Container Corp Q2 Review: Strong volumes, realisations drive profitability

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Sachin PalMoneycontrol Research

Container Corporation of India (Concor), the leading rail freight transporter in India, reported a strong set of earnings for the second quarter of FY19.

The growth in the company's topline was primarily due to higher volumes and realisations across both the segments it operates in, and SEIS (Service Exports from India Scheme) incentives-related income of Rs 100 crore.

The jump in its operating profit was because of better operating efficiencies as well as a higher share of double stack container trains in the overall pie.

For the quarter ended September, Concor's total revenues increased 26 percent on year to Rs 1,822 crore.

The company reported an adjusted earnings before interest, tax, depreciation and amortization (EBITDA), excluding SEIS income, of Rs 404 crore for the quarter, up from Rs 311 crore reported last year.

Adjusted operating margin for the quarter improved 70 bps to 22.2 percent. Employee expenses rose sharply as the company implemented Pay Commission-related wage hikes earlier this year.

EXIM (Export-Import) volumes forms a majority of Concor's revenue and continues to drive business growth. EXIM volumes for Q2FY19 were up 13 percent on year, while domestic volumes improved 19 percent.

Concor's handling volumes for the quarter stood at ~1.0 million TEU (twenty-foot equivalent unit), which translates to a volume growth of 14 percent for the overall business.

The jump in realisations during the quarter was mainly on account of a freight rate hike (increase of Rs 1,000 per TEU) and an upward revision in service charges (increased by Rs 1,500 per TEU).

However, this was marginally offset through a reduction in lead distance.

During the last quarter, the company realigned its business strategy and decided to offer 45 days of free storage for import/direct port delivery (DPD)-loaded containers as well as export/direct port entry (DPE)-loaded containers.

The new business strategy reinforces its focus on gaining more market share by utilising idle capacities and also emerging as an integrated container rail solutions provider.

Outlook and recommendation

Increased economic activity will keep domestic volumes strong for the company, while the improvement in international trade dynamics will continue to support EXIM volumes.

However, the EXIM segment volume growth could get impacted by the ongoing trade war between US and China.

The management has maintained its volume and revenue growth guidance of 10-12 percent for FY19.

Based on the guidance, we expect the net profit growth to be in the range of 15-18 percent, driven by recent price revisions and economies of scale. The completion of the Dedicated Freight Corridor is another trigger that needs to be watched out for in the long run.

Concor is currently trading at a FY19 price-earnings multiple of 24 times. The company's market leadership position, along with its healthy balance sheet, justifies its trading multiple.

We expect Concor to be a steady performer over the next few years and recommend buying it on dips because of its strong revenue and profit visibility.