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New LLF policy: Devil lies in the detail?

The Union Cabinet today approved the policy on leasing of railways land for Gati Shakti terminals, cutting the annual Land Licence Fee (LLF) to 1.5% (earlier 6%) of market value of land while also extending the term for up to a period of 35 years (earlier 5 years). Although this new policy will be applicable on new terminals, it provides existing entities an option to switch to the new regime post a transparent and competitive bidding process (most likely on revenue sharing parameter, similar to the Gati Shakti Cargo Policy) where the incumbent will possess the right of first refusal. However, there is no clarity yet about recovery of the investments the incumbent operator has made in the infrastructure at those terminals. We keenly await the fine print, expected to be released within the next 90 days. We broadly maintain our estimates at present and will revisit our LLF assumption only post clarity on the policy and Concor’s strategy on renewal of its terminals. We provide sensitivity to EPS and TP in Exhibit 6 and Exhibit 7 (1% lower LLF rate implies 5% increase in EPS and 3% increase in our TP). We introduce FY25 and roll forward to Sept’23TP of INR 860 (earlier Mar’23TP of INR770). Buy stays. Key risks to recommendation are a) unfavourable outcome in the fine print of the policy and b) sub-par capital allocation decisions.

* New LLF policy cuts rate from 6% to 1.5% of market value of land for Gati Shakti Terminals: The Union Cabinet today approved the policy on leasing of railways land for Gati Shakti Cargo terminals. The policy will enable a) integrated development of infrastructure, b) development of more cargo terminals, and c) increase modal share of rail in freight transportation, thereby reducing the country’s logistics cost. Key points are:

* The policy provides for long-term leasing of railway land for Gati Shakti cargo related activities for a period of up to 35 years (earlier 5 years) at 1.5% (earlier 6%) of market value of land per annum. There exists an annual escalation clause of 6%.

* The existing entities using railway land for cargo terminals (paying 6% LLF) will have the option to switch to the new policy regime after a transparent and competitive bidding process. They will possess the first right of refusal for the existing terminals. As per the Gati Shakti Policy, the competitive bidding and award of tender will be based on revenue share basis. We await more clarity on the same from the fine print.

* Over the next 5 years, 300 new PM Gati Shakti Cargo Terminals are likely to be developed, which could generate 1.2 lakh jobs.

* A comprehensive policy document will be framed and implemented within 90 days of Cabinet approval.

* What does it mean for Concor?: On the face of it, it appears that the policy is aimed at the Gati Shakti terminal. However, it provides Concor and other players the option to adopt/ switch to this new regime through a competitive bidding process. Although rules/ conditions are yet to be spelled out clearly, as per Gati Shakti Policy Cargo terminal policy, if Concor is to take the option of moving to the new regime, it is likely to have to win the terminal back basis revenue share model via a competitive bidding process. We await more clarity on this from the fine print as the scenario remains hazy. We have included EPS sensitivity to LLF (Exhibit 7) and Gross spread on haulage charge (INR/ TEU) and fair value (Exhibit 6) in this report.

* Concor sets INR 80-100bn capex target over the next 3-4 years; double-digit volume growth in FY23: In its 4QFY22 earnings call, Concor had announced a capex target of INR 80-100bn over the next 3-4 years, which will be spent on infrastructure development, rolling stock, containers and equipment, most of which is likely to funded through internal accruals. Having said that, the company in its 1QFY23 earnings call highlighted the likelihood of substantially lower capex outlay of INR 5-6bn in FY23. Moreover, in a recent media interaction, the CMD highlighted that around INR 40bn will be spent on procuring 230 rakes. The company is looking to increase its owned containers from current 37k TEU to 1.5-2 lakh TEU. We note that Concor has already spent about INR 35- 40bn in the past 5 years on new terminal developments. In addition, the CMD remains optimistic of demand trends, and the company has maintained its annual guidance of achieving 10-12% volume growth.

* Maintain estimates and BUY: We broadly maintain our FY23-24 EPS estimates and introduce FY25 estimates in this report. We roll forward to Sep’23TP of INR 860. We value a) Concor at 16x Sep’24EV/EBITDA, and b) MMLP at 1.3x investment to arrive at a Sep’23TP of INR 860 (INR 770 earlier). We maintain BUY. Key risks to recommendation are a) unfavourable outcome in the fine print of the policy and b) sub-par capital allocation decisions.

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