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Container Corp -- Export recovery boosts outlook: Upgrading to Buy
„Raising PO as well; exports growth lifts EPS & P/E outlook
We are upgrading our rating for Container Corp (Concor) from Underperform to
Buy given: (1) stronger traffic growth and EBITDA margin that will likely drive 15%
EPS growth in FY12/13e, and (2) rise in longer-term prospects driven by Concor’s
Rs10bn foray into logistics parks biz. We are also raising our PO from Rs1,212 to
Rs1,355 (24% upside potential) on: (1) our EPS upgrade of 4% for FY12e and
11% for FY13e, and (2) expectation of stock getting re-rated from PE of 12x to
15xFY13e owing to pick up in growth and rise in longer term prospects.
Traffic growth of 13%+ in FY12/13e vs 2% in FY09-11
Concor is entering the phase of 13%+ traffic growth rate, similar to the FY03-08
period, substantially better than the no-growth phase of FY09-11. Key driver of
stronger traffic growth is recent recovery in demand for manufactured goods from
US/Europe (India Macro Watch, 14 Feb 2011). Concor, as a transporter of
containerized cargo using India’s vast railway network, is also likely to benefit
from the recent expansion of port capacities in Kerala, Gujarat, and Tamil Nadu.
Favorable change in revenue mix to offset cost pressure
We believe Concor’s EBITDA margin is set to improve from 26% in FY10 to
27.3% in FY11e, and to 27.6% in FY12e, due to change in revenue mix in favour
of international trade traffic. Also, reduction in ‘empty-running’ given a balanced
growth of exports-imports will help cut rail freight cost, the key source of cost push.
Foray into logistics parks to boost LT growth prospects
Concor is investing Rs10bn during FY11-13e on eight new logistics parks. We
have not factored in the earnings from logistics park, but are positive about the
long term potential as these park will help expand scope of service and will also
help Concor to enter the non-containerized bulk cargo market as well.
Revival in earnings growth:
Upgrading to Buy; lifting PO, ests
We are upgrading our investment rating for Container Corp (Concor) from
Underperform to Buy on: (1) stronger traffic growth and EBITDA margin that will
likely drive 15% EPS growth in FY12/13e, and (2) rise in longer-term prospects
driven by Concor’s Rs10bn foray into logistics parks business.
We are also raising our PO from Rs1,212 to Rs1,355 (24% upside potential)
driven by: (1) our EPS upgrade of 4% for FY12e and 11% for FY13e, and
(2) change in PO basis from P/E of 16x FY12e to 15x FY13e.
We now expect the company to achieve 15%+ profit growth in FY12e and FY13e
vs marginal decline in FY10 and 4% growth in 9MFY11. Growth is likely to pick up
from the current quarter (Q4FY11e onwards). Key drivers of recovery in earnings
growth trajectory are:
1. Traffic growth of 13%+ in FY12/13e against earlier expectations of 8%
growth driven by stronger exports
2. Around 2% rise in average revenue per container handled, due to change in
revenue mix in favour of EXIM route instead of domestic route
3. Rise in EBITDA margin by 30bp in FY12e and 10bp in FY13e given reduction
in empty-running and better revenue mix.
Container traffic growth looking up
Concor is steadily emerging from the impact of global economic downturn which
hit the growth of its containers for Indian exporters in FY09 and FY10. The
company reported 14% EXIM traffic growth in Q3FY10 vs only 2% growth in
FY10 and 5% in H1FY11. According to the company, 14% growth in EXIM
container traffic continues to be witnessed in Jan 2011 too. Key driver of traffic
recovery is the revival in exports, particularly led by higher demand from US and
Europe which form the bulk of India’s container traffic. We expect sustained rise
in exports to drive 14% EXIM traffic growth in FY12e and 13% growth in FY13e.
Revenue mix & productivity to offset cost pressure
Concor’s EBITDA margin has already recovered to 27.9% in 9MFY11 and 28.9%
in Q3FY11 from 26% in FY10. Key drivers of margin improvement are:
„ Decline in the percentage of trains run without load (empty-running) from 6%
in FY10 to 3.8% in Q3FY11 driven by faster growth in exports – thereby
reducing deficit between export and import cargoes.
