveals that over a distance of 1,000km, freight costs are lower 20-25% for cargo transported via the rail route. However, the difference between rail and road freight cost would narrow for multi-axle vehicles or excessive overloading of cargo on a truck.

Heavy cargo preferred over light cargo load for rail movement Container rail operators (as well as the IR) charge clients on per container basis – and not on per tonne basis as is the practice followed by road operators. In this backdrop, containers having lower weight tend to become expensive to move by rail vis-à-vis road and vice versa. Thus, clients that need to move heavyweight cargo prefer the rail route over roads. This factor typically impacts the movement of cargo by rail in the exim sector as the average load of the container is 14-16 tonnes, which makes movement by road cheaper despite the longer distance. The same is reflected in exim cargo movement of rail (containerized) at only 30%.

However, at times, clients also may favour rail against road due to the pilferage factor, which is extremely high during the course of road transportation. This results in a higher cost of insurance. In such cases, while weight of the cargo may be lower, the value of cargo being transported may outweigh the cost differential between the two modes to avoid pilferage and theft.

Economies of scale on container rail movement A single rake can handle up to 2,430 tonnes of cargo (27.5 tonnes per container), while a single truck has the capacity to carry 16-20 tonnes (tractor trailors can handle 27 tonnes). Thus, to carry 2,430 tonnes, a road operator will require a big fleet of trucks. If there are large volumes to be handled, rail movement gives economies of scale and lesser hassles (lower handling points, dealing with one vendor against dealing with multiple truck operators, etc). Thus, for higher loads, rail transportation emerges as a faster and more reliable mode with lower instances of accidents in comparison to roads.

Exhibit 17: A study by Arshiya Intl highlights the benefit of moving heavy weight cargo by rail vs road

Source: Arshiya International corporate presentation

Background• Distance – 900 km • Movement required - 4,000 MT per week

Road• Average Trailer Turn Around Time for Circuit – 7

days @ speed of 16km/hour• Average carrying capacity /trailer – 27 MT• Trailers required for evacuation/week – 150 nos• Cost per tonne carried on Trailer – Rs1,900

Rail• Average Rake Turn Around Time for Circuit – 4

days @ speed of 30km/hour• Average carrying capacity/ rake – 2,430 tonnes• Rakes required for evacuation/ week – 1 rake• Cost per tonne carried on rake – Rs1,185

Net Advantages of Rail• Cost per ton for movement lower by 37% • Increased efficiency with respect to time • Reduced Loading & Unloading issues/costs • One vendor relationship vs. dealing with multiple vendors

vs

Background• Distance – 900 km • Movement required - 4,000 MT per week

Road• Average Trailer Turn Around Time for Circuit – 7

days @ speed of 16km/hour• Average carrying capacity /trailer – 27 MT• Trailers required for evacuation/week – 150 nos• Cost per tonne carried on Trailer – Rs1,900

Rail• Average Rake Turn Around Time for Circuit – 4

days @ speed of 30km/hour• Average carrying capacity/ rake – 2,430 tonnes• Rakes required for evacuation/ week – 1 rake• Cost per tonne carried on rake – Rs1,185

Net Advantages of Rail• Cost per ton for movement lower by 37% • Increased efficiency with respect to time • Reduced Loading & Unloading issues/costs • One vendor relationship vs. dealing with multiple vendors

vs

Rail is also a safer mode of transport vs roads

Over a distance of 1,000km, freight costs are

lower 20-25% for cargo transported via rail route

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…BUT RAIL YET TO GAIN MARKET SHARE Rail freight share tumbles over the past few decades

Cheaper modes of transportation such as coastal shipping and pipelines

The IR’s share vis-à-vis roads has fallen sharply from ~89% in 1950s to 30% in 2008, despite rail being a faster and more cost-effective medium of cargo transportation. Apart from the road sector taking away bulk of the traffic, pipelines have also captured some share for moving POL (petroleum, oil and lubricants). Besides, coastal shipping has chipped at IR’s share due to cheaper pricing.

Focus on bulk movement and not on aggregation

In the early 1980s, the IR changed its policy of ‘yard-to-yard’ movement of rakes (a train load of wagons) to ‘end to end’ movement of rakes. Earlier, a customer could offer traffic as a wagon load. Such loaded wagons would be brought to the nearest yard, and after sufficient accumulation of wagons for a full rake for a yard in the direction of the destination, the rake would move to the nominated yard. The wagon in the rake would then be sorted to build rakes for further yards towards the final destinations. This process would continue with wagons sometimes having to undergo sorting up to half a dozen yards – incurring significant yard waiting times, and thereby operating inefficiencies and delays.

Under the ‘end-to-end’ movement practice, a customer is required to offer a full rake of traffic, in which case the rake moves right from the origin to destination without any intermediate sorting. While this policy has provided significant operational gains for bulk commodities, which could offer rake-load traffic, it has led to loss of share in other (high rated or break bulk) commodities due to customers’ inability to offer rake-load cargo.

Road transportation offered aggregation, end to end services

Road transportation offered a lucrative choice to customers having less than rake load cargo, even at a higher price, due to the flexibility, frequency, and door-to-door delivery. IR was unable to offer economic and timely services to such customers as volumes were insufficient for rake load movement. However, these commodities have future potential due to the growth in containerization.

Higher proportion of bulk movement by rail

Movement of freight accounts for nearly two-third of IR’s revenues. It broadly consists of two groups, bulk comprising of seven commodities and, other goods, consisting of 42 commodities. Due to IR’s focus on bulk rake load movement, IR’s share in other commodities (non-bulk, high value items), which was nearly 35% in 1974–75, dropped to just 11% by 2005–06 and to 8% in FY08.

IR’s share vs roads sharply down from ~89%

in 1950s to 30% in 2008

IR’s end-to-end movement policy, with a full rake of

traffic by client, has reduced flexibility –leading

to loss of market share

IR focuses primarily on bulk traffic movement

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Exhibit 18: Cargo break-up handled by Indian Railways – focus largely on bulk cargo

Source: Rail budget documents, IDFC-SSKI Research

Concor – created to address the need for aggregation of cargo With IR’s focus on bulk cargo and limited servicing to small part wagon load cargo, IR set up Concor in 1988 to service the small cargo load (part rake or wagon loads) and garner some market share from the road segment. Over the years, Concor has built an inventory of 9,816 wagons (218 rakes) and handled 2.31m TEUs in FY09, of which 80% has been in the exim segment. Importantly, Concor’s limited focus on the domestic segment has left the turf open to road operators. Consequently, aggregation of cargo, specifically for the domestic segment, continues to be done by road operators.

Cargo aggregation and end-to-end service to accelerate shift to rail Opening up of the container rail business to private entrants was driven by the intent to focus on aggregation of break bulk cargo such as white goods, leather, textiles, cycles, electronic items, auto components, steel, pharmaceuticals, etc. Private participation, we believe, will catalyze a shift from road to rail transportation even as container rail operators are restricted from handling bulk commodities such as ores, minerals, coal and coke.

Container rail operators’ capacity – 6% of road freight Container rail operators, including Concor, are targeting a cumulative fleet of ~500 rakes in another 3-4 years. If we were to assume five round trips in a month at 100% utilization, the total capacity of container rail operators would be 4.5m TEUs. Further, assuming an average loading of 18 tonnes/ TEU (current average loading on exim route is 14 tonnes/ TEU, while domestic route loading ranges between 20-27 tonnes/ TEU), the total capacity of container rail operators would be about 97m tonnes on an annual basis once the 500 rakes are operational after three years. All the container operators, including Concor, handled approximately 30m tonnes in FY09 with around 300 rakes.

At 97m tonnes of capacity (at 100% utilization of 500 rakes), container rail operators would have the ability to handle only 3% of the total freight market (~3bn tonnes in FY08) in India. As a proportion of the total road freight industry, container rail operators would have a 6% capacity.

(m tonnes) 2005–06 2006–07 2007–082008–09 (RE) 2008–10 (BE) Coal 294,250 313,330 336,830 373,750 403,530 Raw material & finished goods for steel plants 69,090 74,260 80,580 81,710 86,430 Iron ore for exports 41,240 38,840 53,740 46,390 40,500 Cement 61,195 73,130 78,990 86,660 92,000 Foodgrain 41,640 41,840 38,230 34,150 33,480 Fertilisers 32,652 34,260 35,830 43,330 43,250 POL 33,454 31,690 35,880 38,230 39,160 Other goods 93,000 120,400 133,810 145,780 143,650 Total 666,510 727,750 793,890 850,000 882,000 % yoy growth 10.7 9.2 9.1 7.1 3.8

2008–10 (BE)

Coal46%

POL4%

Other goods16%

Fertilisers5%

Foodgrain4%

Cement10% Iron ore for

exports5%

Raw material & finished goods for steel plants

10%

Concor has had limited focus on the domestic

segment

Once the targeted capacity of 500 rakes is operational,

operators will be able to handle 6% of road freight

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Exhibit 19: With 500 rakes, container rail operators will have 3% capacity of overall freight market Total no. of rakes (Concor and private operators) 500 Per rake capacity for a trip @ 100% utilisation (TEUs) 180 Average no. of trips / month / rake 5 Total capacity in a month (TEUs) 450,000 Annual capacity (TEUs) 5,400,000 Average loading per container (tonnes) 18 Total capacity of rail operators (m tonnes) 97.2 Estimated freight in India for FY09 (m tonnes) 3,108 % of volumes for container rail operators 3.3 Total road freight in India (m tonnes) 1,726 % of volumes for container rail operators 6.0 Source: IDFC-SSKI Research

‘Market creation’ initiatives required to attract volumes While the target volumes of container rail operators appear to be low in comparison to the total freight market, operators have to take various steps to attract cargo, which is likely to be a time consuming process:

Market creation: Though rail is cheaper than road as a mode of transportation, the shift from rail to road is unlikely to happen immediately and will be a gradual process as operators prove the efficacy of their services to potential clients. Accordingly, operators will have to identify markets where a cluster of clients require movement on a regular basis, which can be consolidated for certain routes. This activity will require rail sidings with enough yard space to do such kind of aggregation. Hence, the market for volumes needs to be created, which is likely to take some time.

Reliable service: Container rail operators need to provide reliable and regular services to clients. If an operator has only 2-3 rakes, any delay of movement of one rake can potentially delay the return movement or other rakes. Consequently, rail operators have the imperative to attain a certain scale to garner volumes.

Offer end-to-end integrated services: Last mile connectivity is the key differentiating factor between rail and road movement. In order to attract volumes, container operators need to provide integrated service offerings that include last mile connectivity by road for ensuring a seamless transportation service to clients. To provide this service effectively, a hub-and-spoke model, wherein movement from hub-to-hub is via rail and the end destination is serviced by roads, is the apt solution. For last mile connectivity, operators can either tie-up with truck operators or own trucks for road haulage. The hub-and-spoke integrated model, by integrating the cost-effectiveness of rail and the point-to-point delivery of road, will prompt customers to outsource their logistics requirement to a container rail operator and drive the shift of volumes from road to rail.

Innovative solutions: Container rail operators will have to come up with innovative service offerings, which will allow the client to move over to railways from roads. For example, wagon designs can be customized so as to handle more cars as also reduce damage to cars during transit. Such innovation can be applied to various industries, which will then enable operators to enter into long-term contracts with clients and win business.

Aggregation facilities and identification of right

markets to help convert potential into demand

Container rail operators need to operate on a hub-

and-spoke model

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Exhibit 20: Key growth drivers for volumes


































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THE RAIL CONTAINER INDUSTRY LANDSCAPE POST PRIVATIZATION The Government of India (GoI), in the Rail Budget presented in February 2005, allowed entry of private players into containerized freight transportation by rail. According to the Indian Railways private players would serve to:

• increase Indian Railways’ market share of container traffic

• provide incremental capacity to cater to the exponentially growing containerized traffic in India

• ensure speedy clearance of export/ import of containerized traffic

• substantially increase containerized domestic traffic on Indian Railways

• improve quality of service to customers

Licenses to private players for providing container rail movement The Indian Railways has given licenses to private players, which allows them to offer container train movement by rail. The private players can either take a pan-India license for Rs500m or a route-specific license for Rs100m. The license will entitle the container operator to source container volumes either for domestic movement or to and from ports for international cargo. Once the wagon is loaded and ready for movement, the IR will haul the rakes to the destination. The license does not extend to private operators the right to lay tracks or haul the rakes from one destination to another.

The four categories for which the licenses were given to private rail operators are:

Category 1: Rs500m for access to the entire rail network for both domestic and exim cargo

Category 2: Rs100m for exim traffic – the entire rail network which connects the JNPT or Mumbai Port to any location, excluding any location in and/ or reached via the NCR; and domestic traffic – the entire rail network excluding any traffic which originates and also terminates at a location on or reached via the NCR route.

Category 3: Rs100m for exim traffic – the entire rail network which connects the ports of Pipavav, Mundra, Chennai, Ennore, Vizag, Kochi to any location; and domestic traffic – the entire rail network excluding any traffic which originates and also terminates at a location on or reached via the NCR route.

Category 4: Rs100m for exim traffic – the entire rail network which connects ports like Kandla, New Mangalore, Tuticorin, Haldia, Kolkata, Paradip and Mormugao to any location; and domestic traffic – the entire rail network excluding any traffic which originates and also terminates at a location on or reached via the NCR route.

16 players in container rail operations The opening up of container rail operations has resulted in the entry of 15 new players in the business apart from Container Corporation of India (Concor). Of these 15 players, 11 have obtained the pan-India license, while the remaining four have opted for a category-specific license.

Players which have obtained the Rs500mn license (pan India) are: 1. Adani Logistics Ltd (MPSEZ) 7. Hind Terminals (MSC Group) 2. Arshiya Rail Infrastructure (Arshiya International) 8. India Infrastructure Logistics Pvt Ltd (APL) 3. Container Corporation of India (Concor) 9. Kribco 4. Central Warehousing Corporation (CWC) 10. Container Rail Road Services Pvt. Ltd. (DP World) 5. Dinesh/ ETA (Emirates Trading Agency) 11. Reliance Infrastructure Leasing 6. Gateway Rail Freight Ltd. (Gateway Distriparks) 12. Sical Logistics

Players which have obtained the Rs100mn license (sector specific routes) are: 1. Boxtrans (JM Baxi and Co) 3. In logistics (B2B) 2. Delhi Assam Roadways Corporation (DARC) 4. Pipavav Rail Corporation (PRCL)

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ECONOMICS OF CONTAINER RAIL OPERATORS Container rail operators are required to invest in ICDs or rail sidings, where cargo can be aggregated and operations can be carried out on the hub-and-spoke model. Also, to attract higher volumes, players should have a value-added offering comprising integrated solutions. As an integrated offering calls for heavy investments and with rail haulage being a key fixed cost, the business is highly capital intensive. To optimize returns, a rail operator needs to ensure higher utilization levels of its rakes by restricting empty running as also achieve a higher turnaround time of rakes to enhance profitability. As players scale up their business and develop the market, we believe economies of scale can enable them to generate 15%+ returns from the integrated value added services over the longer term.

HARD INFRASTRUCTURE: A KEY OPERATIONAL REQUISITE Having established volumes for the business, we have tried to analyze what will be the economics of a container rail operator and the critical success factors for them to generate returns. Some of the critical success factors for the business are:

• Infrastructure: wagons and rail sidings (to load the containers)

• Return loads and utilization levels: volumes on both sides of a trip

• Turnaround time: trips per month for a rake

Container rail business is an asset-intensive business as operators are required to invest in rakes (wagons), rail sidings (terminals) as well as in other related infrastructure such as containers, container handling equipment such as rubber tyre gantries (RTG), forklifts, etc.

