Container Corporation's Q2FY20 results (Neutral): Strong operational performance
Q2FY20 result highlights
- Adj. PAT fell 9% yoy to Rs3.04bn: due to no recognition of SEIS income (govt export incentive; FY20 yet to be notified). Ex-SEIS, PAT grew 8% yoy driven by sharp margin expansion.
- Revenue growth muted at +1% yoy to Rs17.4bn: due to 2% yoy volume decline (EXIM -2.7% yoy & domestic +2.1% yoy; originating -3% yoy) led by weak macro trade as reflected in port volumes. This was offset by 3% yoy increase in realisations (exim +2%; domestic +5%) led by 5% freight hike effective 1st April 2019 and service charge hikes in 2HFY19.
- Margins expand 150bps yoy to 25%: on 19% yoy drop in empty running charges (exim -14%, domestic -25%; 25% disc by Railways) higher lead distances (typically better margins) and Rs262m lower other expenses on IndAS 116. EBIT margins: Exim +141bps yoy to 23.8%, domestic -317bps yoy to 5.2%. Hence, EBITDA grew 8% yoy to Rs4.35bn. Higher depreciation (impact of IndAS 116) +22% yoy to Rs1.28bn and finance cost of Rs81mn (vs nil in 2Q19) impacted profitability.
- Reported loss of Rs3.22bn: due to reversal of the disallowed SEIS income of Rs8.6bn (Rs6.4bn net of tax; FY16-19) & Rs91.5mn (SEIS cost).
- Advance freight: Concor had paid an advance freight charge of Rs30bn to the Indian Railways, with Rs15bn payable in Sept-19. However, Concor has utilised only Rs19bn of this Rs30bn advance and has delayed the advance freight payable in Sep-19.
Conf call highlights: (1) FY20E volume guidance cut to flat vs 10% growth earlier; with 4-5% yoy revenue and PAT growth (2) Lost mkt share from 73%+ in 1HFY19 to 67% in 1HFY20 led by focus on profitable and long lead distance volumes (3) Capex to pick up in 2H20 on DFCC compliant rakes with 25 tonnes payload (Nov-19 onwards); (4) Terminal land lease is at Rs1175/TEU (40-45% of volumes; 41 of 84 terminals) with change linked to previous year’s PAT performance.
Impact on financials: FY20/21 EPS upgrade by 3%/5% to Rs17.2/19.5
Valuations & view
Overall, the quarter’ performance has been strong with margin expansion despite weak volumes led by efficiencies at play (price hikes and better volume mix). The strong operational performance illustrates the inherent strength of the business model which will likely benefit once DFCC is commissioned (faster turnaround times, higher mkt share). However we believe at 30x FY21E earnings (17% EBIT CAGR over FY19-21E), the stock factors in the positives. The strategic sale to private player with mgmt. control could drive re-rating of the stock. Neutral. ​
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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