„ Increase in the percentage of EXIM traffic as percentage of total containers
handled from 77.7% in FY10 to 79% [in?]. Considering that EXIM traffic has
over 28.5% EBIT margin and domestic traffic has less than 15%, the change
in product mix in favor of EXIM has led to margin improvement.
We expect Concor’s EBITDA margin to be 27.6% in FY12e and 27.7% in FY13e
vs 27.7% in FY11e. We expect it to remain strong despite rise in cost pressure (in
the form of increasing rail freight charges and declining pricing power). Key
reasons for sustainability of strong margin are: (1) further improvement in revenue
mix in favour of EXIM, particularly exports, and (2) reduction in turnaround time
per container following recent modernization of terminals.
Upsides from new logistics parks likely from FY12e
Concor is foraying into the logistics parks business by setting up eight new parks,
for which it will invest up to Rs10bn by FY13. Investments in logistics parks will
open up new business opportunities and are likely to have a 25%+ ROCE. Key
drivers of higher business from these parks includes::
„ These parks will offer services over and above terminal services, including
dedicated facilities for packaging, warehousing, and sales office. Eight new
logistics park will come up in two phases – five in the first phase (by endFY12) and the rest in the second (by end-FY13). Each of these parks will
have 100-200ha of land, which is substantially higher than the average size
of 20-30ha of Concor’s existing terminals. The company has completed land
acquisitions in Punjab, Gujarat, Andhra Pradesh, and Rajasthan, and has
identified lands in Tamil Nadu, Karnataka, and Orissa.
„ Some of the logistics parks will also offer terminal services for bulk freight
under the new ’Private Freight Terminal‘ policy of Indian Railways (see
below). This will expand Concor’s scope of business from containerized
cargo to bulk cargo such as cement and steel.
Indian Railways’ thrust on private participation a boon
Indian Railways has released a host of new policies to attract private investment.
Concor is considering to take advantage of these policies given that it has excess
cash balance of over Rs20bn and annual operating cash flow of over Rs10bn.
Following are the list of policies:
„ Private Freight Terminal Operator (PFTO) Policy. This policy allows private
companies including Concor to offer terminal handling service to host of non
containerized bulk commodities like cement, which were hitherto the
monopoly of Indian Railway.
„ Special Freight Train Operator (SFTO) Policy. This policy allows private
companies to own special type of wagons for transporting host of
commodities excluding iron ore and coal on India railway network.
„ Automobile Freight Train Operator (AFTO) Policy. This policy allows private
companies to offer end to end logistics solution for carrying automobiles
made in India to the dealers using Railway network
„ Railways’ Infrastructure for Industry Initiative (R3i) Policy. This policy allows
private companies to own rail line up to certain length and complement the
network under Indian Railways.
Valuation re-rating likely
Concor is currently trading at a P/E of 16.2x FY11e and 14x FY12e. Since 2005,
the stock has mostly been trading at one-year rolling forward P/E of 15x. We
expect the stock to re-rate along with increase in earnings growth driven by rising
port traffic in India. Port traffic is likely to see cyclical recovery driven by strong
exports. Along with higher port traffic growth Concor’s profit is likely to grow at
15%+ in the next two years vs flattish profits for the past two years. In addition to
rise in growth rate, longer-term outlook for Concor is also getting better given its
proposed investment in logistics parks.
We expect Concor to trade at a P/E of 15x FY13e in one year’s time and hence
are raising our PO to Rs1,355 (Rs1,212 earlier).
Risks
Decline in average distance per container
Concor’s profit growth in 9MFY11 got hit by around 8% in the average distance
carried per container for EXIM traffic, given a combination of: (1) a shift in traffic
to new ports such as Mundra and Pipavav which are closer to customers; and
(2) a shift in traffic demand for goods which are carried over a smaller distance.
