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CONTAINER CORPORATION OF INDIA (CONCOR)
PRICE: RS.930 RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.1000 FY12E P/E: 13.7X; P/ABV: 2.1X
Stock has corrected significantly - change rating to Accumulate
from Reduce
Stock has underperformed the broader market in the last one
year
Since we had initiated coverage on Concor exactly a month back with a Reduce
rating and TP of Rs 1000 (CMP was Rs 1098 on 29th July 2011) the stock has fallen
17 % surpassing our target price. In fact it has underperformed the broader market
in the last one year by falling 29% versus 15% fall in nifty. Now the stock trades at
2.1 x FY12E P/B, reasonable considering ~16% RoE. Three year average historical
one year forward P/B for Concor is 2.5. In case of P/E multiple, it trades at 13.7
times FY12E, which we believe is little undervalued in context of the healthy operating
margin of above 25% with strong operational cash flows of ~ Rs 24 bn over
FY11 to FY13E and healthy free cash flow of ~Rs14 bn over FY11 TO FY13E. Average
historical one year forward P/E for Concor for the last 3 years is 16.
Concor has a mammoth infrastructure
Concor had acquired most if its land around 22 years back on long term lease from
Indian Railways (IR) and the network of ICD and CFS on these pan India pieces of
land were built in a phased manner. These terminals are located strategically along
the key container-transporting corridors in the country. Today private operators have
mostly acquired private land at market rates to set up their own inland container
depots (ICDs). Even the 10,000 odd wagons which Concor owns were acquired long
time back and have depreciated a lot. Consequently the cost of service of Concor is
comparatively low than the private players.
Pan India infrastructure for Concor
Nos
No of rakes 220
No of wagons 10,000
No of ICDs 60
Source: Company
Even the employee cost (even after the sixth pay commission) has been only around
2% of its revenues compared to 5% for private players like Gateway Distriparks Limited
(GDL).The above factors coupled with competitive pricing enables Concor to
enjoy ROE of ~ 20%, one of the factors that lured most of the private players to
enter the container rail business.
Operational performance and cash flow generation continuous 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.
Competition continuous to intensify - Private container rail business
growing steadily
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 8 rakes in the next
two years. Also their Faridabad ICD is expected to become operational by
Q3FY12.While Concor relatively is going slow with their capacity expansion
programme.
We estimate that Concor which has already lost 20% Exim business to private operators
would lose further market share to private operators like In logistics Solutions,
Boxtrans Logistics, Gateway Distriparks and Arshiya International.
Railway policy change has hampered domestic volumes in
Q1FY12 - domestic volumes to slow down for the company
Concor reported a 13% YoY decline in domestic volumes in Q1FY12 primarily led by
recent railway policy effective Dec-2010. Railways increased the specified rating of
five commodities (cement, stone other than marbles, iron & steel, alloys & metals,
POL products) leading to higher haulage by 100% to 275%. This led to Concor losing
almost the entire volumes of these commodities to road transportation. In fact,
up until Nov-2010 domestic volumes had witnessed an 8% YoY growth, which were
almost completely nullified by the loss of these volumes (reported 9MFY11 domestic
volume growth of about 5%). For full FY11, Concor reported a domestic volume
growth of about 0.9% YoY. This step of railways is likely to impact YoY growth figures
in FY12E as well, since first eight months of FY11 were not impacted by the
policy change. We estimate the domestic volumes to grow at a slow pace of 6% in
FY12E (against historical 8%).
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.
Railway policy change has hampered domestic volumes in
Q1FY12 - domestic volumes to slow down for the company
Concor reported a 13% YoY decline in domestic volumes in Q1FY12 primarily led by
recent railway policy effective Dec-2010. Railways increased the specified rating of
five commodities (cement, stone other than marbles, iron & steel, alloys & metals,
POL products) leading to higher haulage by 100% to 275%. This led to Concor losing
almost the entire volumes of these commodities to road transportation. In fact,
up until Nov-2010 domestic volumes had witnessed an 8% YoY growth, which were
almost completely nullified by the loss of these volumes (reported 9MFY11 domestic
volume growth of about 5%). For full FY11, Concor reported a domestic volume
growth of about 0.9% YoY. This step of railways is likely to impact YoY growth figures
in FY12E as well, since first eight months of FY11 were not impacted by the
policy change. We estimate the domestic volumes to grow at a slow pace of 6% in
FY12E (against historical 8%).
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.
