The article on the divestment of CONCOR I wrote in this week elicited some responses and few follow up questions. I thought it imperative that questions, shared by a gentleman / gentlewoman, need clarifying answers.
The format for this follow up article is on the basis of Q &A. I have reproduced the questions in toto and tried to answer with best of my knowledge.
Here we go!
- You mentioned private equity may be part of the process and opportunity for leverage is high – can you elaborate this, what leverage is referred here. You mean, the value will go up due to Private Equity bidders ?
There are two types of Private Equity (PE) players who may be interested here. One, who not only want pure financial investment but also strategic interest in the company. They have built expertise and network in the logistics segment and may entirely on their own
Second type of PE players will see this as pure financial investment if it fits into their respective theses. These PE players , in all probability, will associate with any known organization or company who has experience and wherewithal to run and grow the business of this scale. Though the logistics players of this level of scale of few and far between in India, it may be narrow down to only a few known players in Industry.
What is common in them is that though they may want to take advantage pf almost zero debt in CONCOR. And this is the leverage (financial) I was referring to.
There is a caveat in order here. Since ultra-low interest regime has come to an end, leveraging might not be easy for all PE players equally. Some PE players have access to low cost funds. If these PE players come into fray valuation will certainly increase.
- Duration of the lease : the govt had clarified that the first right of refusal will be given to existing user, so how will it go into other parties if the current lessor does not want to surrender ?
I am glad you asked this question. My whole contention is that first right of refusal still opens up the opportunity for other players. The terminals and ICDs are also benefited by network effect. If a player thinks that a particular terminal of CONCOR will enhance the value of the network, that player may do everything to get that particular asset. CONCOR or any existing player might not be able to match the kind of bidding a challenger may make.
So far CONCOR, was given lease without competition . But even with First Right of Refusal likelihood of competition has increased significantly. This dynamic should be modelled while valuing CONCOR and putting the bids by the bidders.
- CONCOR’s readiness to leverage its existing infra to take advantage of DFC can you elaborate why CONCOR would not be ready to leverage DFC, will it not be best suited compared to other operators ?
The question here is not regarding the ability of CONCOR , it is to do with technical and operational constraints these infra may face.
For example, existing terminals are connected through legacy railway network while DFC are designed to handle double stacked and longer rakes.
In order to remain competitive, it is necessary CONCOR’s terminals must either be of DFC network or connected to the hubs situated on DFC network.
However, even if above condition is met, it may not prove to be sufficient. The operational complexity in these types of setups will definitely go up with concomitant costs. The terminals acting as feeders may also not be located favourably vis-à-vis the hubs ( on DFC network).
The result of the complex network will be higher costs and delays for customers that can affect the volumes in CONCOR’s terminals.
The scenario warrants greater scrutiny while assessing the value of terminals . The model should incorporate different scenarios that will require deep understanding of the interplay between terminals’ efficiency and impact on container volumes.
I hope I could satisfy the queries made here and will be happy to answer any additional questions.
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