Container Corporation's Q3FY18 results (Neutral) - Volumes sustain, margins impacted by higher costs
Q3FY18 result highlights
- PAT +55%yoy to Rs2.2bn: due to recognition of SEIS income of Rs1.86bn.
- Revenues +11% yoy to Rs14.5bn: led by higher exim volumes on improved trade (exim +11% yoy; originating +8.2% yoy) and domestic (+9.2% yoy). However, realisations in exim continued to decline (-2.4% yoy) on lower lead distances (higher share of volumes from Mundra & East ports vs JNPT). Domestic saw 9% yoy increase in realisations.
- Rise in employee costs drives margin contraction: OPM fell to 17.9% (-200bps yoy) due to hike in employee costs on wage revision (3rd wage revision effective 1st Jan-17) and related arrears (~Rs350-400m prior period). Accordingly, exim margins fell 142bps yoy to 15.9% despite 40% yoy reduction in empty running cost. Double stacking momentum sustained (~140% yoy; flattish qoq; 10% of volumes).
- Domestic disappoints with 0.3% margins: (+16bps yoy) due to higher empty running charge on imbalance (+51% yoy) in North and East / South routes. Hence, EBITDA was flat yoy to Rs2.6bn.
Conf call highlights: (1) FY18 volume guidance maintained at 12% (2) Mkt share at JNPT improved to 85-86%, overall exim market share at 73.5% (3) Empty running charges fell 2% yoy to Rs600m on higher exim double stacking (likely to double in FY18 over FY17) (4) Signed MoU with PSA for operating extension gate at JNPT, may help improve market share (5) Concor yet to monetise SEIS income (7) Focus on MMLPs sustain with 3-4 MMLPs to be commissioned in Q4FY18 (Rs8-10bn capex in FY18).
Key positives: Sustained volume growth, lower empty charges in exim
Key negatives: Rise in employee costs, weak domestic performance
Impact on financials: FY18/19 EPS cut by 2.2%/1.3% to Rs45.3/51.7
Valuations & view
We expect Concor to see 11% volume CAGR over FY17-FY20E due to low base as also pick up in international trade. Moreover as double stacking benefit scales up, we expect 16% earnings CAGR over FY17-20. 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 24.5x FY20E earnings and 19x FY20E EV/EBITDA factor in long term positives, while time bound govt incentives (scheme till FY20, ~15% of earnings) are unlikely to get a rich multiple. Maintain 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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