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Container Corporation's Q4FY19 results (Outperformer) - Margin surprise despite weak volumes

Q4FY19 result highlights

• PAT +15.6% yoy to Rs3.52bn: beating estimates on higher than expected realisations, margins and other income (+89% yoy ex-SIES).
• Revenues +12.4% yoy to Rs17.5bn: despite muted 2.9% yoy volume growth (originating -1% yoy) led by sharp jump in realisations (exim +9.1% yoy; domestic +8.5% yoy). Higher realisation are led by freight hike and service charge hike in 1HFY19 (Rs2500/TEU) as also better volume mix (higher imports, lower empties, etc).
• Margins expand: +155bp yoy to 21.9% on lower empty running costs (-36% yoy to Rs420m; 25% discount on empty movt by Indian Railways effective 1^st Jan; -53% yoy to Rs160m in exim), improved volume mix & higher double stacking. EBIT margins: Exim (excl SEIS) +450bp to 23.3%, domestic -412 bp yoy in to 5.2%. EBITDA +21% yoy to Rs3.8bn.
• FY19 performance: Revenues grew by 11% yoy to Rs65.4bn (excl. SEIS) led by 8.4% yoy volume growth (8% exim, 10% domestic) and +2.5% yoy realisation. OPM +151bp yoy to 22% (price hikes, 10% fall in empty costs). EBITDA +19% yoy to Rs14.4bn, PAT was up 16.2% yoy to Rs12.2bn

Advance freight scheme: Concor has offered its clients a fixed charge for FY20 backed by a fixed freight scheme by Indian Railways (IR). Concor has paid an advance Rs45bn freight charge to IR (Rs30bn already paid; Rs15bn in Sept-19) resulting in liquidation of investments (other income loss) and raising Rs7bn debt (to be repaid via internal accruals in a quarter). The benefits would accrue if IR were to take a hike (~5-6%+) driving mkt share gains for Concor and offsetting the financial impact of the advance freight.

Conf call highlights: (1) Added 19 rakes & 3 terminals in FY19 taking the total to 335 rakes & 83 terminals (2) DFC connecting Gujarat ports to be operational by 4Q20, (3)  Rs7.68bn capex in FY19; Rs60-80bn over FY17-22 (4) Guidance for 12% volume growth in FY20 (5) Started distribution logistics centre in Chennai on 30^th Mar-19 and costal shipping business

Impact on financials: FY20/21 EPS raised by 4%/9% to Rs20.5/19.3

Valuations & view

Concor’s cost efficiencies has led to margin expansion despite muted volumes in 4Q19. We believe uptick in industry volumes and mkt share gains is critical to growth. Further, as DFC is commissioned, double stacking would improve and Concor’s investments in terminals would aid mkt share gains and drive 17% EBITDA CAGR over FY19-21E. The stock currently trades at 23x FY21E earnings. Outperformer. ​