Idfc Container Rail

Sector report
INDIA RESEARCH
December 2009 Logistics: Container rail

BSE Sensex: 16720
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.
Valuations
Bhoomika Nair
Company Price Mcap Reco. FY11E (x) Target Upside
bhoomika@idfcsski.com
91-22-6638 3337 (Rs) (Rs m) P/E EV/EBITDA price (Rs) (%)
Container Corporation 1,227 159,514 Outperformer 16.9 11.2 1,450 18.2
IDFC – SSKI Securities Ltd Gateway Distriparks 130 13,965 Outperformer 14.5 8.1 160 23.4
701-702 Tulsiani Chambers, Arshiya 188 11,040 Outperformer 12.3 8.5 250 33.0
7th Floor (East Wing), Prices as on 18 December 2009
Nariman Point,
Mumbai 400 021.
Fax: 91-22-2204 0282 “For Private Circulation only” “Important disclosures appear at the back of this report”
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 2
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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)
Companies Rakes operational Operational rail siding Planned rail sidings
Concor 218 59 terminals 3-4 IC Ds/Logistics parks
3 ICDs - Garhi (Delhi), Sanewal (Ludhiana),
Gateway Distriparks (GRFL) 18 Faridabad (NCR)
Kalamboli (Mumbai)
Strategic alliance with Allcargo & C WC at JNPT, New locations in strategic
Hind Terminals (MSC Group) 10
Mundra & NCR alliance with Allcargo
India Infrastructure Logistics Pvt
9 Tie ups with CFS/ ICD operators Panipat
Ltd (APL)
Emirates Trading Agency (ETA) 7 Tie ups with CFS/ ICD operators 2 owned sidings
CRRS (DPW) 7 Tie ups with CFS/ ICD operators NA
Arshiya international 6 Vizag; Tie ups with various private sidings Khurja (NCR); 5 others
Land acquired for more
Adani Logistics 5 Patli in Gurgaon (NCR) and Kishengargh, Rajasthan
sidings
3 CFs (Chennai, Tuticorin & Vizag); Tie up with CFS/
Sical Logistics 5 More sidings planned
ICD operators & private sidings
Central Warehousing Corp (CWC) - Has several ICDs and CFSs of it s own NA
Reliance Infrastructure Leasing - NA NA
Kribco - NA NA
Players in Rs100m license fee category (sector-specific routes)

Inlogistics (B2B) 12 Kalamboli (JNPT); Tie ups with CFS/ ICD operators 3 sidings planned
Boxtrans (JM Baxi and Co) 12 Vizag & Rajasthan; Tie ups with CFS/ ICD operators 5-6 sidings planned
Delhi Assam Roadway s Corp. 2 NA NA
Pipavav Rail Corporation (PRCL) - NA NA
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
DECEMBER 2009 3
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Enough freight volumes in the system…

Despite being cheaper India has a large freight market estimated at 3.1bn tonnes in volumes, which have
than road, IR estimated to been expanding (8% CAGR over the past three years) in line with the rapid
be handling only 30% of economic growth. Interestingly, only 30% of this cargo is estimated to be handled
India’s freight volumes
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

In the domestic market, The domestic segment is extremely fragmented with limited penetration of
container rail estimated to containerized rail movement, which is estimated to be 1% (~6m tonnes) currently.
have only 1% penetration 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
With estimated rake Total capacity in a month (TEUs) 450,000
capacity of 500 over next 3 Annual capacity (TEUs) 5,400,000
years, operators eying Average loading per container (tonnes) 18
5-6% of road freight Total capacity of rail operators (m tonnes) 97.2
volumes 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
Source: IDFC-SSKI Research
DECEMBER 2009 4
SSKI INDIA
End-to-end integrated services to drive volumes and shift to rail

Players need to ‘create the While target volumes of container rail operators appear to be low in comparison to
market’ by offering the total freight market, players face the imperative to ‘create the market’ – a time
innovative and efficient consuming process in our view. To attract volumes to the container rail segment,
solutions 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’
Regular & reliable

Integrated solutions Innovative solutions
services
• Timely delivery • Road bridging • Customised wagons or

• Scheduled services or • End to end services to containers for
as per requirement – provide first and last different cargo
daily / weekly, etc mile connectivity • Eg. customised
wagons for cars
• Reefer containers
Aggregation of cargo Value added services
• Aggregation of cargo to fill an entire • Customs clearance

rake load • Warehousing solutions
• Improves turnaround time of assets • Stuffing & De-stuffing
• Packaging & labelling, etc
Drivers for growth

Market creation Shift from in volumes
road to rail
Hub-and-spoke model can Last mile connectivity is the key differentiating factor between rail and road
plug the gap in terms of movement. In order to attract volumes, container operators need to provide
last mile connectivity 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
Players need to attain a To grow the container rail market and drive a shift in volumes from road to rail,
critical asset base to operators should possess the ability to provide reliable and cost-effective solutions.
attract volumes 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
DECEMBER 2009 5
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
Capital intensive business
Road related
Container handling Road related
Rakes Container handling Containers Rail/sidings/ICD infrastructure
Rakes equipment Containers Rail/sidings/ICD infrastructure
equipment - Trucks, etc
- Trucks, etc
Higher utilization and turnaround times – critical for profitability

Faster turnaround of rakes There is no set break-even level of utilization for a container rail operator as the
augments a player’s break-even point depends on the distance moved by a rake, tonnage, value-added
capacity to handle higher
services, realizations, etc. Break-even level, to some extent, is also dependent on the
volumes, and return loads
improve utilization levels 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

Rail sidings expedite ICDs/ Rail sidings play a critical role in attracting cargo volumes and achieving a
loading/ unloading of faster turnaround of rakes as also improved utilization levels for an operator. Rail
containers on to the rake
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.
DECEMBER 2009 6
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Exhibit 6: Sidings can significantly enhance turnaround times and thereby drive profitability
Aggregation &
consolidation of
cargo (improves
utilization levels)
Benefits Act as hub centers

Faster turnaround
times
of (operate on hub &
sidings spoke model)
Area to provide
value added
services
Long gestation business, but high returns over the longer term
With critical mass, players The container rail business is capital-intensive and requires a long gestation period
can generate returns of to build volumes. However, once a company achieves a level to attain economies of
15%+ which can be further
augmented 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
Blended turnaround
Rakes (no.) 40 Average time per trip (days) 6.0
time
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 Realization vary based
Total Capital Employed 8,860 Realization (Rs/TEU) 30,000 on tonnage and
distance; value added
Gearing (x) 1.5 services can enhance
Debt 5,316 Revenues (Rs m) 5,913 realization
Interest rate (%) 11 EBITDA (Rs m) 1,707
Depreciation rate (%) 5 PAT (Rs m) 577
RoE can improve

significantly with
faster turnaround
RoCE (%) 14.3 time and higher
RoE (%) 16.3 utilization levels
DECEMBER 2009 7
SSKI INDIA
Sensitivity analysis to turnaround time and utilization levels

A higher degree of To arrive at profitability of the business, we have assumed a base case of 4.6 trips
integrated services assures per month for an operator. In case the frequency of trips goes up to five a month,
customer stickiness even
at higher prices
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
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.
DECEMBER 2009 8
SSKI INDIA
CONCOR, ARSHIYA AND GDL ARE OUR BETS IN THE SECTOR

With funding and infrastructure in place, listed plays better placed
Our coverage stocks well Based on our interaction with various industry players and analysis of the industry,
placed to grow profitably 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

An unmatchable Concor is a dominant player in the container rail business with 95% market share
competitive edge in terms and dominance in the exim sector. Concor has created a large asset base over the
of infrastructure and years in terms of number of rakes, equipment, containers as also a pan-India
capital structure
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