Further decline in distance travelled can affect our earnings estimates. However,
the lead distance has stopped declining from Q1FY11 level. Also, Concor is
seeing lower turnaround time in private ports such as Pipavav and Mundra,
offsetting the impact of decline in lead distance.
Fall in pricing power
The key negative development of the past three quarters for Concor is the decline
in its ability to pass on the railway freight hike to its customers. According to the
company, it has so far passed on 80% of the Indian Railways’ freight hike. The
decline in pricing power could be structural and is due to rising competition.
However, Concor may be able to compensate the loss of pricing power by
increasing terminal service revenue with the help of its investments in logistics
parks going forward, in our view.
Jump in capex
Concor is going to have annual capex of around Rs10bn in FY12 and FY13 vs
around Rs3bn per annum during the FY05-10 period. The jump in capex is due to
the company’s proposed foray into logistics parks, which could have high
gestation periods and bring down ROE and ROCE. However, we are assuming
the rise in capex to be positive for Concor which has been struggling to deploy its
excess cash and expand the scope of business over the past couple of years.
De-rating of PE to 10x level of pre 2004 period
Concor though is trading mostly above 15x one year forward PE since 2006 has
the risk of trading at around 10x , at which it used to trade before 2006. Lower PE
prior to 2006 can be attributed to lower PE of sensex if we adjust for the IT
stocks. We expect the stock to trade at least in line with Sensex PE which we
expect to trade at 15x FY13e in a years time.
Price objective basis & risk
Container Corp (CIDFF)
Our PO of Rs1,355 is based on PE of 15x on FY13E earnings. The stock is
currently trading at 14x FY12e and 12x FY13e. We expect the stock to rerate to
15x FY13e in one year along with increase in profit growth rate to 15% and
improvement in longer term prospect owing to the proposed foray into logistiocs
parks. Since 2005 the stock has mostly traded at one year forward rolling PE in
excess of 15x barring the brief period of sub prime crisis driven derating in early
2009. Risks: higher competition from road transport owing to slower than
anticipation expansion of railway network, decline in distance travelled per
container owing to installation of new ports closer to key markets, and decline in
pricing power.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Container Corp -- Export recovery boosts outlook: Upgrading to Buy
„Raising PO as well; exports growth lifts EPS & P/E outlook
We are upgrading our rating for Container Corp (Concor) from Underperform to
Buy given: (1) stronger traffic growth and EBITDA margin that will likely drive 15%
EPS growth in FY12/13e, and (2) rise in longer-term prospects driven by Concor’s
Rs10bn foray into logistics parks biz. We are also raising our PO from Rs1,212 to
Rs1,355 (24% upside potential) on: (1) our EPS upgrade of 4% for FY12e and
11% for FY13e, and (2) expectation of stock getting re-rated from PE of 12x to
15xFY13e owing to pick up in growth and rise in longer term prospects.
Traffic growth of 13%+ in FY12/13e vs 2% in FY09-11
Concor is entering the phase of 13%+ traffic growth rate, similar to the FY03-08
period, substantially better than the no-growth phase of FY09-11. Key driver of
stronger traffic growth is recent recovery in demand for manufactured goods from
US/Europe (India Macro Watch, 14 Feb 2011). Concor, as a transporter of
containerized cargo using India’s vast railway network, is also likely to benefit
from the recent expansion of port capacities in Kerala, Gujarat, and Tamil Nadu.
Favorable change in revenue mix to offset cost pressure
We believe Concor’s EBITDA margin is set to improve from 26% in FY10 to
27.3% in FY11e, and to 27.6% in FY12e, due to change in revenue mix in favour
of international trade traffic. Also, reduction in ‘empty-running’ given a balanced
growth of exports-imports will help cut rail freight cost, the key source of cost push.
Foray into logistics parks to boost LT growth prospects
Concor is investing Rs10bn during FY11-13e on eight new logistics parks. We
have not factored in the earnings from logistics park, but are positive about the
long term potential as these park will help expand scope of service and will also
help Concor to enter the non-containerized bulk cargo market as well.