Rail sidings required for timely movement of cargo The investment in rail sidings (terminals) is extremely essential for a container rail operator. Rail terminals are required as a point to load and unload rakes with containers. Moreover, the yard area around the rail siding can be used for stuffing and de-stuffing of containers and providing various value-added services such as customs clearance, packaging, storage, etc. Consequently, owning rail sidings gives the flexibility to the operator for attracting cargo and handling more volumes by providing timely and reliable services to its clients.

Terminals enable integrated services on hub-and-spoke mechanism Considering that volumes are spread out and operators are likely to service clusters of clients, a hub-and-spoke model can reduce empty running of a rake. The movement of volumes between one cluster to another – e.g. between Chennai and NCR region – can be done by rail by having terminals at both ends, acting as hubbing points, for consolidation. Further, clusters can be serviced from the hub centers by road to provide integrated solutions to these clients. Consequently, a rail siding with a yard for consolidating is extremely critical to consolidate cargo from various clients for aggregation.

Owned rail sidings enable a player to offer services like customs clearance, packaging, storage, etc

A hub-and-spoke model can reduce empty running

of rakes

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Building rail sidings is a challenge As discussed earlier, having rail sidings at strategic locations is extremely critical for a container rail operator to attract volumes. However, setting up rail sidings with storage yard (commonly referred to as ICDs, logistics parks, etc) is quite a challenge. Availability of land poses to be the largest challenge for rail operators as the land for building the siding has to be near the existing rail network for connectivity. Moreover, the price of land for the siding can lead to a jump in cost of setting up the infrastructure. Apart from acquiring land, there are various approvals required from the Indian Railways for connectivity to its network, which can be a time consuming process at times.

IR to allow usage of private and unused rail sidings to operators To address the issues faced by private rail operators for setting up sidings as areas of consolidation, IR (in its recent budget) proposed to open up the usage of unused rail sidings and various private sidings for the use of container rail operators. Once such usage of siding is allowed to private parties, container rail operators can use these sidings to load/ unload cargo, aggregation of cargo, and provide value-added, timely and reliable services to clients.

Perils of using a rail siding or common facility While use of a rail siding may provide immediate relief to container rail operators by facilitating a centre for aggregation, there are a few perils associated with using common user facilities. Some of them are:

Indian Railways siding to allow limited mechanization for loading: Rail terminals for container handling are different than those used by IR for bulk handling as bulk cargo loading is primarily manual (using platforms), while that for containers is largely mechanized. As a result, if an operator utilizes IR sidings, mechanization would be limited for loading and unloading of containers.

Aggregation / Disaggregation will be a problem for lack of space: Rail terminals are also points for aggregating cargo of rail container operators, wherein cargo of various clients is aggregated or disaggregated. If a container rail operator does not have a rail siding of its own, aggregation or disaggregation of cargo (including value added services) will have to be done at another location and then transported to the rail siding, which would inflate costs.

Turnaround time may increase depending on availability of terminal: If rail terminals are shared between other players and IR, the turnaround time of a rake may increase for loading or unloading depending on the availability of the siding.

Rake availability – no more a big concern Availability of rakes was a big concern at the time of opening up of the sector for private participation with non-availability of wheel sets and axles being the key hindrance. However, IR has since then identified more vendors for wheel sets and axles as also accelerated the approval process. Moreover, wagon manufacturers placed advance orders for these critical components, which eased availability of wagons. Some of the major wagon manufacturers are Titagarh Wagons, Texmaco, Jessop, etc. Also, as most container rail operators have been going easy on ramp-up plans due to the economic slowdown, rake availability has improved considerably.

Land availability, cost and approvals from IR are key

issues in creating ICDs

…it is fraught with issues such as lack of space for

loading/ unloading, aggregation/

disaggregation, etc

Steps taken by IR to ease wheel sets and axles availability; approval

process expedited and advance orders placed

for wagons

While permission for private operators to use

IR’s sidings is a welcome move…

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Other ancillary infrastructure Apart from investing in rakes and sidings, container rail operators are required to invest in containers, container handling equipment such as reach stackers, RTGCs, etc. Such handling equipment enables efficient movement of containers, mechanized loading and unloading of rakes, etc.

UTILIZATION, TURNAROUND TIME AND VALUE ADD DRIVE PROFITABILITY IR charges based on per container, telescopic, weight slabs

IR charges haulage rates to container operators on per TEU rather than per tonne basis for providing a locomotive and moving a rake from one destination to another. Moreover, haulage charges are telescopic-based, implying that charges for a longer lead distance are lower than for shorter lead distances. IR charges on a weight slab basis as well as for moving empty flats and containers. Notably, charges for moving empty rakes or containers as well as 40ft containers are typically lower than for normal laden containers. Also, charges do not typically differ for exim and domestic cargo.

Exhibit 21: IR charges based on per container, weight slab and telescopic basis Up to 20 tonnes 21-27 tonnes Above 27 tonnes Empty wagons Empty containers Source: IDFC-SSKI Research

Higher utilization and return loads key to profitability As IR charges for an entire rake, container rail operators require higher utilization levels and return loads to cover the cost of haulage, which forms a significant part of overall costs. If rakes have low utilization levels and there is empty running, a container rail operator will have to bear the cost of moving empty wagons, which would hit profitability and return ratios. Consequently, higher the utilization of rakes, higher is the profitability for the business.

Operators entering into long-term volume contracts Container rail operators tie in long-term volumes or ply on heavy traffic routes to achieve almost 100% utilization, at least on one way so as to ensure a minimum 50% utilization for a round trip. In some cases, there may not be enough cargo movement on the return journey on that route for the entire rake. Consequently, some operators tend to wait for 3-4 days to aggregate cargo for the return load. However, if the operator is running a regular service on a daily or bi-weekly basis or for a client with whom it has entered into a long-term contract, the operator may not be able to wait for volumes. This then results in lower utilization levels for the return journey. Sometimes, the operator may run a short empty journey and fill the rakes at a third location and incur less empty running costs, which would somewhat improve utilization levels for the return load.

Haulage charges paid to IR a key component of fixed

costs for operators

Operators need to reduce empty running to make

higher profits

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Higher turnaround of assets results in better profitability As discussed earlier, the container rail business is extremely capital intensive with hefty investments required for creating the infrastructure of rakes, terminals, containers, etc. Consequently, if an operator can turnaround rakes faster and thereby increase its capacity to handle volumes, the operator can derive significant operating leverage benefits. A faster turnaround of rakes can be achieved by either owning sidings or having access to sidings, as it allows quick loading and unloading as also facilitates faster transit times on a route.

Another way to improve the turnaround time is having enough volumes on both ends of a route so that the rake does not wait for volumes to be loaded. As private container operators have recently entered the business, some of them do not have enough volumes at both the ends and tend to wait for rakes to fill up rather than run empty. Consequently, the turnaround time is lower, specifically in the domestic segment wherein volumes are not readily available. However, the exim sector witnesses faster turnaround of rakes with sufficient volumes ready to be moved from ports to the hinterland and vice-versa.

Exhibit 22: Drivers for an operators’ profitability


Average turnaround time at 4-5 trips per month for a rake Based on our discussions with various container rail operators, we estimate an average turnaround time per rake of 3-4 trips (to and fro) per month in the domestic segment, and 7-8 trips in the exim segment. These turnaround times can vary depending on the distance travelled of the rake as also volumes on both ends of the route. Assuming a turnaround of 5 trips a month, each rake can do around 60 trips per year. Further, assuming a 100% utilisation and 60 trips, each rake can have a capacity of 10,800TEUs annually. The rake capacity can increase or decrease based on the turnaround time of the rake (number of trips).

Exhibit 23: Rake capacity based on 5 trips per month (average of exim and domestic movement) Rake 1 Rake capacity (per trip – to & fro) 180 Average trip per month/rake 5 Total capacity in a month (TEUs) 900 Annual capacity (TEUs) 10,800 Source: IDFC-SSKI Research

Higher profitability

Return loads & higher

utilization

Faster turnaround

Value added services

Higher profitability

Return loads & higher

utilization

Faster turnaround

Value added services

With faster turnaround of rakes, and thereby higher capacity, an operator can derive material operating

leverage benefits

Rake capacity can increase or decrease

based on the turnaround time of the rake

DECEMBER 2009 25

SSKI INDIA

Mechanical testing – mars turnaround times of a rake As per IR and RDSO norms, each rake is required to undergo mechanical testing from a safety standpoint, for which IR has designated mechanical testing centers across the country. Mechanical testing is required to be done after a rake has run 6,000km or one month (which ever is earlier), which results in longer turnaround time of the rake and lower capacity available. If mechanical testing is available at a higher number of sidings, including private ones, we believe the turnaround times of all the rakes in the system can improve substantially.

Value added and integrated services enhance profitability The ability of container rail operators to offer various integrated logistics solutions as part of rail offerings augments their profitability. Services like customized containers, storage/ warehouse infrastructure, accountability of handling & transportation at both loading and unloading points, last mile connectivity, cargo visibility through IT solutions and service level driven performance allow operators to offer significant value to clients, and thereby reduce dependence on turnaround times and utilization levels.

PROFITABILITY BETTER ON EXIM VS DOMESTIC VOLUMES Concor’s financials reveal higher profitability ratios for business on the exim routes vis-à-vis the domestic sector (the only publicly available numbers for the two segments). We analyze the difference between the two business lines for operators as the cost of rail haulage (60-70% of revenues) is same for the two sectors.

Terminal revenues aid exim margins To service exim volumes, an operator should have the ability to provide value added services including customs clearance, documentation, stuffing and de-stuffing, storage space, etc at either its ICDs or CFSs. These services entail higher revenues and margins for an operator vis-à-vis the domestic volumes.

Balanced exim tends to ensure return loads and utilization In the exim business, a balance between export and import volumes ensures return loads and reduces empty running for an operator, thereby improving the utilization levels. Moreover, as 65-70% of exim container volumes are handled through JNPT, there are enough volumes in both directions to restrict empty running. This enhances operator profitability on an exim route vis-à-vis the domestic sector as there are no set routes for the latter stream of business, and players have to develop and create routes.

Improved turnaround time of rakes in exim volumes As exim cargo offers adequate volumes in both directions, rakes typically do not have to wait for containers to fill up. This substantially improves the turnaround time for rakes. In the exim segment, turnaround time of rakes can be as high as 7-8 trips per month. Further, the time sensitivity attached with exim cargo, especially exports, sometimes enables operators to charge higher rates for timely movement. This further boosts margins in the exim sector.

Mechanical testing of rakes, if available at more

sidings, can improve industry turnaround times

Return volumes are largely assured on exim routes…

…and thus turnaround times as also margins

are higher

DECEMBER 2009 26

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Margins can be comparable for domestic and exim volumes The domestic sector has the potential to deliver similar profits as the exim sector. A value-added integrated offering can reduce the dependence of container rail operators on turnaround and utilization levels, which can enhance profitability on the domestic sector for the operator. However, we believe this is likely to take time as operators are still in the process of developing the market.

Exhibit 24: Profitability parameters between exim and domestic segments


PROFORMA FINANCIALS OF A RAIL OPERATOR (INDICATIVE) Based on our discussions with various container rail operators, container rail business offers the potential to generate high returns, which has enticed private participants into the business. While there are enough volumes in the Indian freight market, container rail operators need to identify, create and develop the market to move volumes from road to rail. If the container rail operator provides integrated value added services to its customers through innovative solutions to its clients, player’s dependency can reduce on lower utilisation, return loads and turnaround times.

The container rail business is extremely capital intensive and, hence, has a long gestation period. Once operations are scaled up (higher volumes and economies of scale) to cover fixed costs, the business can generate sustainable returns of 15%+. Based on our interaction with industry players, we understand that there is no fixed break-even point for the business. Returns are tied to the nature and type of services provided by an operator, i.e. whether an operator’s rakes run on the exim or domestic route and if value-added integrated solutions are provided to clients. Hence, the break-even point for an operator would be at utilization level of 65-85% for three round trips per month. That is the point when all the costs are covered and the business would turns profitable.

• Limited volumes impacts turnaround time of rake• Can be improved by consolidation of cargo

• Adequate volumes ready to be moved, results in faster turnaround time

Turnaround time

• Need to find return loads on same routes – results in higher empty running

• Empty running can be reduced by operating on routes with return loads and long term contracts with clients

• Return loads is typically balanced out due to balance of trade between imports and exports

• Lower empty running

Return loads

• Limited terminal handling revenues due to no requirement of customs clearances

• Can be enhanced by offering value added services of warehousing, packaging, etc

• Revenues on terminal handling due to custom clearances, etc

Terminal revenues

DomesticExim

• Limited volumes impacts turnaround time of rake• Can be improved by consolidation of cargo

• Adequate volumes ready to be moved, results in faster turnaround time

Turnaround time

• Need to find return loads on same routes – results in higher empty running

• Empty running can be reduced by operating on routes with return loads and long term contracts with clients

• Return loads is typically balanced out due to balance of trade between imports and exports

• Lower empty running

Return loads

• Limited terminal handling revenues due to no requirement of customs clearances

• Can be enhanced by offering value added services of warehousing, packaging, etc

• Revenues on terminal handling due to custom clearances, etc

Terminal revenues

DomesticExim

Scaled-up rail container operations can generate 15%+ returns driven by

economies of scale

DECEMBER 2009 27

SSKI INDIA

Exhibit 25: Proforma financials of a rail container operator

Asset details (Rs m) Operational details – key assumptions Rakes (no.) 40 Average time per trip (days) 6 Cost / rake 122 Average trips / yr / rake (no.) 61 Cost of all rakes 4,860 Capacity (TEUs) 219,000 Cost of setting up 1 ICD 750 Cost of setting up 4 ICDs 3,000 Utilization (%) 90 Other handling equipment & establishments 500 Registration fees 500 Volumes handled (TEUs) 197,100 Total Capital Employed 8,860 Realization (Rs/TEU) 30,000 Gearing (x) 1.5 Debt 5,316 Interest rate (%) 11 Depreciation rate (%) 5

P&L (Rs m) Revenues 5,913 Rail haulage 3,166 Other costs 1,040 Total costs 4,206 EBITDA 1,707 Margin (%) 28.9 Depreciation 443 EBIT 1,264 Interest 585 PBT 679 Tax 102 Tax rate (%) 15.0% PAT 577 ROCE (%) 14.3% ROE (%) 16.3% Source: IDFC-SSKI Research

Sensitivity analysis to turnaround time and utilization levels To arrive at profitability of the business, we have assumed a base case of 4.6 trips per month for an operator. In case the frequency of trips goes up to five a month, the average profits would increase by 20%. Similarly, profits are highly sensitive to utilization levels, and a 1% increase in utilization rate improves profits by 7%. Further, the capital structure can have a significant impact on profits and return ratios of an operator. However, these variables impact returns based on the extent of value-added services provided by an operator and the ability to provide integrated solutions. The higher the degree of integrated services provided, higher would be the stickiness of customers even at higher prices. Operators can thereby reduce the dependence of profitability to utilization levels and turnaround time.

Realization vary based on tonnage and distance; value added services can enhance realizations

RoE can improve significantly if turnaround time is faster and utilization levels improve

Realizations linked to tonnage and distance as

also level of value add

Higher value-add and integrated solutions

ensure client stickiness even at higher prices

DECEMBER 2009 28

SSKI INDIA

Exhibit 26: Sensitivity analysis

Parameters Profit increase (%) RoE (%) 1% increase in utilisation levels 7 17 Turnaround improvement by 0.5 days 20 20 Gearing (2x) (10) 18 Source: IDFC-SSKI Research

Likely consolidation in the industry As discussed earlier, container rail is a long gestation and extremely capital-intensive business. Consequently, we believe players with deep pockets – and thereby the ability to infuse hefty funds into the business for scale-up and bear losses for a comparatively longer period of time – would survive in the longer term. We see consolidation ahead as the recent economic slowdown, which has stemmed fund availability for business scale-up while also impacting volumes, would sift weaker players from the stronger ones. Consolidation, we believe, would be positive for the industry as it would reduce competitive intensity.