Rail business has A recent entrant in the containerized rail segment, Arshiya holds a pan-India
achieved break-even and license. Having commenced operations in March 2009, Arshiya has six rakes
appears set to turn
profitable in FY11E 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.
DECEMBER 2009 9
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GDL – fund raising to aid turnaround in FY11E

Having achieved a critical GDL is among India’s largest private container rail operators with 18 rakes
asset base, GDL expected operational and plans to add another three in the next 2-3 months. GDL is the
to secure healthy volumes only private player with three operational rail sidings/ ICDs and another terminal
of 100,000 TEUs in FY10
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
Exhibit 10: Concor PER band
1600 Container Corporation 8.0 12.0 16.0 20.0
1200
800
400
0
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
DECEMBER 2009 10
SSKI INDIA
Exhibit 11: Arshiya PER band
400 Arshiya International 8.0 12.0 16.0 20.0
300
200
100
0
Jun-06
Jun-07
Jun-08
Jun-09
Mar-06
Mar-07
Mar-08
Mar-09
Sep-06
Dec-06
Sep-07
Dec-07
Sep-08
Dec-08
Sep-09
Dec-09
Exhibit 12: Gateway Distriparks PER band

Gateway Distriparks 8.0 12.0 16.0 20.0
240
180
120
60
0
Jun-05
Jun-06
Jun-07
Jun-08
Jun-09
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Sep-05
Dec-05
Sep-06
Dec-06
Sep-07
Dec-07
Sep-08
Dec-08
Sep-09
Dec-09
DECEMBER 2009 11
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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
Only 30% of the 3.1bn We estimate India’s total freight market at ~3.1bn tonnes, which has expanded at
tonnes freight estimated to an 8% CAGR over the past three years. According to industry sources, only ~30%
be handled by IR
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…

We expect strong traction India’s international trade (exim) has witnessed strong growth over the past few
in exim in the long term as years barring FY09 and FY10E, lacklustre years due to the global recession. While
the global economy exports have grown on the back of increased competitiveness of the manufacturing
bounces back
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$168bn in FY09 (9% CAGR), while over the longer
term by FY14E to double India’s exports of goods and services. Imports into India
are also set to grow, particularly of oil and capital goods.
DECEMBER 2009 12
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Exhibit 14: International trade has been growing at a strong pace over the past few years
(US$ m)
Exports Imports
300,000
225,000
150,000
75,000
0
FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09R
Source: RBI
…expected to drive 8% CAGR in port traffic…

9-10% CAGR seen in traffic Traffic at major Indian ports has registered 9-10% CAGR over the last 4-5 years,
at major Indian ports over led by strong international trade as well as improved port infrastructure. We expect
the last 4-5 years 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
With improving port Container penetration in India is extremely low, at ~54% in FY09, compared to
infrastructure, container the global average of >75%. This is attributable to the poor infrastructure at ports
penetration likely to rise 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
(%, yoy growth) (%)

Container penetration (as % of containerisable cargo)
30.0
Port volumes Containerisable cargo Container volumes 60.0 Global average
of 75%+
25.0
12% CAGR
45.0
20.0 over next 3
years
15.0
30.0
10.0
5.0
15.0
0.0
(5.0) 0.0
FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09
Source: Indian Ports Association; IDFC-SSKI Research
DECEMBER 2009 13
SSKI INDIA
30% of exim cargo handled by rail; domestic penetration very low

Penetration of Of the 6.8m TEUs handled at the major ports for international trade in FY09, only
containerized cargo in 30%, or ~2m TEUs, were handled by the railways (27%, or 1.85m TEUs, by
domestic sector abysmally Concor). The remaining 4.8m TEUs of cargo was moved via roads. Statistics in the
low at 1-2%
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 gives Containerization has brought about revolutionary changes in the concept of
flexibility in movement of general cargo handling, and related shipping and port activities. With economies of
assorted cargo, in
minimum units
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

Speedy inter-
model
transports
Low handling Low insurance

costs costs
Benefits of
containerisation
Reduced
Low packing pilferage &
costs breakage
DECEMBER 2009 14
SSKI INDIA
Transportation via rail is cheaper than by road

Over a distance of Movement of cargo by rail is cheaper than that by road over longer distances,
1,000km, freight costs are mainly owing to economies of scale offered by the former. Our analysis reveals that
lower 20-25% for cargo over a distance of 1,000km, freight costs are lower 20-25% for cargo transported
transported via rail route
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
Rail is also a safer mode of Container rail operators (as well as the IR) charge clients on per container basis –
transport vs roads 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
Background
• Distance – 900 km
• Movement required - 4,000 MT per week
Road Rail
• Average Trailer Turn Around Time for Circuit – 7 • Average Rake Turn Around Time for Circuit – 4
days @ speed of 16km/hour days @ speed of 30km/hour
• Average carrying capacity /trailer – 27 MT vs • Average carrying capacity/ rake – 2,430 tonnes
• Trailers required for evacuation/week – 150 nos • Rakes required for evacuation/ week – 1 rake
• Cost per tonne carried on Trailer – Rs1,900 • 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
Source: Arshiya International corporate presentation
DECEMBER 2009 15
SSKI INDIA
…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
IR’s share vs roads The IR’s share vis-à-vis roads has fallen sharply from ~89% in 1950s to 30% in
sharply down from ~89% 2008, despite rail being a faster and more cost-effective medium of cargo
in 1950s to 30% in 2008 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

IR’s end-to-end movement In the early 1980s, the IR changed its policy of ‘yard-to-yard’ movement of rakes (a
policy, with a full rake of train load of wagons) to ‘end to end’ movement of rakes. Earlier, a customer could
traffic by client, has
offer traffic as a wagon load. Such loaded wagons would be brought to the nearest
reduced flexibility –leading
to loss of market share 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

IR focuses primarily on Movement of freight accounts for nearly two-third of IR’s revenues. It broadly
bulk traffic movement 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.
DECEMBER 2009 16
SSKI INDIA
Exhibit 18: Cargo break-up handled by Indian Railways – focus largely on bulk cargo
2008–10 (BE)
(m tonnes) 2005–06 2006–07 2007–082008–09 (RE) 2008–10
(BE) Other goods
Coal 294,250 313,330 336,830 373,750 403,530 16%
Raw material & POL
finished goods for 4% Coal
Fertilisers 46%
steel plants 69,090 74,260 80,580 81,710 86,430
5%
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
Foodgrain 41,640 41,840 38,230 34,150 33,480 4%
Fertilisers 32,652 34,260 35,830 43,330 43,250 Cement
POL 33,454 31,690 35,880 38,230 39,160 10% Iron ore for Raw material &
Other goods 93,000 120,400 133,810 145,780 143,650 exports finished goods
Total 666,510 727,750 793,890 850,000 882,000 5% for steel plants
10%
% yoy growth 10.7 9.2 9.1 7.1 3.8
Source: Rail budget documents, IDFC-SSKI Research
Concor – created to address the need for aggregation of cargo

Concor has had limited
With IR’s focus on bulk cargo and limited servicing to small part wagon load
focus on the domestic cargo, IR set up Concor in 1988 to service the small cargo load (part rake or wagon
segment 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

