Rail container lead distances remain weak
India rail container trends for February 2017
* India’s rail container volume was up 7.3% YoY in February 2017 with EXIM volume up 3.5% YoY while domestic volume surged 21.3% YoY.
* Average lead distance for February 2017 was 947kms (down 6.5% YoY, flat MoM) with EXIM lead distance of 836kms down 8.5% YoY and domestic lead distance of 1,304kms down 6.0% YoY. EXIM lead distances are now down by 29% from levels of 1,176kms seen in April 2010.
* Reiterate Sell on Container Corporation of India (CCRI, TP Rs1,131) as structural issues of falling lead distances, competition from road and weak EXIM trade persist.
* While CCRI reported strong YoY volume growth of 10% in Q3FY17, it was offset by realization decline of 14%. (EXIM down 16%, domestic down 5%) owing to falling lead distances, withdrawal of congestion surcharge and rebates on certain routes.
Feb-17 rail container volume up 7% YoY, domestic up 21%
India’s rail container volume was up 7.3% YoY in February 2017 with EXIM volumes up 3.5% YoY while domestic volumes surged 21.3% YoY. In YTDFY17 (April 2016-February 2017), overall volume growth stood at 1.9% with EXIM volume up 1.6% YoY and domestic up 3.4% YoY.
EXIM lead distance down 8.5% YoY, down 29% from April 2010 levels
Average lead distance for February 2017 was 947kms (down 6.5% YoY, flat MoM) with EXIM lead distance of 836kms down 8.5% YoY and domestic lead distance of 1,304kms down 6.0% YoY. In YTDFY17 (April 2016 – February 2017), EXIM lead distance is down 6.5% YoY with domestic lead distance down 0.3% YoY. With JNPT continuing to lose incremental market share to ADSEZ’s (Buy) Mundra and Hazira ports, average lead distance may not see improvement in the medium term. EXIM lead distances are now down by 29% from levels of 1,176kms seen in April 2010.
Focus for CCRI now shifts to revenue growth
Container Corporation of India‘s (CCRI) Q3FY17 results were a mixed bag with strong YoY volume growth of 10% offset by realization decline of 14%. (EXIM down 16%, domestic down 5%) owing to falling lead distances, withdrawal of congestion surcharge, higher double stacking and rebates on certain routes. While traditionally volume growth was an effective way of measuring CCRI’s business performance as rail haulage charges were usually a pass through, the presence of multiple variables in estimating realizations presents a case for considering revenue growth as a more suitable measure of CCRI’s performance.
Structural issues persist, reiterate Sell on CCRI
While we model for 5% volume growth in FY17E, 7.5% in FY18E and 11% in FY19E for CCRI, this is contingent on overall EXIM trade recovery, higher double stacking and no incremental market share loss to road. CCRI currently trades at 17.0x FY19E EV/EBITDA and 25.1x FY19E P/E and is expensive in our view. While current valuations do not capture the growth potential in railway container volume post the commissioning of the Dedicated Freight Corridor (DFC) from FY20E, our March 2018 FCFE based DCF gives us a TP of Rs1,131 which assumes CCRI’s volume CAGR at 20% over FY21-25E, terminal growth rate of 5% and WACC of 10.5%. We reiterate our Sell rating.
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