CHALLENGES AND RISKS FOR CONTAINER RAIL OPERATORS Exim segment – congestion on key routes (JNPT-NCR)

Exim container traffic is largely serviced through the western ports of JNPT, Mundra, Kandla and Pipavav, which cumulatively handle ~70% of the total container traffic at Indian ports. Given this, exim container rakes are operated primarily on the JNPT-NCR route. Apart from container traffic, the JNPT-NCR route tackles substantial passenger traffic as also bulk of the traffic undertaken by IR. With the ever-increasing number of rakes (by container rail operators and for bulk cargo) to service the growing cargo at these ports and locations, the route has become saturated as no new railway tracks have been added. Moreover, double stacking is not possible on the routes connecting the ports to NCR as they are largely electrified. Consequently, we believe the congestion for connectivity to the western ports will impact turnaround time of rakes on the exim route. We believe turnaround time of rakes can improve substantially once the dedicated freight corridor is operational.

The IR is addressing this by setting up a Dedicated Freight Corridor (DFC), which is currently under implementation. We believe once the DFC is operational, it will significantly improve the turnaround time of rakes.

Dealing with the Indian Railways (IR) Erratic increase in haulage charges: The concession agreement between the IR and container rail operators does not specify any schedule for hike in haulage rates. The rate increase by IR can be any time and as many times during a year, with no caps. For example, IR had hiked its haulage rates by an average of 15% effective 1 August 2008. The erratic increase in rail haulage charges hampers container rail operators’ ability to price their services to clients on a fixed rate basis. At times, container rail operators may also have to absorb the increase in haulage rates for some time till it is passed on to the clients.

The economic slowdown has tested a player’s

ability to stoke expansion

Congestion for connectivity to western

ports to impact turnaround of rakes on the exim route

Operators may have to absorb the increase in

haulage rates till it is passed on

DECEMBER 2009 29

SSKI INDIA

No turnaround time guarantees: Once an operator loads its rake with containers, the IR attaches a locomotive to the rake and hauls the rake to the destination. However, there is no guarantee extended by the IR on timely movement of these rakes. In the absence of guaranteed timelines at their end, container rail operator cannot provide the same to clients. Moreover, efficiency of a container rail operator is also hampered as any delay in movement of rakes impacts the planning for loading and unloading of wagons.

Initial movement of bulk cargo by container rail operators: As per the model concession agreement, container rail operators are banned from handling coal, minerals, ores and coke. The sector has been privatized to increase IR’s market share in freight movement by aggregating break-bulk cargo. However, creation of market and shift from road to rail will happen over a period of time. In the interim, private players may fail to secure a full rake load and therefore operators are targeting to shift heavy bulk traffic (from which they are not categorically banned) from road to rail. Nevertheless, the IR may view the movement of such bulk traffic as its own, which at times creates a problem for container rail operators.

Absence of a regulator: Currently, IR dons the hat of both the vendor and regulator, and resolves, on an ad-hoc basis, issues pertaining to the type of cargo handled, loss of cargo in transit, turnaround time by the IR, stabling, haulage rate hikes, etc. Thus, in case of a dispute between the IR and a container rail operator, there is no third party to resolve the issue. As capacity and the scope of services offered by container rail operators expand, we see increasing need for a regulator.

Congested routes lead to lower turnaround times

With increasing freight handling capacity and

scope of services, a third-party regulator required to

mediate disputes

DECEMBER 2009 30

SSKI INDIA

COMPANIES

DECEMBER 2009 31

IDFC - SSKI INDIA

Arshiya International (Arshiya) straddles the entire logistics services supply chain. Through its various tie-ups and a unique web-based solution, Arshiya offers containerized solutions for both domestic and international trade in India and the Gulf region. Arshiya’s value proposition has been further strengthened by pioneering the FTWZ concept in India, which will act as a trading and warehousing hub for international trade. Arshiya is linking all its solutions through container rail movement, for which it has strategically entered into long-term contracts with clients to secure assured volumes. Such assured volumes would enable higher utilization and thereby drive profitability of the rail operations. At 12.3xFY11E earnings, valuations appear to be extremely attractive in view of the 67% earnings growth in FY11E. Reiterate Outperformer with a price target of Rs250 per share.

Arshiya – an integrated logistics solutions provider: Arshiya offers dynamic, end-to-end logistics solutions including indigenized software solutions that facilitate seamless logistics management across geographies and transport modes. Arshiya is strengthening its offering by entering the container rail business as also pioneering the FTWZ concept in India. The first zone is being set up at JNPT, which will act as a trading and warehousing hub for exim cargo.

Projects in advanced stages of execution: Construction has commenced at Arshiya’s FTWZs and the first phase at JNPT is likely to be operational in Q1FY11 with Delhi FTWZ starting operations in H2FY11E. In the rail business, Arshiya has adopted a strategy of entering into long-term agreements to enhance utilization and profitability with plans to scale up to 30 rakes over the next two years. A customized service with last mile connectivity is being offered to enhance value proposition to rail customers.

Presence across the entire logistics chain; Outperformer: Arshiya’s integrated solutions comprising freight forwarding, containerized rail and FTWZ logistics solutions would drive strong growth in revenues (64% yoy) and earnings (67% yoy) in FY11E. Also, execution visibility of new initiatives has improved significantly in the last six months with all projects achieving financial closure. At 12.3x FY11E earnings, reiterate Outperformer with a price target of Rs250.

Key financials

As on 31 March FY08 FY09 FY10E FY11E FY12ENet sales (Rs m) 4,012 5,005 4,846 7,941 12,299 Adj. net profit (Rs m) 457 646 539 900 1,370 Shares in issue (m) 59 59 59 59 59 Adj. EPS (Rs) 7.8 11.0 9.2 15.3 23.3 % change 112.8 41.3 (16.5) 66.8 52.2 PE (x) 24.1 17.1 20.5 12.3 8.1 Price/ Book (x) 2.2 1.8 1.6 1.4 1.2 EV/ EBITDA (x) 19.5 15.3 15.9 8.5 5.4 RoE (%) 15.2 11.8 8.4 12.3 16.2 RoCE (%) 15.4 11.2 7.3 10.9 16.2Prices as on 18 December 2009

Performance (%) 3-mth 6-mth 1-yr 3-yr Arshiya 24.3 72.8 129.2 100.4 Sensex (0.1) 17.2 65.9 21.8

Stock data

Reuters Code ARTC.BO Bloomberg ARST IN 1-yr high/low (Rs) 194/43 1-yr avg daily volumes (m) 0.05 Free Float (%) 59.1

Arshiya International Integrated opportunity

Rs188OUTPERFORMER

Mkt Cap: Rs11bn; US$236m

Com

pan

y up

date

21 December 2009

BSE Sensex: 16720

Price performance

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-08

Feb-

09

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09

Aug

-09

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-09

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-09

Arshiya International Sensex

Bhoomika Nair [email protected] 91-22-66 38 3337

DECEMBER 2009 32

IDFC - SSKI INDIA

INVESTMENT ARGUMENT Arshiya is fast emerging as an integrated logistics solution provider. The existing business is being integrated with container rail business and FTWZs are being set up at various locations to provide hassle-free warehousing activities. With the core business expected to revive in H2FY10 led by a pick-up in freight rates and volumes, the first FTWZ at JNPT is likely to commence operations in Q1FY11 (to commission in phases over FY11-12). Arshiya has entered into long-term agreements with clients to enhance utilization levels as also turnaround times in the container rail operations. We believe such agreements, along with the scale-up, will enable Arshiya to turn around its rail business in FY11E and enhance returns. We expect 67% growth in Arshiya’s earnings in FY11 driven by improvement in the core business, commencement of FTWZ operations and turnaround of the rail business. Outperformer with a price target of Rs235 per share.

ARSHIYA: AN END-TO-END LOGISTICS SOLUTIONS PROVIDER Arshiya offers end-to-end logistics solutions for international movement of cargo. To offer superior logistics solutions across the world, Arshiya has tied up with various global freight forwarding companies to draw upon the partners’ expertise in integrated solutions. Arshiya has set up companies in Qatar, Dubai and Oman to strengthen its end-to-end solutions capability. While volumes from the Gulf locations have been impaired due to the slower trade activity in the region, signs of pick up are visible, especially in Qatar and Oman.

Apart from infrastructure-led service offerings (rail, FTWZ and Distriparks) Arshiya’s business operations span mainly three segments – a) freight forwarding, b) supply chain logistics (forward and reverse) solutions, and c) project logistics.

Exhibit 1: Arshiya – integrated approach

Source: Company, IDFC-SSKI Research

Arshiya‘s Integrated Logistic Solutions

Freight forwarding & project logistics

Supply chain management IT solutions (Cyberlog)

Free trade warehousing zones

(FTWZ)Container rail Distriparks (ICD/Rail

Sidings)

Arshiya‘s Integrated Logistic Solutions

Freight forwarding & project logistics

Supply chain management IT solutions (Cyberlog)

Free trade warehousing zones

(FTWZ)Container rail Distriparks (ICD/Rail

Sidings)

DECEMBER 2009 33

IDFC - SSKI INDIA

Capabilities in the fast growing project logistics – a key strength Given that project logistics is a highly complex solution involving transportation of over-dimensional cargo, only a handful of players operate in this segment. This implies significantly higher margins for incumbents. We expect Arshiya to capitalize on the growing demand for project logistics solutions in both India and the Gulf region.

Arshiya provides IT visibility for its clients – a key value-add Arshiya offers seamless logistics solutions through its proprietary IT solution – an integrated supply chain management software solution. The completely integrated application facilitates seamless logistics management of demand fulfillment across all geographies and transport modes, thereby reducing costs, stock levels, and cycle time while meeting delivery timelines.

As Arshiya’s focus on infrastructure-led logistics business has increased, it has sold the marketing rights of Cyberlog (its software solution company) for US$10m (Rs470m). Against the consideration, Arshiya will write off development expenses of ~Rs100m, thereby securing net income of Rs370m form Cyberlog. Going forward, Arshiya will receive an annual fee for the existing client base and a 20% royalty on new clients. Further, the IPR and new development rights shall remain with Arshiya, thereby ensuring that it continues to offer IT solutions to clients as part of its total integrated logistics service offering. Arshiya believes that sale of Cyberlog will not dilute its value proposition to clients, as it is the only company offering the entire gamut of services from freight forwarding to rail to FTWZ logistics solutions.

Free Trade Warehousing Zones – a new growth avenue for Arshiya Free Trade Warehousing Zones (FTWZ) are proposed to be developed along the lines of a Special Economic Zone (SEZ), wherein the area under development would be classified as a deemed foreign territory, and the unit operating within the zone would be accorded special status with various fiscal and non-fiscal benefits. The FTWZ would provide the much-needed infrastructure required for trading and storage activities relating to foreign trade such as deferred duty benefits, hubbing, etc.

Arshiya is pioneering the concept of FTWZs in India and plans to set up two FTWZs in phase I at JNPT (Mumbai) and Khurja (New Delhi). Arshiya will also be looking to set up more FTWZs at other locations including central India (Nagpur), eastern and southern regions. All the FTWZs would have a CFS/ ICD facility as also rail connectivity.

With limited competition, integrated project logistics

businesses fetch high margins

Arshiya has realized net income of Rs370m from selling Cyberlog, which

will continue to generate annuity income

The new concept of FTWZ to boost business

prospects for Arshiya in the coming years

DECEMBER 2009 34

IDFC - SSKI INDIA

Exhibit 2: Arshiya’s planned FTWZs at strategic locations to be rail linked

Source: Company

First FTWZ at JNPT to be operational in Q1FY11 Arshiya has commenced construction on its first FTWZ. The work has been awarded to L&T and Tata Blue Scope for construction of the warehouses, which we expect to start generating revenues from Q1FY11. The JNPT FTWZ is likely to have three (aggregating 450,000 sq. ft) of the 16 planned warehouses to be operational from Q1FY11. The subsequent warehouses will be built during the year and would be operational by end-FY11E.

Arshiya is in advance stages of finalizing contracts with potential unit holders within the FTWZ, which is likely to yield a rental of Rs70/ sq. ft / month. Apart from lease rentals, Arshiya will also earn revenues from the CFS facilities provided within the yard as also from the value-added services (packaging, labeling, stuffing, sorting, etc) provided within the zone.

Delhi FTWZ – to be operational by H2FY11E The Delhi FTWZ at Khurja is progressing with a lag of 3-4 months to the JNPT FTWZ. The approvals have been received, while initial construction work for leveling and boundary wall is ongoing. Once designing work is finalized for the warehouses, work will be awarded for building the facility to contractors (L&T and Tata Blue Scope; same as that for JNPT FTWZ). Simultaneously, Arshiya plans to start signing up agreements with clients for the FTWZ. Accordingly, we expect the Delhi FTWZ to be operational in H2FY11 (commissioning in phases by FY12).

Port that processes 62% of India’s container freight traffic (Phase 1)

40% of India’s manufacturing done here (Phase 1)

Port that processes 62% of India’s container freight traffic (Phase 1)

40% of India’s manufacturing done here (Phase 1)

Arshiya is in advance stages of finalizing

contracts with potential unit holders within the

JNPT FTWZ

For Delhi FTWZ, approvals have been received and initial construction work

undertaken

DECEMBER 2009 35

IDFC - SSKI INDIA

Other FTWZs to be operational in 3-4 years Arshiya is looking to expand the current FTWZs at JNPT and Khurja as also set up FTWZs at other locations such as Nagpur (for which it has already acquired land), and southern and eastern India. We believe the other FTWZs are likely to be rolled out in a phased manner over the next 3-4 years once the first two FTWZs are operational and running smoothly. Accordingly, our earnings estimates do not factor in any revenues or earnings from other facilities or expansion of the existing facilities.

FTWZs to fetch incremental revenues for existing business as well Considering the strategic location of the FTWZ at JNPT (the largest container port in India), we believe Arshiya can utilize the FTWZ to provide integrated logistics solutions to customers as well as offer it as a hubbing zone for international trade. With the need for movement of volumes for clients as well as the use of software for tracking consignments within the zone through its proprietary IT solutions, we believe the FTWZ will drive the core logistics business as well. We have not factored in the multiplier effect that the FTWZ can have on the existing business.

RAIL BUSINESS: INTEGRATING LOGISTICS SOLUTIONS Entry into container rail business – completing the logistics chain

Arshiya has entered the container rail space by taking a license for pan-India operations. Entry into containerized rail movement will enable Arshiya to provide integrated logistics solutions to clients. Further, the container rail business will enable Arshiya to link its FTWZ across all the locations, thereby imparting the ability to provide seamless logistics solutions to customers. Arshiya began its operations in March 2009 and is currently operating with six rakes. Arshiya targets to have a base of 30 rakes over the next 1-2 years.

Long-term contracts to aid profitability Being a late entrant into the space, Arshiya has the benefit of knowing beforehand the challenges faced by other operators in terms of profitability. Accordingly, Arshiya has entered into long-term contracts with clients on a take or pay basis – which compensates for empty running or lower utilization levels. At its end, Arshiya is required to maintain certain service level standards in terms of rake availability, transportation, etc. We believe the long-term agreements (key clients include Vedanta, Mitsubishi, Essar, etc) will mitigate a key risk factor of running empty rakes, especially on the return haul.