Once the targeted capacity Container rail operators, including Concor, are targeting a cumulative fleet of ~500
of 500 rakes is operational, rakes in another 3-4 years. If we were to assume five round trips in a month at
operators will be able to
100% utilization, the total capacity of container rail operators would be 4.5m
handle 6% of road freight
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.
DECEMBER 2009 17
SSKI INDIA
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
Total road freight in India (m tonnes) 1,726
‘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:
Aggregation facilities and Market creation: Though rail is cheaper than road as a mode of transportation, the
identification of right shift from rail to road is unlikely to happen immediately and will be a gradual
markets to help convert process as operators prove the efficacy of their services to potential clients.
potential into demand
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.
Container rail operators Offer end-to-end integrated services: Last mile connectivity is the key
need to operate on a hub- differentiating factor between rail and road movement. In order to attract volumes,
and-spoke model
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.
DECEMBER 2009 18
SSKI INDIA
Exhibit 20: Key growth drivers for volumes
Regular & reliable

Integrated solutions Innovative solutions
services
• Timely delivery • Road bridging • Customised wagons or

• Scheduled services or • End to end services to containers for
as per requirement – provide first and last different cargo
daily / weekly, etc mile connectivity • Eg. customised
wagons for cars
• Reefer containers
Aggregation of cargo Value added services
• Aggregation of cargo to fill an entire • Customs clearance

rake load • Warehousing solutions
• Improves turnaround time of assets • Stuffing & De-stuffing
• Packaging & labelling, etc
Drivers for growth

Market creation Shift from in volumes
road to rail
DECEMBER 2009 19
SSKI INDIA
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)
DECEMBER 2009 20
SSKI INDIA
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
Owned rail sidings enable

The investment in rail sidings (terminals) is extremely essential for a container rail
a player to offer services operator. Rail terminals are required as a point to load and unload rakes with
like customs clearance, containers. Moreover, the yard area around the rail siding can be used for stuffing
packaging, storage, etc 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

A hub-and-spoke model Considering that volumes are spread out and operators are likely to service clusters
can reduce empty running of clients, a hub-and-spoke model can reduce empty running of a rake. The
of rakes 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.
DECEMBER 2009 21
SSKI INDIA
Building rail sidings is a challenge

Land availability, cost and As discussed earlier, having rail sidings at strategic locations is extremely critical for
approvals from IR are key a container rail operator to attract volumes. However, setting up rail sidings with
issues in creating ICDs 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

While permission for To address the issues faced by private rail operators for setting up sidings as areas of
private operators to use consolidation, IR (in its recent budget) proposed to open up the usage of unused
IR’s sidings is a welcome
move…
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

…it is fraught with issues
While use of a rail siding may provide immediate relief to container rail operators
such as lack of space for by facilitating a centre for aggregation, there are a few perils associated with using
loading/ unloading, common user facilities. Some of them are:
aggregation/
disaggregation, etc 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

Steps taken by IR to ease Availability of rakes was a big concern at the time of opening up of the sector for
wheel sets and axles private participation with non-availability of wheel sets and axles being the key
availability; approval hindrance. However, IR has since then identified more vendors for wheel sets and
process expedited and
advance orders placed
axles as also accelerated the approval process. Moreover, wagon manufacturers
for wagons 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.
DECEMBER 2009 22
SSKI INDIA
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
Haulage charges paid to IR IR charges haulage rates to container operators on per TEU rather than per tonne
a key component of fixed basis for providing a locomotive and moving a rake from one destination to
costs for operators
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
Higher utilization and return loads key to profitability

Operators need to reduce As IR charges for an entire rake, container rail operators require higher utilization
empty running to make levels and return loads to cover the cost of haulage, which forms a significant part
higher profits 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.
DECEMBER 2009 23
SSKI INDIA
Higher turnaround of assets results in better profitability

With faster turnaround of As discussed earlier, the container rail business is extremely capital intensive with
rakes, and thereby higher hefty investments required for creating the infrastructure of rakes, terminals,
capacity, an operator can containers, etc. Consequently, if an operator can turnaround rakes faster and
derive material operating thereby increase its capacity to handle volumes, the operator can derive significant
leverage benefits
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
Value added
services
Higher
profitability
Faster Return loads &

turnaround higher
utilization
Average turnaround time at 4-5 trips per month for a rake

Rake capacity can Based on our discussions with various container rail operators, we estimate an
increase or decrease average turnaround time per rake of 3-4 trips (to and fro) per month in the
based on the turnaround domestic segment, and 7-8 trips in the exim segment. These turnaround times can
time of the rake 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
DECEMBER 2009 24
SSKI INDIA
Mechanical testing – mars turnaround times of a rake

Mechanical testing of As per IR and RDSO norms, each rake is required to undergo mechanical testing
rakes, if available at more from a safety standpoint, for which IR has designated mechanical testing centers
sidings, can improve across the country. Mechanical testing is required to be done after a rake has run
industry turnaround times 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

Return volumes are largely In the exim business, a balance between export and import volumes ensures return
assured on exim routes… 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

…and thus turnaround As exim cargo offers adequate volumes in both directions, rakes typically do not
times as also margins have to wait for containers to fill up. This substantially improves the turnaround
are higher
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.
DECEMBER 2009 25
SSKI INDIA
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
Exim Domestic
• Limited terminal handling revenues due to no

• Revenues on terminal handling due requirement of customs clearances
Terminal revenues
to custom clearances, etc • Can be enhanced by offering value added services of
warehousing, packaging, etc
• Need to find return loads on same routes – results in
• Return loads is typically ba lanced
higher empty running
out due to ba lance of trade between
Return loads imports and exports • Empty running can be reduced by operating on routes
with return loads and long term contracts with
• Lower empty running
clients
• Adequate volumes ready to be • Limited volumes impacts turnaround time of rake

Turnaround time moved, results in faster turnaround
• Can be improved by consolidation of cargo
time
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.
Scaled-up rail container The container rail business is extremely capital intensive and, hence, has a long
operations can generate gestation period. Once operations are scaled up (higher volumes and economies of
15%+ returns driven by
economies of scale
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.
DECEMBER 2009 26
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
Realizations linked to
tonnage and distance as Cost of setting up 4 ICDs 3,000 Utilization (%) 90
also level of value add 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
Realization vary based on tonnage
Interest rate (%) 11 and distance; value added services
Depreciation rate (%) 5 can enhance realizations
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 RoE can improve 679
significantly if
Tax turnaround time is 102
Tax rate (%) faster and utilization 15.0%
PAT levels improve 577
ROCE (%) 14.3%

ROE (%) 16.3%
Sensitivity analysis to turnaround time and utilization levels

Higher value-add and To arrive at profitability of the business, we have assumed a base case of 4.6 trips
integrated solutions per month for an operator. In case the frequency of trips goes up to five a month,
ensure client stickiness the average profits would increase by 20%. Similarly, profits are highly sensitive to
even at higher prices
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.
DECEMBER 2009 27
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
Likely consolidation in the industry

The economic slowdown As discussed earlier, container rail is a long gestation and extremely capital-
has tested a player’s intensive business. Consequently, we believe players with deep pockets – and
ability to stoke expansion 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)
Congestion for Exim container traffic is largely serviced through the western ports of JNPT,
connectivity to western Mundra, Kandla and Pipavav, which cumulatively handle ~70% of the total
ports to impact turnaround container traffic at Indian ports. Given this, exim container rakes are operated
of rakes on the exim route
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)

Operators may have to Erratic increase in haulage charges: The concession agreement between the IR
absorb the increase in and container rail operators does not specify any schedule for hike in haulage rates.
haulage rates till it is The rate increase by IR can be any time and as many times during a year, with no
passed on
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.
DECEMBER 2009 28
SSKI INDIA
Congested routes lead to