Revival in earnings growth:
Upgrading to Buy; lifting PO, ests
We are upgrading our investment rating for Container Corp (Concor) from
Underperform to Buy on: (1) stronger traffic growth and EBITDA margin that will
likely drive 15% EPS growth in FY12/13e, and (2) rise in longer-term prospects
driven by Concor’s Rs10bn foray into logistics parks business.
We are also raising our PO from Rs1,212 to Rs1,355 (24% upside potential)
driven by: (1) our EPS upgrade of 4% for FY12e and 11% for FY13e, and
(2) change in PO basis from P/E of 16x FY12e to 15x FY13e.
We now expect the company to achieve 15%+ profit growth in FY12e and FY13e
vs marginal decline in FY10 and 4% growth in 9MFY11. Growth is likely to pick up
from the current quarter (Q4FY11e onwards). Key drivers of recovery in earnings
growth trajectory are:
1. Traffic growth of 13%+ in FY12/13e against earlier expectations of 8%
growth driven by stronger exports
2. Around 2% rise in average revenue per container handled, due to change in
revenue mix in favour of EXIM route instead of domestic route
3. Rise in EBITDA margin by 30bp in FY12e and 10bp in FY13e given reduction
in empty-running and better revenue mix.
Container traffic growth looking up
Concor is steadily emerging from the impact of global economic downturn which
hit the growth of its containers for Indian exporters in FY09 and FY10. The
company reported 14% EXIM traffic growth in Q3FY10 vs only 2% growth in
FY10 and 5% in H1FY11. According to the company, 14% growth in EXIM
container traffic continues to be witnessed in Jan 2011 too. Key driver of traffic
recovery is the revival in exports, particularly led by higher demand from US and
Europe which form the bulk of India’s container traffic. We expect sustained rise
in exports to drive 14% EXIM traffic growth in FY12e and 13% growth in FY13e.
Revenue mix & productivity to offset cost pressure
Concor’s EBITDA margin has already recovered to 27.9% in 9MFY11 and 28.9%
in Q3FY11 from 26% in FY10. Key drivers of margin improvement are:
„ Decline in the percentage of trains run without load (empty-running) from 6%
in FY10 to 3.8% in Q3FY11 driven by faster growth in exports – thereby
reducing deficit between export and import cargoes.
„ Increase in the percentage of EXIM traffic as percentage of total containers
handled from 77.7% in FY10 to 79% [in?]. Considering that EXIM traffic has
over 28.5% EBIT margin and domestic traffic has less than 15%, the change
in product mix in favor of EXIM has led to margin improvement.
We expect Concor’s EBITDA margin to be 27.6% in FY12e and 27.7% in FY13e
vs 27.7% in FY11e. We expect it to remain strong despite rise in cost pressure (in
the form of increasing rail freight charges and declining pricing power). Key
reasons for sustainability of strong margin are: (1) further improvement in revenue
mix in favour of EXIM, particularly exports, and (2) reduction in turnaround time
per container following recent modernization of terminals.
Upsides from new logistics parks likely from FY12e
Concor is foraying into the logistics parks business by setting up eight new parks,
for which it will invest up to Rs10bn by FY13. Investments in logistics parks will
open up new business opportunities and are likely to have a 25%+ ROCE. Key
drivers of higher business from these parks includes::
„ These parks will offer services over and above terminal services, including
dedicated facilities for packaging, warehousing, and sales office. Eight new
logistics park will come up in two phases – five in the first phase (by endFY12) and the rest in the second (by end-FY13). Each of these parks will
have 100-200ha of land, which is substantially higher than the average size
of 20-30ha of Concor’s existing terminals. The company has completed land
acquisitions in Punjab, Gujarat, Andhra Pradesh, and Rajasthan, and has
identified lands in Tamil Nadu, Karnataka, and Orissa.
„ Some of the logistics parks will also offer terminal services for bulk freight
under the new ’Private Freight Terminal‘ policy of Indian Railways (see
below). This will expand Concor’s scope of business from containerized
cargo to bulk cargo such as cement and steel.
Indian Railways’ thrust on private participation a boon
Indian Railways has released a host of new policies to attract private investment.
