CONTAINER CORPORATION OF INDIA (CONCOR)

Transcription

1 RESULT UPDATE Amit Agarwal CONTAINER CORPORATION OF INDIA (CONCOR) PRICE: RS.1210 RECOMMENDATION: BUY TARGET PRICE: RS.1660 FY17E P/E: 18.2X Concor reported weak numbers for Q3FY16 with drop in EXIM volumes at 599,506 TEUs (-7.5% QoQ), sales dipping by 7% QoQ at Rs 14bn and operating margins again dipping by 120 bps QoQ at 19.9% primarily due to three factors: 1) Weak global container trade, 2) Weak exports from India and 3) Arbitrary haulage hike by Indian railways in both EXIM and domestic markets. To offset the above impact, the company is taking strong measures to improve volumes going forward which is likely to reflect from Q1FY17. Summary table (Rs mn) FY15 FY16E FY17E Sales 55,322 59,766 67,593 Growth (%) EBITDA 12,961 13,426 15,390 EBITDA margin (%) PBT 12,934 14,576 16,415 Net profit 10,466 11,567 12,932 EPS (Rs) Growth (%) CEPS (Rs) BV (Rs/share) Dividend / share (Rs) ROE (%) ROCE (%) Net cash (debt) 29,474 30,466 32,948 NW Capital (Days) (8.9) (9.5) (10.1) EV/EBITDA (x) P/E (x) P/Cash Earnings P/BV (x) , Kotak Securities - Private Client Research We are not changing our volume assumptions and estimates and expect the company to report 10% volume CAGR over FY15 to FY18E in Exim (versus guidance of 10%) and volume CAGR of 5% in the domestic segment (versus guidance of 6%), Ebidta margin of ~22/23%, PAT CAGR of 11% and ROE of 13.4%. This would be on the back of estimated recovery in trade (recovery from FY17 on a lower base of FY16), strong asset base and relationships of the company and steps taken by the company to revive growth. We continue to value the company at 25 times FY17E EPS and Maintain BUY with an unchanged TP of Rs Quarterly Snapshot (Rs mn) Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Revenues 14,512 14,974 14,208 15,019 14,046 Staff cost Rail freight expenses 8,276 8,934 8,927 9,455 8,848 Others 2,163 2,481 1,994 2, Operating expenditure 10,848 11,788 11,294 11,857 11,245 EBIDTA 3,664 3,186 2,914 3,162 2,801 EBIDTA (%) Other Income 852 1, Interest Depreciation Taxation PAT 3,006 2,930 2,104 2,336 2,062 Prior period adjustment Adjusted PAT 3,006 2,930 2,104 2,336 2,062 Highlights of the quarter Revenues have remained flat in EXIM at Rs bn (flat QoQ) with dip in volumes at 599,506 TEUs (-7.5% QoQ) which indicate price hikes taken by the company to pass on the hike in haulage charges in the current quarter. While revenues were stable in the domestic segment at Rs 2.72 bn (+2% QoQ) with volume at 110,816 TEUs (+6% QoQ) As per management, Concor has taken a total hike of 13% in the last one year in tariffs to pass on the hike of 28% by Indian Railways (IR) effective January 1, We can expect more such hikes in near future as well till the Concor passes on a significant portion of the haulage hike to customers. Ebidta was reported at Rs 2.8 bn translating into a weak operating margin of 19.9% (-120 bps QoQ). Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited. Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 12