No turnaround time guarantees: Once an operator loads its rake with containers,
lower turnaround times 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.
With increasing freight Absence of a regulator: Currently, IR dons the hat of both the vendor and
handling capacity and regulator, and resolves, on an ad-hoc basis, issues pertaining to the type of cargo
scope of services, a third- handled, loss of cargo in transit, turnaround time by the IR, stabling, haulage rate
party regulator required to
hikes, etc. Thus, in case of a dispute between the IR and a container rail operator,
mediate disputes
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.
DECEMBER 2009 29
SSKI INDIA
COMPANIES
DECEMBER 2009 30
IDFC - SSKI INDIA
Company update
Rs188
Arshiya International OUTPERFORMER
Integrated opportunity Mkt Cap: Rs11bn; US$236m
21 December 2009
Arshiya International (Arshiya) straddles the entire logistics services supply
BSE Sensex: 16720 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
Stock data solutions through container rail movement, for which it has strategically
Reuters Code ARTC.BO
entered into long-term contracts with clients to secure assured volumes. Such
Bloomberg ARST IN assured volumes would enable higher utilization and thereby drive profitability
1-yr high/low (Rs) 194/43 of the rail operations. At 12.3xFY11E earnings, valuations appear to be
1-yr avg daily volumes (m) 0.05 extremely attractive in view of the 67% earnings growth in FY11E. Reiterate
Free Float (%) 59.1
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
Price performance facilitate seamless logistics management across geographies and transport modes.
240 Arshiya International Sensex 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,
180
which will act as a trading and warehousing hub for exim cargo.
120
60 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
Dec-08
Feb-09
Oct-09
Dec-09
Apr-09
Jun-09
Aug-09
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.
Performance (%)
Presence across the entire logistics chain; Outperformer: Arshiya’s integrated
3-mth 6-mth 1-yr 3-yr
Arshiya 24.3 72.8 129.2 100.4
solutions comprising freight forwarding, containerized rail and FTWZ logistics
Sensex (0.1) 17.2 65.9 21.8 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 FY12E
Net 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
Bhoomika Nair
EV/ EBITDA (x) 19.5 15.3 15.9 8.5 5.4
bhoomika@idfcsski.com
RoE (%) 15.2 11.8 8.4 12.3 16.2
91-22-66 38 3337
RoCE (%) 15.4 11.2 7.3 10.9 16.2
Prices as on 18 December 2009
DECEMBER 2009 31
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
Freight forwarding & Supply chain

IT solutions (Cyberlog)
project logistics management
Arshiya‘s Integrated Logistic Solutions
Free trade
Distriparks (ICD/Rail
warehousing zones Container rail
Sidings)
(FTWZ)
Source: Company, IDFC-SSKI Research
DECEMBER 2009 32
IDFC - SSKI INDIA
Capabilities in the fast growing project logistics – a key strength

With limited competition, Given that project logistics is a highly complex solution involving transportation of
integrated project logistics over-dimensional cargo, only a handful of players operate in this segment. This
businesses fetch
high margins
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 has realized net Arshiya offers seamless logistics solutions through its proprietary IT solution – an
income of Rs370m from integrated supply chain management software solution. The completely integrated
selling Cyberlog, which application facilitates seamless logistics management of demand fulfillment across
will continue to generate all geographies and transport modes, thereby reducing costs, stock levels, and cycle
annuity income
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

The new concept of FTWZ Free Trade Warehousing Zones (FTWZ) are proposed to be developed along the
to boost business lines of a Special Economic Zone (SEZ), wherein the area under development
prospects for Arshiya in would be classified as a deemed foreign territory, and the unit operating within the
the coming years
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.
DECEMBER 2009 33
IDFC - SSKI INDIA
Exhibit 2: Arshiya’s planned FTWZs at strategic locations to be rail linked
40% of India’s
manufacturing
done here (Phase 1)
Port that processes

62% of India’s
container freight
traffic (Phase 1)
Source: Company
First FTWZ at JNPT to be operational in Q1FY11

Arshiya is in advance
Arshiya has commenced construction on its first FTWZ. The work has been
stages of finalizing awarded to L&T and Tata Blue Scope for construction of the warehouses, which
contracts with potential we expect to start generating revenues from Q1FY11. The JNPT FTWZ is likely
unit holders within the to have three (aggregating 450,000 sq. ft) of the 16 planned warehouses to be
JNPT FTWZ
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

For Delhi FTWZ, approvals The Delhi FTWZ at Khurja is progressing with a lag of 3-4 months to the JNPT
have been received and FTWZ. The approvals have been received, while initial construction work for
initial construction work leveling and boundary wall is ongoing. Once designing work is finalized for the
undertaken 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).
DECEMBER 2009 34
IDFC - SSKI INDIA
Other FTWZs to be operational in 3-4 years

After JNPT and Delhi, Arshiya is looking to expand the current FTWZs at JNPT and Khurja as also set
other FTWZs to be rolled up FTWZs at other locations such as Nagpur (for which it has already acquired
out in central, southern land), and southern and eastern India. We believe the other FTWZs are likely to
and eastern India 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 currently Arshiya has entered the container rail space by taking a license for pan-India
operating rail business operations. Entry into containerized rail movement will enable Arshiya to provide
with six rakes 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

To secure volumes, Being a late entrant into the space, Arshiya has the benefit of knowing beforehand
Arshiya has entered into the challenges faced by other operators in terms of profitability. Accordingly,
long-term agreements with Arshiya has entered into long-term contracts with clients on a take or pay basis –
Vedanta, Mitsubishi, which compensates for empty running or lower utilization levels. At its end,
Essar, etc
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.
DECEMBER 2009 35
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
To complement its rake
fleet, Arshiya setting up and offloading cargo. Arshiya has developed one own rail siding in Vizag to handle
own sidings 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
Rail operations have
performed well in H1FY10; various steps to reduce dependence on utilization levels and ensure a quicker
expected to turn profitable turnaround by offering integrated logistics solutions, entering into long-term
with a fleet of 15-20 rakes contracts, etc. The strategy has worked in favour of Arshiya as despite FY10 being
in FY11
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
Long term
contracts
Sidings planned;
Return loads
one already
tied in
operational
Drivers for rail

profitability
Integrated
services IT visibility
Customised
solutions
DECEMBER 2009 36
IDFC - SSKI INDIA
FINANCIALS & VIEW

Expect 35% CAGR in revenues over FY09-12
Though revenues could be After flat revenues in FY09, Arshiya could see lower realizations in FY10E as it
flat in FY10, we expect passes on the lower freight charges to clients. However, we believe freight rates
robust 65% revenue
growth in FY11
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
(Rs m)
Core logistics JNPT FTWZ Delhi FTWZ RAIL
14,000
10,500
7,000
3,500
0
FY07 FY08E FY09E FY10E FY11E FY12E
Overall margins to expand with entry into high-margin business…

We expect margins to Arshiya’s value-added service offerings have enabled deeper penetration of clients.
improve to ~25% in FY11 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
35
30
25
20
15
10
FY07 FY08 FY09 FY10E FY11E FY12E
DECEMBER 2009 37
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
With various projects in
execution mode, Arshiya projects (excluding Nagpur) as well as to ramp up rail operations. Accordingly,
to incur capex of Rs19bn Arshiya will raise project specific debt of Rs12.5bn, while the remaining capex will
over FY10-12E 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

Adjusted net profit (Rs m - LHS) EPS growth (% - RHS)
1,600 120
1,200 85
800 50
400 15
0 -20
Return ratios to improve as projects start generating returns

Ramp-up of new projects Fund raising in FY07 and capex on FTWZ and rail operations have led to muted
to drive return ratios 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
(%) RoE ROCE
35
28
21
14
0
DECEMBER 2009 38
IDFC - SSKI INDIA
Attractive valuations; maintain Outperformer

Buy with a price target of Arshiya has a strong competitive advantage in its ability to provide integrated
Rs250 per share 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.
DECEMBER 2009 39
IDFC - SSKI INDIA
Earnings model Key ratios

