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CONTAINER CORPORATION OF INDIA (CONCOR)
PRICE: RS.975 RECOMMENDATION: REDUCE
TARGET PRICE: RS.950 FY13E P/E: 13.9X
Subdued operational performance
Concor reported its Q2FY12 net profit at Rs 1,754 million (-15 % YoY and -
25% QoQ) ~ 16% lower than what we had estimated. This was on account
of lower realizations in the Exim segment of Rs 14,722 per TEU (versus Rs
14,864 per TEU YoY). This is primarily due to falling lead distance with some
originating volumes shifting from JNPT to Pipavav and Mundra for the
company. However realization have increased in the domestic segment, as it
has passed a significant portion (not entirely) of the rail haulage hike by
Indian Railways (IR) to the customers. Consequently the operating margins
of the company came in at 26.4 % falling by 100 bps YoY. Revenues were
reported at Rs 9.9 bn growing 5% YoY primarily aided by growth in
volumes in the Exim segment (+10% YoY and 6% QoQ) and higher YoY
realization (+8 % YoY and 7% QoQ) in the domestic segment. Falling lead
distance, higher domestic haulage (margin pressure), competition and
infrastructure bottlenecks of IR are jeopardizing the growth prospects of
Concor. We change our rating to REDUCE from Accumulate with a price
Target of Rs 950.
Highlights of the quarter
n Revenues in the Exim segment was reported at Rs 7,999 (+9% YoY and +4%
QoQ). Revenues in the domestic segment was reported at Rs 1,946 mn (-8%
YoY and +8% QoQ). Overall revenues was reported at Rs 9,945 mn (+5% YoY
and +5% QoQ).
n Operating margins for the quarter has slipped by 100 bps to 26.4 % primarily
due to higher rail freight expense. Management indicated that the Corporate
Social Responsibility (CSR) expense was also up in the quarter.
n With interest rates moving up by more than 200 bps in the last one year and
Concor having a cash reserve of Rs 23 bn , the other income component of the
company has gone up to Rs 753 mn ( from Rs 381 mn YoY)
n There is a prior period adjustment made in Q2FY12 of Rs 468 mn which pertains
to income tax adjustment of FY11. Company would continue to be a MAT paying
entity going ahead with effective tax rate at 20%.
n Consequently the PAT of the company has slipped to Rs 1754 mn (-25% QoQ
and -15% YoY).
Total volumes have grown to 655,845 (+5 YoY and 6% QoQ). Volumes in the Exim
segment has grown to 543,324 TEU (+10% YoY and 6% QoQ) while volumes have
declined in the domestic segment by 14% YoY (+2% QoQ).
Realizations have been under pressure in the Exim segment primarily due to falling
lead distance coupled with competition (waning pricing power). Realization in the
Exim segment has fallen in Q2FY12 to Rs 14,722 per TEU (-1% YoY and -4% QoQ).
However the realization have increased in the domestic segment, as the company
was able to pass on a significant portion (not entirely) of the rail haulage hike on
certain commodities by IR from January 2011. However this hike is hurting the domestic
volumes as the company has lost some business of these commodities to either
IR or to roadways.
Note: India Railway (IR) is reviewing the domestic rail policy of December 2010
which dented the domestic volumes for Concor in the last two quarters. This policy
may be reversed by IR with some conditions. If such a reversal happens, we would
increase our domestic volume assumption and upgrade earnings and TP.
Empty running and lead distance
The company spent a total of Rs 471 mn on empty running in the quarter versus Rs
457 mn in Q2FY11. While the lead distance in the Exim segment (loaded) was 1020
km versus 1065 km in Q2FY11 (it was 1170 km in FY10).
Cash balance and other income
Concor today has a cash balance of Ra 23 billion on its balance sheet which would
yield the company around 9% per annum (versus 7% yield YoY). Consequently the
other income for the quarter was higher at Rs 753 million (versus Rs 381 million
YoY).
Competition continues to intensify - Private container rail business
growing gradually
Private operators are getting tie-ups (as Concor do) with shipping lines to drive their
Exim volumes. Most private players have also accelerated their ICD expansion and
rolling stock addition programme to get a share in the Exim business. For instance,
GDL which currently operates 21 rakes would be adding further 6 rakes in the next
two years. Also their Faridabad ICD is expected to become operational by Q3FY12.
On the other hand, Concor is going slow with their capacity expansion programme.
performance and cash flow generation continues to
be healthy
Even though operational performance of Concor is not at historical high (ROE has
fallen from 25% in FY07 to around ~16% in FY11), still it has one of the highest
operating margins of 25% (Vs. 17% of GDL). Also we estimate strong operational
cash flows of ~ Rs 24 bn over FY11 to FY13E and healthy free cash flow of ~Rs14 bn
over FY11 TO FY13E. The key reason for fall in ROE for the company is the fall in
asset turnover - the asset turnover for Concor has fallen from 0.97 in FY08 to 0.72 in
FY11. Similarly asset turnover has impacted the ROCE of the company. This is primarily
due to competition where the asset + additional capex are not translating into
revenue and profitability as it did historically for Concor.