However, despite such agreements, we expect profitability of the rail business to ramp up slowly as Arshiya is operating trial runs for customers at its own cost. Moreover, any hiccups in the initial stage of operations may restrict profitability. Consequently, we have not factored in any significant revenues and profits from the container rail business in FY10, which is likely to have 8-10 rakes operational by the year-end.

After JNPT and Delhi, other FTWZs to be rolled

out in central, southern and eastern India

Arshiya currently operating rail business

with six rakes

To secure volumes, Arshiya has entered into

long-term agreements with Vedanta, Mitsubishi,

Essar, etc

DECEMBER 2009 36

IDFC - SSKI INDIA

One siding operational in Vizag – setting up Distriparks Arshiya is currently operating its rakes from private, port or rail sidings for loading and offloading cargo. Arshiya has developed one own rail siding in Vizag to handle rakes for various customers, where it can hub cargo as also earn warehousing revenues. Apart from this, Arshiya is setting up Distriparks across some key locations of the country such as the Delhi siding, which is next to its FTWZ in Khurja (which also is a central junction on the railways-proposed DFC). Further, Arshiya plans to take on lease unused sidings from either private operators or railways (as per the recent railway budget) to enhance the usage of sidings. With the overall ramp-up in rake fleet, we believe Arshiya will need to have its own sidings to consolidate cargo so that it can operate on a hub-and-spoke mechanism.

Operations expected to turn profitable in FY11 Capitalizing on its late entry in the container rail operations, Arshiya has taken various steps to reduce dependence on utilization levels and ensure a quicker turnaround by offering integrated logistics solutions, entering into long-term contracts, etc. The strategy has worked in favour of Arshiya as despite FY10 being the first year of operations, the rail business is already breaking even for H1FY10. We expect Arshiya to turn profitable from FY11 on a sizeable base of 15-20 operational rakes. Further, with various sidings commencing operations at Vizag, Khurja, etc, profitability of the rail operations is likely to improve rapidly.

Exhibit 3: Drivers for rail profitability


Sidings planned; one already operational

Return loads tied in

Long term contracts

Integrated services IT visibility

Customisedsolutions

Drivers for rail profitability



Long term contracts


Customisedsolutions


To complement its rake fleet, Arshiya setting up

own sidings

Rail operations have performed well in H1FY10; expected to turn profitable with a fleet of 15-20 rakes

in FY11

DECEMBER 2009 37

IDFC - SSKI INDIA

FINANCIALS & VIEW Expect 35% CAGR in revenues over FY09-12

After flat revenues in FY09, Arshiya could see lower realizations in FY10E as it passes on the lower freight charges to clients. However, we believe freight rates have bottomed out and we expect 15-20% revenue CAGR in the core freight forwarding and supply chain solutions business over the next 2-3 years. Moreover, with the ramp-up in rail business and the FTWZ commencing operations in FY11E, we expect revenues to grow at a robust pace of 64% in FY11E, driving a robust 35% CAGR in revenues over FY09-12.

Exhibit 4: FTWZ commissioning & scale-up in rail business to drive revenues in next 3 years

0

3,500

7,000

10,500

14,000

FY07 FY08E FY09E FY10E FY11E FY12E

Core logistics JNPT FTWZ Delhi FTWZ RAIL(Rs m)


Overall margins to expand with entry into high-margin business… Arshiya’s value-added service offerings have enabled deeper penetration of clients. Accordingly, despite flattish revenues in FY10E, we expect margins to expand by 180bp to 17%, primarily on the back of better margins in the core business. Revenues from the high-margin FTWZ business and ramp-up in the rail business are likely to further drive a 780bp expansion in margins to 24.8% in FY11.

Exhibit 5: High margin business of FTWZ & rail to lead to margin expansion

EBITDA margin

10

15

20

25

30

35 (%)

FY07 FY08 FY09 FY10E FY11E FY12E Source: IDFC-SSKI Research

Though revenues could be flat in FY10, we expect

robust 65% revenue growth in FY11

We expect margins to improve to ~25% in FY11

DECEMBER 2009 38

IDFC - SSKI INDIA

…but higher interest and depreciation on new projects Arshiya has earmarked a capex of ~Rs19bn over FY10-12 for its various FTWZ projects (excluding Nagpur) as well as to ramp up rail operations. Accordingly, Arshiya will raise project specific debt of Rs12.5bn, while the remaining capex will be funded through equity. An equity component of Rs5.4bn has already been infused, with the remaining Rs1.2bn to be incurred over the next two years through internal accruals as also release of working capital.

Exhibit 6: New projects to drive strong growth in profits over FY11-12E

0

400

800

1,200

1,600

FY07 FY08 FY09 FY10E FY11E FY12E-20

15

50

85

120Adjusted net profit (Rs m - LHS) EPS growth (% - RHS)


Return ratios to improve as projects start generating returns Fund raising in FY07 and capex on FTWZ and rail operations have led to muted return ratios for Arshiya over the past two years. Moreover, Arshiya has begun drawing down on debt to meet the debt component of its various projects. While various projects are currently in the execution phase with no revenues or profits, we expect revenue and profit contribution from the first FTWZ in FY11 and ramped-up rail business to drive an improvement in return ratios. Once the projects are fully operational (FY12-13 onwards), we expect return ratios to be in the 18-20% range.

Exhibit 7: Return ratios to start improving with operational FTWZs & scale-up in rail business

0

7

14

21

28

35 (%)

FY07 FY08 FY09 FY10E FY11E FY12E

RoE ROCE


With various projects in execution mode, Arshiya to incur capex of Rs19bn

over FY10-12E

Ramp-up of new projects to drive return ratios

DECEMBER 2009 39

IDFC - SSKI INDIA

Attractive valuations; maintain Outperformer Arshiya has a strong competitive advantage in its ability to provide integrated logistics solutions to clients, which should drive a robust 25% CAGR in earnings over FY09-12. Moreover, Arshiya has funded the first phase of its projects (FTWZ and rail), which imparts higher visibility on project execution. We believe the new initiatives (FTWZs, rail container transportation business, etc) can add significant shareholder value over the medium term. At 12.3x FY11E earnings, valuations are attractive. We reiterate Outperformer on the stock with a price target of Rs250 per share.

Buy with a price target of Rs250 per share

DECEMBER 2009 40

IDFC - SSKI INDIA

Earnings model

Year to 31 March FY08 FY09 FY10E FY11E FY12ENet sales 4,012 5,005 4,846 7,941 12,299 % growth 115.3 24.8 (3.2) 63.9 54.9 Operating expenses 3,494 4,243 4,021 5,972 8,400 EBITDA 517 762 826 1,970 3,900 % change 135.5 47.2 8.4 138.6 98.0 Other income 63 88 30 40 20 Net interest (9) (14) (96) (492) (1,352)Depreciation 42 70 134 431 830 Pre-tax profit 529 765 625 1,087 1,737 Deferred tax (3) (2) - - -Current tax 77 122 94 190 347 Profit after tax 456 645 531 897 1,390 Minorities 2 2 8 3 (20)Non-recurring items (3) 8 370 - -Net profit after non-recurring items 454 654 909 900 1,370 % change 160.0 44.2 39.0 (1.1) 52.2

Balance sheet

As on 31 March FY08 FY09 FY10E FY11E FY12EPaid-up capital 114 118 118 118 118 Preference share capital - - - - -Reserves & surplus 4,911 5,855 6,764 7,664 9,034 Total shareholders' equity 5,025 5,972 6,882 7,782 9,151 Total current liabilities 498 579 532 818 1,177 Total debt 17 1,296 3,497 7,567 10,879 Other non-current liabilities 22 30 1,222 1,219 1,239 Total liabilities 536 1,905 5,251 9,604 13,295 Total equity & liabilities 5,562 7,877 12,133 17,385 22,446 Net fixed assets 2,173 5,476 8,937 12,632 17,291 Investments 1,337 0 - - -Total current assets 2,048 2,338 3,196 4,753 5,155 Other non-current assets 3 63 - - -Working capital 1,551 1,759 2,664 3,935 3,979 Total assets 5,562 7,877 12,133 17,385 22,446

Cash flow statement

Year to 31 March FY08 FY09 FY10E FY11E FY12EPre-tax profit 529 765 625 1,087 1,737 Depreciation 42 70 134 431 830 Chg in working capital (396) (535) (95) (860) (1,085)Total tax paid (77) (122) (94) (190) (347)Ext ord. items & others (34) 16 1,562 (3) 20 Operating cash inflow 64 194 2,133 464 1,155 Capital expenditure (1,851) (3,303) (3,461) (3,696) (4,658)Free cash flow (a+b) (1,788) (3,109) (1,328) (3,232) (3,503)Chg in investments (1,337) 1,337 0 - -Debt raised/ (repaid) (32) 1,279 2,201 4,070 3,313 Capital raised/ (repaid) 4,336 175 - - -Dividend (incl. tax) 0 (53) - - -Misc (751) 51 (126) (428) (3,204)Net chg in cash 428 (321) 747 411 (3,395)

Key ratios

Year to 31 March FY08 FY09 FY10E FY11E FY12EEBITDA margin (%) 12.9 15.2 17.0 24.8 31.7 EBIT margin (%) 11.9 13.8 14.3 19.4 25.0 PAT margin (%) 11.4 12.9 11.1 11.3 11.1 RoE (%) 15.2 11.8 8.4 12.3 16.2 RoCE (%) 15.4 11.2 7.3 10.9 16.2 Gearing (x) 0.0 0.2 0.5 1.0 1.2

Valuations

Year to 31 March FY08 FY09 FY10E FY11E FY12EReported EPS (Rs) 7.7 11.1 15.5 15.3 23.3 Adj. EPS (Rs) 7.8 11.0 9.2 15.3 23.3 PE (x) 24.1 17.1 20.5 12.3 8.1 Price/ Book (x) 2.2 1.8 1.6 1.4 1.2 EV/ Net sales (x) 2.5 2.3 2.7 2.1 1.7 EV/ EBITDA (x) 19.5 15.3 15.9 8.5 5.4


Shareholding pattern

Foreign35.0%

Promoters40.9% Non Promoter

Corporate Holding7.8%

Institution1.5%

Public & Others14.8%

As of September 2009



Long term contracts


Customisedsolutions




Long term contracts


Customisedsolutions


DECEMBER 2009 41

IDFC - SSKI INDIA

Container Corporation of India (Concor) has acquired an unmatchable competitive edge in the container rail business with its large fleet of rakes, pan-India network of terminals, strategic alliances and strong balance sheet. Despite the entry of private players, we see Concor well-placed to defend its leadership status over the medium term. While the sizeable asset base ensures economies of scale, Concor’s dominance would also allow it to be the key beneficiary of the rising container volumes over the next 2-3 years. Given the high earnings visibility and superior return ratios, we reiterate Outperformer on the stock at current valuations of 16.9x FY11E earnings, and set a price target of Rs1,450.

High resilience to competition: Concor’s large rake fleet and pan-India ICD network impart economies of scale and the flexibility to aggregate cargo (implying higher utilization levels and faster turnaround times). A strong balance sheet and depreciated assets give Concor the ability to compete effectively. Concor is also entering into strategic alliances to tie in long-term volumes and limit the impact of competition. Over the next 2-3 years, we do not see new players making a material dent in Concor’s dominance.

Volumes expected to pick up from H2FY10: Slack international and domestic trade had impacted cargo movement, and thereby Concor’s volumes, in H2FY09 as also H1FY10. However, we expect volumes to pick up sharply in H2FY10 and continue into FY11 led by revival in trade, especially in the exim segment. Further, Concor’s increased focus on the domestic business is likely to drive domestic volumes.

High earnings visibility; Outperformer: Concor stands to be the key beneficiary of the rising industry volumes. As volumes pick up and empty running reduces, we expect 12% CAGR in Concor’s earnings over FY09-12. In view of the high earnings growth visibility and superior return ratios, current valuations appear attractive. Reiterate Outperformer with a price target of Rs1,450 per share.

.

Key financials

As on 31 March FY08 FY09 FY10E FY11E FY12ENet sales (Rs m) 33,473 34,172 38,369 43,824 51,660 Adj. net profit (Rs m) 7,505 7,915 8,428 9,419 11,232 Shares in issue (m) 130 130 130 130 130 Adj. EPS (Rs) 58 61 65 72 86 % change 7.8 5.5 6.5 11.8 19.2 PER (x) 21.3 20.2 18.9 16.9 14.2 Price/Book (x) 5.0 4.2 3.6 3.1 2.7 EV/EBITDA (x) 16.0 15.0 13.0 11.2 9.1 RoE (%) 25.8 22.8 20.7 19.9 20.6 RoCE (%) 25.5 22.3 21.3 20.9 21.4Prices as on 18 December 2009

21 December 2009

BSE Sensex: 16720

Performance (%) 3-mth 6-mth 1-yr 3-yr Concor 5.4 31.3 94.4 16.4 Sensex (0.1) 17.2 65.9 21.8

Stock data

Reuters Code CCRI.BO Bloomberg CCRI IN 1-yr high/low (Rs) 1355 / 594 1-yr avg daily volumes (m) 0.07 Free Float (%) 36.9

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Container Corporation of India Sensex

Container Corp. Power of precedence

Rs1227OUTPERFORMER

Mkt Cap: Rs159.5bn; US$3.4bn

Com

pan

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date


DECEMBER 2009 42

IDFC - SSKI INDIA

INVESTMENT ARGUMENT Concor has indeed lost the monopoly in container rail operations but not its competitive edge vis-à-vis the new players. We expect Concor to retain its dominance, at least in the medium term, on the back of the strong asset base created over the past 20 years – the most critical success requisite in the business. Concor is best placed among peers to derive economies of scale and benefit from the expected recovery in trade. Strength of Concor’s business is underlined by return ratios of 20%+ and operating return ratios of 40%+ (net of Rs20bn cash). We expect Concor to maintain its lead, at least over the next 2-3 years till other players scale up. Valuations of 16.9x FY11E earnings are attractive in this backdrop. Outperformer with an 18-month price target of Rs1,430.

Concor – India’s dominant container rail operator Concor, owned 63% by the Government of India, commenced operations in 1989 by taking over existing terminals of the Indian Railways (IR). The IR established Concor as an independent organization to undertake specialized inter-modal containerization activities. Concor offers its clients integrated logistics services for container movement with business primarily divided into two segments – international (exim) and domestic cargo. In the international segment, Concor facilitates inland penetration of containers from ports to the hinterland, while it facilitates movement of containers between cities across various parts of India in the domestic segment. Exim cargo accounts for ~80% of Concor’s volumes.

Strong competitive advantages Over the years, Concor has developed an excellent infrastructure in terms of a pan-India network of container handling terminals and rakes to offer seamless logistics services to its customers. The extensive infrastructure gives Concor a strong competitive edge vis-à-vis peers. Some of the key competitive advantages that Concor has over other players are:

Exhibit 1: Concor has an extremely strong competitive edge vis-à-vis peers


Competitive strengths

Large fleet(218 rakes)

Pan India network

(59 terminals)

Depreciated assets

Cash balance(Rs20bn)



Pan India network

(59 terminals)

Depreciated assets


Concor has been the pioneer in India to

undertake specialized containerization activities

A large fleet of rakes, pan-India terminal network, depreciated assets and high cash on books are Concor’s key strengths

DECEMBER 2009 43

IDFC - SSKI INDIA

A large fleet of rakes: Concor has purchased all of IR’s wagons suitable for carrying containers so as to prevent other players from leasing them. The company has also acquired additional state-of-the-art, high-speed wagons to improve its turnaround time. Concor’s wagon strength currently stands at 9,816 or 218 rakes. Concor plans to add 20-25 rakes every year to meet the growing demand in both domestic and exim segments. Such a large fleet of rakes gives Concor the flexibility to handle more volumes and offer reliable services.