Year to 31 March FY08 FY09 FY10E FY11E FY12E Year to 31 March FY08 FY09 FY10E FY11E FY12E
Net sales 4,012 5,005 4,846 7,941 12,299 EBITDA margin (%) 12.9 15.2 17.0 24.8 31.7
% growth 115.3 24.8 (3.2) 63.9 54.9 EBIT margin (%) 11.9 13.8 14.3 19.4 25.0
Operating expenses 3,494 4,243 4,021 5,972 8,400 PAT margin (%) 11.4 12.9 11.1 11.3 11.1
EBITDA 517 762 826 1,970 3,900 RoE (%) 15.2 11.8 8.4 12.3 16.2
% change 135.5 47.2 8.4 138.6 98.0 RoCE (%) 15.4 11.2 7.3 10.9 16.2
Other income 63 88 30 40 20 Gearing (x) 0.0 0.2 0.5 1.0 1.2
Net interest (9) (14) (96) (492) (1,352)
Depreciation 42 70 134 431 830
Pre-tax profit 529 765 625 1,087 1,737 Valuations
Deferred tax (3) (2) - - -
Current tax 77 122 94 190 347
Year to 31 March FY08 FY09 FY10E FY11E FY12E
Profit after tax 456 645 531 897 1,390 Reported EPS (Rs) 7.7 11.1 15.5 15.3 23.3
Minorities 2 2 8 3 (20) Adj. EPS (Rs) 7.8 11.0 9.2 15.3 23.3
Non-recurring items (3) 8 370 - - PE (x) 24.1 17.1 20.5 12.3 8.1
Net profit after Price/ Book (x) 2.2 1.8 1.6 1.4 1.2
non-recurring items 454 654 909 900 1,370 EV/ Net sales (x) 2.5 2.3 2.7 2.1 1.7
% change 160.0 44.2 39.0 (1.1) 52.2 EV/ EBITDA (x) 19.5 15.3 15.9 8.5 5.4
Balance sheet Drivers for rail profitability
As on 31 March FY08 FY09 FY10E FY11E FY12E Long term

Paid-up capital 114 118 118 118 118 contracts
Preference share capital - - - - -
Sidings planned;
Reserves & surplus 4,911 5,855 6,764 7,664 9,034 Return loads
one already
tied in
Total shareholders' equity 5,025 5,972 6,882 7,782 9,151 operational
Total current liabilities 498 579 532 818 1,177
Total debt 17 1,296 3,497 7,567 10,879 Drivers for rail
profitability
Other non-current liabilities 22 30 1,222 1,219 1,239
Total liabilities 536 1,905 5,251 9,604 13,295 Integrated
Total equity & liabilities 5,562 7,877 12,133 17,385 22,446 services IT visibility
Net fixed assets 2,173 5,476 8,937 12,632 17,291
Investments 1,337 0 - - - Customised
Total current assets 2,048 2,338 3,196 4,753 5,155
solutions
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
Shareholding pattern
Public &
Cash flow statement Others
14.8%
Foreign
35.0%
Pre-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) Institution
Total tax paid (77) (122) (94) (190) (347) 1.5%
Ext ord. items & others (34) 16 1,562 (3) 20 Promoters
Operating cash inflow 64 194 2,133 464 1,155 40.9% Non Promoter
Capital expenditure (1,851) (3,303) (3,461) (3,696) (4,658) Corporate Holding
Free cash flow (a+b) (1,788) (3,109) (1,328) (3,232) (3,503) 7.8%
Chg in investments (1,337) 1,337 0 - - As of September 2009
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)
DECEMBER 2009 40
IDFC - SSKI INDIA
Company update
Rs1227
Container Corp. OUTPERFORMER
Power of precedence Mkt Cap: Rs159.5bn; US$3.4bn
21 December 2009
Container Corporation of India (Concor) has acquired an unmatchable
BSE Sensex: 16720 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
Stock data the key beneficiary of the rising container volumes over the next 2-3 years.
Reuters Code CCRI.BO
Given the high earnings visibility and superior return ratios, we reiterate
Bloomberg CCRI IN Outperformer on the stock at current valuations of 16.9x FY11E earnings,
1-yr high/low (Rs) 1355 / 594 and set a price target of Rs1,450.
1-yr avg daily volumes (m) 0.07
Free Float (%) 36.9 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
Price performance
Container Corporation of India Sensex
effectively. Concor is also entering into strategic alliances to tie in long-term
210
volumes and limit the impact of competition. Over the next 2-3 years, we do
175
not see new players making a material dent in Concor’s dominance.
140
105
Volumes expected to pick up from H2FY10: Slack international and domestic
trade had impacted cargo movement, and thereby Concor’s volumes, in
70
H2FY09 as also H1FY10. However, we expect volumes to pick up sharply in
Dec-08
Jan-09
Feb-09
Mar-09
Oct-09
Nov-09
Dec-09
Apr-09
May-09
Jun-09
Jul-09
Aug-09
Sep-09
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.
Performance (%)
3-mth 6-mth 1-yr 3-yr High earnings visibility; Outperformer: Concor stands to be the key
Concor 5.4 31.3 94.4 16.4 beneficiary of the rising industry volumes. As volumes pick up and empty
Sensex (0.1) 17.2 65.9 21.8
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
Net 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
Bhoomika Nair Price/Book (x) 5.0 4.2 3.6 3.1 2.7
bhoomika@idfcsski.com EV/EBITDA (x) 16.0 15.0 13.0 11.2 9.1
91-22-66 38 3337 RoE (%) 25.8 22.8 20.7 19.9 20.6
RoCE (%) 25.5 22.3 21.3 20.9 21.4
DECEMBER 2009 41
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 has been the Concor, owned 63% by the Government of India, commenced operations in 1989
pioneer in India to by taking over existing terminals of the Indian Railways (IR). The IR established
undertake specialized
containerization activities
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
Large fleet
(218 rakes)
A large fleet of rakes, pan-

India terminal network,
depreciated assets and
Pan India
high cash on books are Cash balance Competitive
network
Concor’s key strengths (Rs20bn) strengths (59 terminals)
Depreciated
assets
DECEMBER 2009 42
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.
Concor’s huge network of

A pan-India network: Concor has a pan-India network of 59 terminals, which
59 terminals enables it to enables the company to aggregate volumes across the country as also provide value-
aggregate volumes pan- added services such as customs clearance, storage, stuffing, de-stuffing, etc. The pan-
India and offer value-add 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

Strategic focus on Concor has tied up with many shipping lines for warehousing and terminal facilities
securing volumes to help to capitalize on the growing volumes. Moreover, Concor has a 26% stake in the
maintain dominance 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

While import volumes Concor took a hit on exim volumes (accounting for 80% of total volumes) in FY09
have picked up sharply, and H1FY10, led by sluggish international trade and a drop in port traffic. However,
export volumes too have volumes have stabilized from March 2009 onwards, as import volumes have picked
started to improve 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
DECEMBER 2009 43
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

550,000 Exim (TEUs - LHS) % growth (RHS)
30.0
475,000 15.0
400,000 0.0
325,000 -15.0
250,000 -30.0
1QFY06
2QFY06
3QFY06
4QFY06
1QFY07
2QFY07
3QFY07
4QFY07
1QFY08
2QFY08
3QFY08
4QFY08
1QFY09
2QFY09
3QFY09
4QFY09
1QFY10
2QFY10
3QFY10E
4QFY10E
Efforts to balance import and export volumes

