LOGISTICS SECTOR UPDATE -
CENTRUM 2007
Research- Kotak DT -05.09.2007
Containerization -
Building global trade competitiveness
We recently attended the
Centrum 2007 conference held in Delhi
that was organized by the CII Institute of Logistics. The event was on the
logistics industry in India
and the container segment, in particular.
Almost all participants at the event were convinced that India could handle 20 mn TEUs by 2016, if not
earlier. If we add transshipment
containers, then India could
handle approximately 30 mn TEUs by 2016. In FY07, India handled 6
mn TEUs. Thus, we are likely to see four
to five fold growth in container traffic. This provides a huge opportunity for
container logistics service providers.
The event witnessed
all-round participation from Government officials like GK Pillai - Senior
Advisor, Transport, Planning Commission, VN Mathur, Member Traffic, Railways,
MS Rao, ED Planning, Ministry of Railways, Sanjeev Garg, ED projects,Rail Vikas
Nigam Ltd among others. Major industry players like Concor, Shipping Corporation
of India, Gateway Distriparks, TCI, Reliance Logistics, various other shipping
and logistics service providers and foreign players like Transcare Logistics also
attended the two-day summit.
The following are our
key takeaways from the summit:
Container traffic may
touch 30 mn TEUs by 2016
For the last five years,
India's exports have grown at a CAGR of 18.4% in
value terms. Imports have grown at a
CAGR of 21.6% in value terms. The share of containerized cargo to total
cargo is also growing at an increasing pace. The share of cargo that can be
containerised has also increased from 60% to 68%. With this, the container traffic has grown at CAGR of
15.8% in the last five years. In FY07,
India's
container traffic grew at 20% to 6 mn TEUs. That is commendable considering the
severe capacity constraints at Indian ports. Hence, projecting a CAGR of 15%,
going forward, we expect India
to handle 10 mn TEUs by 2011.
This would increase to 20 mn TEUs by 2016.
EVENT UPDATE
In terms of total port
traffic, for every transshipment container handled at a hub port, two more
handlings would be required at ports, one at the same hub and another at the
feeder port. India
has the potential to handle approximately 10 mn TEUs of transshipped
containers. Thus, the total works out to 30 mn TEUs by 2016. This is a five-fold jump in traffic of
containers to be handled at Indian ports by 2016. This leads to substantial
opportunities for service providers for handling these containers.
Penetration of
containerization
Currently, the containerized
cargo represents about 30% by value of India's external trade. Going
forward, this proportion is likely to grow as the general cargo gets more and
more containerized. Some of the commodities that India trades in containers include
engineering goods, agricultural commodities, textiles, readymade garments,
pharmaceuticals products, auto and electronics.
Currently, 68% of the cargo that can be containerized is
being containerized. With growing awareness of the benefits of containerization
we expect this to go up to the international standards of 75% to 80%. This
would lead to increased handling of containers and, thus, offer huge potential
for the container logistics service providers.
Connectivity to port, key
to evacuation - Rail
With GDP growth and
increasing penetration, the container traffic is set to explode in India. To
increase capacity at ports and improve connectivity to the port Rs.140 bn of
investments have been cleared. Out of these, Rs.110 bn are for berths and Rs.30
bn for port connectivity to be implemented by 2012.
The Tughlakabad-JNPT,
i.e., Delhi-Mumbai line is one of the most highly trafficked corridors in the
country. As compared to an average line capacity of 50 trains per day, it has
been handling over 67 trains per day operating at capacity utilization levels
of 135%. Several other sections are being operated at 160% utilisation levels.
Out of this, roughly 40
trains on this corridor are passenger trains leaving very little capacity for
freight trains. Also, it has lower priority compared to passenger trains. Considering this, the Government of India has
cleared the dedicated rail freight corridor. It will be operational
anywhere between 2012 and 2015 depending on the financing and execution of the
project. This would lead to a shift of containers from road to rail. At
present, 30% of the hinterland containers are moved by rail. The Railway
Ministry is planning to double this to 60% after dedicated rail freight corridors
become operational. Also, railways are the cheaper mode of transporting
containers over longer
distances as compared to road.
Inland Haulage costs for Delhi Container Traffic
to JNPT v/s other ports
Concor is the leading service provider of transportation for
containers by railways.
Recently, the Government
has allowed private players to operate container trains. A total of 15
companies have obtained the license to operate container trains.However, out of
them, only seven players have started operations. The rest have problems of
land acquisition to set up ICD and rolling stocks.However, as many as seven
players including Gateway Distriparks have tied up with Concor for the rolling
stock. According to Centrum 2007, this is a serious concern
because even after
allowing private players, in the real sense, Concor is the sole
source of the rolling stock in the medium-term.
Top ten Indian container
ports in FY07 (‘000 TEU)
Currently, about 40 container trains are operated per day
all over India. Out of this, over 25 trains are on the Delhi JNPT route. For
handling 20 mn TEUs, at 30% movement by rail and at 90 TEUs per train, we would
need around 190 trains per day. If we run double stack container trains then
this requirement could come down to 120 trains a day. This is a huge opportunity for the companies involved in the transportation
of containers by train.
Connectivity to port, key
to evacuation - Road
Apart from rail, the
road infrastructure has to be in place to improve connectivity to the port. We
need expressway connectivity to the port beyond just four laning of the
highways. Currently, trucks have to wait for hours on the roads connecting to
the ports. This is leading to
significant delay and cost escalations, thereby impacting the overall
efficiency of the ports.Four laning of roads would solve the problem in the
near term. However, if we have to plan to handle 20 mn TEUs by 2016 then we
need dedicated expressway connectivity to the port to handle the humungous
growth in container traffic.
