Company update: Container Corporation (Outperfomer) - Endeavor to be an end to end logistics service provider
Key highlights of our meeting with Container Corporation of India (Concor) management.
Volume growth to remain strong: Sustained port volume growth will continue to boost strong volume momentum. Management maintained guidance of 12% volume growth for FY19 across domestic and exim segments. We note this is despite weakness seen in Nov-18 Indian Railways data.
Focus on end-to-end service: Concor is focusing on becoming a complete logistics solution provider rather than just a transport solution. Towards this goal, the company intends to provide last-mile connectivity for customers to enhance its service levels. Concor is developing a software that will provide the lowest multi-vendor road transportation quote to customers for last-mile transportation versus current system of single vendor quote. The software will be online in 5-6 months (FY20E) to be implemented across terminals on a pan-India basis. Management believes this development will improve the company’s service levels, attract volumes and enhance market share.
Recent hikes to absorb rail haulage hike: In May 2018, Concor increased rail freight rate by Rs1000/TEU and terminal service charges by Rs1500/TEU in mid-Aug 2018. Accordingly, Concor is absorbing the rail haulage hike of 5% or ~Rs650/TEU (on originating volumes) effective 1st Dec-18. Concor will take a hike only in select domestic volumes where it has a cost escalation clause. Concor will consider a hike in FY20E.
Increase in rolling stock to aid faster evacuation and higher double stack: Presently, Concor has ~300 rakes and plans to add 275 rakes over the next 5 years, which will enable the company to evacuate volumes at a faster pace and gain market share. Moreover, Concor is adding and converting its existing fleet of rakes from 61T to 68T (likely by FY20-21E). Higher rake capacity will enable Concor to handle more double stacked rakes (+50% double stack rakes expected in FY19E) and aid margin expansion over the medium term.
Valuation and view
We expect the uptick in port volumes to boost volume growth for Concor. Strategic alliances, price increases and ramp up in double stacking should help Concor post 17% EBITDA CAGR over FY18-20E. While investments in logistics parks will impact near-term return ratios (long gestation period), these parks will enable Concor to maintain a competitive edge and offer seamless logistics solutions to clients over the long term. The stock currently trades at 24x FY20E earnings (28.6x FY20E earnings ex-SIES income). Maintain Outperformer.
Container Corp. of India is engaged in the transportation of containers by rail, management of ports, air cargo complexes and establishing cold-chain. Though rail is the main stay of Co.'s transportation plan, road services are also provided to cater to the need of door-to-door services, whether in the International or Domestic business. Co. is organized on All-India basis into two major operating divisions which are EXIM and Domestic divisions.
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