Container Corporation's Q3FY20 results (Neutral): Weak macros impact volumes;all eyes on DFCC

Q3FY20 result highlights

• Adj. PAT fell 36% yoy to Rs1.76bn: due to no recognition of SEIS income (export incentive), muted operational performance and higher tax.
• Revenue declined 3% yoy to Rs15.3bn: due to 1.7% yoy volume decline (EXIM -2.4% yoy & domestic +2.4% yoy; originating -3.5% yoy) led by weak macro trade as reflected in port volumes. Further realisations were down 1.2% yoy (exim -1.3%; domestic -2.4%) due to lower lead distances and adverse mix towards higher movement of empty flats.  
• Margins expand 312bps yoy to 24.3%: on 18% yoy drop in empty running charges (exim -28%, domestic -7%; 25% disc by railways), lower other expenses on IndAS 116 (Rs405mn) and Rs450m lower land license fees (adj for payment made in prior period). EBIT margins: Exim +480bps yoy to 23.9%, domestic -654bps yoy to 0.7% (higher loss in coastal shipping on aggressive pricing to gain mkt share). Overall, EBITDA grew 11% yoy to Rs3.72bn. Higher depreciation (+19% yoy to Rs1.26bn; impact of IndAS 116) & interest (Rs60mn; nil in 3Q19) impacted PAT.
• Higher tax of 42% in the quarter as Concor has shifted to the new tax regime of 25.17% (Rs530mn impact of adjustment to def. tax liabilities).

Conf call highlights: (1) Lost mkt share from 73%+ in 1HFY19 to 68% in 9MFY20 led by focus on profitable & long lead distance volumes; (2) DFC to be operational by Jun-20 with connectivity to Gujarat ports, with Concor likely to benefit by offering guaranteed transit time services (likely to drive volume shift from road to rail); (3) Concor added 1 rake in 3Q20 with total 311 rakes and new DFC compliant rakes are expected to come in Feb-20; (4) Rs10bn capex in FY20E (Rs2.6bn in 9MFY20); (5) Will add 7-9 new terminals in FY20E, however evaluating shut down of few old terminals (6) Completed trial runs for bulk movement of cement in general containers with commercial movt expected soon; (7) Coastal shipping is making losses as Concor is aggressively pricing services to gain mkt share; ex-coastal, domestic margins are stable; (8) Net cash position at Rs28bn;

Impact on financials: Cut FY20E EPS by 8% to Rs15.8; FY21E at Rs19.5 (no chg)

Valuations & view

The weak macro trade has impacted earnings with adverse volume mix. Concor has been able to partially offset the same via lower empty runs. However, once DFCC is commissioned, Concor is likely to see strong volume growth with faster turnaround times driving mkt share gains from road. However we believe at 30x FY21E earnings (15% 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.