In view of the strong growth in import volumes and the trade imbalance (mismatch
Lower empty running and
cost-cutting initiatives to between exports and imports), pendencies at JNPT and other ports had led to higher
aid margin expansion in empty running for Concor (18% in Q1FY10). With improving export volumes,
exim segment 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
We expect a 7% CAGR in
Concor’s domestic typically higher and return volumes have been easier to procure in this segment.
volumes over FY09-12 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.
DECEMBER 2009 44
IDFC - SSKI INDIA
Exhibit 3: Domestic volumes have been relatively more resilient to the economic downturn
Domestic (TEUs - LHS) % growth (RHS)
140,000 50.0
117,500 32.5
95,000 15.0
72,500 -2.5
50,000 -20.0
3QFY10E
4QFY10E
1QFY06
2QFY06
3QFY06
4QFY06
1QFY07
2QFY07
3QFY07
4QFY07
1QFY08
2QFY08
3QFY08
4QFY08
1QFY09
2QFY09
3QFY09
4QFY09
1QFY10
2QFY10
Operating margins to remain range-bound

We expect Concor’s margins to remain stable within a range of 27-28% over FY09-
Despite escalating
competition, we expect 12, depending on the mix of volumes and the quantum of empty running. Concor is
Concor’s margins to taking various steps (higher tariffs on import volumes, hike in terminal charges, etc)
remain stable at 27-28% to ensure that margins are not impacted despite lower exim volumes and the trade
over FY09-12
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
30.0
25.0
20.0
15.0
10.0
FY06 FY07 FY08 FY09 FY10E FY11E FY12E
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.
DECEMBER 2009 45
IDFC - SSKI INDIA
Strong free cash flow generation – high return ratios

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

We set a DCF-based price We continue to like Concor’s business model considering that it is a play on the
target of Rs1,450 for growth in international trade and rising container volumes (both international and
Concor 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.
DECEMBER 2009 46
IDFC - SSKI INDIA
THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK
DECEMBER 2009 47
IDFC - SSKI INDIA

% growth 10.2 2.1 12.3 14.2 17.9 EBIT margin (%) 23.4 23.9 23.7 23.6 23.5
EBITDA 8,904 9,311 10,432 11,832 13,896 RoE (%) 25.8 22.8 20.7 19.9 20.6
% growth (0.1) 4.6 12.0 13.4 17.4 RoCE (%) 25.5 22.3 21.3 20.9 21.4
Other income 1,645 2,111 1,828 2,009 2,425 Gearing (x) - - - - -
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 Valuations
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) - - - Reported EPS (Rs) 57.9 60.9 64.8 72.5 86.4
Net profit after Adj. EPS (Rs) 57.7 60.9 64.8 72.5 86.4
non-recurring items 7,522 7,912 8,428 9,419 11,232 PER (x) 21.3 20.2 18.9 16.9 14.2
% growth 6.9 5.2 6.5 11.8 19.2 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
Balance sheet
As on 31 March FY08 FY09 FY10E FY11E FY12E Concor has an extremely strong competitive edge vis-à-vis peers
Paid-up capital 650 1,300 1,300 1,300 1,300
Preference share capital - - - - -
Large fleet
Reserves & surplus 31,189 36,322 42,498 49,364 56,843 (218 rakes)
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 Pan India
Cash balance Competitive
Other non-current liabilities - - - - - network
(Rs20bn) strengths (59 terminals)
Total liabilities 7,108 8,135 9,715 10,876 13,322
Total 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 Depreciated
assets
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 Shareholding pattern

Public &
Others
Pre-tax profit 9,485 10,262 10,931 12,344 14,587 1.0% Foreign
Depreciation 1,063 1,159 1,330 1,497 1,735 24.2%
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) Institutions
Free cash flow (a+b) 6,499 4,951 5,468 6,158 8,926 10.0%
Chg in investments (237) (477) (16,992) (5,500) (5,000) Promoters
Debt raised/(repaid) - - - - - 63.1% Non
Promoter
Capital raised/(repaid) - - - - -
Corporate
Dividend (incl. tax) (1,673) (2,053) (1,519) (2,292) (2,713) Holding
Misc - - - - - 1.7%
Net chg in cash 4,589 2,420 (13,043) (1,634) 1,213
As of September 09
DECEMBER 2009 48
IDFC - SSKI INDIA
Company update
Rs130
Gateway Distriparks OUTPERFORMER
Harvest time Mkt Cap: Rs14bn; US$300m
21 December 2009
Gateway Distriparks (GDL), an established CFS player with presence at key
BSE Sensex: 16720 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
Stock data profitability as utilization and turnaround times improve. Notably, the recent
Reuters Code GATE.BO
fund raising in rail business (GRFL) is extremely positive, as besides limiting
Bloomberg GDPL IN the strain on parent balance sheet, the capital infusion would also accelerate
1-yr high/low (Rs) 148 / 42 turnaround of the business. At 14.2x FY11E earnings, valuations are
1-yr avg daily volumes (m) 0.62 attractive in view of healthy cash flows from CFS business and value-creation
Free Float (%) 54.5
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
Price performance
Gateway Distriparks Sensex
in international trade from H2FY10, we expect healthy growth in volumes for
200
the CFS business. Overall, we expect the CFS business to generate cash of
160 Rs700m-900m annually with limited capex plans.
120
Rail business to turn profitable in FY11E: GDL’s rail business (GRFL) is the
80
largest private container rail operator in India with 18 rakes and three ICDs
40 operational. GDL plans to acquire more rakes and set up additional ICDs, for
Dec-08
Oct-09
Jan-09
Feb-09
Mar-09
Nov-09
Dec-09
Apr-09
May-09
Jun-09
Jul-09
Aug-09
Sep-09
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.
Performance (%)
3-mth 6-mth 1-yr 3-yr Improving operational performance; attractive valuations: We expect 25%
GDL 15.5 39.6 48.9 (29.2) CAGR in GDL’s revenues over FY09-12, driven by rising volumes for both CFS
Sensex (0.1) 17.2 65.9 21.8
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
Net 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 23.9
PE (x) 20.1 17.3 17.2 14.2 11.4
Bhoomika Nair Price/ Book (x) 2.3 2.2 2.1 1.9 1.7
bhoomika@idfcsski.com EV/ EBITDA (x) 13.9 10.4 9.6 8.1 6.6
91-22-66 38 3337 RoE (%) 11.5 12.5 12.4 13.9 15.6
RoCE (%) 10.2 12.3 7.9 8.8 12.0
DECEMBER 2009 49
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
Container freight
station
Delivery of goods as
• Box handling & full container load
storage
Container
Port terminal • Stuffing & De- Factory
transportation
stuffing (less than
container load) Inbound and outbound
• Goods handling movement of less than
• Warehouse & container load traffic
storage
Presence in strategic locations gives competitive edge

GDL the largest private GDL has CFSs in key strategic locations in India – JNPT (Mumbai), Chennai,
player in container rail Vizag and Kochi. The JNPT, Chennai and the Vizag ports handle 78% of the total
business with CFSs at key
containerized cargo in India, while Kochi is set to be developed over the next few
locations…
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.
DECEMBER 2009 50
IDFC - SSKI INDIA
Exhibit 2: GDL – three ICD and four CFS facilities operational across India
Ludhiana
Faridabad
Garhi
JNPT Kalamboli
Capacity 366,000 TEUs

Vizag
Capacity 24,000 TEUs
Chennai
Kochi Capacity 60,000 TEUs Operational CFS

ICDs/rail sidings
Capacity 15,000 TEUs Planned ICDs
Source: Company, IDFC-SSKIR Research
Volumes expected to grow in line with port traffic

…which will help it Sluggish international trade in H2FY09 and H1FY10 led to a sharp fall in port
capitalize on volume volumes and lower volumes for GDL in turn. We expect CFS volumes to revive in
upturn at India’s ports 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

