After a 20%+ correction in the share price over the past three months (vs BSE index -7.3%), we believe Container Corporation of India (Concor) is more than factoring in our concerns over the near-term weakness in traffic growth.
Following our recent interaction with the Dedicated Freight Corridor (DFC) project officials and management, we remain confident over the long-term attractiveness of the company’s business, especially after the likely game-changing DFC commissioning by 2018/19.
We raise our TP to Rs 1,695 as we roll over our TP to Sept 2016 from March 2016 and cut our earnings estimates by 3% for FY16-18F to factor in the near-term traffic weakness.
Our revised TP implies a 25% upside from current levels, thus driving our rating upgrade to buy. Our bull-case scenario, which assumes doubling of Concor’s market share over 10 years after DFC’s completion, yields a fair value of Rs 2,016/share. Weakness in traffic, tariff hike by railways and a delay in DFC are key risks.
Almost 43% of the civil contracts have already been awarded on the western DFC, while the balance will be awarded by June 2016. Completion timelines have been pushed back to December 2018 and December 2019 now, but work has gathered pace and we do not foresee any risk to the new timelines.
With its new route strategy entailing a shift from the point-to-point to hub-and-spoke model, Concor will be the single-largest beneficiary of DFC and benefit from revenue growth pick-up, margins and reducing asset intensity.
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