A pan-India network: Concor has a pan-India network of 59 terminals, which enables the company to aggregate volumes across the country as also provide value-added services such as customs clearance, storage, stuffing, de-stuffing, etc. The pan-India network allows Concor to target volumes across the length and breadth of the country in both domestic and exim segments. In addition, the higher number of terminals enables Concor to contain its empty running as also improve the turnaround time of rakes. We believe such an extensive network of ICDs and CFSs is a strong competitive edge that Concor has over peers.

Depreciated assets: Concor’s sizeable asset base of 59 terminals and 218 rakes, accumulated over the past 20 years, gives it significant economies of scale. Concor has depreciated assets on books, which is a key edge over new players in the business. For example, average cost of a wagon for Concor is Rs1.2m-1.3m, while it is Rs2.8m-3m for a new player.

Cash on books: Concor has an extremely strong balance sheet with huge cash of Rs20bn and no debt on books. The fact that Concor can easily meet its capex needs from internal accruals, we believe, places it in an enviable position vis-à-vis peers.

Entering new business areas to tie-up volumes Concor has tied up with many shipping lines for warehousing and terminal facilities to capitalize on the growing volumes. Moreover, Concor has a 26% stake in the third container terminal at JNPT (Jawaharlal Nehru Port Trust). Concor is looking to acquire stakes in other container terminals as well. We believe the strategy will enable Concor to tie up volumes for the longer term.

Largely insulated from competition Concor continues to hold a 95%+ market share as its strengths largely insulate it from competition post the entry of private players in the business. The large wagon fleet, coupled with a pan-India ICD network, enables Concor to capture higher volumes and effectively restrict its empty running compared to other players. A case in point is that while peers have suffered an acute slowdown due to the economic downturn, not a single rake of Concor had to be stabled in contrast. Going forward, we expect Concor to remain a dominant player in the business and unlikely to be impacted by new players in the medium term.

Exim volumes expected to grow in H2FY10 Concor took a hit on exim volumes (accounting for 80% of total volumes) in FY09 and H1FY10, led by sluggish international trade and a drop in port traffic. However, volumes have stabilized from March 2009 onwards, as import volumes have picked up sharply – thereby driving a rise in port pendencies from 3,000 TEUs/ day in H1FY09 to ~10,000 TEUs/ day in Q1FY10. Similarly, exports have started showing signs of improvement over the past 2-3 months. Accordingly, we expect the qoq

Concor’s huge network of 59 terminals enables it to aggregate volumes pan-

India and offer value-add

Strategic focus on securing volumes to help

maintain dominance

While import volumes have picked up sharply,

export volumes too have started to improve

DECEMBER 2009 44

IDFC - SSKI INDIA

improvement in volumes to continue as also drive strong volume growth for Concor in H2FY10.

Exhibit 2: Exim volumes to rebound in H2FY10E

250,000

325,000

400,000

475,000

550,000

1QFY

06

2QFY

06

3QFY

06

4QFY

06

1QFY

07

2QFY

07

3QFY

07

4QFY

07

1QFY

08

2QFY

08

3QFY

08

4QFY

08

1QFY

09

2QFY

09

3QFY

09

4QFY

09

1QFY

10

2QFY

10

3QFY

10E

4QFY

10E

-30.0

-15.0

0.0

15.0

30.0Exim (TEUs - LHS) % growth (RHS)


Efforts to balance import and export volumes In view of the strong growth in import volumes and the trade imbalance (mismatch between exports and imports), pendencies at JNPT and other ports had led to higher empty running for Concor (18% in Q1FY10). With improving export volumes, trade imbalance has reduced and we expect empty running (currently at 9%) to come down as export volumes pick up further. Also, Concor has undertaken cost-cutting initiatives while increasing its terminal handling charges to reduce the impact of empty running on margins. Concor has also hiked rates on import volumes by 3% effective 1 July 2009. We believe higher charges on import volumes will mitigate the impact of empty running, thereby improving operating margins in exim segment.

Focus increased on domestic business Concor has traditionally focused on exim volumes as demand for clearing ports is typically higher and return volumes have been easier to procure in this segment. Importantly, higher volumes and utilization levels culminate into better turnaround times which, in turn, imply significantly higher profitability in the exim business. Shortage of wagons in earlier years had also prompted Concor to focus more on exim volumes. However, as wagon availability has eased over the past few years, Concor has been laying due emphasis on the domestic business. Also, Concor has strived to grow the domestic business to compensate for the sluggishness in exim cargo. Notably, domestic volumes have bounced back relatively faster in H1FY10.

Domestic volumes had declined in FY09 due to the economic slowdown, but have been witnessing a pick-up since December 2008, with the uptrend continuing into H1FY10 as well (20%+ yoy growth). Revival in the domestic activity, coupled with Concor’s focus on the domestic sector, has led to higher domestic volumes, and the management expects further growth in H2FY10. While domestic volumes are likely to bounce back in FY10 and grow at a strong pace, we believe higher competitive intensity is likely to restrict growth in the longer term. Accordingly, we have factored in a 7% CAGR in domestic volumes for Concor over FY09-12E.

Lower empty running and cost-cutting initiatives to aid margin expansion in

exim segment

We expect a 7% CAGR in Concor’s domestic

volumes over FY09-12

DECEMBER 2009 45

IDFC - SSKI INDIA

Exhibit 3: Domestic volumes have been relatively more resilient to the economic downturn

50,000

72,500

95,000

117,500

140,000

1QFY

06

2QFY

06

3QFY

06

4QFY

06

1QFY

07

2QFY

07

3QFY

07

4QFY

07

1QFY

08

2QFY

08

3QFY

08

4QFY

08

1QFY

09

2QFY

09

3QFY

09

4QFY

09

1QFY

10

2QFY

10

3QFY

10E

4QFY

10E

-20.0

-2.5

15.0

32.5

50.0Domestic (TEUs - LHS) % growth (RHS)


Operating margins to remain range-bound We expect Concor’s margins to remain stable within a range of 27-28% over FY09-12, depending on the mix of volumes and the quantum of empty running. Concor is taking various steps (higher tariffs on import volumes, hike in terminal charges, etc) to ensure that margins are not impacted despite lower exim volumes and the trade imbalance. With its various competitive strengths such as a pan-India network, higher utilization and turnaround times as also depreciated assets with no debt on books, Concor is also well placed to protect its margins from the onslaught of competition.

Exhibit 4: Margins to remain stable despite higher competition

EBITDA margin

10.0

15.0

20.0

25.0

30.0

(%)

FY06 FY07 FY08 FY09 FY10E FY11E FY12E Source: IDFC-SSKI Research

Expect 15% CAGR in earnings over FY10-12 Driven by higher volumes, we expect 15% CAGR in Concor’s revenues over the next three years. However, the higher empty running and significant capex would lead to slower growth in earnings (7% yoy) relative to revenues (12% yoy) in FY10E. We expect earnings growth to rebound over FY10-12 to 15% CAGR.

Despite escalating competition, we expect

Concor’s margins to remain stable at 27-28%

over FY09-12

DECEMBER 2009 46

IDFC - SSKI INDIA

Strong free cash flow generation – high return ratios Concor generates significantly higher free cash flows of Rs6bn-7bn annually (pre-capex) on the back of better utilization of assets and economies of scale. Accordingly, Concor has cash of Rs20bn on books. Concor generates high return ratios of 20-25%, while it generates 40%+ operating RoCE (without cash).

Capex – new areas of business being explored The management expects to utilize the free cash to incur Rs4bn capital expenditure annually on acquiring additional rakes, ICDs/ CFSs and other handling equipment at various facilities. The hefty investment into wagons is being undertaken to maintain its dominant position and attract higher volumes. The capex will be funded through internal accruals. Besides funding the core business, Concor is exploring other business opportunities such as shipping, cold chain, etc, which it will enter into on MoU basis, i.e. without committing any significant investments for these businesses.

Attractive valuations; maintain Outperformer We continue to like Concor’s business model considering that it is a play on the growth in international trade and rising container volumes (both international and domestic). Moreover, we believe Concor is well placed to defend its dominance in the medium term given its large wagon fleet, pan-India network of ICDs and CFSs as well as depreciated assets (thereby economies of scale) – and thereby ability to garner higher volumes. In our view, the management has been proactive in tying up volumes through strategic alliances, which will continue to drive consistent growth in volumes. Considering the earnings growth visibility and high return ratios, we believe that Concor currently trades at attractive valuations of 16.9xFY11E earnings. We maintain Outperformer rating on the stock with a DCF-based target price of Rs1,450 per share.

We set a DCF-based price target of Rs1,450 for

Concor

Concor generates high return ratios of 20-25%,

and 40%+ operating RoCE (without cash)

DECEMBER 2009 47

IDFC - SSKI INDIA

THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK

DECEMBER 2009 48

IDFC - SSKI INDIA

Earnings model

Year to 31 March FY08 FY09 FY10E FY11E FY12ENet sales 33,473 34,172 38,369 43,824 51,660 % growth 10.2 2.1 12.3 14.2 17.9 Operating expenses 24,569 24,861 27,937 31,992 37,764 EBITDA 8,904 9,311 10,432 11,832 13,896 % growth (0.1) 4.6 12.0 13.4 17.4 Other income 1,645 2,111 1,828 2,009 2,425 Depreciation 1,063 1,159 1,330 1,497 1,735 Pre-tax profit 9,485 10,262 10,931 12,344 14,587 Deferred Tax 126 201 219 62 204 Current Tax 1,854 2,147 2,285 2,864 3,151 Profit after tax 7,505 7,915 8,428 9,419 11,232 Non-recurring items 17 (3) - - -Net profit after non-recurring items 7,522 7,912 8,428 9,419 11,232 % growth 6.9 5.2 6.5 11.8 19.2

Balance sheet

As on 31 March FY08 FY09 FY10E FY11E FY12EPaid-up capital 650 1,300 1,300 1,300 1,300 Preference share capital - - - - -Reserves & surplus 31,189 36,322 42,498 49,364 56,843 Total shareholders' equity 31,839 37,622 43,798 50,664 58,143 Total current liabilities 5,371 6,197 7,559 8,658 10,900 Total Debt - - - - -Deferred tax liabilities 1,737 1,938 2,156 2,218 2,422 Other non-current liabilities - - - - -Total liabilities 7,108 8,135 9,715 10,876 13,322Total equity & liabilities 38,947 45,757 53,513 61,540 71,465 Net fixed assets 18,372 21,947 25,267 28,770 31,535 Investments 1,554 2,031 19,023 24,523 29,523 Total current assets 19,021 21,780 9,223 8,248 10,407 Working capital 13,650 15,582 1,664 (410) (493)Total assets 38,947 45,757 53,513 61,540 71,465

Cash flow statement

Year to 31 March FY08 FY09 FY10E FY11E FY12EPre-tax profit 9,485 10,262 10,931 12,344 14,587 Depreciation 1,063 1,159 1,330 1,497 1,735 chg in Working capital (314) 412 142 180 255 Total tax paid (1,854) (2,147) (2,285) (2,864) (3,151)Ext ord. Items & others - (33) - - -Operating cash Inflow 8,380 9,654 10,118 11,158 13,426 Capital expenditure (1,881) (4,703) (4,650) (5,000) (4,500)Free cash flow (a+b) 6,499 4,951 5,468 6,158 8,926 Chg in investments (237) (477) (16,992) (5,500) (5,000)Debt raised/(repaid) - - - - -Capital raised/(repaid) - - - - -Dividend (incl. tax) (1,673) (2,053) (1,519) (2,292) (2,713)Misc - - - - -Net chg in cash 4,589 2,420 (13,043) (1,634) 1,213

Key ratios

Year to 31 March FY08 FY09 FY10E FY11E FY12EEBITDA margin (%) 26.6 27.2 27.2 27.0 26.9 EBIT margin (%) 23.4 23.9 23.7 23.6 23.5 PAT margin (%) 22.4 23.2 22.0 21.5 21.7 RoE (%) 25.8 22.8 20.7 19.9 20.6 RoCE (%) 25.5 22.3 21.3 20.9 21.4 Gearing (x) - - - - -

Valuations

Year to 31 March FY08 FY09 FY10E FY11E FY12EReported EPS (Rs) 57.9 60.9 64.8 72.5 86.4 Adj. EPS (Rs) 57.7 60.9 64.8 72.5 86.4 PER (x) 21.3 20.2 18.9 16.9 14.2 Price/Book (x) 5.0 4.2 3.6 3.1 2.7 EV/Net sales (x) 4.3 4.1 3.5 3.6 3.0 EV/EBITDA (x) 16.0 15.0 13.0 11.2 9.1

Concor has an extremely strong competitive edge vis-à-vis peers


Promoters63.1%

Foreign24.2%

Non Promoter Corporate Holding

1.7%

Institutions10.0%

Public & Others1.0%

As of September 09



Pan India network

(59 terminals)

Depreciated assets




Pan India network

(59 terminals)

Depreciated assets


DECEMBER 2009 49

IDFC - SSKI INDIA

Gateway Distriparks (GDL), an established CFS player with presence at key strategic locations, is expected to be a key beneficiary of the rising container traffic growth in India. Further, GDL’s forward integration into the value chain by entering rail container business completes its service offering. GDL is India’s largest private container rail operator and the business is being scaled up by adding rakes and sidings. This, we believe, would aid profitability as utilization and turnaround times improve. Notably, the recent fund raising in rail business (GRFL) is extremely positive, as besides limiting the strain on parent balance sheet, the capital infusion would also accelerate turnaround of the business. At 14.2x FY11E earnings, valuations are attractive in view of healthy cash flows from CFS business and value-creation potential in GRFL (to be profitable in FY11E). Reiterate Outperformer.

CFS business – a cash cow: GDL has its CFS facilities at strategic locations, which enables it to tap the growing container volumes. With an expected revival in international trade from H2FY10, we expect healthy growth in volumes for the CFS business. Overall, we expect the CFS business to generate cash of Rs700m-900m annually with limited capex plans.

Rail business to turn profitable in FY11E: GDL’s rail business (GRFL) is the largest private container rail operator in India with 18 rakes and three ICDs operational. GDL plans to acquire more rakes and set up additional ICDs, for which it would utilize the funds raised recently. While the scale-up in operations would provide GFRL the flexibility of operations, revival in volumes and higher capacity would improve turnaround time of rakes and utilization levels.

Improving operational performance; attractive valuations: We expect 25% CAGR in GDL’s revenues over FY09-12, driven by rising volumes for both CFS and rail operations. We also see margin expansion FY11 onwards as operating margins stabilize in the CFS business and improve in the rail business. Accordingly, we estimate 15% earnings CAGR and higher return ratios for GDL over the period. At 14.2x FY11E earnings, we reiterate Outperformer on the stock with a price target of Rs160 per share.

.