Concor is considering to take advantage of these policies given that it has excess
cash balance of over Rs20bn and annual operating cash flow of over Rs10bn.
Following are the list of policies:
„ Private Freight Terminal Operator (PFTO) Policy. This policy allows private
companies including Concor to offer terminal handling service to host of non
containerized bulk commodities like cement, which were hitherto the
monopoly of Indian Railway.
„ Special Freight Train Operator (SFTO) Policy. This policy allows private
companies to own special type of wagons for transporting host of
commodities excluding iron ore and coal on India railway network.
„ Automobile Freight Train Operator (AFTO) Policy. This policy allows private
companies to offer end to end logistics solution for carrying automobiles
made in India to the dealers using Railway network
„ Railways’ Infrastructure for Industry Initiative (R3i) Policy. This policy allows
private companies to own rail line up to certain length and complement the
network under Indian Railways.
Valuation re-rating likely
Concor is currently trading at a P/E of 16.2x FY11e and 14x FY12e. Since 2005,
the stock has mostly been trading at one-year rolling forward P/E of 15x. We
expect the stock to re-rate along with increase in earnings growth driven by rising
port traffic in India. Port traffic is likely to see cyclical recovery driven by strong
exports. Along with higher port traffic growth Concor’s profit is likely to grow at
15%+ in the next two years vs flattish profits for the past two years. In addition to
rise in growth rate, longer-term outlook for Concor is also getting better given its
proposed investment in logistics parks.
We expect Concor to trade at a P/E of 15x FY13e in one year’s time and hence
are raising our PO to Rs1,355 (Rs1,212 earlier).
Risks
Decline in average distance per container
Concor’s profit growth in 9MFY11 got hit by around 8% in the average distance
carried per container for EXIM traffic, given a combination of: (1) a shift in traffic
to new ports such as Mundra and Pipavav which are closer to customers; and
(2) a shift in traffic demand for goods which are carried over a smaller distance.
Further decline in distance travelled can affect our earnings estimates. However,
the lead distance has stopped declining from Q1FY11 level. Also, Concor is
seeing lower turnaround time in private ports such as Pipavav and Mundra,
offsetting the impact of decline in lead distance.
Fall in pricing power
The key negative development of the past three quarters for Concor is the decline
in its ability to pass on the railway freight hike to its customers. According to the
company, it has so far passed on 80% of the Indian Railways’ freight hike. The
decline in pricing power could be structural and is due to rising competition.
However, Concor may be able to compensate the loss of pricing power by
increasing terminal service revenue with the help of its investments in logistics
parks going forward, in our view.
Jump in capex
Concor is going to have annual capex of around Rs10bn in FY12 and FY13 vs
around Rs3bn per annum during the FY05-10 period. The jump in capex is due to
the company’s proposed foray into logistics parks, which could have high
gestation periods and bring down ROE and ROCE. However, we are assuming
the rise in capex to be positive for Concor which has been struggling to deploy its
excess cash and expand the scope of business over the past couple of years.
De-rating of PE to 10x level of pre 2004 period
Concor though is trading mostly above 15x one year forward PE since 2006 has
the risk of trading at around 10x , at which it used to trade before 2006. Lower PE
prior to 2006 can be attributed to lower PE of sensex if we adjust for the IT
stocks. We expect the stock to trade at least in line with Sensex PE which we
expect to trade at 15x FY13e in a years time.
Price objective basis & risk
Container Corp (CIDFF)
Our PO of Rs1,355 is based on PE of 15x on FY13E earnings. The stock is
currently trading at 14x FY12e and 12x FY13e. We expect the stock to rerate to
15x FY13e in one year along with increase in profit growth rate to 15% and
improvement in longer term prospect owing to the proposed foray into logistiocs
parks. Since 2005 the stock has mostly traded at one year forward rolling PE in
excess of 15x barring the brief period of sub prime crisis driven derating in early
2009. Risks: higher competition from road transport owing to slower than
anticipation expansion of railway network, decline in distance travelled per
container owing to installation of new ports closer to key markets, and decline in
pricing power.
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