(TEUs)
JNPT Chennai Vizag Kochi % yoy growth
400,000 60
320,000 45
240,000 30
160,000 15
80,000 -
- (15)
FY05 FY06 FY07 FY08 FY09 FY10E FY11E FY12E
DECEMBER 2009 51
IDFC - SSKI INDIA
JNPT CFS – key driver for CFS profits

Margins higher at JNPT GDL’s CFS business is primarily driven by its CFS at the JNPT port. This is evident
CFS as congestion in the fact that the JNPT CFS contributed 85-88% to GDL’s overall CFS profits in
mandates faster shifting of
FY08 and FY09. Operating margins at the JNPT CFS are higher due to port
volumes to CFSs
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
We expect CFS business GDL generates ~Rs800m of net profit from the CFS business annually, with limited
to throw up cash of working capital requirements. Considering that GDL is unlikely to have aggressive
Rs700m-900m annually
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
Further integration into GDL, through its CFS network, caters to a specific niche in the logistics value chain.
the logistics chain via Although the specialization has led to high profitability, further integration into the
entry into container rail 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

GRFL has infrastructure to Considering the requirement for consolidation and value-added services in the
consolidate cargo for an hinterland, GDL has housed all its ICDs under GRFL. GRFL currently has three
entire rake load, operate operational ICDs at Garhi Hasaru, Ludhiana (Sanewal) and Kalamboli (near Panvel,
on a hub-and-spoke Mumbai). GRFL is adding another ICD in Faridabad (NCR region), to be
mechanism and improve
turnaround of rakes 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.
DECEMBER 2009 52
IDFC - SSKI INDIA
21 rakes by end-FY10E to make GRFL the largest private operator…

The largest fleet of 18 Over the past 2-3 years, GRFL has consistently added rakes to increase the reliability
rakes operational to be of its service offerings. Moreover, the higher number of rakes gives GRFL flexibility
further scaled up to 21 to provide services between rail sidings for customers, and thereby garner higher
rakes by end-FY10
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

Exim/ Domestic volume Presence at key strategic locations, such as the northern hinterland, as well as a
swing of 80:20 or 50:50 or higher number of rakes provides GRFL the flexibility to operate on either of the
40:60 shows flexibility of routes based on availability of volumes. The point is well demonstrated by the fact
operations o adapt to that exim vs domestic volumes differ on month to month basis with the swing as
market conditions
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
Rs3bn raised from Blackstone – a private equity fund

Blackstone to hold a Blackstone GPV Capital Partners (a private equity fund) has announced its plans to
37.27-49.9% stake in invest Rs3bn in Gateway Rail Freight (GRFL), a 95% subsidiary of GDL, through
GRFL, depending on compulsory convertible preference shares (CPPS). On conversion of the preference
latter’s profitability 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).
DECEMBER 2009 53
IDFC - SSKI INDIA
Exhibit 5: GRFL – shareholding pattern

Current At Rs5bn valuation At Rs3bn valuation
Blackstone
Management
37.3%
5%
GDL
Blackstone 47.6%
49.9%
GDL
59.6%
Management
3.1% Management
GDL
2.5%
95%
Source: Company; IDFC-SSKI Research
Blackstone deal values rail business at 1.5-2.5x PBV

As GRFL is currently in Based on the Blackstone deal, GRFL’s pre-money value works out to Rs3bn at the
ramp-up phase and making lower end (49.9% stake) and Rs5.05bn at the higher end (37.27% stake) of the
losses, valuation of GRFL valuation. GDL has invested Rs2bn as equity into GRFL. Based on the same, the
seems reasonable 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
Fund raising to accelerate GRFL’s turnaround

The capital infusion in Funds raised through the private equity deal will be utilized to scale up the business
GRFL would allow it to by adding more rakes as also more ICDs (including the Garhi ICD which is
expand without leaning on currently on GDL’s books) in FY11E. Accordingly, the funds raised would enable
parent and accelerate rail
business’s turnaround
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.
DECEMBER 2009 54
IDFC - SSKI INDIA
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
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
(Rs m) CFS (LHS) Rail (LHS) Cold chain (LHS) % yoy growth (RHS)
10,000 80
We expect strong volume 7,500 60

growth in both CFS and
rail businesses
5,000 40
2,500 20
- 0
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.
DECEMBER 2009 55
IDFC - SSKI INDIA
Exhibit 9: Margins to bottom out in FY10E, improve from FY11E onwards

OPM (%)
60
We expect margins to 45
expand in FY11 led by
stability in CFS business
and expansion in the rail
30
business margins
15
0
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

As the rail business turns GDL had extremely strong return ratios up to FY07 led by healthy margins and
profitable, we expect profitability of CFS business. However, entry into the rail business as also limited
return ratios to inch up
over the next 2-3 years
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
(%) RoE ROCE

18.0
13.5
9.0
4.5
0.0
DECEMBER 2009 56
IDFC - SSKI INDIA

Buy with a price target of GDL, an established CFS player, with footprint at key strategic locations and
Rs160 per share 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.
DECEMBER 2009 57
IDFC - SSKI INDIA

% growth 68.6 66.2 21.2 22.1 32.7 EBIT margin (%) 27.0 22.5 15.7 17.2 19.1
EBITDA 1,024 1,461 1,326 1,688 2,423 RoE (%) 11.5 12.5 12.4 13.9 15.6
% change 26.1 42.6 (9.3) 27.3 43.6 RoCE (%) 10.2 12.3 7.9 8.8 12.0
Other income 144 119 155 241 171 Gearing (x) 0.0 0.3 0.3 0.3 0.4
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 Valuations
Deferred tax 19 16 - 34 47
Current tax 123 146 (17.3) 136 310
Profit after tax 715 772 798 965 1,195 Reported EPS (Rs) 6.4 7.4 7.4 9.0 11.1
Minorities 15 21 - - - Adj. EPS (Rs) 6.3 7.4 7.4 9.0 11.1
Non-recurring items 5 3 - - - PE (x) 20.1 17.3 17.2 14.2 11.4

Net profit after Price/ Book (x) 2.3 2.2 2.1 1.9 1.7
non-recurring items 735 796 798 965 1,195 EV/ Net sales (x) 5.1 3.4 2.3 2.0 1.8
% change (5.6) 8.3 0.3 20.9 23.9 EV/ EBITDA (x) 13.9 10.4 9.6 8.1 6.6
Balance sheet Revenues to grow at a robust pace

(Rs m)
As on 31 March FY08 FY09 FY10E FY11E FY12E CFS Rail Cold chain % yoy growth (RHS)
10,000 80
Paid-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 7,500 60
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 5,000 40
Other non-current liabilities 636 606 3,606 3,606 3,606

Total liabilities 1,665 3,529 6,917 7,131 7,933
2,500 20
Total equity & liabilities 8,132 9,766 13,575 14,376 15,997
Net fixed assets 6,651 8,132 8,955 10,255 12,962
Investments 0 230 230 230 230 - 0
Total current assets 1,472 1,396 4,382 3,884 2,797 FY07 FY08 FY09 FY10E FY11E FY12E
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
Shareholding pattern
Public &
Foreign
Others
Cash flow statement 12.8%
21.1%

Pre-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)
Institutions
Ext ord. items 158 (27) 3,000 - -
18.1%
Operating cash inflow 1,146 1,022 4,182 1,279 1,615
Promoters
Capital expenditure (2,223) (1,887) (1,250) (1,800) (3,400)
45.5% Non
Free cash flow (a+b) (1,077) (865) 2,932 (521) (1,785)
Promoter
Chg in investments - (230) - - -
Corporate
Debt raised/ (repaid) 141 1,829 224 109 653 Holding
Capital raised/ (repaid) 19 (640) - - - 2.5%
Dividend (incl. tax) (111) (502) (377) (377) (377)
As of September 2009
Misc (83) 43 (39) (73) (85)
Net chg in cash (1,111) (364) 2,740 (861) (1,594)
DECEMBER 2009 58
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)