Key financials

As on 31 March FY08 FY09 FY10E FY11E FY12ENet sales (Rs m) 2,714 4,510 5,466 6,674 8,856 Adj. net profit (Rs m) 730 793 798 965 1,195 Shares in issue (m) 116 108 108 108 108 Adj. EPS (Rs) 6.3 7.4 7.4 9.0 11.1 % change (6.6) 16.6 0.6 20.9 23.9PE (x) 20.1 17.3 17.2 14.2 11.4 Price/ Book (x) 2.3 2.2 2.1 1.9 1.7 EV/ EBITDA (x) 13.9 10.4 9.6 8.1 6.6 RoE (%) 11.5 12.5 12.4 13.9 15.6 RoCE (%) 10.2 12.3 7.9 8.8 12.0Prices as on 18 December 2009

21 December 2009

BSE Sensex: 16720

Performance (%) 3-mth 6-mth 1-yr 3-yr GDL 15.5 39.6 48.9 (29.2) Sensex (0.1) 17.2 65.9 21.8

Stock data

Reuters Code GATE.BO Bloomberg GDPL IN 1-yr high/low (Rs) 148 / 42 1-yr avg daily volumes (m) 0.62 Free Float (%) 54.5

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DECEMBER 2009 50

IDFC - SSKI INDIA

INVESTMENT ARGUMENT GDL, a leading CFS player in India, has CFS and ICD facilities across key locations such as JNPT, Chennai, Vizag and NCR. The locational advantage places GDL in a position to capitalize on the ongoing volume recovery in both CFS and rail businesses. Setting up of container rail operations has enabled GDL to provide end-to-end logistics solutions as also utilize the free cash being generated from the CFS business. GDL, one of the largest private container rail operators, with 18 rakes and three ICDs operational and further expansion planned over the next 12 months, has a strong competitive positioning in the space. Notably, fund raising (Rs3bn) in the rail business would allow a faster scale-up which, in turn, would accelerate its turnaround. We expect the rail business to be profitable in FY11. Outperformer

CFS BUSINESS: GDL’S CASH COW GDL – a leading CFS player

GDL was incorporated in April 1994 and commenced business operations in December 1998 as a CFS (Container Freight Station) operator. GDL provides logistics support services for export-import of containerized cargo including transportation of containers to and from facilities, stuffing and de-stuffing cargo and customs clearances, storage of containers in container yards and other related services (general and bonded warehousing services, etc).

Exhibit 1: Services offered at the CFS – Key functions of CFS’s – storage and handling containers


Presence in strategic locations gives competitive edge GDL has CFSs in key strategic locations in India – JNPT (Mumbai), Chennai, Vizag and Kochi. The JNPT, Chennai and the Vizag ports handle 78% of the total containerized cargo in India, while Kochi is set to be developed over the next few years. GDL has three operational ICDs in the hinterland (housed in the rail business) – at Garhi Harsaru (near Delhi), Ludhiana (Sanewal) and Kalamboli (Panvel). Another ICD at Faridabad (Delhi) is under construction. GDL has emerged as the largest private sector player in the segment, especially at JNPT (wherein it has a 25% market share), and has presence on the East and West coasts of India as well as in the Delhi-Manesar industrial belt. GDL has tie-ups with most of the shipping companies across Indian ports to cater to all the markets in India.

GDL the largest private player in container rail

business with CFSs at key locations…

Port terminal Container transportation

Container freight station

• Box handling & storage

• Stuffing & De-stuffing (less than container load)

• Goods handling• Warehouse &

storage

Factory

Delivery of goods as full container load

Inbound and outbound movement of less than container load traffic

Port terminal Container transportation

Container freight station

• Box handling & storage

• Stuffing & De-stuffing (less than container load)

• Goods handling• Warehouse &

storage

Factory

Delivery of goods as full container load

Inbound and outbound movement of less than container load traffic

DECEMBER 2009 51

IDFC - SSKI INDIA

Exhibit 2: GDL – three ICD and four CFS facilities operational across India

Kochi

Chennai

JNPT

Vizag

FaridabadGarhi

Ludhiana

Operational CFSICDs/rail sidings

Planned ICDs

Kalamboli

Source: Company, IDFC-SSKIR Research

Volumes expected to grow in line with port traffic Sluggish international trade in H2FY09 and H1FY10 led to a sharp fall in port volumes and lower volumes for GDL in turn. We expect CFS volumes to revive in H2FY10 and grow at 8% in FY11. Volumes at Chennai, Vizag and Kochi ports are expected to grow at a faster clip of 15-20%. However, we believe GDL’s largest CFS at JNPT (75% of overall CFS volumes) is likely to grow at a slower pace of 5% due to slower volume growth at JNPT as also intense competitive intensity.

Exhibit 3: GDL’s volume trend

-

80,000

160,000

240,000

320,000

400,000

(TEUs)

FY05 FY06 FY07 FY08 FY09 FY10E FY11E FY12E(15)

-

15

30

45

60JNPT Chennai Vizag Kochi % yoy growth


…which will help it capitalize on volume

upturn at India’s ports

Capacity 366,000 TEUs




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JNPT CFS – key driver for CFS profits GDL’s CFS business is primarily driven by its CFS at the JNPT port. This is evident in the fact that the JNPT CFS contributed 85-88% to GDL’s overall CFS profits in FY08 and FY09. Operating margins at the JNPT CFS are higher due to port congestion, which requires faster shifting of volumes to CFSs for various clearances and other activities. Incrementally, the other CFSs at Chennai, Vizag and Kochi give GDL exposure to ports which are expanding capacities and would thus give a volume push in the coming years.

CFS business to remain a cash cow GDL generates ~Rs800m of net profit from the CFS business annually, with limited working capital requirements. Considering that GDL is unlikely to have aggressive capex plans due to limited land availability at JNPT and minimal requirement at other CFS facilities, we expect the CFS business to generate steady cash flows of Rs700m-900m annually (based on volumes and margins in a particular year). Notably, we do not see a repeat of the FY09 performance in terms of profit levels of the CFS business in the medium term as dwell times (and hence rental incomes) had jumped in H2FY09 with a chunk of exim cargo languishing at CFSs due to the severe financial crunch. Over FY10-12, we expect 9-10% revenue and earnings CAGR in GDL’s CFS business to drive stable cash flows.

RAIL BUSINESS (GRFL): TURNING PROFITABLE IN FY11E Diversification into rail business for integrated logistics solutions

GDL, through its CFS network, caters to a specific niche in the logistics value chain. Although the specialization has led to high profitability, further integration into the logistics chain became an imperative for long-term growth prospects. Accordingly, GDL has commenced container rail operations by taking a pan-India license under Gateway Rail Freight (GRFL) – a subsidiary set up for this business. The entry into rail-based container movement will help GDL provide complete end-to-end services from the port to inland destination and vice-versa.

ICD business housed in GRFL – three operational ICDs Considering the requirement for consolidation and value-added services in the hinterland, GDL has housed all its ICDs under GRFL. GRFL currently has three operational ICDs at Garhi Hasaru, Ludhiana (Sanewal) and Kalamboli (near Panvel, Mumbai). GRFL is adding another ICD in Faridabad (NCR region), to be operational in 12 months. With 3-4 ICDs in key locations, along with support from CFS facilities at ports, GRFL would have the capability to consolidate cargo for an entire rake load, operate on a hub-and-spoke mechanism and improve the turnaround of rakes. Besides utilizing its own ICDs, GRFL also uses Indian Railways’ sidings as also some private sidings. GRFL is one of the few private players to have three operational ICDs which, we believe, is a strong edge over other private peers.

We expect CFS business to throw up cash of

Rs700m-900m annually

Margins higher at JNPT CFS as congestion

mandates faster shifting of volumes to CFSs

GRFL has infrastructure to consolidate cargo for an entire rake load, operate

on a hub-and-spoke mechanism and improve

turnaround of rakes

Further integration into the logistics chain via

entry into container rail

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21 rakes by end-FY10E to make GRFL the largest private operator… Over the past 2-3 years, GRFL has consistently added rakes to increase the reliability of its service offerings. Moreover, the higher number of rakes gives GRFL flexibility to provide services between rail sidings for customers, and thereby garner higher volumes. While GRFL has 18 rakes operational, it plans to add another three rakes by end-FY10 to reach a rake fleet of 21. More rakes would be added in FY11E to capture higher volumes in both domestic and international markets. With its 18 rakes as of date, GRFL is the largest operator among private container rail operators.

…providing flexibility between exim and domestic routes Presence at key strategic locations, such as the northern hinterland, as well as a higher number of rakes provides GRFL the flexibility to operate on either of the routes based on availability of volumes. The point is well demonstrated by the fact that exim vs domestic volumes differ on month to month basis with the swing as sharp as 80:20 or 50:50 or 40:60 between the two segments. Considering that GRFL is creating a market for itself, especially in the domestic segment, we believe the higher number of rakes and ICD facilities provide it flexibility to operate on either of the two routes. As such, GRFL has not set any volume mix targets between the two segments.

Exhibit 4: Assets on book of GRFL Rakes 18 rakes (18 operational, 3 rakes to be added in 3-4 months) ICDs Garhi Ludhiana Navi Mumbai (Kalamboli) Faridabad (under execution) Others Containers, Tractor trailers, Handling Equipment, etc Source: Company, IDFC-SSKI Research

Rs3bn raised from Blackstone – a private equity fund Blackstone GPV Capital Partners (a private equity fund) has announced its plans to invest Rs3bn in Gateway Rail Freight (GRFL), a 95% subsidiary of GDL, through compulsory convertible preference shares (CPPS). On conversion of the preference shares into equity at any time over the next five years, Blackstone will have a stake between 37.27-49.9% in GRFL (dependent on the company’s operational performance). However, the entire fund infusion into GRFL is likely to happen within a span of 1-2 months. The agreement also includes a call option for GDL to acquire the CCPS at the end of five years from the date of the investment and a put option for Blackstone to sell the CCPS to GDL at the end of 10 years.

Blackstone’s stake in GRFL depends on EBITDA milestones that GRFL needs to achieve over the next five years. GRFL needs to achieve the EBITDA target set in any one of the five years to limit Blackstone’s stake to 37.27%. In case GRFL misses the EBITDA targets specified as per the agreement, Blackstone’s stake in GRFL will proportionately increase, with a cap of 49.9%. Further, Blackstone will have a representation on the board of GRFL. Post the conversion, GDL’s stake in GRFL will reduce to between 48-60% (based on Blackstone’s stake).

The largest fleet of 18 rakes operational to be further scaled up to 21

rakes by end-FY10

Exim/ Domestic volume swing of 80:20 or 50:50 or 40:60 shows flexibility of

operations o adapt to market conditions

Blackstone to hold a 37.27-49.9% stake in GRFL, depending on

latter’s profitability

DECEMBER 2009 54

IDFC - SSKI INDIA

Exhibit 5: GRFL – shareholding pattern

Source: Company; IDFC-SSKI Research

Blackstone deal values rail business at 1.5-2.5x PBV Based on the Blackstone deal, GRFL’s pre-money value works out to Rs3bn at the lower end (49.9% stake) and Rs5.05bn at the higher end (37.27% stake) of the valuation. GDL has invested Rs2bn as equity into GRFL. Based on the same, the Blackstone deal values GRFL at 1.5-2.5x PBV. We have not taken into account the Rs1.15bn as advance given to GRFL as it is to be refunded to GDL over the next five years at a coupon of 6% p.a. Considering that GRFL is currently in the ramp-up phase and making losses, we believe valuation of the rail business (GRFL) is reasonable.

Exhibit 6: Valuation of GRFL by Blackstone

% stake of Blackstone 49.90 37.27% Fund infusion by Blackstone 3,000 3,000 Post money valuation 6,012 8,049 Pre-money valuation 3,012 5,049 GDL stake 95% 95% GDL stake value (Pre – money) 2,861 4,797 GDL per share value (Rs) 26.6 44.5 GDL's equity investment in GRFL 2,000 2,000 Valuation of GRFL on PBV (x) basis 1.5 2.5 Source: Company, IDFC-SSKI Research

Fund raising to accelerate GRFL’s turnaround Funds raised through the private equity deal will be utilized to scale up the business by adding more rakes as also more ICDs (including the Garhi ICD which is currently on GDL’s books) in FY11E. Accordingly, the funds raised would enable GRFL to add scale to the business without straining GDL’s balance sheet. The expansion would enhance flexibility of operations as also capacity, thereby reducing losses of the rail business. We expect the rail business to turn around in Q4FY10 and be profitable in FY11.

GDL95%

Management5%

GDL59.6%

Management3.1%

Blackstone37.3%

GDL47.6%Blackstone

49.9%

Management2.5%

Current At Rs5bn valuation At Rs3bn valuation

As GRFL is currently in ramp-up phase and making

losses, valuation of GRFL seems reasonable

The capital infusion in GRFL would allow it to

expand without leaning on parent and accelerate rail

business’s turnaround

DECEMBER 2009 55

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Exhibit 7: Key financial details of the rail business

Balance sheet of GRFL (Rs m) P&L (Rs m) FY09 1HFY10 FY10E Equity 2,000 Revenues 1,834 1,454 3,245 Debt 2,000 EBITDA 140 169 422 Advance from GDL 1,150 PAT (250) (69) (50) Total capital employed 5,150 Source: Company, IDFC-SSKI Research

FINANCIALS & VALUATIONS Expect 25% growth in revenues over FY09-12

We expect GDL to deliver 25% CAGR in revenues over FY09-12, primarily owing to the scale-up in rail business, which will drive volumes. Also, a revival in exim volumes would allow GDL to capture higher volumes for both CFS and rail businesses. We expect realizations to be largely flat due to the escalated competitive intensity in the two businesses.

Exhibit 8: Revenues to grow at a robust pace

-

2,500

5,000

7,500

10,000

(Rs m)

FY07 FY08 FY09 FY10E FY11E FY12E0

20

40

60

80

CFS (LHS) Rail (LHS) Cold chain (LHS) % yoy growth (RHS)


Margins to stabilize – led by improvement in rail business Higher competitive intensity, lower volumes, dwell times as also expansion of the CFS business into new locations have been impacting margins at GDL’s CFS business. In H2FY10, we expect margins to stabilize at Q2FY10 level of 46.5% as volumes revive and dwell times return to normalized levels of 10-12 days. At the same time, margins have already started improving in the rail business, and we expect it to continue in FY11 as well. Flexibility due to scale-up of operations, higher exim volumes as also better utilization levels in the domestic segment are the key margin drivers in the rail business. Overall, margins would likely dip in FY10 due to lower margins for CFS business, though we expect margins to expand in FY11 driven by stability in CFS business and expansion in the rail business margins.

We expect strong volume growth in both CFS and

rail businesses

DECEMBER 2009 56

IDFC - SSKI INDIA

Exhibit 9: Margins to bottom out in FY10E, improve from FY11E onwards

OPM (%)

0

15

30

45

60

FY07 FY08 FY09 FY10E FY11E FY12E Source: IDFC-SSKI Research

Free cash in CFS to be utilized for acquisitions or warehousing GDL has been infusing the surplus funds generated from core business into GRFL towards business expansion as well as to fund losses. The fund-raising, we believe, reduces the strain on GDL’s balance sheet. Moreover, GRFL will pay Rs840m to GDL for the transfer of the Garhi ICD land, resulting in excess cash of Rs1.04bn on GDL’s books. The funds are likely to be utilized by GDL for funding capex at its Kochi CFS (Rs350m-400m) and other expansions in the CFS space, putting up warehousing facilities or increasing stake in Snowman Frozen Food (a 50% cold chain subsidiary).

Return ratios to improve GDL had extremely strong return ratios up to FY07 led by healthy margins and profitability of CFS business. However, entry into the rail business as also limited growth in CFS business has capped return ratios. As the rail business turns profitable, we expect return ratios to inch up over the next 2-3 years.

