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DFC commissioning to drive earnings growth

Earnings outlook positive on account of improving margins

* Container Corporation (CCRI) reported surprisingly strong 1QFY22 earnings – reported EBITDA at INR4.3b beat our estimate by 31%, led by betterthan-expected realization and lower-than-expected LLF provisioning.

* We believe the commissioning of the Dedicated Freight Corridor (DFC) is a big positive for CCRI as this would aid margin expansion through higher double stacking and improved asset utilization.

* We raise our FY22E/FY23E EPS estimate by 9%/7%. We maintain our Buy rating on expected volume and margin benefits from DFC.

Better realization drives 31% beat on EBITDA

* Revenue/EBITDA/PAT grew 52%/173%/313% YoY to INR18.1b/INR4.3b/INR2.5b and came in +5%/+31%/+34% v/s our estimate. This was led by better realization and lower-than-expected LLF provisioning.

* Blended realization improved 12% YoY to INR18,226/TEU (+4% v/s our estimate). EXIM/Domestic realization stood at INR16,032/INR28,347 per TEU, up 12%/3% YoY and 3%/3% above our estimate.

* Total volumes rose 35% YoY to 991,746 TEUs v/s our est. of 978,726 TEUs, with EXIM/domestic volumes at 815,077/176,669 TEUs (+30%/+69% YoY).

* The EBITDA margin stood at 24% (est 19%).

* Land Licensing Fee (LLF) provisioning during the quarter stood at INR1.14b (v/s INR2.2b in 4QFY21).

Highlights from management commentary

* The company has revised down the LLF liability for FY22 to INR3.8b (v/s INR4.5b earlier) in consultation with the land revenue department.

* It plans to enter a 35-year lease agreement with the Railways for its 24 terminals by making a 99% upfront payment for the market value of the land, which should be in the range of INR60–70b. The upfront payment would be financed through debt (~INR35b) and cash on the books.

* The management guided at 12%/100% YoY growth in FY22 revenue/PAT.

* The increase in realizations is sustainable on account of 1) a rise in loaded running and 2) higher terminal usage charges.

* DFC has commenced operations from 29th July. This is expected to reduce the running time and attract more traffic, driving the shift in volumes from road to rail. It would also aid margins – as lower run times and higher loads would lead to higher double stacking and higher asset utilization.

Valuation and view

* CCRI is a direct play on the upcoming large rail freight infrastructure (DFC).

* We expect a ~44% CAGR in EBITDA over FY21–23E, led by healthy volume growth and margin improvement on operating leverage benefits.

* The stock trades at 15.7x FY23E EV/EBITDA. We derive DCF-based TP of INR780/share based on a WACC of 11.5%.

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