Liquidity in the stock is a concern
Concor is a Government Enterprise with Government of India holding 63.08% and
Institutions including foreign institutions holding around 33.72% in the company. Out
of the total number of shares of 130 mn, only around 3.2 % (or 4 mn shares) is
available as free float. This is the only reason for low volumes in the stock at the
bourses. Similar is the case even in Allcargo Global Logistics
Outlook and Valuation
We are not changing the estimates as nothing has fundamentally changed in the
company/sector. We continue to value Concor at 15x FY12E P/E. Our value reflects
the following: 1) 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
operating margins of above 25% both in FY12E and FY13E. 3) Operational
cash flows of ~ Rs 24 bn over FY11 to FY13E and healthy free cash flow of ~Rs14 bn
over FY11 to FY13E.With the above projections, we believe the valuations have become
little attractive and that has lead to the change in the rating. We now have an
ACCUMULATE rating on the stock with an unchanged target price of 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.930 RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.1000 FY12E P/E: 13.7X; P/ABV: 2.1X
Stock has corrected significantly - change rating to Accumulate
from Reduce
Stock has underperformed the broader market in the last one
year
Since we had initiated coverage on Concor exactly a month back with a Reduce
rating and TP of Rs 1000 (CMP was Rs 1098 on 29th July 2011) the stock has fallen
17 % surpassing our target price. In fact it has underperformed the broader market
in the last one year by falling 29% versus 15% fall in nifty. Now the stock trades at
2.1 x FY12E P/B, reasonable considering ~16% RoE. Three year average historical
one year forward P/B for Concor is 2.5. In case of P/E multiple, it trades at 13.7
times FY12E, which we believe is little undervalued in context of the healthy operating
margin of above 25% with strong operational cash flows of ~ Rs 24 bn over
FY11 to FY13E and healthy free cash flow of ~Rs14 bn over FY11 TO FY13E. Average
historical one year forward P/E for Concor for the last 3 years is 16.
Concor has a mammoth infrastructure
Concor had acquired most if its land around 22 years back on long term lease from
Indian Railways (IR) and the network of ICD and CFS on these pan India pieces of
land were built in a phased manner. These terminals are located strategically along
the key container-transporting corridors in the country. Today private operators have
mostly acquired private land at market rates to set up their own inland container
depots (ICDs). Even the 10,000 odd wagons which Concor owns were acquired long
time back and have depreciated a lot. Consequently the cost of service of Concor is
comparatively low than the private players.
Pan India infrastructure for Concor
Nos
No of rakes 220
No of wagons 10,000
No of ICDs 60
Source: Company
Even the employee cost (even after the sixth pay commission) has been only around
2% of its revenues compared to 5% for private players like Gateway Distriparks Limited
(GDL).The above factors coupled with competitive pricing enables Concor to
enjoy ROE of ~ 20%, one of the factors that lured most of the private players to
enter the container rail business.
Operational performance and cash flow generation continuous 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.
Competition continuous to intensify - Private container rail business
growing steadily
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 8 rakes in the next
two years. Also their Faridabad ICD is expected to become operational by
Q3FY12.While Concor relatively is going slow with their capacity expansion
programme.
We estimate that Concor which has already lost 20% Exim business to private operators
would lose further market share to private operators like In logistics Solutions,
Boxtrans Logistics, Gateway Distriparks and Arshiya International.
Railway policy change has hampered domestic volumes in
Q1FY12 - domestic volumes to slow down for the company
Concor reported a 13% YoY decline in domestic volumes in Q1FY12 primarily led by
recent railway policy effective Dec-2010. Railways increased the specified rating of
five commodities (cement, stone other than marbles, iron & steel, alloys & metals,
POL products) leading to higher haulage by 100% to 275%. This led to Concor losing
almost the entire volumes of these commodities to road transportation. In fact,
up until Nov-2010 domestic volumes had witnessed an 8% YoY growth, which were
almost completely nullified by the loss of these volumes (reported 9MFY11 domestic
volume growth of about 5%). For full FY11, Concor reported a domestic volume
growth of about 0.9% YoY. This step of railways is likely to impact YoY growth figures
in FY12E as well, since first eight months of FY11 were not impacted by the
policy change. We estimate the domestic volumes to grow at a slow pace of 6% in
FY12E (against historical 8%).
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.
Railway policy change has hampered domestic volumes in
Q1FY12 - domestic volumes to slow down for the company
Concor reported a 13% YoY decline in domestic volumes in Q1FY12 primarily led by
recent railway policy effective Dec-2010. Railways increased the specified rating of
five commodities (cement, stone other than marbles, iron & steel, alloys & metals,
POL products) leading to higher haulage by 100% to 275%. This led to Concor losing
almost the entire volumes of these commodities to road transportation. In fact,
up until Nov-2010 domestic volumes had witnessed an 8% YoY growth, which were
almost completely nullified by the loss of these volumes (reported 9MFY11 domestic
volume growth of about 5%). For full FY11, Concor reported a domestic volume
growth of about 0.9% YoY. This step of railways is likely to impact YoY growth figures
in FY12E as well, since first eight months of FY11 were not impacted by the
policy change. We estimate the domestic volumes to grow at a slow pace of 6% in
FY12E (against historical 8%).
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.
Liquidity in the stock is a concern
Concor is a Government Enterprise with Government of India holding 63.08% and
Institutions including foreign institutions holding around 33.72% in the company. Out
of the total number of shares of 130 mn, only around 3.2 % (or 4 mn shares) is
available as free float. This is the only reason for low volumes in the stock at the
bourses. Similar is the case even in Allcargo Global Logistics
Outlook and Valuation
We are not changing the estimates as nothing has fundamentally changed in the
company/sector. We continue to value Concor at 15x FY12E P/E. Our value reflects
the following: 1) 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
operating margins of above 25% both in FY12E and FY13E. 3) Operational
cash flows of ~ Rs 24 bn over FY11 to FY13E and healthy free cash flow of ~Rs14 bn
over FY11 to FY13E.With the above projections, we believe the valuations have become
little attractive and that has lead to the change in the rating. We now have an
ACCUMULATE rating on the stock with an unchanged target price of Rs 1000.
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