Exhibit 10: Return ratios to start improving from FY11E onwards as rail turns around

0.0

4.5

9.0

13.5

18.0(%)

FY07 FY08 FY09 FY10E FY11E FY12E

RoE ROCE


We expect margins to expand in FY11 led by

stability in CFS business and expansion in the rail

business margins

As the rail business turns profitable, we expect

return ratios to inch up over the next 2-3 years

DECEMBER 2009 57

IDFC - SSKI INDIA

Attractive valuations; maintain Outperformer GDL, an established CFS player, with footprint at key strategic locations and aggressive expansion strategy, is likely to be the key beneficiary of the rising container traffic in India. We believe GDL’s forward integration into the value chain via rail-based container movement as well as cold chain logistics solutions would enable GDL to offer end-to-end services to clients. Further, the recent fund raising in rail business (GRFL) is extremely positive for GDL as it limits the fund infusion into GRFL on GDL’s part while also accelerating the turnaround process of GRFL. At 14.2x FY11E earnings, we believe valuations are attractive in view of cash flow generation in the CFS business and value creation in GRFL, which is expected to turn profitable by Q4FY10. Maintain Outperformer with a price target of Rs160 per share.

Buy with a price target of Rs160 per share

DECEMBER 2009 58

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Earnings model

Year to 31 March FY08 FY09 FY10E FY11E FY12ENet sales 2,714 4,510 5,466 6,674 8,856 % growth 68.6 66.2 21.2 22.1 32.7 Operating expenses 1,689 3,049 4,140 4,986 6,432 EBITDA 1,024 1,461 1,326 1,688 2,423 % change 26.1 42.6 (9.3) 27.3 43.6 Other income 144 119 155 241 171 Net interest (20.0) (201.6) (234.6) (255.0) (311.0)Depreciation 292 445 465 539 731 Pre-tax profit 857 933 781 1,135 1,552 Deferred tax 19 16 - 34 47 Current tax 123 146 (17.3) 136 310 Profit after tax 715 772 798 965 1,195 Minorities 15 21 - - -Non-recurring items 5 3 - - -Net profit after non-recurring items 735 796 798 965 1,195 % change (5.6) 8.3 0.3 20.9 23.9

Balance sheet

As on 31 March FY08 FY09 FY10E FY11E FY12EPaid-up capital 1,156 1,077 1,077 1,077 1,077 Reserves & surplus 5,311 5,160 5,581 6,168 6,987 Total shareholders' equity 6,467 6,237 6,658 7,245 8,064 Total current liabilities 645 694 858 962 1,111 Total debt 215 2,045 2,269 2,378 3,031 Deferred tax liabilities 169 185 185 185 185 Other non-current liabilities 636 606 3,606 3,606 3,606 Total liabilities 1,665 3,529 6,917 7,131 7,933 Total equity & liabilities 8,132 9,766 13,575 14,376 15,997 Net fixed assets 6,651 8,132 8,955 10,255 12,962Investments 0 230 230 230 230 Total current assets 1,472 1,396 4,382 3,884 2,797 Other non-current assets 9 7 7 7 7 Working capital 827 703 3,524 2,921 1,686 Total assets 8,132 9,766 13,575 14,376 15,997

Cash flow statement

Year to 31 March FY08 FY09 FY10E FY11E FY12EPre-tax profit 857 933 781 1,135 1,552 Depreciation 292 445 465 539 731 Chg in working capital (37) (183) (81) (258) (358)Total tax paid (123) (146) 17 (136) (310)Ext ord. items 158 (27) 3,000 - -Operating cash inflow 1,146 1,022 4,182 1,279 1,615 Capital expenditure (2,223) (1,887) (1,250) (1,800) (3,400)Free cash flow (a+b) (1,077) (865) 2,932 (521) (1,785)Chg in investments - (230) - - -Debt raised/ (repaid) 141 1,829 224 109 653 Capital raised/ (repaid) 19 (640) - - -Dividend (incl. tax) (111) (502) (377) (377) (377)Misc (83) 43 (39) (73) (85)Net chg in cash (1,111) (364) 2,740 (861) (1,594)

Key ratios

Year to 31 March FY08 FY09 FY10E FY11E FY12EEBITDA margin (%) 37.7 32.4 24.3 25.3 27.4 EBIT margin (%) 27.0 22.5 15.7 17.2 19.1 PAT margin (%) 26.9 17.6 14.6 14.5 13.5RoE (%) 11.5 12.5 12.4 13.9 15.6 RoCE (%) 10.2 12.3 7.9 8.8 12.0 Gearing (x) 0.0 0.3 0.3 0.3 0.4

Valuations

Year to 31 March FY08 FY09 FY10E FY11E FY12EReported EPS (Rs) 6.4 7.4 7.4 9.0 11.1 Adj. EPS (Rs) 6.3 7.4 7.4 9.0 11.1 PE (x) 20.1 17.3 17.2 14.2 11.4 Price/ Book (x) 2.3 2.2 2.1 1.9 1.7 EV/ Net sales (x) 5.1 3.4 2.3 2.0 1.8 EV/ EBITDA (x) 13.9 10.4 9.6 8.1 6.6

Revenues to grow at a robust pace


Promoters45.5%

Foreign21.1%

Non Promoter Corporate Holding

2.5%

Institutions18.1%

Public & Others12.8%

As of September 2009

-

2,500

5,000

7,500

10,000

(Rs m)

FY07 FY08 FY09 FY10E FY11E FY12E0

20

40

60

80CFS Rail Cold chain % yoy growth (RHS)

DECEMBER 2009 59

IDFC - SSKI INDIA

PROFILE OF CONTAINER RAIL OPERATORS There are 16 players in the container rail business. Below we have a brief profile of each of the players in the business, which highlights their current and future strategies.

Players in Rs500m license fee category (all India)

Players in Rs100m license fee category (sector-specific routes)







NANA-Kribco















NANA-Kribco



















DECEMBER 2009 60

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Adani Logistics

Entry into container rail business through Mundra Port & SEZ (MPSEZ) The Adani group has forayed into container rail operations through Mundra Port and Special Economic Zone (MPSEZ). Mundra Port is located in the Kutch region of Gujarat. While Mundra is not a major port, volumes at MPSEZ’s two container terminals are quite high (0.8m TEUs in FY09) as the port is among the top three container ports in the country. Further, MPSEZ is looking to expand its capacity over the next five years.

Striving to provide integrated logistics solutions MPSEZ has set up a subsidiary, Adani Logistics (ALL) which, besides providing container rail services, will be setting up CFS and ICD facilities across India. Accordingly, ALL has taken a Category 1 license (pan-India) for both domestic and exim operations. MPSEZ is positioning itself as a provider of end-to-end logistics services by servicing customers from plant to the port. Notably, ALL is trying to attract clients in the automotive industry, wherein ALL will take the cars from the factory till Mundra Port, wherein the cars will be loaded onto the ship utilizing the RoRo service at the port terminal.

Container rail and ICDs to enable MPSEZ to provide end-to-end solutions


Infrastructure – two ICDs and six rakes operational In order to provide integrated services to clients as also value-added services such as customs clearance, storage, palletization, plugging and monitoring of refrigerated containers, ALL has set up an ICD at Patli in the NCR and another at Kishengarh in Rajasthan. The ICDs enable ALL to consolidate cargo from various clients, which facilitates a faster turnaround time of rakes and higher utilization levels in both exim and domestic cargo.

ALL currently operates six rakes at Patli and Kishangarh, primarily servicing the Mundra port, in the exim sector. Depending on demand and return volumes, ALL also occasionally runs rakes in the domestic sector.

Going slow on expansion and business ramp-up Given the sluggish business conditions, ALL – in line with peers – has curtailed its capacity addition plans even though it has already acquired land across various locations in India for setting up ICDs/ CFSs. Till volumes pick up, ALL plans to focus on agri logistics and rail connectivity for various group requirements.

Financial details – ALL and ICPL

(Rs m) ALL ICPL* FY08 FY09 FY08 FY09 Share capital 511 511 1,240 1,470 Reserves - (218) - (63) Total Networth 511 292 1,240 1,408 Debt / liabilities 516 1,651 1,029 3,570 Others (3) (193) - (333) Total capital employed 1,024 1,750 2,268 4,645 Revenues 223 560 - 24 Profit / loss before tax (30) (189) - (62) Source: MPSEZ annual report, IDFC-SSKI research; ICPL* – the company which has the ICD assets. ICPL and ALL are to be merged in FY10

UNLISTED

Port/SEZ CFS Rail ICD CustomerPort/SEZ CFS Rail ICD Customer

DECEMBER 2009 61

IDFC - SSKI INDIA

Boxtrans (JM Baxi)

Boxtrans Logistics (Boxtrans) is a subsidiary of J.M. Baxi & Co. and United Liner Agencies of India Pvt. Ltd (ULA). J.M. Baxi has businesses in several shipping support service lines including a shipping agency, agency services for cruise and visiting naval ships, container transport management, port development, terminal management, international freight forwarding, project cargo, etc. ULA too has a shipping agency and provides services in the areas of stevedoring, ship chartering, freight forwarding (MTO), ownership & management of CFS and container terminals.

Category III license – focus on domestic business Boxtrans has taken a Category III license, which allows it to offer container rail services across India. As per its license, Boxtrans can run rakes to JNPT using any other route other than the NCR-JNPT route.

Boxtrans primarily focuses on domestic cargo movement as the management sees ample scope for a shift from road to rail. Accordingly, it runs services in areas such as Kolkata, Gujarat, Orissa, Vizag, NCR, etc. In the exim sector, Boxtrans provides connectivity to the Mundra port from NCR.

Currently using terminals on shared basis; plans to add more ICDs Boxtrans has its own terminals in Vizag and Durai (Rajasthan), while it utilizes CWC’s Loni terminal in NCR and IR terminals in other parts of the country. Boxtrans also utilizes the ICDs set up by Adani in Patli to run its rakes.

Going forward, Boxtrans plans to set up own rail terminals (ICDs/ CFSs) in Sonepat, Haryana (NCR – to be operational in 4-5 months), Chennai, Nagpur, Orissa, Ludhiana and Ahmedabad. The facilities will improve efficiencies at its rail operations and facilitate aggregation of cargo as well as hub-and-spoke services, which are extremely critical to draw volumes in the domestic segment.

Rake expansion on hold Like peers, Boxtrans has eschewed from adding rakes over the past year in the wake of the economic slowdown and continues to operate with 12 rakes. Boxtrans has four rakes on order, but will defer the delivery till volumes improve. Besides adding more ICDs to expand volumes, Boxtrans is also eyeing the automotive market and plans to acquire specialized containers that can rack more cars in a rake to create a niche for itself and grow volumes.

Rs2bn invested in container rail business so far Boxtrans has till date invested Rs2bn in the container rail business with Rs100m towards rail license fee, ~Rs1.5bn for rakes and containers, and the remaining ~Rs400 towards land and other infrastructure. The investment has been funded through a mix of debt (Rs2bn) and equity (Rs1bn). For further investments, Boxtrans will be looking at a mix of debt and equity, in the existing proportion. The equity fund raise will be done internally using the group’s free cash flows.

UNLISTED

DECEMBER 2009 62

IDFC - SSKI INDIA

Container Rail Road Services Pvt. Ltd (DPW) Background

DPW is one of the largest marine terminal operators in the world with 49 terminals and 12 new developments across 31 countries. Its dedicated, experienced and professional team of nearly 30,000 people serves customers in some of the most dynamic economies in the world. In 2008, DPW handled more than 46.8m TEUs (20-feet equivalent container units) across its portfolio from the Americas to Asia – an increase of 8% on 2007. With a pipeline of expansion and development projects in key growth markets including India, China and the Middle East, capacity is expected to rise to around 95m TEUs over the next 10 years. DPW has significant presence in India with terminals in Mundra, JNPT, Cochin, Vallarpadam, Kulpi, Vizag, etc. DPW handled ~4m TEUs in FY08 across its terminals in India.

Container Rail Road Services Private Ltd (CRRS) DPW has set up Container Rail Road Services Pvt. Ltd (CRRS) for its container rail operations. CRRS has taken a Category I license for pan-India services. DPW aims to provide end-to-end integrated logistics solutions in the exim segment as it already handles almost 4m TEUs at various ports. Container rail operations will enable DPW to connect the terminals at various ports to hinterland.

Seven operational rakes running from various ICDs in NCR Currently, DPW has seven rakes operational on the NCR-Mundra and NCR-JNPT routes. As can be seen in the exhibits below, CRRS has weekly rakes running from three locations in NCR to JNPT and Mundra ports, where DPW have captive volumes from the container terminal that it operates.

Currently, CRRS uses private ICDs or rail sidings to operate rakes in NCR, while it uses the rail siding at the ports to load and unload cargo.

CRRS current network and routes it operates on


Hinterland

Port

UNLISTED

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Weekly schedule of services in the exim segment

Services from To Trips per week Mundra Ludhiana (NCR) Thrice a week JNPT ACTL (NCR) Once week JNPT Ludhiana (NCR) Thrice a week Ludhiana (NCR) JNPT Thrice a week ACTL (NCR) JNPT Twice a week Daurai (NCR) Mundra Once a week Ludhiana (NCR) Mundra Once a week Ludhiana (NCR) ACTL (NCR) Once a week Ludhiana (NCR) Daurai (NCR) Once a week Source: Company

Going slow on expansion plans Considering the slowdown in the international trade and the decline in container volumes at ports, CRRS has been slow on scaling up operations. In the past one year, CRRS has not added a single rake or invested in ICD/ CFS till date and the company has been using terminals of other private operators.

CRRS’s investments in the container rail business have been limited to Rs1.5bn, incurred towards rail license, rakes, containers and some handling equipment.

DECEMBER 2009 64

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Central Warehousing Corporation (CWC)

Background Established in 1957, CWC is a premier warehousing agency in India providing logistics support to the agricultural sector. CWC is one of India’s largest public warehouse operators offering logistics services to a diverse group of clients. CWC operates 488 warehouses pan-India with a storage capacity of 10.7m tonnes across a wide basket of products ranging from agricultural produce to sophisticated industrial products.

Pan-India network of ICDs and warehouses CWC has developed an extensive infrastructure of 36 CFSs and ICDs across India over the past few decades. The CFSs/ ICDs offer composite services for containerised movement of export as well as import cargo. Apart from such CFS and ICD facilities, CWC has also developed rail side warehousing complexes across 22 locations. Such rail side warehousing complexes and a network of ICD/ CFS enable CWC to attract cargo, where aggregation can be done and total solutions, with value added services, can be provided to its customers.

A pan-India license CWC has taken a category I license, which allows it to operate pan-India on all routes and handle domestic as well as exim cargo. CWC utilizes its ICDs in the NCR, primarily Loni and Noli, for operating container trains on the exim route. CWC generates revenues by extending its ICDs to be used by other operators that do not have their own ICDs. Currently, 6-7 operators are utilizing CWC’s Loni ICD in NCR to consolidate cargo and load and unload rakes.

Runs rakes of other operators – no plans of adding rakes CWC has not yet acquired or placed orders for rakes and instead has leased four rakes from other private players. These rakes are primarily being run on the JNPT-Loni (NCR) route. The leased rake model limits CWC’s capital infusion into the business beyond the license fee as the company already has a sizeable base of ICDs operating across the country. Moreover, CWC does not plan to add any of its own rakes and is looking to collaborate with other players for leasing out further rakes and growing volumes.

UNLISTED

DECEMBER 2009 65

IDFC - SSKI INDIA

ETA Freight Star

Background of the ETA group ETA Engineering Pvt. Ltd (ETA) is a part of the US$5.4bn ETA-Ascon and Star Group (a Dubai-based group). ETA has well diversified activities over 16 broad industry verticals. Among the prominent verticals of the group are contracting, engineering, trading, shipping/ logistics, manufacturing and assembly, facilities management, real estate, healthcare, aviation, education, insurance, etc.

