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Container Corporation's Q2FY18 results (Neutral) - Volumes strong, margins miss

Q2FY18 result highlights

• PAT +41%yoy to Rs2.2bn: led by margin expansion & higher other inc.
• Revenues increased 5% yoy to Rs14.3bn: led by 11.2% yoy growth in volumes on improved exim trade (exim +11% yoy; originating +7% yoy) and domestic (+12.6% yoy). However, realisations in exim continued to decline (-7.7% yoy) on lower lead distances (higher share of volumes from Mundra and east ports like Kolkata, Vizag, etc. vs JNPT). However, domestic segment saw 4% yoy increase in realisations.
• Double stacking benefits & lower empty runs drive yoy margin expansion: OPM at 19.7% (+300bps yoy) led by low base. We note margins fell 270bps qoq led by a one-time gain of Rs288mn in 1Q18 and lower double stacking qoq (4% qoq drop to 533 rakes). Overall, exim margin +110bps yoy to 17% as empty running cost fell 19% yoy to Rs308m led by higher double stacking via Khatuwas (~2x yoy increase). Domestic margins +277bps yoy to 5.6% due to low base. Hence, EBITDA increased 24% yoy to Rs2.8bn.

Conf call highlights: (1) FY18 volume guidance maintained at 10-12% (2) Gained mkt chare at JNPT at 83%, while lost mkt share at Mundra at 50.2% (3) Empty running charges fell 5% yoy to Rs588m on lower imbalance and higher double stacking (likely to double in FY18 over FY17) (4) Typically lower lead distance typically drives lower margins, lead distance likely to fall further (5) Domestic segment saw lower volumes qoq due to GST (6) Govt is yet to notify grants under the SEIS scheme (7) 2HFY18 to see commissioning of 7 MMLPs, (8) Capex to sustain at Rs10bn for FY18.

Key positives: Strong volume growth, margin expansion

Key negatives: Drop in leads; Khatuwas captive volumes yet to ramp up

Impact on financials: FY18/19 EPS cut by 2.6%/3.6% to Rs46.3/52.4

Valuations & view

We expect Concor to see 12% volume CAGR over FY17-FY19E due to low base as also pick up in international trade. Moreover as double stacking benefit scales up, we expect 16% earnings CAGR over FY17-19. However, Rs60bn capex (over next 5 years), towards logistics parks is unlikely to be earnings accretive in medium term (gradual volume ramp up as seen in Khatuwas) and would drag return ratios. We believe valuations of 26.5x FY19E earnings and 22x FY19E EV/EBITDA factor in long term positives, while time bound govt incentives are unlikely to get a rich multiple. Neutral.