Concor 218 59 terminals 3-4 IC Ds/Logistics parks
3 ICDs - Garhi (Delhi), Sanewal (Ludhiana),
Gateway Distriparks (GRFL) 18 Faridabad (NCR)
Kalamboli (Mumbai)
Strategic alliance with Allcargo & C WC at JNPT, New locations in strategic
Hind Terminals (MSC Group) 10
Mundra & NCR alliance with Allcargo
India Infrastructure Logistics Pvt
9 Tie ups with CFS/ ICD operators Panipat
Ltd (APL)
Emirates Trading Ag ency (ETA) 7 Tie ups with CFS/ ICD operators 2 owned sidings
CRRS (DPW) 7 Tie ups with CFS/ ICD operators NA
Arshiya international 6 Vizag; Tie ups with various private sidings Khurja (NCR); 5 others
Land acquired for more
Adani Logistics 5 Patli in Gurgaon (NCR) and Kishengargh, Rajasthan
sidings
3 CFs (Chennai, Tuticorin & Vizag); Tie up with CFS/
Sical Logistics 5 More s idings planned
ICD operators & private sidings
Central Warehousing Corp (CWC) - Has several ICDs and CFSs of it s own NA
Reliance Infrastructure Leasing - NA NA
Kribco - NA NA
Players in Rs100m license fee category (sector-specific routes)

Inlogistics (B2B) 12 Kalamboli (JNPT); Tie ups with CFS/ ICD operators 3 sidings planned
Boxtrans (JM Baxi and Co) 12 Vizag & Rajasthan; Tie ups with CFS/ ICD operators 5-6 sidings planned
Delhi Assam Roadway s Corp. 2 NA NA
Pipavav Rail Corporation (PRCL) - NA NA
DECEMBER 2009 59
IDFC - SSKI INDIA
Adani Logistics UNLISTED
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
Port/SEZ CFS Rail ICD Customer
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
DECEMBER 2009 60
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Boxtrans (JM Baxi) UNLISTED
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.
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Container Rail Road Services Pvt. Ltd (DPW) UNLISTED
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
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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.
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Central Warehousing Corporation (CWC) UNLISTED
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.
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ETA Freight Star UNLISTED
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.
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Hind Terminals UNLISTED
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) UNLISTED
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).
DECEMBER 2009 67
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InLogistics (Innovative B2B Logistics) UNLISTED
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.
DECEMBER 2009 68
IDFC - SSKI INDIA
Sical Multimodal And Rail Transport (SMART) UNLISTED
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.
DECEMBER 2009 69
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Other operators UNLISTED
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.
DECEMBER 2009 70
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Sector report

December 2009 Logistics: Container rail

Privatization of container rail operations has enticed 16 players, including

Attractive valuations; Overweight: We believe operators need deep pockets to

Is There Enough for All? ......................................................................12

Economics of Container Rail Operators ...............................................21

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

CONTAINER RAIL BUSINESS: SHIFT FROM ROAD TO RAIL THE KEY

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

 Enough freight volumes in the system…

Exhibit 2: Indicative break-up of freight handled in the country

 …but penetration of container rail is quite low

 End-to-end integrated services to drive volumes and shift to rail

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

Regular & reliable

• Timely delivery • Road bridging • Customised wagons or

Aggregation of cargo Value added services

• Aggregation of cargo to fill an entire • Customs clearance

Drivers for growth

Source: IDFC-SSKI Research

UTILIZATION LEVELS, TURNAROUND TIMES & ICDS CRITICAL FOR PROFITS

integrated solutions, it also makes the business extremely capital-intensive, with a

Capital intensive business

Source: IDFC-SSKI Research

 Higher utilization and turnaround times – critical for profitability

 Sidings – required to operate on hub-and-spoke mechanism

Benefits Act as hub centers

Source: IDFC-SSKI Research

Exhibit 7: Proforma financials of a rail container operator

RoE can improve

 Sensitivity analysis to turnaround time and utilization levels

Exhibit 8: Sensitivity analysis

CONCOR, ARSHIYA AND GDL ARE OUR BETS IN THE SECTOR

 Concor – unlikely to be impacted by competition

 Arshiya – long-term contracts to drive profitability

 GDL – fund raising to aid turnaround in FY11E

 Valuations attractive – we are Overweight on sector

Exhibit 10: Concor PER band

1600 Container Corporation 8.0 12.0 16.0 20.0

Source: IDFC-SSKI Research

Exhibit 11: Arshiya PER band

400 Arshiya International 8.0 12.0 16.0 20.0

Exhibit 12: Gateway Distriparks PER band

IS THERE ENOUGH FOR ALL?

IS THE MARKET LARGE ENOUGH FOR 16 PLAYERS?

Exhibit 13: Indicative break-up of freight handled in the country

 Increasing international trade…

 …expected to drive 8% CAGR in port traffic…

As international trade grows and port infrastructure (particularly at container

(%, yoy growth) (%)

Source: Indian Ports Association; IDFC-SSKI Research

 30% of exim cargo handled by rail; domestic penetration very low

RAIL TRANSPORTATION VS ROADS: RAIL WINS HANDS DOWN…

Exhibit 16: Huge benefits of containerisation

Low handling Low insurance

 Transportation via rail is cheaper than by road

 Economies of scale on container rail movement

Net Advantages of Rail

Source: Arshiya International corporate presentation

…BUT RAIL YET TO GAIN MARKET SHARE

Focus on bulk movement and not on aggregation

Road transportation offered aggregation, end to end services

Enough freight volumes in the system…

…but penetration of container rail is quite low

End-to-end integrated services to drive volumes and shift to rail

Higher utilization and turnaround times – critical for profitability

Sidings – required to operate on hub-and-spoke mechanism

Sensitivity analysis to turnaround time and utilization levels

Concor – unlikely to be impacted by competition

Arshiya – long-term contracts to drive profitability

GDL – fund raising to aid turnaround in FY11E

Valuations attractive – we are Overweight on sector

Increasing international trade…

…expected to drive 8% CAGR in port traffic…

30% of exim cargo handled by rail; domestic penetration very low

Transportation via rail is cheaper than by road

Economies of scale on container rail movement

Concor – created to address the need for aggregation of cargo

Cargo aggregation and end-to-end service to accelerate shift to rail

Container rail operators’ capacity – 6% of road freight

‘Market creation’ initiatives required to attract volumes

Licenses to private players for providing container rail movement

16 players in container rail operations

Rail sidings required for timely movement of cargo

Terminals enable integrated services on hub-and-spoke mechanism

Building rail sidings is a challenge

IR to allow usage of private and unused rail sidings to operators

Perils of using a rail siding or common facility

Rake availability – no more a big concern

Other ancillary infrastructure

Higher utilization and return loads key to profitability

Operators entering into long-term volume contracts

Higher turnaround of assets results in better profitability

Average turnaround time at 4-5 trips per month for a rake

Mechanical testing – mars turnaround times of a rake

Value added and integrated services enhance profitability

Terminal revenues aid exim margins

Balanced exim tends to ensure return loads and utilization

Improved turnaround time of rakes in exim volumes

Margins can be comparable for domestic and exim volumes

Sensitivity analysis to turnaround time and utilization levels

Likely consolidation in the industry

Dealing with the Indian Railways (IR)

Capabilities in the fast growing project logistics – a key strength

Arshiya provides IT visibility for its clients – a key value-add

Free Trade Warehousing Zones – a new growth avenue for Arshiya

First FTWZ at JNPT to be operational in Q1FY11