CONCOR Initiating Coverage Research Report By Nirmal Bang

Best is yet to come!

We initiate coverage on Container Corporation of India (CONCOR) with a Buy rating and a target price (TP) of Rs703, implying an upside of 18% from the current market price (CMP). The TP is based on P/E ratio of 35x on FY23E EPS, which is at the lower end of the trading band for the past five years.

Our optimism stems from the anticipated multifold growth in profitability due to the beneficial impact of following (1) Strong push by the Ministry of Railways to improve freight market share from 28% currently to 44% by improving infrastructure (2) Operationalization of the Dedicated Freight Corridors (DFCs) by June’22, which is expected to sharply increase asset utilization (3) Focused strategy by CONCOR for long haul freight and removal of discounts, which have led to improvement in margins (4) Cost cutting through reduction of manpower and other overhead expenses will lead to further improvement in margins (5) Consistently strong balance sheet with net cash position (6) Negative working capital has also helped in maintaining a strong balance sheet (7) Strong operating cash flow and FCF and (8) Improving return ratios.

We recommend Buy with a TP of Rs703. We have valued CONCOR at 35x P/E on FY23E EPS, which is at the lower end of the 5-year band. We derive optimism from (1) Anticipated strong growth in volume with the expected improvement in rail infrastructure (2) Rising demand for rail freight will lead to pricing power (3) Strong cost control, which will help improve and maintain EBITDA margin at ~20% (4). Strong balance sheet with net cash of Rs4.5bn as of 2QFY21.

Railways is increasing focus to improve freight market share; CONCOR to piggy back: Apart from operationalization of the DFCs in India, the Ministry of Railways in the New Rail Plan enunciated recently has devised a strategy to improve its market share in freight from 26% currently to 45% in few years through doubling of speed and cost reduction. One of the key focus areas, as per Government projections is to focus on increasing containerization of freight. CONCOR has a market share of 60-70% of the total container traffic on rail network and is expected to be a key beneficiary.

DFCs – a game changer for CONCOR; will lead to increase in asset utilization at lower cost: There are two DFCs that are being constructed at present. The Eastern DFC (length 1,337kmms) and the Western DFC (1,506kms), both of which are expected to be completed by June’22. This would lead to cost reduction, lower travel time and higher loading per rake, thus increasing the turnround time per container. This is also expected to lead to increase in rail’s market share of freight traffic, further reduction in cost vis-a-vis road transport and reduced travel time. We expect CONCOR to be one of the key beneficiaries.

Earnings to clock ~21% CAGR over FY21-FY23 driven by revenue growth and margin expansion: Due to uncertainty of project completion, we have not included the benefits of DFCs or the aggressive push by railways to improve its freight market share (by improving infrastructure to reduce cost and travel time). We expect revenue CAGR of 15.6% over FY21E-FY23E and earnings CAGR of 21.2%. Earnings growth is expected to be driven by: (1) Revenue growth (2) Margin expansion due to cost reduction (3) Marginal interest expense due to net cash on the balance sheet.

Strong balance sheet with net cash: The company has consistently maintained a strong balance sheet with net cash position for most of the years. Most of the capex is managed from the operating cash flow received by the company. The net debt to equity ratio is -0.04x as of 2QFY21.

Negative working capital helps to maintain strong balance sheet: One of the key reasons for the strong balance sheet is the negative working capital. Since this is a service industry, the inventory is minimal and the company takes revenue upfront at the time of booking, thereby reducing the receivables.

Strong cash flows – OCF yield and FCF yield expected to improve: The company has strong operating cash flow and free cash flow. The OCF yield is expected to improve from 1.8% in FY20 to 5.8% in FY23E. The FCF yield is expected to grow from -2.9% in FY20 to 3.6% in FY23E. Return ratios to improve: We expect RoE to improve from 4.0% in FY20 to 10.4% in FY23E. This improvement is expected to be driven by improvement in net profit margin and asset turnover. The RoCE is expected to improve from 8.0% in FY21E to ~11.5% in FY23E.

Attractive valuation – without impact of higher freight due to strong thrust by railways, impact of DFFCIL: The CONCOR stock is currently trading at 29.8x on FY23E EPS, which is at the lower end of the 5-year trading band. This does not include the sharp impact of the railways’ thrust to improve its market share in freight transport and the impact of operationalization of the DFCs – both of which will lead to re-rating of the stock. We derive added comfort due to the strong balance sheet, negative working capital and strong cash flows. We recommend Buy with a TP of Rs703, implying an upside of 18%.