CONCOR has sustained operating margin at a healthy 24.5% (flat QoQ) despite a sluggish demand environment. The operator will receive DFC compliant 25T axle load wagons from 3QFY20 onwards. We reiterate that it will be a key beneficiary of the DFC. Maintain BUY with a revised TP of Rs 645 (at 24x Sep-21 EPS).
HIGHLIGHTS OF THE QUARTER
* Financials: Despite tepid volumes (-2% YoY), CONCOR sustained healthy margins at 24.5% (flat QoQ) due to efficiency gains (lower empty running charges of Rs 526mn vs. Rs 648mn YoY) and a 5% price hike taken in the year. Adj. PAT at Rs 3.1bn is not comparable YoY as SEIS income (Rs 996mn in 2QFY19) has not been booked. CONCOR has improved profitability in the sluggish environment by focusing on its profitable routes as well as through efficiency gains
* Dedicated Freight Corridor: The management expects freight pricing on the DFC will be similar to the current railway charges. Further, as the 25ton axle load wagons are operationalised, CCRI will gain market share from the domestic roadways segment, particularly on the long haul routes. We believe that CONCOR will witness healthy double digit growth with the phased commissioning of the DFC.
* Volume outlook: Near term volume outlook remains tepid as management has lowered guidance to low single digits (0-2%) for FY20. To gain market share, the co is attempting to move bulk commodities, cement and food grains onto its containers. Medium term outlook will be driven by the shift from road once the DFC is operational.
* Reducing dependence on Indian Railways: CONCOR derives over 40% of its vols from railway owned terminal. Current land license fee is Rs 1,175 per container (vs. Rs 1,015 YoY). They intend to shift to their own ICDs and will reduce the share of railways to 30%.
We reiterate BUY as (1) Vol growth is expected in midteens with the commissioning of the DFC. We are building in 14/18% growth in volumes over FY21/22E (2) Margins have been resilient amidst a weak macro and (3) Any developments on privatization will improve valuations. Key risk: Any increase in charges by Indian railways.
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