Pan-India license with eight rakes operational ETA has a pan-India license acquired for Rs500m, allowing the company to operate its rakes and offer services across India for exim and domestic cargo. ETA commenced container rail operations in November 2007 and currently operates seven rakes between Loni (CWC’s ICD), ACTL ICD and Dhapper and JNPT on the exim route. ETA provides a daily service between Loni and CWC in collaboration with other players. Apart from other domestic cargo, ETA is also focussed on a niche market of moving liquid cargo in containers such as vegetable oil, carbon black, MEG, etc, for which it has entered into long-term contracts of 1-3 years with clients.

Expanding the ICD network and fleet of rakes ETA plans to expand its fleet from seven rakes currently to 20 rakes over the next two years based on volume ramp-up. ETA is also setting up its own ICDs and CFSs (logistics parks) in NCR and Nagpur. In addition, ETA is looking to collaborate with other players to set up shared terminals.

Integrated services – a logical extension Integrated multimodal logistics, including rail operations, we believe, are a logical extension of ETA’s trading and shipping operations. The expansion of its own fleet will enable ETA to run daily services to JNPT as well as cater to other ports, while ICDs and logistics parks will facilitate provision of end-to-end solution on hub-and-spoke basis for domestic and exim customers.

Debt tied up; scouting for PE funds ETA has already tied up funds to expand its business – while debt worth Rs3.25bn has already been secured, equity amounting to Rs1bn has also been infused. ETA is currently looking for private equity funds to further expand and grow the scale of the business.

UNLISTED

DECEMBER 2009 66

IDFC - SSKI INDIA

Hind Terminals

Background Hind Terminals (HTPL) is a Private Limited company, incorporated in India under the Companies Act, 1956. The company is part of the Sharaf Group, a strong and well-known business conglomerate in Dubai with interests in business of shipping, logistics, collateral management, etc.

Category I license HTPL holds a pan-India license for container train operations and currently operates 10 container trains between NCR/ Ludhiana and Mundra & JNPT as also various other locations in India.

Developing ICDs / CFSs either on its own or through strategic alliances HTPL has developed a state-of-the-art Container Freight Station at Dronagiri, Nhava Sheva near JNPT Port over an area of 75 acres under Strategic Alliance Agreement with Central Warehousing Corporation (CWC). The said CFS is one of the largest at Nhava Sheva with a rail siding.

HTPL operates a Container Freight Station (CFS) at Mundra over an area of 40 acres belonging to Central Warehousing Corporation.

HTPL is in the process of developing ICDs in the NCR, at Palwal and other locations to capture sizeable traffic from the North India which is the hinterland for JN Port and Mundra Port. HTPL has already acquired land admeasuring ~100 acres for development of Palwal ICD.

HTPL has entered into a long-term Strategic Alliance Agreement with All Cargo Global Logistics for setting up, operating and managing CFSs and ICDs at Indore, Hyderabad, Nagpur and Bangalore as also such other locations as agreed by both the parties.

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India Infrastructure and Logistics Pvt Ltd (IIPL)

APL IndiaLinx is a joint venture between APL, container transportation arm of the NOL Group, and HIPE (Hindustan Infrastructure Projects & Engineering Pvt. Ltd). The two entities have come together to form India Infrastructure and Logistics Pvt. Ltd (IILPL), which carries out operations of APL’s IndiaLinx service. The service is run under the APL banner – a brand that is synonymous with transport and logistics services globally.

Extension of shipping services IIPL aims to provide reliable and intermodal services to its international customers from origin to destination, by providing an integrated and seamless service through coordination of both inland and ocean transportation. APL has taken a Category I license (pan-India) for Rs500m.

Operating on the exim route IIPL is currently running its container rail operations with nine rakes on the NCR-JNPT and Mundra routes, including two reefer services to JNPT and Mundra. IIPL is using CWC’s ICD at Loni, ACTL at Faridabad as also Adani’s Patli ICD to load and unload containers in NCR. The company has also started operations at Ludhiana (using GDL’s siding). Further, the company runs domestic reefer services between NCR and Mumbai.

Current services of IIPL in exim and domestic trade

Exim Frequency Domestic NCR (Loni, CWC) - JNPT 5 times a week Schedule service from Panipat to eastern, southern and central India NCR (Patli, Adani) - JNPT Once a week NCR (Loni, CWC) - Mundra Once a week NCR (Faridabad, ACTL) - JNPT Twice a week Source: Company website

Demand linked expansion Considering that 90-95% of IIPL’s volumes are in the exim segment, which has witnessed a marked slowdown due to sluggish international trade, IIPL has not added any rakes in the past year. Going forward, the company plans to go slow on rake addition, and would consider ramping up only when demand accelerates. Till such time, IIPL plans to continue sharing terminals with other operators. With volumes picking up, IIPL is in the process of setting up the Panipat terminal (land already acquired), which is likely to be operational by Q3CY10. Further, it plans to set up other ICDs across India. IIPL has already invested Rs1bn as its equity contribution, while the remaining Rs1.6bn of capital employed has been funded through debt (total capital employed of Rs2.6bn).

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InLogistics (Innovative B2B Logistics)

As the container rail sector was thrown open to private players, Bagadiya Brothers (P) Ltd, traditionally exporters of food grains and iron ore, were among the first ones to enter the business and set up Innovative B2B Logistic Solutions Pvt. Ltd for the purpose.

Category IV license with 12 rakes Inlogistics has taken a Category IV license, which allows the company to operate rakes across India except on the JNPT-NCR route. Inlogistics was the first private container operator to commence operations in November 2006 from Memari, West Bengal to Kakinada Port, Andhra Pradesh. With focus on the domestic route, Inlogistics has 15 rakes operational, of which three have been leased out to CWC for running on the NCR-JNPT route. Currently, Inlogistics runs rakes primarily on the east-north (steel) and west-east (marble) routes. Moreover, Inlogistics provides end-to-end logistics solutions, including last and first mile connectivity through road.

Setting up rail sidings for aggregation purposes Inlogistics currently runs its container rail operations from CWC’s ICD in NCR (Loni), some private rail sidings as well Indian Railways’ sidings. However, Inlogistics plans to have its own rail sidings across India to reduce the delivery time to customers and improve turnaround times of its rakes. Accordingly, Inlogistics has recently set up a siding in Kalamboli (near JNPT), and has leased land from CWC on long-term basis for the purpose. Inlogistics plans to add another 2-3 rail sidings in the northern and eastern parts of the country, where it generates higher volumes from the domestic segment.

Inlogistics basic infrastructure details

Particulars Numbers Rakes 15 - given on lease to CWC 3 - Operating on its own 12 Sidings - Use of private, rail sidings - own Kalamboli siding 1 - new sidings planned 3 Containers 1,200 Source: Company website

Domestic focus softens hit of slowdown; but rake addition on hold Inlogistics primarily runs on the domestic route with limited exposure to the exim route (through lease of rakes to CWC). Notably, the company’s focus on the domestic route has had mitigated the adverse impact of the economic slowdown as domestic volumes were largely resilient to the slowdown.

As mentioned earlier in the report, we believe there are enough volumes for all container rail operators, especially in the domestic market where penetration of both containers and rail movement is quite low. However, the shift of cargo from road to rail is likely to happen gradually as the market develops over a period of time.

Recently raised private equity funds Inlogistics has raised funds through a PE investor, India Value Fund, which has taken a majority stake in the business. The funds raised will enable Inlogistics to scale up the business. This, in turn, would enable aggregation and faster turnaround of rakes as also higher utilization levels. Currently, Inlogistics is making marginal losses and is close to break even. While the equity infusion would enable operational scale-up in the form of higher efficiencies and volumes, interest costs too are likely to reduce, which will drive profits over the longer term.

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Sical Multimodal And Rail Transport (SMART) SMART is a 100% subsidiary of Sical Infrastructure Assets (SIAL), which in turn is a 74% subsidiary of Sical Logistics. Sical Logistics is a provider of port-based bulk as well as containerized services besides having trucking and warehousing operations. Sical’s entry into the container rail business (a pan-India license acquired for Rs500m) is a step towards offering seamless multimodal operations to clients.

Three CFSs operational; collaborations for terminal access on other routes Through its group companies, SMART has access to three CFSs in Tuticorin, Chennai and Vizag. The CFSs give Sical access to port volumes and enable it to move rakes in the exim sector. Moreover, the company has entered into long-term collaborations with other terminal providers for terminal access on all the routes it operates. The rail sidings enable SMART to load and unload containers on to rakes as also for volume aggregation in both domestic and exim segments. Further, SMART has five rakes operational for movement of containers and it plans to ramp up to 13 rakes over the next 2-3 years.

Contracts are long-term in nature To ensure higher utilization and better turnaround time of its rakes, SMART prefers to enter into long-term contracts with clients. Accordingly, the company has entered into a long-term contract with Hindustan Copper, to which it provides complete multimodal solutions with last mile connectivity for transporting copper cathodes/ concentrates from Jharkhand to Rajasthan. SMART also provides last mile connectivity for finished products from Hindustan Copper’s factory near Mumbai. Considering the volumes from Hindustan Copper, two rakes have been deployed for the client. Besides, there are two rakes that move between the northern and southern states for glass, tiles, marbles, auto sector, etc. A fifth rake moves on the exim route servicing the Chennai port. Notably, Sical is one of the few players in the industry servicing the southern parts of India.

Total capital employed of Rs2.5bn SMART has so far employed a capital of Rs2.5bn in the business, funded through Rs1.1bn of equity and the remaining through debt. Expansion of rake fleet and infrastructure assets will be funded through debt and some equity infusion. In FY09, SMART had revenues of Rs365m and incurred losses of Rs83m. As volumes ramp up and turnaround time as also utilization levels improve, SMART is likely to achieve a turnaround.

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Other operators

Delhi Assam Roadways Delhi Assam Roadways Corporation (DARC) is a transport and logistics company in India providing various services such as bulk truck transportation, warehousing, project cargo services, etc. DARC, as a logistics service provider, aims to provide multi-modal transportation, for which it has taken a Category IV (Rs100m) license. Under this license, DARC can run container train operations to and from select Indian ports – Kandla, New Mangalore, Marmugao (on the west coast), Tuticorin, Haldia, Kolkata and Paradeep (on the east coast) for exim cargo as also all over India for domestic cargo (but restriction of operating on the NCR-JNPT route). Accordingly, DARC has set up a 100% subsidiary, Transrail Logistics, for its container rail operations. Currently, it has two rakes operational. For terminal access, it has entered into an agreement with Adani for using the latter’s Patli ICD.

Pipavav Rail Corporation Pipavav Railway Corporation (PRCL) was set up as a 50:50 joint venture by Indian Railways and Gujarat Pipavav Port (GPPL) to construct, maintain and operate a 271km-long broad gauge railway line connecting Pipavav port to Surendranagar junction of Western Railway in Gujarat. The Pipavav port is 54.8% owned by APM Terminals Management BV, the world’s third biggest container port operator. Entry of PRCL into the container rail business was to provide reliable services that connect the Pipavav port, which handles 0.2m TEUs to the hinterland. However, PRCL has till date not invested in the business through either rakes or rail sidings. As per the MCA, container rail operators were mandated to begin operations within three years of obtaining the license (January 2006). However, PRCL has not yet started operations and has currently received a 1-year extension on the deadline for the same. As per press releases, PRCL is unlikely to begin operations in the near term. Currently, connectivity to the port is being provided by Concor which runs a regular service to the port.

Krishak Bharati Cooperative Krishak Bharati Cooperative (Kribhco) is a cooperative society for manufacture of fertilizer. Kribhco was promoted by the Government of India, IFFCO, NCDC and other agricultural co-operative societies spread all over the country. Kribhco operates in the area of bio-fertilizers, urea and seeds. Its fertilizer complex is located at Hazira, Gujarat, seed plants at various locations in eight states and service centers called Krishak Bharati Seva Kendras at various places in the country. To service its captive volumes, Kribhco acquired a pan-India license of Rs500m in 2007. Kribhco had plans to run rakes in the Gujarat, Maharashtra and Madhya Pradesh regions. However, Kribhco is yet to start operations, for which it has another year as deadline as per the MCA.

Reliance Infrastructure Engineers Reliance Infrastructure Engineers Pvt. Ltd (RIEPL) is part of the Anil Dhirubhai Ambani Group (ADAG). RIEPL has taken a pan-India category I license for Rs500m in 2006. The company has not yet started operations and does not own any rakes or sidings. However, to keep the license, as per the MCA, it ran one rake in collaboration with BLR Logistics in February 2009 by leasing a rake from an existing operator.

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Analyst Sector/Industry/Coverage E-mail Tel. +91-22-5638 3300

Pathik Gandotra Head of Research; Financials, Strategy [email protected] 91-22-6638 3304 Shirish Rane Construction, Power, Cement [email protected] 91-22-6638 3313 Nikhil Vora FMCG, Media, Mid Caps, Education, Exchanges [email protected] 91-22-6638 3308 Ramnath S Automobiles, Auto ancillaries, Real Estate, Oil & Gas [email protected] 91-22-6638 3380 Nitin Agarwal Pharmaceuticals [email protected] 91-22-6638 3395 Chirag Shah Metals & Mining,Telecom, Pipes, Textiles [email protected] 91-22-6638 3306 Bhoomika Nair Logistics, Engineering [email protected] 91-22-6638 3337 Hitesh Shah IT Services [email protected] 91-22-6638 3358 Bhushan Gajaria Retailing, FMCG, Media, Mid Caps [email protected] 91-22-6638 3367 Salil Desai Construction, Power, Cement [email protected] 91-22-6638 3373 Ashish Shah Construction, Power, Cement, Telecom [email protected] 91-22-6638 3371 Probal Sen Oil & Gas [email protected] 91-22-6638 3238 Chinmaya Garg Financials [email protected] 91-22-6638 3325 Aniket Mhatre Automobiles, Auto ancillaries [email protected] 91-22-6638 3311 Ritesh Shah Pharmaceuticals, IT Services [email protected] 91-22-6638 3376 Saumil Mehta Metals, Pipes [email protected] 91-22-6638 3344 Vineet Chandak Real Estate [email protected] 91-22-6638 3231 Swati Nangalia Mid Caps, Media, Exchanges [email protected] 91-22-6638 3260 Sameer Bhise Strategy, Financials [email protected] 91-22-6638 3390 Nikhil Salvi Construction, Power, Cement [email protected] 91-22-6638 3239 Shweta Dewan Mid Caps, Education, FMCG [email protected] 91-22-6638 3290 Rupesh Sonawale Database Analyst [email protected] 91-22-6638 3382

Dharmesh Bhatt Technical Analyst [email protected] 91-22-6638 3392 Equity Sales/Dealing Designation E-mail Tel. +91-22-6638 3300

Naishadh Paleja MD, CEO [email protected] 91-22-6638 3211 Paresh Shah MD, Dealing [email protected] 91-22-6638 3341 Vishal Purohit MD, Sales [email protected] 91-22-6638 3212 Nikhil Gholani MD, Sales [email protected] 91-22-6638 3363 Sanjay Panicker Director, Sales [email protected] 91-22-6638 3368 V Navin Roy Director, Sales [email protected] 91-22-6638 3370 Suchit Sehgal AVP, Sales [email protected] 91-22-6638 3247 Pawan Sharma MD, Derivatives [email protected] 91-22-6638 3213 Jignesh Shah AVP, Derivatives [email protected] 91 22 6638 3321 Sunil Pandit Director, Sales trading [email protected] 91-22-6638 3299 Mukesh Chaturvedi SVP, Sales trading [email protected] 91-22-6638 3298 Viren Sompura VP, Sales trading [email protected] 91-22-6638 3277 Rajashekhar Hiremath VP, Sales trading [email protected] 91-22-6638 3243

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