Container Corporation of India – 3QFY2011 Result Update - Angel Broking

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Container Corporation of India  – 3QFY2011 Result Update

Angel Broking maintains Reduce on Container Corporation of India with a Target Price of Rs. 1,194.

Container Corporation’s (Concor) 3QFY11 results were marginally ahead of our

expectations on account of the strong operating performance in the Exim

segment. The domestic segment recorded moderate growth in volumes due to the

17-day Gujjar agitation and hike in domestic haulage charges. Management has

revised its Exim volume growth guidance for FY11 to 9% yoy (12% earlier), which

we believe is challenging. The hike in Exim haulage charges will also impact

volume growth negatively going forward. We maintain a Reduce on the stock.

Exim shines, while domestic segment hit by Gujjar agitation: Concor reported

9.8% yoy growth in revenue to `971cr v/s our estimate of `987cr. The Exim

segment revenues grew 13.4% yoy to `762cr on strong volumes. However, the

domestic segment revenue fell 1.5% yoy to `210cr due to the 17-days Gujjar

agitation and hike in domestic haulage charges. OPM stood at 28.9%, up by a

marginal 7bp yoy, but by a healthy 116bp sequentially on lower empties running

and higher ground rent earned due to the Gujjar agitation. EBIT margin of the

Exim segment witnessed strong growth of 232bp qoq (up 236bp yoy) to 30.8%,

while that of the domestic segment was up 148bp qoq (down 704bp yoy) to

11.4%. Depreciation was flat yoy, while other income rose sharply by 25.5% yoy

due to higher yield earned on free cash. Consequently, PAT grew by 13.9% yoy to

`228cr, which was above our estimate of `214cr.

Outlook and valuation: Concor is gradually losing its pricing power in the Exim

segment, which could be further threatened by the rising number of rail-linked

ICDs by the private players and increase in haulage charges. We estimate Concor

to post muted earnings CAGR of 8.1% over FY10–12 v/s 17.6% CAGR posted

over FY05–09. At `1,228, the stock is trading at 17.6x FY12E EPS, which is at the

higher end of its historical P/E band, and 11.8x FY12E EV/EBITDA. We maintain a

Reduce on Concor, with a Target Price of `1,194

Volume growth mixed bag

The Exim segment reported a strong volume growth of 14.3% yoy and 4.9% qoq to

517,461TEUs led by inventory build-up ahead of the festive season in the domestic

as well as global markets. However, the domestic segment reported lacklustre

growth of 1.7% yoy (up 10.5% qoq) to 145,384TEUs on account of the 17-days

Gujjar agitation, which blocked the North-West rail corridor completely resulting in

the monthly port pendency to ~8,000TEUs as compared to 2,000TEUs normally.

Further, increase in the domestic haulage charges resulted in loss of revenue of

handling 22,000TEU’s. Going forward, we expect Concor to register CAGR of

8.4% and 4.9% in Exim and domestic volumes respectively, over FY2010-12.

Hike in haulage charges to impact rail operators’ margins

The Indian Railways (IR) recently hiked haulage charges of the container operators

on domestic transportation of nine classified commodities ranging from 50-200%

for TEUs, while the hike was much higher on the 40 feet containers. The revision

came into effect from December 1, 2010 following which majority of the traffic

shifted to the road sector. With effect from January 1, 2011, the IR further hiked

the haulage charges on the domestic non-classified commodities and Exim

containers by an additional 4%. While Concor has guided that it intends to pass on

nearly 50% of these hikes, we believe it would come at the cost of volumes and

margins given the intense competition. As per management estimates, it lost out

approx 22,000TEUs to the road transporters in December 2010 post the hike in

the haulage charges.

Recommendation rationale

Deteriorating Exim market share remains a concern

Concor is in a commanding position owing to its mammoth infrastructure (233

rakes and 60 terminals) built over 20 years. The company plans to add another

40-45 rakes and four terminals over FY2010-12E. Currently, Concor is the

preferred rail container transporter among the shipping lines being the lowest-cost

service provider in the segment and due to the strategic location of its container

depots. However, over FY2006-10, Concor conceded market share by 620bp to

27.4% from the peak of 33.7% to the road segment and private players. In

FY2007, Concor’s performance was impacted by the higher IR tariffs and opening

up of rail containerisation to private players. Over the next four-five years, we

expect Concor to record further drop in market share to around 20% on the back

of higher haulage charges, which would render it uncompetitive in the FEU

segment, and the growing presence of private players.

Expensive valuations

Concor is gradually losing its pricing power in the Exim segment, which could be

further threatened with increasing number of rail-linked ICDs from private players.

However, we remain bullish on the container sector in the long term, which is the

core driver of Concor's business. Nonetheless, higher IR tariffs and opening up of

the container industry to private players will impact the company’s market share in

the long run. We also believe Concor’s growth trajectory will be lower than its

historical trend. Thus, the key risk to our recommendation will be Concor

maintaining its market share and accelerated construction of the dedicated

rail-freight corridor, which could see the rail segment wresting market share from

the road segment. We estimate Concor to post muted earnings CAGR of 8.1%

over FY2010–12 (v/s 17.6% CAGR over FY2005–09). At the CMP, the stock is

trading at 17.6x FY2012E earnings, which is at the higher end of its historical P/E

band and 11.8x FY2012E EV/EBITDA. We maintain a Reduce on Concor, with a

Target Price of `1,194.