2 Ebidta over quarters has fallen for Concor from 25% to 20% due to weak global container trade, increasing competition, regular hike in rail haulage by IR and imposition of full service tax on containerized traffic. We estimate the margins to improve from here and settle at 23% levels in the longer run. Consequently, PAT was reported at Rs 2.06 bn below our expectation of Rs 2.25 bn Concor is making capex in private freight terminals (PFTs) and Logistics Parks which complement the container rail business of the company and which we believe should be able to improve revenues and volumes for the company going ahead despite a weak business environment. Management estimate capex of Rs 20 bn over FY15 to FY17E. Concor estimates capex of Rs 10 bn per annum over the next 2 financial years, with plans to develop several logistics parks/private freight terminals (PFT) across India and along the dedicated freight corridor. We expect this will add another source of revenue to the company (open for private use) and also complement the current business of the company. The company has already notified and started operations at two PFTs - one in Kahunas and second in Secunderabad. Management expects the number of terminals to increase to 75 (now 60) by end of FY17. We estimate these investments would have a long gestation period and would be returns dilutive in the near term. However, note that return dilution should be seen in the context that currently this capital earns returns attributable to cash only. While short-term pressure may exist, eventually operational returns would exceed cash returns The company is currently having 250 rakes with 10 more rakes expected to join the fleet by end of FY16E and another 10 rakes by end of FY18E. Volumes got impacted in Q3FY16 Volume performance of the company got impacted in the current quarter as well as 9MFY16 due to 1) Weak global container trade, 2) Weak exports from India and 3) Arbitrary haulage hike by Indian railways in both EXIM and domestic markets. Management indicated that the situation may remain subdued in Q4FY16 and improve from Q1FY17. Quarterly volumes and Realisations Volume and realisations Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Exim volumes (TEUs) 665, , , , ,506 Domestic volumes (TEUs) 115, , , , ,816 Total volumes (TEUs) 780, , , , ,322 Exim revenues (Rs Mn) 11,880 11,852 11,570 12,367 12,329 Domestic revenues (Rs mn) 2,632 3,121 2,639 2,653 2,717 Total revenues (Rs mn) 14,512 14,973 14,209 15,020 15,046 Realisation Exim/ TEU 17,861 18,306 18,833 19,071 20,565 Realisation Domestic/ TEU 22,825 26,439 24,494 25,442 24,518 Avg Realisation/TEU 18,595 19,561 19,677 19,954 21,182 We estimate overall volume CAGR of 10% over FY15 to FY18E We estimate the company to deliver 10% volume CAGR over FY15 to FY18E in Exim (versus guidance of 10%) and volume CAGR of 5% in the domestic segment (versus guidance of 6%). Improving volumes is critical in 1) Deploying idle capacity; 2) Reducing empties; 3) Bring down rebates and 4) Business opportunities for all players allaying fears of competition. Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 13

3 Container Volumes for Concor (000) Segment FY13 FY14 FY15 FY16E FY17E FY18E Exim TEUs 2,152 2,361 2,621 2,884 3,201 3,569 YoY % Domestic TEUs YoY % Total 2,585 2,869 3,111 3,395 3,738 4,133 YoY % , Kotak Securities - Private Client Research Empty running was higher in Q3FY16 Both Exim and domestic reported higher empty running in the quarter totaling Rs 718 mn primarily due to weak global trade and slow exports from India. As a result of the above, Concor has resorted to rationalization of routes with consolidation of trips and cutting down of loss making routes. As a result, we estimate empty running cost at Rs 2.5 bn in FY16E and at Rs 2.2 bn in FY17E. Empty running cost for Concor (Rs mn) Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Empty Running cost JNPT continues to key port for the company - Share of other ports have increased JNPT continues to have a lion share of business for Concor with ~41% share, followed by Mundra at ~25% and Gujarat Pipavav at ~18%. Due to capacity constraints at JNPT, volumes have shifted to private ports of Mundra and GPPL on the west coast, who are reporting healthy growth in container volumes and accordingly share of Concor at these ports is on an increasing trend. We estimate this trend to continue at least for the next three financial years Percentage share of various ports for Concor Port FY12 FY13 FY15 FY15 Q1FY16 Q2FY16 Q3FY16 JNPT Chennai Mundra Gujarat Pipavav Despite near-term hiccups, long-term prospects remain intact. Following are the key triggers: Capacity addition at JNPT - The total installed capacity at JNPT is currently at 4.25 Mn TEUs and is developing its fourth container terminal with a handling capacity of 0.8 Mn TEUs. The phase one of the terminal is expected to become operational by the end of JNPT has faced stagnant volumes in the last 3 years primarily due to capacity constraints and currently contributes ~41% to the revenues of Concor. The share in JNPT for Concor has come down primarily due to healthy growth at Mundra and Pipavav. We expect the capacity addition at JNPT to improve volumes for Concor as JNPT is a consumption port as well as a gateway port and has huge demand from shipping lines. Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 14