Similarly, we need
proper planning for trailer parking, maintenance, facilities for drivers etc to
complement the roads and avoid congestion at the ports. Currently 70% of inland
containers move by road. This proportion
is likely to reduce to 40% by 2016 once the dedicated rail freight corridor
becomes fully operational. Thus, till then, the expressway connectivity to
the ports is extremely crucial to handle the growth in container traffic.
Developing ports on hub
and feeder strategy a must for India
The share of global
throughput of the top 20 container ports was 75.9% in 1970.It dropped to 49.6%
in 1980 due to proliferation of container ports. However, since then the share
of top-20 container ports has been rising steadily to reach 56.3% in 2006. Thus
it has shown a trend of concentration due to transshipment and scale economies
at bigger ports.To handle the humungous growth in container traffic to be
handled at Indian ports we need to develop ports based on hub and feeder
strategy. We need four to five hub ports with at least 16 meters draft to
handle larger mother vessels of 6000 to 8000 TEU capacity. Then, we need feeder
ports with relatively lower draft of 12 meters to carry the cargo from major
ports to feeder ports. This would, thereby,reduce the dependence on road and
rail connectivity. This would lead to faster evacuation of containers leading
to efficiency in the port operation.
In future, we may also
have ships which can handle even 12000-14000 TEUs. These would make only a few
calls at mega hub ports to/from where cargo movement would be transshipped and
feedering would take place through present age ships of 4000 TEU capacity.
Thus, ports would require infrastructure
facilities like wide berthing, high crane handling capacity, quicker and safe
loading and unloading capabilities and direct shift of containers to feeder
vessels.
The next generation will
be the Malaccamax ship, with 18000 TEUs of 200,000 DWT,
470 m long, 60 m wide,
and 16 m of draft, with more then 100 MW power for 25.5 knots. Container traffic and
transshipment at major Ports
India's handling of transshipment containers as a percentage
of total containers has steadily decreased from 5.9% in FY02 to 3.9% in FY06. This is primarily because
in the absence of a hub port in India, a majority of the country's containers are
currently transshipped through other ports like Colombo, Singapore and Dubai. Handling
these through India transshipment terminal would result in savings between
Rs.6000 and Rs.16000 per TEU for India exporters. About 50% of containers
exported through Indian ports are transshipped at some point prior to reaching
their overseas destination. Approximately, 30% of the containers are
transshipped in either Colombo or Singapore/Klang and another 5% in Dubai or
Salalah. About 50% of the container traffic is not transshipped and moves on
the same vessel to the final destination port. While 80% of the JNPT traffic is
direct, almost 87% of all other ports are through a hub. Of Indian containers transshipped in Singapore/Klang, Chennai and
Kolkata account for 68%, while for Colombo the eastern and southern ports
account for 87%.
Direct and Hub shipments
According to discussions
at Centrum 2007, on the west coast, JNPT looks the best option for making it a
hub port considering the investments that are being made to upgrade and expand
its operations. However, if we consider draft and evacuation possibilities then
Mundra Port seems a better option. On the east coast,Visakhapatnam is the most
viable port for hub operations as it has natural water depth of 20 metres and
is in the center of India's east coast.However,
Chennai Port possesses commercial advantage in terms of large investments being
planned at Chennai port. Also, Vallarpadam and Vizhinjam are possibilities
from the South.
Decrease in transshipment
containers due to inadequate facilities -JNPT looks the best option for a hub
port 50% of containers exported through Indian ports are transshipped
JNPT v/s other Asian
ports
JNPT, which is the
largest container port of India, has depth of only 12 metres. Colombo, on the
other hand, has a depth of 15 meters, which is proposed to be increased to 17
metres and eventually to 20 metres. JNPT currently handles vessels of up to
4000 TEUs compared to 8500 TEUs at Colombo. In 2006, JNPT handled 3.3 mn TEUs
whereas Colombo port handles 3.1 mn TEUs. This is despite handling a higher
volume of traffic than Colombo port.JNPT is constrained by its deficient draft
from offering cheaper and higher quality services, that is, higher frequency
and lower transit times. Other ports in the region like Singapore, Dubai, and
Port Klang etc. have drafts of at least 15 meters and can accommodate vessels
up to 11000 TEUs. Thus, we need massive investments in the port sector to
handle the multifold expected rise in container traffic.
Conclusion
At the end of the
summit, we believe growth in the Indian economy and increasing penetration of
containerization would lead to faster growth in the handling of containers in
the country. Currently, we handle about 6 mn TEUs. If we are to handle 30 mn
TEUs, it calls for huge growth in opportunities for logistics service providers.
Thus, we are positive on the overall
logistics scenario in the country.
The companies under our coverage that are likely to benefit
from the increased
handling of containers are Concor, Gateway Distriparks and
Allcargo Global Logistics.
We estimate Concor will
report EPS of Rs.126.7 and Rs.149.3 in FY08E and FY09E, respectively. At
Rs.2214, the stock trades at 14.8x FY09E earnings. We maintain BUY on
Concor with a price target of Rs.3000, which provides 36% upside potential.
We estimate Gateway
Distriparks will report EPS of Rs.8.2 and Rs.10.7 in FY08E and FY09E,
respectively. At Rs.132, the stock trades at 12.3x FY09E earnings. We maintain BUY
on GDL with a price target of Rs.180, which provides 37% upside potential.
We estimate Allcargo
Global Logistics will report EPS of Rs.56.5 and Rs.70.8 in CY07E and CY08E,
respectively. At Rs.889, the stock trades at 12.6x CY08E earnings. We maintain BUY
on Allcargo with a price target of Rs.1346, which provides 52% upside
potential.
Disclaimer- I do not hold any position in this stock and I
only use research reports to validate certain facts and do not follow Buy/Sell
recommendations by them without doing my homework.
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