Many of the CONCOR’s facilities are based on land leased from the railways, often at concessional rates. According to a report, the government plans to direct CONCOR to purchase railway land on which its facilities are located. Which means, the company may have to pay as much as ₹ 8,000 crore for the land.
The move serves the dual purpose of underscoring the government’s resolve to proceed with the stake sale as well as shoring up Indian Railways’ finances. Weak financial condition is forcing the railways to collect advance haulage charges from large customers such as CONCOR and NTPC Ltd.
But such a transaction can load CONCOR with debt and reduce its appeal for a prospective buyer. Currently, the firm is estimated to incur land licence fee of ₹ 200 crore annually. Land acquisition at circle rates will raise costs.
Recovery of additional expenses through tariff hikes in a competitive environment can be tough. Further, tariff hikes in the recent past at several terminals limit the scope for more such increases. “The new owner would want to re-price the container freight offering higher (to compensate for the debt related interest costs); this could have possible impact on volumes given high sensitivity of pricing to volumes,” said Antique Stock Broking Ltd in a note.
Absorption of additional costs without commensurate tariff hikes can hurt profitability. On the positive side, the transaction will pave the way for the strategic divestment, which can help CONCOR realize its full potential. But a lot depends on the government pursuing this, the price at which this land is transferred and how the firm funds this investment.