4 Dedicated freight corridor (DFC) - DFC is expected to link the four major metros covering 2800 km, at a cost of about Rs 950 bn. By connecting power plants and coal mines in the east to ports along the western coast, the rail corridor will help ease port congestion, upgrade rail infrastructure, rationalize freight rates, and aid energy efficiency through reduced diesel consumption. DFC would also be capable of running double stack trains. The first phase of DFC is proposed to come up by Q4FY18E is estimated to benefit Concor in the form of: 1) improved volumes due to increased movement of cargo and 2) Savings as the DFC is expected to lower the turnaround time for container rail companies and also run double stack trains. Impending GST bill - Implementation of the GST is expected to bring benefits like lower turnaround time for vehicles owned by container rail operators and higher income from value added activities such as special purpose warehousing, palletization, and inventory management). All of the above will lead to superior long-term volume growth for rail operators in general and Concor in particular Unparalleled advantages Concor has several intrinsic advantages to beat the industry: (1) long operating history with wide network of terminals and their associated advantages (ability to do double-stacking) for the company and customers, (2) the company is a price setter, increasing business risks for new entrants and peers, (3) intangible advantages (customers' preference/comfort of working with Concor' s ICD based on its relationship with customs and other softer issues) and (4) land availability at the right geography/price (more important for incremental capex). We estimate the margins to settle at 23% levels. Haulage charges are payments made by container train companies to Indian Railways to use the rail network and locomotives and forms almost 50% of the operating cost. IR had increased the same by an average of 28% across categories in December 2014 which had impacted the margins of the company in Q4FY15 and 9MFY16 with Concor gradually passing the same cost to customers (till date Concor has passed on 13%). From our experience we see no long term impact for container train companies as road logistics is much slower (75% slower to rail), costlier to rail for longer routes and suffer from infrastructure bottlenecks. Infact the upcoming Dedicated Freight Corridor (DFC) would shift volumes more towards container rail companies as and when it comes up in the next 3 to 4 years. Disinvestment of Concor The government which currently holds around 62% in Concor would divest around 5% in Q4FY16 (Offer for sale). This event can keep the stock price under pressure till the disinvestment is over. But we are positive on the stock in the longer run. Cash balance/operational cash flow is healthy The cash balance of the company has reduced from ~Rs 29 bn in September 2014 to ~Rs 13 billion on its balance sheet in September 2015 which would yield the company around 8 to 9% per annum. The company has used a large part of the cash reserves to pursue its capex programme and we estimate the company to continue to utilize these cash reserves for financing the expansion plans. In long term we expect the operational returns from the capex to exceed investment cash returns. It is important to note that concor generates around Rs 10 bn of operational cash flow per annum which is sufficient to meet the capex requirements of the company without resorting to debt. Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 15

5 We recommend BUY on Concor with a price target of Rs.1660 Outlook and Valuation Despite near term weakness, we estimate the company to report 10% volume CAGR over FY15 to FY18E in Exim (versus guidance of 10%) and volume CAGR of 5% in the domestic segment (versus guidance of 6%), Ebidta margin of ~22/ 23%, PAT CAGR of 11% and ROE of 13.4%. This would be on the back of estimated recovery in trade, upcoming DFC, strong asset base and healthy relations of the company. We continue to value the company at 25 times FY17E EPS and Maintain BUY with a TP of Rs 1660 Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 16