Another comforting factor is the Healthy balance sheet - zero
debt, substantial cash balance and no funding issues
We estimate Concor to spending around Rs 10 bn over the next 24 months towards
capex. The cash balance of Rs 23 bn and operating cash flow of about ~Rs 24 bn
over FY11 to FY13E very comfortably supports such a capex. The company doesn't
have to take high cost debt in these uncertain times.
Management continues to guide for 10% top-line and bottomline
growth in FY12E
Concor management has guided for a revenue growth of 10% in FY12E with sustained
margins. This is above our estimate of an 8% growth in revenues. The missmatch
between our estimates and management guidance is likely on potential sluggish
growth in domestic volumes. The policy was implemented only in December-
2010 and hence the first eight months of FY12E are likely to witness weak volumes
on a YoY basis. Our estimates imply an overall volume growth of 5.6 % in FY12E
primarily led by Exim volume growth estimate of ~ 5.5% with domestic volumes
growing by 6% YoY.
Outlook and Valuation
Stock has underperformed the broader market in the last one year
Since we had initiated coverage on Concor exactly 3 months back with a Reduce
rating and TP of Rs 1000 (CMP was Rs 1098 on 29th July 2011) the stock has fallen
13 % surpassing our target price. In fact it has underperformed the broader market
in the last one year by falling 25% versus 13% fall in nifty. Now the stock trades at
2.0 x FY13E P/B, slightly expensive considering ~15% RoE. Three year average historical
one year forward P/B for Concor is 2.1 with average ROE of 18.5%. In case of
P/E multiple, it trades at 13.9 times FY13E, which we believe is little overvalued in
context of the continuous loss in Exim market share, subdued performance of domestic
segment and falling operating margins. Average historical one year forward
P/E for Concor for the last 3 years is 15.
We are not changing the estimates as we are not changing our assumptions. We
value Concor at 13.5x FY13E P/E (10% discount to average one year forward). Our
valuation reflects the following: 1) Sluggish overall volume CAGR of ~5.6 % over
FY11 to FY13E primarily led by Exim volume CAGR of 5.5 % and domestic volume
CAGR of 6% YoY.2) Sustained drop in operating margins due to competition and
falling lead distance (structural change). With the above projections, we believe the
valuations are still stretched and that has lead to the change in the rating of the
stock. We now have a REDUCE rating on the stock with a changed target price of
Rs 950 (earlier Rs 1000).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
CONTAINER CORPORATION OF INDIA (CONCOR)
PRICE: RS.975 RECOMMENDATION: REDUCE
TARGET PRICE: RS.950 FY13E P/E: 13.9X
Subdued operational performance
Concor reported its Q2FY12 net profit at Rs 1,754 million (-15 % YoY and -
25% QoQ) ~ 16% lower than what we had estimated. This was on account
of lower realizations in the Exim segment of Rs 14,722 per TEU (versus Rs
14,864 per TEU YoY). This is primarily due to falling lead distance with some
originating volumes shifting from JNPT to Pipavav and Mundra for the
company. However realization have increased in the domestic segment, as it
has passed a significant portion (not entirely) of the rail haulage hike by
Indian Railways (IR) to the customers. Consequently the operating margins
of the company came in at 26.4 % falling by 100 bps YoY. Revenues were
reported at Rs 9.9 bn growing 5% YoY primarily aided by growth in
volumes in the Exim segment (+10% YoY and 6% QoQ) and higher YoY
realization (+8 % YoY and 7% QoQ) in the domestic segment. Falling lead
distance, higher domestic haulage (margin pressure), competition and
infrastructure bottlenecks of IR are jeopardizing the growth prospects of
Concor. We change our rating to REDUCE from Accumulate with a price
Target of Rs 950.
Highlights of the quarter
n Revenues in the Exim segment was reported at Rs 7,999 (+9% YoY and +4%
QoQ). Revenues in the domestic segment was reported at Rs 1,946 mn (-8%
YoY and +8% QoQ). Overall revenues was reported at Rs 9,945 mn (+5% YoY
and +5% QoQ).
n Operating margins for the quarter has slipped by 100 bps to 26.4 % primarily
due to higher rail freight expense. Management indicated that the Corporate
Social Responsibility (CSR) expense was also up in the quarter.
n With interest rates moving up by more than 200 bps in the last one year and
Concor having a cash reserve of Rs 23 bn , the other income component of the
company has gone up to Rs 753 mn ( from Rs 381 mn YoY)
n There is a prior period adjustment made in Q2FY12 of Rs 468 mn which pertains
to income tax adjustment of FY11. Company would continue to be a MAT paying
entity going ahead with effective tax rate at 20%.
n Consequently the PAT of the company has slipped to Rs 1754 mn (-25% QoQ
and -15% YoY).
Total volumes have grown to 655,845 (+5 YoY and 6% QoQ). Volumes in the Exim
segment has grown to 543,324 TEU (+10% YoY and 6% QoQ) while volumes have
declined in the domestic segment by 14% YoY (+2% QoQ).
Realizations have been under pressure in the Exim segment primarily due to falling
lead distance coupled with competition (waning pricing power). Realization in the
Exim segment has fallen in Q2FY12 to Rs 14,722 per TEU (-1% YoY and -4% QoQ).
However the realization have increased in the domestic segment, as the company
was able to pass on a significant portion (not entirely) of the rail haulage hike on
certain commodities by IR from January 2011. However this hike is hurting the domestic
volumes as the company has lost some business of these commodities to either
IR or to roadways.
Note: India Railway (IR) is reviewing the domestic rail policy of December 2010
which dented the domestic volumes for Concor in the last two quarters. This policy
may be reversed by IR with some conditions. If such a reversal happens, we would
increase our domestic volume assumption and upgrade earnings and TP.
Empty running and lead distance
The company spent a total of Rs 471 mn on empty running in the quarter versus Rs
457 mn in Q2FY11. While the lead distance in the Exim segment (loaded) was 1020
km versus 1065 km in Q2FY11 (it was 1170 km in FY10).
Cash balance and other income
Concor today has a cash balance of Ra 23 billion on its balance sheet which would
yield the company around 9% per annum (versus 7% yield YoY). Consequently the
other income for the quarter was higher at Rs 753 million (versus Rs 381 million
YoY).
Competition continues to intensify - Private container rail business
growing gradually
Private operators are getting tie-ups (as Concor do) with shipping lines to drive their
Exim volumes. Most private players have also accelerated their ICD expansion and
rolling stock addition programme to get a share in the Exim business. For instance,
GDL which currently operates 21 rakes would be adding further 6 rakes in the next
two years. Also their Faridabad ICD is expected to become operational by Q3FY12.
On the other hand, Concor is going slow with their capacity expansion programme.
performance and cash flow generation continues to
be healthy
Even though operational performance of Concor is not at historical high (ROE has
fallen from 25% in FY07 to around ~16% in FY11), still it has one of the highest
operating margins of 25% (Vs. 17% of GDL). Also we estimate strong operational
cash flows of ~ Rs 24 bn over FY11 to FY13E and healthy free cash flow of ~Rs14 bn
over FY11 TO FY13E. The key reason for fall in ROE for the company is the fall in
asset turnover - the asset turnover for Concor has fallen from 0.97 in FY08 to 0.72 in
FY11. Similarly asset turnover has impacted the ROCE of the company. This is primarily
due to competition where the asset + additional capex are not translating into
revenue and profitability as it did historically for Concor.
Another comforting factor is the Healthy balance sheet - zero
debt, substantial cash balance and no funding issues
We estimate Concor to spending around Rs 10 bn over the next 24 months towards
capex. The cash balance of Rs 23 bn and operating cash flow of about ~Rs 24 bn
over FY11 to FY13E very comfortably supports such a capex. The company doesn't
have to take high cost debt in these uncertain times.
Management continues to guide for 10% top-line and bottomline
growth in FY12E
Concor management has guided for a revenue growth of 10% in FY12E with sustained
margins. This is above our estimate of an 8% growth in revenues. The missmatch
between our estimates and management guidance is likely on potential sluggish
growth in domestic volumes. The policy was implemented only in December-
2010 and hence the first eight months of FY12E are likely to witness weak volumes
on a YoY basis. Our estimates imply an overall volume growth of 5.6 % in FY12E
primarily led by Exim volume growth estimate of ~ 5.5% with domestic volumes
growing by 6% YoY.
Outlook and Valuation
Stock has underperformed the broader market in the last one year
Since we had initiated coverage on Concor exactly 3 months back with a Reduce
rating and TP of Rs 1000 (CMP was Rs 1098 on 29th July 2011) the stock has fallen
13 % surpassing our target price. In fact it has underperformed the broader market
in the last one year by falling 25% versus 13% fall in nifty. Now the stock trades at
2.0 x FY13E P/B, slightly expensive considering ~15% RoE. Three year average historical
one year forward P/B for Concor is 2.1 with average ROE of 18.5%. In case of
P/E multiple, it trades at 13.9 times FY13E, which we believe is little overvalued in
context of the continuous loss in Exim market share, subdued performance of domestic
segment and falling operating margins. Average historical one year forward
P/E for Concor for the last 3 years is 15.
We are not changing the estimates as we are not changing our assumptions. We
value Concor at 13.5x FY13E P/E (10% discount to average one year forward). Our
valuation reflects the following: 1) Sluggish overall volume CAGR of ~5.6 % over
FY11 to FY13E primarily led by Exim volume CAGR of 5.5 % and domestic volume
CAGR of 6% YoY.2) Sustained drop in operating margins due to competition and
falling lead distance (structural change). With the above projections, we believe the
valuations are still stretched and that has lead to the change in the rating of the
stock. We now have a REDUCE rating on the stock with a changed target price of
Rs 950 (earlier Rs 1000).
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